by Marc Crossman

Iridium’s inability to add meaningful subscribers to its network has left the company floundering in its ability to meet debt obligations. Despite the fact that three credit extensions have been given to the company, Iridium is showing no signs of being able to meet the requirements dictated by the banks to add 27,000 satellite subscribers and 50,000 total subscribers to its network. As of March 31, 1999, five months after going into commercial service, Iridium had only 10,294 total subscribers.

In an attempt to salvage itself, Iridium recently announced it would revamp its capital structure. I believe this plan is, at best, a band-aid for a hemorrhaging satellite telecommunications business. It is not enough to attract the subscribers it needs. The company would be wise to look to the market to which it is most similar-the wireless phone industry-to learn a few lessons. Unfortunately, Iridium has stubbornly insisted that it is a completely unique system and continues to ignore customers. Users of wireless phones, be they cellular or satellite, don’t care about the technology behind the handset-they care about price and size. Iridium showed signs of enlightenment when it announced that it would be slashing prices. However, they lost my bet when they unveiled only a 65 percent decrease in their handset price and a 50 percent decrease in pager units. With the original price of handsets being $3,000 and a pager unit of $700, a 65 percent discount, or $1,000 for handsets; and a 50 percent discount or $350 for pagers, is not going to attract the subscriber numbers that Iridium needs to sustain business.

Furthermore, the company’s service plans remain antiquated. With AT&T announcing its Digital One Rate plan last year and thus increasing minutes-of-use (MOU) and subscriber numbers at a time when all its competitors’ numbers were going down, you would think Iridium would take the hint and offer a simple plan. It did not. And this added to its woes. According to the restructuring plan, all international calls will cost about $3 per minute, and national calls will cost from $1.60 to $2.50 per minute. The least expensive calls will be from one Iridium handset to another at $1.50 per minute. Do they really think this will encourage people to buy Iridium?

One part of the plan that I do think offers some promise is its decision to change its target market from the high-end business traveler to the industrial markets. With that said, it may be too little too late.

Since its commercial service launch, Iridium’s stock has been on a landslide, taking other companies with it. In addition to lowering the valuations for the sector, Iridium also has made conditions extremely difficult for upcoming mobile satellite system projects to raise additional funds. As a result, financing risk is the most profound one to any upcoming satellite projects and should weigh heavily on any investor’s mind.

A prime example of this unfortunate domino effect is ICO’s $5 rights offering. Even at this price, which is 58 percent below its IPO price in July 1998, the offering cannot be completed and has been twice extended. Market conditions provoked by Iridium’s disappointing subscriber results forced ICO to finance the majority of the system using equity. And Iridium’s continuing problems, combined with the amount of money that ICO still needs to raise to take it to commercial service even if this offering is fully subscribed at its approximate $1 billion, is making this transaction much harder to complete. ICO’s management has stated that the company is looking into possibly revising the rights offer and looking more toward its strategic partners for financial support.

Globalstar, the other MSS provider set to launch commercial service in the fall of 1999, also has been affected, but seems to be holding its own. Backed by a well-known commodity in the space business, Loral Space and Communications, Globalstar executives have been working furiously to differentiate the system from Iridium.

Globalstar is slowly succeeding as it has recently completed its financing needs with a secured credit facility, and the stock seems to be trading on its own accomplishments and milestone achievements. Obviously, the tell-all tale will be when Globalstar launches commercial service, which is expected to occur sometime within the next month or so.

I expect that ICO investors are eagerly awaiting the Globalstar launch, since the success of Globalstar will more or less legitimize the market, making ICO’s life much easier.

Marc Crossman is a vice president at J.P. Morgan in New York City. These views are those of the author and do not necessarily reflect the views of the Via Satellite editors or J.P. Morgan.