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Satellite communications rebirth

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The satellite industry has suffered prolonged failure

From Diana J. Choyce
Mar 26 - Apr 01, 2001

We have visited the subject of satellites in the past and the news was never good. No company has managed to lead a viable profit making venture. The newest stab at reviving attempts has been made by several well known entities, hoping that their collaboration will lead them into the forefront. A venture between cell phone pioneer Craig McCaw, Microsoft co-founder Bill Gates, Motorola, Boeing, the Abu Dhabi Investment Company and Saudi Arabian Prince Alwaleed Bin Talal Bin Abdul Aziz Alsaud. Teledesic, formed in 1990, was expected to launch service in 2004, but now some insiders believe 2005 is more likely. This plan may even lead to a future merger. "It's good for all these companies due to the up-front capital costs of these satellite systems," said Sean Badding, an analyst at The Carmel Group, a satellite-research firm. "It was almost a necessary strategy given the current market conditions and how hard it is to raise capital, especially in the communications space." Craig McCaw has shown a real commitment to stabilize and lead the satellite industry into the 21st century.

The satellite industry has suffered prolonged failure in trying to create a stable enterprise. Consider the failure and bankruptcy of Iridium, and possible near future failure of Globalstar Communications. Iridium, which paid more than $5 billion to build a network of 66 satellites capable of delivering mobile phone service nearly anywhere on Earth, was sold for just $25 million after it attracted only about 50,000 customers. The latest suit against Loral Space & Communications, parent company of Globalstar, was filed in early March and accuses Globalstar executives of issuing several false statements between Dec. 6, 1999, and October 27, 2000. The suits, in general, accuse Globalstar executives of not being truthful about the sale of satellite phones, its core product. There are at least six class-action lawsuits from shareholders to be filed against Globalstar in U.S. District Court in Manhattan. The suits will likely all be consolidated into one. At the same time, Motorola, the world's No. 3 handset maker, learned that a bankruptcy court ruling could make it responsible for potentially billions of dollars in Iridium-related claims. The court case could set the stage for Iridium investors to sue Motorola for up to $2 billion in damages, alleging that the Schaumburg, Ill.-based electronics giant poorly managed the satellite company, which led to its failure. It has already suffered millions in losses as Motorola took a $740 million charge against earnings during the fourth quarter of 1999, and may now find itself paying for billions more. Motorola's own records estimate it may have spent about $2.5 billion to cover any financial exposure from Iridium dating back to 1998. "No entity has lost more money on Iridium than Motorola," said Motorola spokesman Scott Wyman.

Market for satellite

Still, there is a belief that a market does exists for satellite communications. Iridium Satellite, a new company led by chairman Dan Colussy, believes it can retool what was considered by many experts to be a brilliant technology, but not necessarily one for which consumers would pay astronomical rates. Iridium's original bulky phones cost as much as $3,000, with airtime fees of up to $7 per minute. Instead, Iridium Satellite plans to target industrial business markets, such as aviation and oil and gas exploration concerns, as well as government customers. The company signed a contract with the Pentagon to serve 20,000 U.S. Defense Department workers over two years, which cleared the way for completion of its acquisition of the old Iridium's assets. They acquired the assets of Iridium in a liquidation sale for about $25 million. "These guys are going to try to make lemonade out of lemons," said Jeffrey Kagan, an independent telecommunications industry analyst. "But you don't have to do a whole lot to have success with a $25 million investment." "We're going to be a niche player. We don't have to be huge," Colussy said. "We don't have to be a company like Iridium planned to be with 1 million customers. We think we can have a nice return on investment and support a second-generation system with much more modest goals."

XM Satellite and Sirius Satellite Radio are both trying to offer in-car music and talk radio to consumers via satelliteŚwith strong support from automakers. DirecPC and StarBand both already offer broadband Net access via satellite and some of the world's largest satellite and defence industry names are backing future projects such as Astrolink, SkyBridge and Spaceway, among others. But most of these proposals are several years away from fruition. ICO-Teledesic Global is a holding company that oversees Teledesic and the assets of the former ICO Global Communications, which has been renamed New ICO. McCaw plans to merge Teledesic and New ICO, pending regulatory and shareholder approvals. But the pact between ICO-Teledesic and Ellipso could lead to a new strategy. "The mobile satellite industry has failed spectacularly in delivering on its promise to users," McCaw said in a statement. "We continue to be compelled by the scope of the market and the importance of providing services for the under-served in the United States and around the world. We look forward to pooling our talents and creativity with our peers in the industry to overcome the challenges that have dragged down those who have launched before us."