by Theresa Foley

The meltdown of the mobile satellite services (MSS) sector during the summer of 1999 may turn out to be less than a total catastrophe in the months ahead if newcomers Globalstar, and then ACeS, can produce better results as they follow Iridium into the marketplace. Both are hoping they will not suffer he fate of Iridium, which nearly collapsed this summer.

Two of the first three big LEO satellite ventures went into a tailspin in August, leaving Globalstar alone in its quest to conquer the global mobile telephone market. Iridium declared bankruptcy on Friday, August 13, and headed toward a court-supervised restructuring that company executives hoped would allow the global mobile telephone operator to remain in business, despite its investors and debtors having suffered huge losses. Two weeks later, ICO Global Communications found itself short of cash to meet near-term obligations and followed Iridium into bankruptcy with its medium earth orbit, 12-satellite system partially constructed.

Industry experts looked to Globalstar to save the big LEO sector from being declared a complete disaster. Besides Globalstar, the upcoming geostationary ventures also could save MSS from going down in the history books as one of the last high-tech catastrophes of the 20th century. Although the GEO ventures share a common market with the big LEOs, they include other features that could make them more profitable. Their design lifetimes are about twice as long; they cost much less to deploy and use; and their lower prices will be more popular with consumers. The operators of the regional systems will be selling into their home markets, moreover, and should be much closer to the end user than their peers at the global systems.

But the one feature that can’t be designed into the system is the market. Convincing tens of millions of users around the world to spend $400-$1,500 on a telephone handset and pay rates that can be much higher than those for cellular calls is not going to be easy.

Roger Rusch, president of consulting firm Telastra, has been telling people for years that the big projections for MSS users are overblown. Rusch has been on the satellite conference circuit using charts that show all the well-known market estimates that predict a 30-40 million subscriber market for satellite MSS, with his own projection falling several notches below. Iridium’s early results appear to vindicate him.

"It’s not going to be tens of millions of users; instead maybe a few million users in a few years time. But it won’t be mass market. It will be a niche market and it will remain that way," Rusch says. "People in the satellite industry are burying their heads in the sand and ignoring some very undesirable characteristics of MSS. It’s not for use in buildings, and that is an enormous turnoff."

Rusch says Inmarsat’s past performance in increasing subscribers and revenues convinced him that the market for MSS is modest. Inmarsat took years to get to 10,000 customers, and while it has grown at a faster clip recently, to a current total of about 160,000 users, Inmarsat is still far from the 1 million mark. Having tens of millions of users seems like an impossible dream to Rusch. The combined capacity of MSS systems under construction today could serve at least 20 million users, and the business plans require several million to support each system. Rusch says supply exceeds demand by a factor of 10 or more.

A year ago, nearly all the experts talked in terms of having room for three or four big LEO players in the MSS market, but today, they are only looking to one company, Globalstar, to prove that their demand forecasts weren’t entirely wrong. If Globalstar can make it in the months ahead, the entire satellite business will be in a better position.

Globalstar

Globalstar, the Loral-backed, 48-satellite big LEO venture, was about to make its service debut as we went to press in late September, after six years of development. After demonstrating the phones to a limited group of users in early fall, Globalstar will slowly roll out service in the markets covered by its first nine gateways. Those include North America, Western Europe, South Africa, China, Korea and parts of South America.

"The experience of Iridium and ICO has proven nothing in terms of the market, only the right and wrong way to put together a business plan," says Loral spokesman Mac Jeffery.

Reid Stephenson, Globalstar’s vice president for marketing, says: "The real beauty of Globalstar is that we have not had to change our business plan from the beginning…We have not put all our eggs in one basket." Instead, Globalstar is going after three market segments: cellular extension, global roaming and fixed services. It also is pacing its service start rather slowly, using a 60-day "soft rollout" period in each service region to make limited sales while the distribution and service network is checked out. Once Globalstar deems its support system for customers is ready, full service will be activated by the service providers in the respective territories, and the telephones and service will become available, he says.

Loral, with its 45 percent stake, provided strong support to Globalstar in the dark days of fall 1998, when it had to overcome the problems created when a Zenit launch failure destroyed 25 percent of its satellites, delayed service initiation, raised costs and caused the back-up plan to be shifted to use fewer satellites.

Now the biggest challenge is to sign on subscribers. Globalstar has predicted that it will have 2.8 million subscribers by year-end 2004. By the end of 2003, the company hopes to have $1.6 billion in annual revenue, according to Euroconsult.

Globalstar has spent $3.3 billion on its 52 satellite system. The satellites are in a low earth orbit and have a 7.5-year design life with the possibility of lasting 10 years, which will give the venture a longer period than Iridium has to spread costs over as it works to recoup the project investment. The satellites have 2,800 voice circuits each, according to Euroconsult, with a total system capacity of 6 million users.

Service rates were to be in the 35- to 55-cent-a-minute range wholesale, with further markup to the end user. But those prices are likely to be about $1.50 a minute or more; the same as being charged by Iridium in its restructured form. Handsets are expected to cost $1,000-$1,500, and fixed telephones $2,500-$3,000. Globalstar and its partners pre-ordered 300,000 handsets from three manufacturers to "seed" the market, and 40,000-50,000 of those should be available to customers by year end 1999, Stephenson says. Globalstar’s strategy was to underprice Iridium in the market. However, actual tariffs to compare Globalstar prices to those of Iridium, especially to the lower prices Iridium instituted during the summer, were unavailable at presstime.

"Being second to market one year after Iridium does not necessarily constitute a serious handicap," says a Euroconsult report, 50 Satellite Operators, published in July. "Globalstar could adapt its offering according to the various problems encountered by Iridium."

Besides Loral, Globalstar’s owners include a group of multinational telecom service providers who collectively own 26 percent, and Globalstar Telecommunications Ltd. (GTL), which has publicly traded stock and owns 32 percent of the project. Prime 66 Partners, the investment company of billionaire Sid Bass, holds 10 percent of GTL.

But Rusch and a few other experts see the same troubles ahead for Globalstar as those that befell Iridium. The differences between the two are not that big, Rusch says, as he adopts another controversial stand as a leading MSS skeptic. Satellite telephones have a list of flaws. According to Rusch, they don’t work inside buildings and sometimes require users to move to a favorable location like the middle of a field before they can connect. But mentioning these issues in satellite industry circles, he notes, is "politically incorrect." Call disconnect is common and the time delay over GEOs is annoying, he adds. "Only a desperate user will resort to a satellite telephone," Rusch says.

On the other end of the spectrum, Betsy Kulick, who has led some of Leslie Taylor Associates’ MSS studies and been bullish on MSS for years, still believes the business will somehow turn itself around. "The amount of usage is more important than the number of subscribers," Kulick says. For the MSS industry to get on stable ground, she says Iridium has to find a way to survive. "There is value in that system," she says, adding that the "five-year lifetime of the satellites is a problem."

But, even if Iridium and Globalstar cannot sign up large numbers of subscribers, the regional GEO mobile systems hold still another chance to prove that MSS can be a winning business. The first will be ACeS.

Aces To Lead Regional Geo Parade

The Asia Cellular Satellite (ACeS) International Ltd.’s first satellite should be in orbit after a planned mid-October Proton launch, due to take place soon after presstime, with services to start in the first quarter of 2000. A decision on how to configure and when to launch a second satellite will be made shortly after the first is launched. ACeS consists of two geostationary satellites, with a $740 million estimated pricetag, supplied by Lockheed Martin. The company became a 32.5 percent equity owner in the project in 1999, when the Indonesian banks defaulted on previously secured loans.

Mike Williams, Lockheed Martin Global Telecommunications vice president of strategy and ventures, says the Asian economic crisis provided Lockheed Martin with the opportunity to become part owner of the project. The rest of the venture is held by Pasifik Satelit Nusantara (34.7 percent), Philippine Long Distance Telephone Co. (20.78 percent) and Jasmine International Plc (11.94 percent).

ACeS will serve Indonesian, Philippine and Thai markets with its first three gateways, which will be functioning at the time of service startup. Additional gateways in Taiwan and India will be introduced later in 2000 to allow service providers there to begin operating. With the second satellite, the system can be expanded to serve Europe and North Africa. ACeS can support 2 million subscribers with its full capacity of 3,000 circuits, assuming three minutes daily use each, according to Euroconsult. Williams says the plan is to have at least 100,000 subscribers by the end of 2000.

ACeS, which will begin service about two years later than initially planned, will charge $1 a minute maximum for satellite airtime, but drop that price after commercial services are in full operation. The handset price will be less than $1,000.

ACeS has applied lessons learned from Iridium to its rollout plans. "We looked to improve distributions, terminals, the tradeoff between driving prices lower and adding more people to the system," says Williams. "That said, we think global LEOs are a somewhat different market than regional GEOs. We will have nowhere near the difficulty in covering costs. The amount of our debt is much more forgiving."

When Lockheed Martin came in as an investor, it helped ACeS renegotiate its financing, so the debt to total capital is about 25 percent. "The repayment schedule and rates are very achievable," says Williams. Coming behind ACeS are a half dozen other regional geostationary mobile satellite projects.

Thuraya

By mid-2000, Thuraya Satellite Telecommunications Co., located in the United Arab Emirates, will have its first launch, followed by a service startup by year end. Thuraya will cover a huge 99-country territory stretching across the Middle East, North and Central Africa, Europe, the Indian subcontinent and Central Asia with its highly advanced, Hughes-built satellite. Early on, Thuraya will focus its efforts on 15 key markets, including Saudi Arabia, Turkey, Egypt, Iran, Pakistan and India.

Yousef Al Sayed, Thuraya’s chief executive, says Thuraya benefitted from writing its business plan in 1997, rather than a decade ago. GSM terrestrial mobile coverage is predicted to be available in 90 percent to 95 percent of major countries in Thuraya’s turf by 2005, but the company has factored the spread of GSM into its planning. "Our business plan is based on territories with no telephones," he says. Thuraya also will sell value-added services such as 9.6 kbps data rates and ISDN speeds through a larger terminal than the handhelds, plus GPS services.

The $1.1 billion project became fully financed in summer 1999 when a $600 million financing facility was signed with five banks, including banks in New Zealand, France, Switzerland, Kuwait and Abu Dhabi. The facility was designed to meet special conditions set by the Islamic banks, who did not want a loan, but instead used a leasing arrangement that avoids the concept of an interest-bearing loan, Al Sayed says.

Prior to closing on the financing facility, the project had $500 million in equity in place from its equity partners that include 19 companies, with Middle Eastern, Asian and African shareholders among themx.

A second Thuraya satellite is planned as a ground spare. Ericsson is building the network switching subsystem; Ascom and Hughes Network Systems are handset suppliers. Hughes will incorporate digital beam forming to allow the antenna beams to be reconfigured into various shapes to match traffic demand and focus on hot spots of users. The design allows 250-300 spotbeams. The system will have voice, location determination via GPS, GSM standards and fax/data capability at rates up to 9.6 kbps. Thuraya will have 13,750 circuits and projects a subscriber base of 1.75 million.

Thuraya intends to price its phones at $600, even if subsidies are required, and calls should be priced not to exceed $2 per minute. The wholesale cost of the call will be 42 cents per minute. Thuraya has ordered 235,000 phones from the suppliers. Its total market is 1.75 million customers with breakeven at 800,000 users, according to Euroconsult. The first year of operations will bring 400,000-460,000 subscribers, according to Thuraya.

"Everybody learned a lot from Iridium," says Al Sayed. "We will not advertise if we are not capable of operating. We have designed our contract that way."

Thuraya has a six-month period of satellite test and check-out during which it can bring in revenues from subscribers. But the company will defer a heavy advertising campaign until Hughes proves the system has no defects and the other elements of the marketing plan, such as the 235,000 pre-ordered handsets being ready for distribution, are in place. Shops in the Middle East and other countries will carry Thuraya phones and sim cards along with their mobile telephone products. Al Sayed says being based in the home market where service is to be sold gives Thuraya advantages over global mobile telephone operators based in a foreign country. "We have GPS in there because of our knowledge. It’s the only way to sell there. Countries insist on their sovereign rights [to keep track of what telephones are being used in their territory] and we can map these countries into our billing system" to provide that information, he says.

Agrani, EAST, Globalstar and Iridium also will compete in Thuraya’s market, but none of these have GPS capability in their systems.

Inmarsat

The patriarch of MSS is London-based Inmarsat Ltd., which has offered mobile satellite services for more than 20 years. After having gone private in spring 1999, Inmarsat is not ready to cede the business to its progeny.

A resurgence of interest in Inmarsat voice telephony products has occurred in the months since Inmarsat’s mini-M phone was inadvertently matched up against Iridium in the military operation and refugee exodus from Kosovo. The mini-M is bigger than the Iridium handsets, but users such as journalists apparently were more satisfied with it than with their Iridium telephones, according to news reports out of the war zone. The products are priced in the same general ballpark, at $2,500 or more for equipment and $2.50-$3 a minute for calls.

Andrew Ivey, Inmarsat marketing manager, says more than 50,000 mini-Ms were in use by August, which is above Inmarsat’s own sales goals. More than 1,000 mini-Ms, which are heavier and larger by far than the Iridium phones, are sold each month, he says.

"When Iridium came to the market, it was a relief to us. Comparison points could finally be drawn. It had been hot air until then," Ivey says.

Iridium donated a substantial amount of free calling time to help the refugee crisis, and news media put their Iridium phones to work during the conflict, but the press reports on the satellite phones generally had praise for the Inmarsat product and complaints about difficulties of using Iridium in the mountains.

The new Inmarsat continues to look at the mobile data market for its future, although it has dropped the idea of a new satellite system called Horizons to serve laptop computer users with global, high-speed access to networks, and is looking at new ways to tap into this emerging market. Ramin Khadem, Inmarsat’s CFO, says 50 percent of the traffic carried on Inmarsat’s system today is data. "We are becoming increasingly data-centric. The Internet is the catalyst," Khadem says. He cites studies that predict 700 million Internet users by 2003 and $850 billion in the U.S. alone in e-commerce by 2002 as motivators pushing Inmarsat to serve the new mobile data market as its primary emphasis.

Instead of Horizons, Inmarsat is developing near-term mobile data products that use the current generation Inmarsat 3s and older Inmarsat 2s, which collectively have another decade and a half of operations left. For example, this fall, Inmarsat introduced its Global Area Network product (GAN), which is a laptop-sized global data communicator that can be hooked up to a laptop to provide a 64 kbps connection from anywhere on the planet.

The GAN will leapfrog other MSS providers in the mobile data arena. The data rate is far faster than the 2.4 kbps available from Iridium when used for data, and the planned 9.6 kbps that Globalstar and ICO hope to offer. Ivey says Inmarsat’s carriage of non-voice traffic (data) is steadily climbing upward, and serving the market for corporate network clients who need global, mobile connections for their computers is where Inmarsat’s future lies. Overall, Inmarsat’s traffic is now 40 percent data, while for the mini-M, 25 percent of the traffic is data, even though the data rate is painfully slow. Data traffic grew by 50 percent last year, he says.

The GAN terminal retails for $10,000-$11,000 and the per-minute cost is $6.50. The potential market is 100,000 corporate users who meet the characteristics of being owned by a large or medium company with multinational operations, a mobile work force and an IT infrastructure in place, according to Ivey.

Agrani

Agrani, the regional GEO multi-mission (L-band MSS, C- and Ku-band FSS and Ku-band DTH) satellite project to serve India and neighboring countries, hopes to have its financing and satellite construction contract completed by year end 1999, allowing development to move ahead after several years of planning, according to Jai Singh, president and CEO of ASC Enterprises, the Mumbai, India-based company behind the project. Agrani plans to start service on its own satellite in 2002 and with leased capacity in 2001.

ASC is backed by Subhash Chandra, a wealthy Indian who has built a media empire from a fortune he earned in other businesses. Chandra’s other companies include Zee Network, which is a TV operator in India that is also carried on the Astra and Echostar satellites into other markets. Siticable, another of Chandra’s companies that has the majority share of cable TV homes in India, is also moving into Internet service provision.

Singh says Agrani, at $400 for a dual-mode (GSM/Agrani satellite) mobile telephone, is going to have the lowest handheld MSS tariffs in the business to meet demands in the highly price-sensitive Indian market. "Agrani, with its vastly superior economics and affordably priced products and services is not another Iridium," says Singh. The customer will pay a projected 50 cents (22 Rupees) per minute, average across various market segments.

Singh also believes that Agrani’s homegrown nature and "India connects India" theme also will give it an emotional edge in the minds of some customer segments. As of now, Iridium has a provisional license from India to offer MSS services, and Agrani has recently been issued a Letter of Intent for a license.

ASC decided last year to switch from a pure MSS L-band satellite design to a multi-mission spacecraft with several frequencies and payloads. Besides MSS, Agrani will be equipped to supply long distance telephony, C- and Ku-band fixed satellite services, and DTH using at least six high-power Ku-band transponders. The MSS part of the multi-mission satellite will be able to carry 8,000 calls involving handheld phones simultaneously.

ASC has proprietary market projections that Singh says were developed with the assistance of British and Indian market researchers. The key market assumptions are backed up by independent primary market research checks, conducted by AC Nielsen at the request of the Independent Business Adviser (KPMG-ICE, U.K.), appointed by the potential lenders.

"Analysts estimate that by 2005, no more than 30 percent of the Indian landmass will be cellular enabled, thus creating a huge market opportunity. Mobile connectivity will be available only in relatively densely populated and widely separated urban pockets," Singh says.

ASC will use service providers and resellers to distribute the Agrani service, but for institutions and specialty markets, it will market the service directly.

ASC intends to be a party to a geostationary mobile satellite standard together with Lockheed Martin, Ericsson, Matra Marconi Space and ACeS, which is to be developed using the current satellite air interface (SAI), developed by Lockheed Martin and Ericsson for ACeS. This next-generation SAI will incorporate the features and capabilities specifically required by ASC. Thuraya uses another air interface, devloped by Hughes.

Lockheed Martin is building ACeS and is expected to build Agrani, while Hughes is supplying Thuraya.

More Big Leos?

Two more big LEO licensees, Ellipso and Constellation Communications, continue to work toward getting their financing and construction completed, despite the cloud Iridium has cast on their business plans.

Ellipso, which has been trying to develop its system since 1990, plans to launch the first four satellites in its 17-spacecraft constellation in first quarter 2002. The system will be deployed in two phases, with the seven or eight satellites that make up the "Concordia" part of the constellation going into service first by middle or third quarter of 2002, according to Gerald Helman, Ellipso’s vice president for international and government affairs.

Ellipso’s strategy is to beat all the competition with the lowest prices, charging 8 cents a minute wholesale for calling time to fixed terminals and 30-35 cents a minute for mobile terminals. User equipment will cost $700 for mobile handsets and $1,500 for fixed telephones. The system will have a capacity that equates to 16 billion to 20 billion minutes a year. Helman says the most recent market projections were done about a year ago by consulting firm Arthur Anderson, which found the market to be 35-40 million customers worldwide. "We look at the market differently than Iridium because of our price points," Helman says.

Iridium’s problems have had no noticeable effect on Ellipso, he says. "Savvy investors understand that in a young industry, these kinds of things happen."

Ellipso plans a medium earth orbit constellation of 17 satellites, with the second phase of 10 spacecraft to be placed in an elliptical orbit that would cover the northern latitudes and be called the Ellipso-Borealis system. Helman says the Concordia phase will reach 85 percent of the world’s population and allow service to start. It will cost $1.1 billion, of which more than 25 percent had been raised in August, he says.

Boeing stepped in to become a major financial backer to Ellipso in June 1998, promising to invest $225 million, and winning the job of system prime contractor, which earlier had been given to Orbital Sciences Corp. (OSC). OSC is no longer involved in Ellipso, having transferred its allegiance to rival MSS project Constellation Communications. In May 1999, Boeing expressed interest in buying 70-80 percent of the Ellipso equity for $500 million more, which would have resulted in a $400 million equity investment and $300 million in vendor financing from Boeing, according to Euroconsult. But Boeing later appeared to pause in its consideration of a majority stake.

Constellation Communications International (CCI) is another big LEO licensee that continues to work toward full system development. Orbital Sciences Corp. is a strategic investor, having committed to buy $50 million worth of CCI shares with an option for another $50 million, in return for a 40 percent equity stake and a $480 million contract for satellite and launch procurement.

Several other regional GEO mobiles are stuck somewhere in the early planning stages. They include Matra Marconi’s Euro African Satellite Telecommunications project (EAST), and a new venture called Cyprus Gem from the Cyprus Development Bank Ltd.

Matra Marconi Space and its partners, including the Cyprus Telecommunications Authority, continue to seek financial backing for the planned EAST project, which would bring mobile and fixed telephony to 106 countries in Africa, the Middle East and Europe. Matra announced the project in 1997, saying that it would cost $800 million. At that time, the plan was to begin manufacturing in mid-1998, with operations in 2000 for fixed services and 2001 for mobile, but that schedule is now delayed along with the financing. Remi Roland, Matra spokesman, says that as of mid-August, there was no news to report on EAST’s progress.

In Asia, the plans of Asia Pacific Mobile Telecommunications Satellite to launch the APMT regional mobile satellite were disrupted by the termination of its $450 million contract with Hughes after the U.S. government refused an export license request.

These new ventures must work extra hard to battle the negative perception Iridium has left with the public, customers and investors. The regional systems should be much closer to their markets than Iridium was, giving them an advantage in knowing how to price their services and handsets, LTA’s Kulick says.

Market estimates for MSS demand have turned out to be very far off the mark in 1999. Predictions have been made by numerous consultant firms and investment institutions with research arms. In the aftermath of the Iridium fiasco, some people are questioning the methodology behind those reports and wanting to know exactly how the numbers were derived.

Many of the consultants admit that their research borrows from other research, and in some cases, is based on information handed out by the very companies on which they are reporting. The reports are aggressive and optimistic about the business, in part because the writers know they will not be able to sell many reports if they do not put out forecasts of a big, bright future. While the writers often know that the numbers they use paint the most positive possible picture, they temper the glowing projections with caveats and warnings of all the things that could happen to keep those projections from happening.

As 1999 draws to an end, MSS competitors are applying the lessons learned during the tumultuous summer to their business plans and continuing to work on their systems in their belief that satellites can find a strong niche market for mobile voice customers. Only time will tell if they are right.

Theresa Foley is Via Satellite’s Senior Contributing Editor.

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