DUBLIN, Ireland-There has been much debate over the future of satellite-based communications. Indeed, regular readers of the financial press might wonder if it has any future in the new millennium as they follow stories of operational difficulties, disappointing subscriber figures and financial restructuring and bankruptcies.
To be fair, the early days of cellular communications were not smooth sailing, and satellite systems are proportionately much more expensive to develop. But the accepted wisdom is that satellite operators made some serious miscalculations, and these mistakes have cost them dearly.
Luca Tassan, an analyst with the Strategis Group, believes there is room for only one global player in the narrowband satellite communications market.
“That was not Iridium simply because its business model was based on unrealistic assumptions,” said Tassan. “There is a chance for Globalstar or ICO to become that global operator, but the financial sector doesn’t have faith in them because their business plans are fundamentally flawed. However, if one of those two can raise the funds necessary to complete their project, there is an opportunity for an operator that can maintain low operating costs.”
He said the existing operators will find it hard to rebalance their finances and that there is not an opportunity for another player to enter the market. He also raised the intriguing possibility that a merger might be the best option for the continued survival of ICO and Globalstar.
“These operators overestimated the size of the market. Their business models were also based on early 1990s network deployment plans and technology and the assumption that cellular services would not be widely available. They should have seen that coming-all our forecasts said that GSM would be everywhere, maybe not to the extent that it is today, but you could still see it coming,” Tassan added.
Iridium was not convinced. But the strategies of Globalstar and ICO have been more complementary to GSM, and as a result their tariffs are more realistic.
“Satellite was a technology with a definite window of opportunity,” said Mohammed Hussein-Ismail, an analyst at Datamonitor. “Iridium didn’t have enough handsets ready on time, and many of its loans were dependent on hitting subscriber targets that it got nowhere near. If it had been more realistic at the outset, it wouldn’t have encountered so many problems.”
However, he is unwilling to dismiss the company completely. “I wouldn’t write it off because of the huge level of investment. The satellites are up, and this investment will have to be paid back in some way. The challenge is that the vast majority of the target market is quite happy with their current GSM phones,” Hussein-Ismail commented.
“Global cellular coverage is not great, but if you are only offering mobile services at a very low data rate, there is not much attraction. The speed of data over satellite is a definite negative factor.”
Ovum analyst Jeremy Green is also critical of the business model employed. “Satellite operators have not made themselves easy to do business with. Many of their investors have been given distribution rights, and they then have to square the promises made in order to get investment with what makes sense in the marketplace in terms of distribution,” Green said.
“The other problems are that quality of service is atrocious, and the handsets were poorly designed. Some calls have good speech clarity, but there is more to service quality than voice quality. People also thought that Iridium could manage line-of-sight issues by having enough satellites, but that would work if the world were a billiard ball. In reality, satellites disappear behind trees and buildings.”
The miraculous thing is that the technology works at all, said Green, explaining that the satellites are as much as 10,000 miles away, and the handset has a power output that enables it to be used as a handheld “without frying your brain.” The technology is pretty special, he said, but it doesn’t work like cellular.
“Iridium was originally premised on the American business traveler,” said Green. “It is possible that there is a large number of potential corporate users, but they just don’t add up to anything like the numbers needed to pay back the original investment.”
U.K.-based research company EMC predicts that sales of dual-mode satellite-cellular terminals will represent less than 1 percent, or about 10 million units, of the global market for terminals by the end of 2003.
According to EMC, systems such as Thuraya for the Middle East and ACeS in Asia most likely will dominate in specific geographical areas because they will be able to draw on the resources of strong players within their respective regions. Roaming agreements may even turn these regional satellite operators into a formidable global alliance.
The global spread of digital cellular has clearly altered the requirement for an alternative means of remote coverage. The responses of the satellite operators will determine their chances of survival and commercial success in the new millennium.
