Teledesic’s one-time plan of launching a $10 billion constellation of satellites to provide broadband services worldwide has been gradually scaled back over the years. But the company’s latest move of returning its Ka-band license to the Federal Communication Commission (FCC) stops just short of shutting the whole thing down.

The dream of telecommunications pioneer Craig McCaw to develop Teledesic into a “broadband in the sky” venture now appears to have ended. Originally licensed by the FCC to provide broadband satellite services in the 28.6-29.1 GHz and 18.8-19.3 GHz bands using a constellation of 840 non-geostationary satellites, Teledesic was considered impractical by many critics from the outset.

McCaw succeeded in recruiting Microsoft [NYSE: MSFT] Chairman Bill Gates and other well-heeled financial backers to support the development of Teledesic. However, not even McCaw and his “Who’s Who” of supporters could overcome doubters in the financial markets.

With billions of dollars needed, the cost was too high to convince Wall Street investors that they would get a payoff within a reasonable period of time. The financial markets had already seen three bankruptcies in the mobile satellite phone market – Iridium, ICO Global Communications and Globalstar. These companies were technologically successful but they never came close to recouping the billions of dollars invested to build and launch each company’s constellation.

Teledesic acknowledged last September that it was undergoing a reality check when it suspended work on two satellites that it had contracted to build under an agreement with Italian satellite manufacturer Alenia Spazio.

Also at that time, Teledesic significantly reduced its staff and announced plans to evaluate possible alternative approaches for its business. Company officials stayed low-key until Teledesic sent a June 27 letter to the FCC in which it surrendered its Ka-band license and asked the agency to dismiss a related modified application.

ITU Approval

Teledesic was also able to obtain approval from the International Telecommunication Union for its broadband satellite system. Teledesic managed to enlist the support of the U.S. government to advocate the company’s position to win an allocation for the system at a previous World Radiocommunication Conference (see related story about this year’s WRC). Those efforts now appear to be for naught.

Before Teledesic’s plans collapsed, the company had reduced the size of its massive constellation down to 30 medium-Earth-orbit satellites and ordered the construction of two of them from Alenia in February 2002. But company officials ultimately concluded it was not prudent to continue the substantial capital expenditures required to construct and launch the satellite system to meet FCC and ITU regulatory milestones “purely on speculation.”

That view was offered after company representatives assessed the financial markets and the commercial prospects for satellite broadband communications. Teledesic spent hundreds of millions of dollars to design and to develop its global broadband satellite system concept over the past decade, company officials said.

“Our decision to suspend our activities results from an unprecedented confluence of events in the telecommunications industry and financial markets,” Teledesic Chairman and Co- CEO McCaw said last September. “We do not presently see elements in place that would result in returns to our shareholders that are commensurate with the risk. We continue to believe that the Teledesic service would ultimately provide unique and measurable benefits to the world, and we are looking at scenarios to preserve the ability for that service to be realized,” he said.

The view from Teledesic management in September was that the scaled-back system could be useful to governments to aid with disaster relief, anti-terrorism, defense services and other critical government activities. The availability of ubiquitous, quality broadband service to the roughly three billion people who lack access to terrestrial capabilities was considered a worthy and potentially profitable mission, company officials said.

Impressive Investors

Aside from financial backing from McCaw and Gates, Teledesic’s strategic investors included Saudi Prince Alwaleed Bin Talal, Boeing [NYSE: BA] and The Abu Dhabi Investment Co.

McCaw and an investment group he headed spent $1.2 billion during May 2000 to acquire ICO from bankruptcy court protection. McCaw had originally planned to combine Teledesic and ICO in some fashion. With Teledesic’s demise, ICO faces a number of challenges to get its service up and running again. ICO is dependent on sorting through a number of regulatory matters, the raising of adequate financing, access to sufficient spectrum, and the operation of its technology without interference from other services, according to the company. ICO has an FCC license to use the 2 GHz band for its satellite and ancillary terrestrial services in the United States.

Perhaps McCaw can learn a few lessons from his Teledesic misstep. “The long story of the Teledesic system that never got built illustrates a common flaw in technology-driven business plans,” said D.K. Sachdev, who heads the Vienna, Va.-based SpaceTel Consultancy. “Very capable system designers develop a revolutionary system architecture and then try to force-fit whatever market data is available to justify the investment.”

The concept of using Teledesic to provide ubiquitous broadband access to fixed stations around the world is as technologically sound today as when “epic battles” were fought in the 1990s at the ITU to allocate the Ka-band for such a service, Sachdev said. However, the market justification was flawed then and did not improve in the interim, he added.

“It is true that billions of people around the world are without phone service,” Sachdev said. “But what they need is local phone service and not connectivity around the world. And they certainly are not going to pay even 50 cents per minute for a call, notwithstanding the revolutionary technology being offered.”

In that light, McCaw and the other Teledesic backers deserve credit for not building even the scaled-down version, Sachdev said. Others are not so wise. Misguided efforts are now underway to salvage the Astrolink broadband satellite system, he added.

At the same time, there have been some encouraging signs from regional systems, such as AceS, Thuraya and iPStar. They are test marketing broadband satellite service in limited environments, Sachdev said. If the business models of the regional systems are validated, one day a case also might be made for the more ambitious, costly and risky global systems, he added.

Roger Rusch, a satellite consultant who heads the Palos Verdes, Calif.-based TelAstra consulting firm, described Teledesic as a pioneering effort that deserves to be recognized as a worthy attempt to provide broadband by satellite using the latest technology.

“In the long run, we expect these services to be provided by geostationary satellites that will be more economical to build and operate,” Rusch said. “The dream of providing broadband services by satellite is still alive with projects like WildBlue and [Hughes Network Systems’] SpaceWay. The goal of providing these services worldwide has merit and will be realized in the near future.”

‘Tremendous Impact’

Teledesic should be acknowledged for making a “tremendous impact” on the satellite industry when it proposed to offer broadband data services worldwide, Rusch said. “The concept of a major switchboard in the sky had been a theoretical dream until it was embraced by McCaw and Gates. Teledesic electrified interest in high-speed Internet services by satellite,” he added.

“Unfortunately, the extensive Teledesic network was extremely complex and expensive,” Rusch said. “After years of study and refinements by several major manufacturers, the cost was still prohibitive. It was not possible to find sufficient financial backing to fund the large capital cost,” he concluded.

–Paul Dykewicz

(William Owens, Teledesic, 425/602-0000; D.K. Sachdev, SpaceTel Consultancy, 703/757-5880; Roger Rusch, TelAstra, 310/373-1925)