Mobile satellite service (MSS) providers based their original business plans on providing ubiquitous voice services to the masses when cell phone service was in its infancy. Investors poured billions into MSS operators based on the anticipated rollout of cellular infrastructure, projected modest uptake of cellular service outside the business community and the promise of heady returns. How things changed.

The wireless industry took the world by storm, blowing away all adoption estimates. Throughout the last seven years, traffic on cellular networks has increased from 200 billion minutes to 2 trillion minutes, while over the same time period rates have plummeted from 35 cents per minute to 5 cents per minute, an 80 percent decline. Footprints of the different cellular networks have expanded as well. Pan-European GSM service is a reality, while cellular networks in the United States cover an overwhelming percentage of the population.

The damage to MSS operators was significant, forcing several to seek the protection of U.S. bankruptcy courts. Today, the revamped original operators were joined by new MSS providers approaching the market with new technology. But they continue to face the promise of stiff competition from terrestrially based carriers. Are MSS operators primed to do all-out battle against terrestrial foes, or are they planning a different approach?

Look to the Future

The world market for cellular services has changed dramatically since the inception of data services. Revenue from data represents more than 23 percent of the overall cellular pie; an impressive figure when you consider that the data revenue is primarily made up of text messaging and e-mails sent from handhelds. In 2004, a well-known consulting firm estimated that cellular revenues for data in 2008 would total $18 billion. That prediction will fall far short, as 2008 year-to-date revenues are expected to approach or exceed $37 billion. This miscalculation isn’t happenstance. The adoption of wireless devices and their usage has consistently been underestimated since the industry’s inception. The world’s population is increasingly mobile and demands connectivity, even in remote locations. MSS operators are counting on this trend to continue and to drive demand for connectivity.

Inmarsat, Iridium, Globalstar and Mobile Satellite Ventures (MSV) all have announced plans for next-generation satellites that will support voice and high speed data. It is interesting to note that all of the MSS players interviewed focused not on voice or data, but rather application connectivity. The future constellations will utilize advanced networks — some are totally IP-based, allowing many new applications to be developed.

"The cell phone market targets population centers," says Don Thoma, executive vice president of Iridium, which is focusing on the 82 percent of the world not covered by cell phone service. "Cellular carriers have reached a point where they have to decide whether it is better to spend the money either to expand or to upgrade their networks. Since 90 percent to 95 percent of the U.S. population has cell phone coverage, the answer is to upgrade so they can generate higher ARPUs (average revenue per user). This means that large areas of the [United States] and other countries will still be without cellular coverage."

Voice service will remain an important part of Iridium’s offerings since people need to talk, but Thoma points out that the company has expanded beyond traditional telephony and data represents the fastest growing market segment. "Iridium’s services are a mobility extender, expanding communications beyond normal bounds." Iridium has announced plans for its second-generation of satellites, dubbed Next, which will provide enhanced services. The shortlist of potential manufacturers has been narrowed to Lockheed Martin and Thales Alenia Space. Service specifications and details about handsets are still being developed.

New Generation of Handsets

Early satellite phones were clunky and heavy, not to mention expensive to own and operate. Although dual-mode phones have been available for many years, they never reached mass market appeal. Nokia sells more cell phones in a day than all of the satellite phones sold in a year. Quite simply, the size and functionality of satellite phones have not kept pace with modern handsets for terrestrial wireless networks — until now. Leveraging advanced ground networks, powerful new satellites, and in some cases, advanced new wave forms, a new generation of satellite handsets is being prepared for market. Thuraya has lead the way, introducing a dual-mode satellite phone. The company has targeted Asia, hoping the lack of terrestrial networks will drive traffic to its circuit switched network.

"The advancements in our new handsets are dramatic," says Globalstar COO Tom Colby. "It has been almost 15 years since our first chipset was conceived. There have been a large number of advancements we are leveraging. We are in the process of upgrading 26 gateways around the world with a new advanced network in preparation for our 48 new satellites which are being manufactured and will begin going up in 2009. We have developed a powerful new waveform and are mass producing [application-specific integrated circuits], driving down the cost of a chipset to around $20. This opens up the possibility of consumer priced products for data and possibly voice. For instance, we could integrate one of the new Globalstar chipsets into a Blackberry device very easily. The market is sensitive to pricing and our new handsets will help increase the number of subscribers," he says.

MSV also is counting on more powerful satellites and advanced chipsets to power its business plan. The company has received a commitment for $650 million of funding over the next two years from Harbinger Capital Partners and plans to launch a pair of geosynchronous satellites, MSV-1 and MSV-2, by 2010. The spacecraft will carry a 22-meter antenna that will allow them to pick up signals from low power, cellular-sized phones. The IP-based next-generation integrated satellite-terrestrial network will enable advanced applications and services to mass consumer markets, says Christian Gates, vice president of strategy at MSV. "Our objective is to integrate satellite with terrestrial chipsets so that there isn’t a meaningful incremental cost to add this capability to a cellular handset. Once we get to that point, subscribers are only paying for the satellite application, not the hardware," he says.

TerreStar, another company with investment ties to Harbinger, is working with Space Systems/Loral to build the most powerful commercial satellite ever manufactured. Like MSV’s spacecraft, TerreStar’s satellite, which is expected to launch a year earlier than MSV, features an extremely large antenna and an IP-based network infrastructure. Both satellites will focus up to 500 spot beams on the United States and the U.S. Virgin Islands.

Inmarsat, an MSS pioneer, has introduced the ISatPhone which provides both satellite and GSM connectivity.

Ground Infrastructure

Regardless of handset size or cost, MSS players still must contend with line-of-sight issues. To bolster coverage in urban canyons, XM Radio and Sirius Satellite radio both deployed terrestrial networks that reuse their respective satellite frequencies. Globalstar and MSV both have been granted ancillary terrestrial component (ATC) licenses by the U.S. Federal Communications Commission (FCC) that will allow the two companies to develop similar ground networks, though neither company has yet to build any terrestrial infrastructure. Instead they have focused on business deals with cellular carriers that need additional spectrum. SkyTerra, the parent company of MSV, is betting heavily on the future value of its ATC spectrum as well.

The all-important question is whether cellular companies in the United States will need additional spectrum after huge buying sprees in the 700 megahertz and advanced wireless services spectrum auctions over the last two years. Tim Farrar, president of TMF Associates, has reservations. "AT&T and Verizon have no incentive to do ATC," he says. "It undermines their existing strategy of buying terrestrial spectrum. U.S. carriers have spent close to $40 billion in the last two auctions. The real question is how long this spectrum will last."

Should cellular carriers run short, they can bolster their existing spectrum with satellite frequencies from MSS players. To utilize satellite frequencies terrestrially, a carrier must add the satellite band to its handset and base stations — a process that is not too difficult in newer base stations. Upgrading antennas and radio gear on cell phone towers would need to be evaluated on a case-by-case basis. Estimates to accomplish this on a nationwide basis range between $2 billion and $5 billion dollars per carrier.

While these are daunting figures, Dennis Matheson, TerreStar’s chief technology officer, says ATC systems do not need to be national in scope. "ATC can be rolled out to support a specific metropolitan service area," he says. "It doesn’t have to be all or nothing. We could even support a specific building in a campus environment should a carrier lack coverage there. Terrestrial carriers have nationwide build requirements associated with their licenses. We don’t. It simplifies our capital plan as we can deploy networks based on our partner’s needs."

"Our objective is to integrate satellite with terrestrial chipsets so that there isn’t a meaningful incremental cost to add this capability to a cellular handset. Once we get to that point, subscribers are only paying for the satellite application, not the hardware." — Gates, MSV

Gates is confident that the wireless industry’s appetite for spectrum will continue. "We are on the cusp of a massive increase in data usage by mobile wireless customers," he says. "Data is expected to account for approximately 23 percent of cellular carriers’ revenues in 2008, so it’s critical to their profitability, but that remains driven predominately by e-mail, text messaging and other lower data-rate applications. We’re just now seeing the broader introduction of higher speed networks and the powerful Web-enabled devices like the iPhone capable of taking advantage of their capabilities."

Devices like this are driving data traffic in an increasingly dramatic fashion. The iPhone is reputed to generate 50 times more search traffic for Google than any other mobile device, and that was prior to the release of the 3G version. A long text message might be 1 kilobyte; the Wikipedia page describing text messaging is 47 kilobytes. A "media rich" page might be 250 to 500 kilobytes. And this is without taking into account video. "As this trend matures, cellular carriers are going to need additional spectrum," says Gates.

Skeptical View

Even with technology developments such as ATC, "satellite’s biggest downfall is the requirement for line of sight," says Errol Olivier, President and CEO of Broadpoint, a full-service telecommunications and network solutions company which provides VSAT and cellular services. "The idea of switching between satellite and cellular is an appealing feature; however you must be outside to make a phone call with a satellite phone. I am not confident that a large number of subscribers will want to go outside in the rain or bad weather to make a phone call."

Farrar agrees, noting that 70 percent of all calls originated while inside a building or a car. "End users are going to be easily misled if you tell them that their satellite phone will work anywhere. Satellite phones must be used outdoors with a clear line of sight. To make them work in cars, you need to install an exterior antenna. That went out of vogue 15 years ago," he says. "There are a number of questions regarding the long-term viability of MSS carriers who are basing their business plans on the success of ATC. First, the FCC must make a ruling on what is a ‘substantial satellite service’. Globalstar has integrated simplex satellite service for text messaging into a handset, and the question remains whether the FCC will consider this to be substantial enough to warrant their license. Since Globalstar is the first to market they will be the test case.

"In addition, you must factor in how quickly the cellular carriers use up the spectrum they just acquired," says Farrar. "Until they land some deals, TerreStar and MSV are very reliant on Harbinger’s money to keep them afloat. Harbinger might accelerate the whole ATC process by investing several billion into a cellular carrier to get the ball rolling. If that happens, other carriers would probably follow suit for competitive reasons."

If cellular carriers find improved ways to wring more throughput from their finite amount of spectrum, or the consumption curve is not as steep, market consolidation is likely to occur. Look for MSS carriers to focus on three areas of differentiation in the future: providing service where there is no cell coverage; providing mobility services, not just voice; and offering complimentary services to wireless carriers rather than battling them directly for customers.