Sat Phones: Why Can't The Business Work?

 @ibtimes
on December 11 2010 11:59 AM
ICO / DBSD Satellite
A rocket with a DBSD satellite lifts off from the Cape Canaveral Air Force Station in Florida. The deal for DISH to buy DBSD was approved Tuesday. Reuters

 

Satellite phones aren't as clunky as they once were, and technology has made them more powerful. Gone are the days when satellite phones had to be accompanies by a suitcase.

Yet do date, the field is littered with bold attempts at a phone that could be used anywhere, without depending on earthbound cell phone networks. Billions have been invested, with relatively little to show for it.

Part of the answer is debt. TerreStar is only the latest casualty of a crushing $1.2 billion debt load. The company introduced its Genus phone last month, but it is in the middle of chapter 11 proceedings and it is unclear that the phone will sell enough to help TerreStar stay in business, especially when it carries a $799 price tag.

LightSquared, formerly known as SkyTerra, also planned a hybrid terrestrial-satellite network. That company too, carried a billion-plus in debt that carries interest rates topping 16% as of the end of 2009. Since then it has been taken private by Haringer Capital Partners, a hedge fund headed up by Philip Falcone, which LightSquared says has provided a total of $2.9 billion. But the satellite it launched in November has been unable to fully deploy its antenna. That means the satellite portion of the network doesn't work. Lightsquared will need to launch another satellite for its integrated network to deliver as promised.

Harbinger is already a big investor in TerreStar as well, and is fighting over the plan of reorganization along with other creditors. Between the two of them there is a real possibility that LightSquared and TerreStar could create serious problems for the hedge fund.

Last May, DBSD, also known as ICO Global Communications, filed for chapter 11 bankruptcy. Before it filed, the company had about $790 million in debt. The bankruptcy case dragged on and eventually was appealed; the Second Circuit sent it back to the lower court, and parts of the bankruptcy plan will be re-litigated. The company is also still in a spectrum licensing dispute with the European Union.

Perhaps the most famous of the satellite phone companies is Iridium. Iridium's plan was ambitious - a constellation of 66 satellites that would allow their phones to work anywhere on Earth. In November 1998 the company was launched and only nine months later it was in chapter 11. The company accumulated some $3 billion in debt, and struggled to gain subscribers - rosy projections of hundreds of thousands never materialized. The phones were bulky, even by the standards of the day. They also didn't work indoors.

Less well known is Globalstar, which, while not as ambitious as Iridium, also relied on a large satellite constellation and expensive calls. Globalstar lasted a little longer, falling into bankruptcy in 2002 and emerging in 2004.

Why so many examples of bankrupt companies? The problem is that satellite businesses are capital intensive. According to industry studies a single satellite can cost on the order of $100 million to launch. Couple that with a market that is by definition small -- not that many people need satellite phones that work in the wilderness. In the case of SkyTerra and TerreStar, the problem is even more acute because their coverage is in North America, and there are not too many places in the continental U.S. with no coverage at all.

Satellite phone calls are also expensive. The plan offered by AT&T and TerreStar charges 65 cents per minute for satellite-linked calls. Roaming charges can add up. Iridium used to charge $1.50 per minute, and even its new, reorganized incarnation charges similar rates now.

One company that has been a consistent success in the satellite phone market is Inmarsat, but that started as a not-for-profit entity set up at the instigation of the United Nations. It did not become a private company until 1999, and by that time it had firmly established itself as the provider of satellite communications at sea. It was in effect a monopoly.

Part of the problem, some experts say, is that the satellite companies may be spectrum plays rather than phone services. Companies buy the spectrum and hope to sell it at a profit, with the satellite service a secondary consideration. That could be the case with TerreStar, which has an FCC license that has some value. It may also be the case with SkyTerra. DBSD was more explicit about it; in its bankruptcy filings the company said most of the value was in the spectrum, and it is that which has been the focus of disputes among creditors.

This doesn't mean there is no hope for satellite services. Iridium, the poster child for financial hubris, has had a second act. In 2001 a group of private investors bought the company for $25 million, and in the years since it has grown and even become profitable, reporting 413,000 billable subscribers in the third quarter of 2010, and operational income of $12 million.

But even so, Iridium's business is no longer focused on satellite telephony, but data links. Much of its subscriber base is business and government users. And while Iridium was recently able to raise $1.8 billion of debt, it is guaranteed by Coface, the French export credit agency, which amounts to government backing of the debt. Globalstar is in a similar situation.

One reason satellite phones couldn't get subscribers in the 1990s was that the cellular phone networks had simply outpaced them: they were available nearly everywhere already. Now, cell phone technology is good enough that it's rare to be in a place without coverage. The high cost of phone calls is also a barrier; it may have cost mobile phone companies billions to build the networks we see today, but they were able to subsidize the phones and charge a lot less than dollars per minute.

It's possible that satellite telephones are one of those markets that is simply not tenable by itself. It wouldn't be the first technology that didn't get much cheaper as time passed -- after all, in the 1930s there were visions of personal aircraft flying skyways in New York. Airplanes stayed expensive, while cars and roads got cheaper. Satellite phones may well be a similar phenomenon.

 

 

Share this article