When it became the first satellite-based global voice operator to launch commercial service last year, Iridium L.L.C. predicted its success would serve as the example other such carriers would need to follow.
Not yet a year later, the company’s dangerously low subscriber additions have resulted in overwhelming negative press and have called into question the viability of the satellite voice market-setting a decidedly different example than what Iridium originally intended.
This is the stage on which the next satellite-based global voice providers must enter when they begin offering service commercially-Globalstar L.P. in September and ICO Global Communications Inc. a year later.
While both carriers have taken steps to distance themselves from Iridium, their actions will be observed through the lens of Iridium’s well-documented struggles.
“I am fundamentally skeptical,” said Tim O’Neil, analyst at SoundView Financial Group Inc., who once was rather bullish on the industry. “The hard questions are being asked-`Is there a market?’ Their projects are being scrutinized extremely closely.”
Already, analysts have downgraded their outlook on several mobile satellite services carriers due to uncertainty over the validity of the satellite voice market. SoundView reduced its rating on Globalstar to hold, from buy, in part due to the Iridium issue. Similar concerns may be behind ICO’s difficulty in attracting subscribers for its rights offering, the deadline for which was extended a second time, to July 27, because the company has not yet received the minimum $500 million figure.
“Financing is difficult for the entire MSS industry right now. There’s no doubt about that,” said Mary Frost, vice president and general manager of ICO, North America.
Globalstar, which recently completed its last leg of buildout financing with a $500 million credit facility underwritten by Bank of America NT&SA, said it has been facing increased scrutiny as a result of Iridium’s problems as well.
“Iridium certainly has had its difficulties that have perhaps changed the attitudes of the analyst community towards the market,” said Reid Stevenson, Globalstar vice president of marketing. “The Iridium case has made people think twice about satellite-based services. But every article I’ve read ends with the fact that Globalstar is coming along with a smaller, cheaper, more reliable service.”
Both Globalstar and ICO said Iridium’s challenges have no bearing on their respective strategies. Their main contention is that Iridium’s original business plan, targeting the international business traveler roaming market, never was indicative of what they intended to execute. The fact Iridium’s strategy didn’t work, teamed with the company’s new concentration on the vertical segment, only supports their plans, they said.
“If anything, our focus has been validated by our competitor’s recent refocusing on these markets,” said ICO’s Frost. “We’ve always thought the market would be industrial businesses.”
According to Stevenson, Globalstar’s primary market is what he called the cellular extension market, filling the cellular coverage gaps of a given country or region for local users.
“We don’t change our strategies that much,” he said. “We’re true to what the original strategy was. We’re just trying to stay the course and launch service on a limited basis in the September/October time frame.”
But O’Neil said Iridium, and most everyone else, assumed these niche market segments would be natural early adopters, who would require little convincing. Iridium expected vertical market adoption would fuel the company’s business plan while it chased after the more difficult horizontal users. But this never happened, calling into question whether this pent-up vertical demand even exists.
“They still don’t have subscribers. They still don’t have the pent-up demand they thought they did and the market thought they did,” he said. “When they didn’t even get that initial pent-up surge in subscribers, you have to ask yourself, `Where is the market?’ “
That Iridium restructured its marketing department to include experts in vertical fields means little, O’Neil continued, because the company had employees familiar in those fields all along.
“They had some very smart people there,” he said. “It’s not a matter of focusing. It really is a question of, `Is there a market?’ The problem now is that the pent-up demand is not showing itself.”
If the pent-up demand didn’t show for the first carrier out of the gate, why should customers suddenly rush for the second, or the third? Iridium, which was supposed to legitimize the mobile satellite market, may have instead proven there is no such market, O’Neil said.
But the carriers haven’t given up just yet.
“I suppose there’s an amount of pressure (to legitimize the industry),” said Sue Kennedy, Iridium vice president of marketing. “But it can be done. It’s just a matter of getting it done. It’s a matter of getting it right this time. Everyone here does believe that satellite is the technology of the future.”
Carriers point to the success of the International Mobile Satellite Organization, or Inmarsat, as proof a market exists. If users were willing to carry around the company’s briefcase-sized unit, why wouldn’t a handheld unit do as well?, Frost asked.
“There’s no question that a handheld product, priced correctly, is a home-run product,” she said. “Every time I meet with customers, it reassures me that they want a small product that works … I think people have an absolute right to expect to be able to communicate anywhere in the world. I truly believe that, and I think that’s not far away.”
