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ET phones home
ET--extraterrestrial telephony--means that you can phone home from anywhere. But, with all the communications satellites being launched, who is going to make money from phone calls in space?
By Paul Gibson -- Electronic Business, 5/1/1998
In his years as Boeing's top executive for launching satellites, Gale Schluter had
never confronted anything like it before. Last winter's foul weather had caused innumerable delays at launch sites on both coasts. Now, in early February, with the weather clearing, Schluter faced an alarming prospect: his biggest customers, Motorola Inc.'s Iridium and Loral Inc.'s Globalstar, might insist on simultaneous launches for their satellites stacked atop rockets thousands of miles apart at Vandenberg Air Force Base in California and Cape Kennedy in Florida. As Schluter knew all too well, Boeing, a relative newcomer to the space game, had neither sufficient ground crews nor computers for such a task. "Frankly," he recalls, "I prayed for rain."
El Niño obliged. The rains continued to drench southern California. But on Valentine's Day, the Florida weather cleared long enough for Globalstar's first four satellites to soar aboard a Boeing Delta II launch vehicle exactly 80 seconds before their launch window closed. Four days later in California another Delta carried five Iridium satellites into low-earth-orbit (LEO).
"Satellites are incidental to us. We're the first global wireless telephone company." --Edward Staiano, vice chairman of Motorola's Iridium venture |
Other research firms offer equally optimistic forecasts for revenue and demand. Forrester Research, Cambridge, MA, predicts that revenue will top $35 billion annually by 2005 as the satellites beam their services at three distinct customer groups: roaming business executives, rural dwellers in areas where phones are few and multi-national firms wanting private intranets for data swapping.
"Our intention," says Edward Staiano, vice chairman and CEO of Iridium, "is to give you wireless service of the highest quality, be it cellular- or satellite-based, anywhere on the planet with one number, one phone, one bill." The paradise of extraterrestrial telephony (ET) beckons.
Yet it was only a half dozen years ago that the satellite industry was filled with gloom. Critics warned it would lose out to fiber optics on land and investors shunned offerings by the satellite makers.
"This is the year when we go into the marketplace. When we compare our performance with our promises." --Douglas Dwyre, president of Globalstar |
Such trends mesh with Wall Street's need to find promising high-yield markets for high-risk investors and with the plenitude of funds now available. A score of firms connected with the satellite industry has made public offerings with some rewarding their investors handsomely. Globalstar's stock climbed sixfold in two years.
But much remains troublesome. The satellite business has become something of a haven for giant high-tech firms searching to replace their waning defense contracts. While launch space is at a premium, other parts of the business face capacity gluts. Listen to Ricardo de Bastos, a senior executive with Orbital Sciences, as he laments, "We are building and launching very high-technology, high-performance systems and we're treated almost like commodities."
And who knows how the Asian malaise will play out? Orders from there are already turning soft. Yet satellite communications players must lay out billions of dollars now for technology that is only partially tested and for a share of markets about which they can only make educated guesses.
It remains an open question whether satellite communications will complement or compete with the land-based telephone companies. Or how the telcos will react to their looming presence.
"[Ours is] an annuity business. It's going to be there for a long time." --Alan Parker, president of Orbcomm |
If there is an over-riding strategy among the vast field of contenders eager to supply communications from space, it is this: Be first to market and grab the best customers before the competitors arrive and profits vanish. Those with deep pockets are adopting a soup-to-nuts approach, participating in every aspect of the satellite business either on their own or with partners. The less well-heeled firms are seeking out market niches where they can be dominant or at least avoid the full force of competition.
Increasingly, this is a business of alliances and huge consortia. Ultimately only a few can survive. Already weaker firms are withdrawing or adjusting their game plans. Witness Cleveland-based TRW Inc. Reluctant to fund the under-capitalized and untested Odyssey Telecommunications International, TRW switched its allegiance to Britain's ICO Global Communications even though this meant returning its spectrum license to the Federal Communications Commission (FCC) and being a late starter.
The new satellites do promise significant advances in communications technology. Far smaller than the earlier geostationary earth orbit (GEO) satellites and staying closer to earth, these new devices can be stacked like poker chips, as many as a dozen at a time atop their launch rockets, significantly reducing costs. At lower altitudes, these low- and medium-earth-orbiting satellites (MEOs) will circle every two hours or so and beam signals that their backers contend can match terrestrial cellular services for clarity and response time.
The satellites will arrive in two waves. Over the course of the next year or so, the first batch--with Iridium, Globalstar and Britain's ICO dominating--will loft satellites for sending voice, data, fax and paging signals to either hand-held or fixed receivers located virtually anywhere on the earth.
A second and more numerous set of satellites, due to be sent aloft around the turn of the millennium, will contain more sophisticated electronics, adding services such as two-way, multi-media and video. Using a wider range of frequencies, these will include such constellations as Motorola's Celestri, Hughes' Spaceway and the Euro-American SkyBridge/CyberStar partnership from Alcatel Espace and Loral. Also among this group will be Teledesic, a constellation backed by telecommunications entrepreneur Craig McCaw and Microsoft's Bill Gates.
LEOs have drawbacks, however. Their footprints are small. So every system will need scores of satellites. Dubbed a broadband "Internet-in-the-Sky," Teledesic is designed to have 288 satellites that by some estimates could cost $30 billion or more to build and operate.
Among the deep-pocketed, do-it-all contenders, three firms--Hughes, Loral and Motorola--stand out as the dominant forces. As befits their defense industry heritage, all three make more of their prowess in engineering and manufacturing than in marketing. Shrewdly, each has spread its risks by choosing to offer a broad spectrum of services, apparently hoping that profitability will increase as they get closer to the ultimate users of their goods and services. All accept the need to form alliances.
Indeed, the industry's capacity for forming incestuous relationships is often bewildering. Ferocious competitors are functioning at the same time as each others' vendors or partners in joint ventures. Los Angeles-based Hughes and Motorola, Schaumburg, IL, for instance, will not only compete aloft with their Spaceway and Celestri constellations, but also each holds a stake in American Mobile Systems, a niche player in data-messaging.
If track records count, Hughes should have an advantage. Hughes Space & Communications is a 30-year space veteran, but its success was largely in the GEO business and satellite broadcasting. These are still fine endeavors and last year Hughes consolidated its position by acquiring PanAmSat.
But today's action is in moving from GEOs to LEOs and MEOs, and from analog to digital processes. So, under President Don Cromer, Hughes stresses fresh approaches to building satellites. "Before we can realize full efficiency in orbit," says Cromer, "we have to have efficiency in the factory." Thus Hughes pushes the use of common buses and modular manufacturing that allows work to proceed in parallel.
Its assembly-line approach--helped no doubt by Hughes' association with General Motors--has cut cycle times by a third while significantly bolstering productivity. In space, Hughes will push MEOs, gambling their size will yield competitive advantages over the LEO constellations from Motorola and Teledesic.
New York-based Loral Space & Communications, too, has its fingers in almost every piece of the satellite pie and also traces its lineage to Detroit. Ford Aerospace had the idea for Globalstar more than a decade ago, long before it morphed into Space Systems/Loral. Through its manufacturing arm, Loral can claim over 600 years of in-space time and participation in the construction of 190 satellites, mostly GEOs, of course.
Globalstar and CyberStar are Loral's bets for the next two generations of satellites. In designing Globalstar, Loral opted for a conventional approach. Its satellites will not communicate with each other, but will function as "bent pipe" transponders, receiving signals from a phone on the ground and passing them back to any gateway within the satellite's 1,500-mile-wide footprint.
The advantage? Lower construction costs, it hopes. CyberStar proposes to link Ku-band satellites with existing land-based cable and telecommunications lines to offer the business world high bandwidth intranets. Perhaps indicating its concerns about doing everything itself, Loral is playing the alliance game too. Through CyberStar, Loral is linking with European-based Alcatel Alsthom and its 64 satellite SkyBridge constellation.
Loral's strategy for dealing with land-based telcos is to "be a friend, not a challenger." So Loral has deals with and collects funding from France Telecom, Vodaphone, which offers services in Britain and the Far East, as well as U.S. West and Korea's Dacom. Such allies could count as Globalstar pursues its goal of getting three million subscribers by 2002. "Our whole business case relies heavily on the quality of service, the dropped calls, the access time, the busy signal," says Globalstar President Douglas Dwyre. "All the measures of merit in the satellite industry are going to be applied to us."
That could be tough to pull off. An inherent drawback of current satellite technology is that its signals are too weak to beam through all but the smallest buildings, a fault that could limit appeal among urban customers.
For its part, Motorola, with its huge stake in both the Iridium and Celestri systems, is more intent on setting an independent course. The Motorola mantra, as espoused by Staiano, is bluntly simple. Think like a global telephone company, not a satellite company. Says he: "Satellites are incidental to us. We're the first global wireless telephone company."
The Motorola mission is to be first with more. It's racing to launch Iridium first and betting that with a more powerful signal than its competitors, Iridium will grab the most customers. The company has announced a firm date--Wednesday, September 23, 1998--for its service to start and Staiano is determined to meet this self-imposed deadline. As of mid-April, Iridium had launched 63 of the planned 66 satellites in the constellation.
Such braggadocio is somewhat warranted. Even its rivals acknowledge that Motorola is the best manufacturer in the business and none comes close to its ability to produce a satellite every 4.3 days. Motorola firmly believes it can get its manufacturing costs down to a level where it can compete on a total-cost basis with terrestrial networks.
Motorola's full-speed-ahead approach isn't without risk, however. To be first, Iridium opted for the older time division multiple access (TDMA) technology that, some critics claim, will be no match for the newer code division multiple access (CDMA) espoused by Globalstar, whose backers include San Diego's Qualcomm, a leader in this technology.
If you haven't got deep pockets, where do you go to find less hostile markets? In a different orbit, hopes David Castiel, founder of Mobile Communication Holdings, Washington, D.C., and one of the many creative niche players looking for safe havens. Rather than fly in the traditional circular orbits, his satellites will fly in elliptical orbits with the apogee in the northern hemisphere. This way his aptly-named Ellipso constellation can spend more time where the most people are.
Ellipso's satellites will move with the sun to achieve maximum exposure during office hours. Castiel figures his satellites will be above customers for roughly 112 minutes out of 180, a significant improvement compared to his competition. Among Castiel's backers is a unit of Lockheed Martin Corp., Bethesda, MD, which is supplying $200 million for earth stations and has booked several million minutes of telephone time.
Another niche player is Herndon, VA-based Orbcomm, a joint venture of Orbital Sciences Corp. and Teleglobe Inc. Orbcomm will offer portable, low-cost, two-way communications that it hopes will appeal to the recreational market, particularly hunters and sailors. But its satellites may find a more lucrative business in tracking locomotives and trucks containing expensive cargoes, or in monitoring utility meters.
Advantages of electrical utility
"That's an annuity business," says Orbcomm President Alan Parker. "It's in place and going to be there a long time." Attaching a readable plate to the infrastructure is all that's needed. Two advantages for electrical utilities would be: 1) no more expensive house calls by their meter readers, and 2) better monitoring of peak demands. For a while Orbcomm could have the market to itself. It plans to have its 28 satellites in commercial service by mid-year, far ahead of the pack.
Being first is important. As Ellipso's Castiel says, "There are two ways to corner a market. Get there first, take everything you can and hope that you can keep it. Or come a bit later and be cheaper, better or both."
In this contest how firms approach markets and marketing could count as much as their engineering capabilities or the power of their systems. "The consumer doesn't care whether service comes via satellite or from a terrestrial link," points out telecommunications lawyer Phillip Spector, a partner with Paul, Weiss, Rifkind, Wharton & Garrison, Washington, D.C. "They only want a clear signal at a reasonable price on their little pocket phones."
How much is reasonable? Satellite service is aiming at drastically different markets--wealthy business executives and poor rural dwellers. "You can almost say the international business traveler is price insensitive," says Carol Ingley, a consultant in Washington, D.C. "Almost to the point where the higher the price, the higher the prestige."
At a telecommunications conference in Washington, D.C., in February, a Wall Street analyst asked six top satellite executives for their predictions on the likely price for calls using their satellites. The answers ranged from 15 cents a minute to $3. But that's the wholesale rate, before resellers add on their charges. For the handsets the estimates ranged from $250 to $750.
Reasonable charges? "I don't think any of them really know," said the analyst, insisting on anonymity as his firm is a major satellite underwriter. "They're floating trial balloons."
Not all will fly. In Indonesia, a local telco, Pasifik Satelit Nusantara, has installed some 2,000 satellite phones in villages, each with a dish, a terminal box and a handset. Publicists say the service is popular. Hardly surprising. The charge for a call to anywhere on earth is 15 cents a minute, a level that's likely to make satellite operators feel dread about repaying their capital costs.
"Field of Dreams" strategy
The satellite operators would love to knock out land-based suppliers and go direct to users. For the moment they dare not. In numerous countries, telephony is still a monopoly business and in many cases a government monopoly. Governments are nervous about any proposals that would bypass their infrastructures and diminish local revenue and taxes. And, in the end, it's governments that control operating licenses. Iridium boasts that it has nailed down contracts with half the countries it wants to serve, but that still leaves the other half outside its footprint.
Who will be the winners? Possibly everyone. Motorola, for instance, says the present $650 billion market for telecommunications will double over the next decade. Its implicit message: There's business aplenty for terrestrial as well as satellite systems.
Motorola could be right. Judged by demand for communications services, particularly of the Internet type, it's hard to bet against these markets. Trouble is, in the satellite business the bets are so huge. Unlike a conventional telephone system operator that can add poles and wires as demand grows, the satellite firms must first launch their craft and then hope demand will follow. They don't have much choice but to adopt a "Field of Dreams" strategy no matter how large the up-front costs.
In the future the battle to deliver local services from the sky can only intensify. Only days after Boeing lofted the Globalstar and Iridium satellites, the Gates-McCaw Teledesic project became more than a paper contender. From the wing of a Lockheed Martin LM-1011, Orbital Sciences successfully released a Pegasus rocket carrying the first Teledesic satellite.
This is countdown time in what promises to be the greatest-ever commercial race in space. Globalstar's Dwyre is right when he says, "This is the year when we come out of the lab and go into the marketplace. When we compare our performance with our promises." The world will be watching, but how will it be dialing?
A former senior editor at Forbes and former executive editor at Financial World, Paul Gibson writes on business subjects from Chatham, NJ. E-mail him at prgibson@coin.csnet.net.
