The path of high-technology is littered with broken dreams. Satcoms may still hold promise. It was during the Kargil battle that many Indians noticed the wonder world of satellite telecommunications (Satcom). Many battle-scarred soldiers were able to speak with their near and dear ones using Iridium phones. The sound quality was crystal clear and there were no transmission breaks -- a normal telephonic conversation was made possible from the most treacherous and testing locales in the world. Indians woke up to the fact that satellite telephones could offer a single number anywhere around the globe.
Iridium, the forerunner in the Satcom market, had splashed advertisements claiming that they planned to make geography history. And the $140 million advertisement campaign was not a mere boast.
The technology that Iridium and other players in the Satcom business are offering, enables people to have one number that could be accessed from anywhere in the world. Phone calls could be made to any location from any location, be it the Amazon or Alaska.
But after launching its service in November last year, two bigwigs of the Satcom game have filed for bankruptcy under the US Chapter 11 rules. That is, they have signaled a ‘time-out’ and request their lenders to give them time to restructure operations and to freeze interest payments for some time.
There are several interesting sides to this imbroglio. One is that huge amounts were invested. Around $7-8 billion was invested in these prestigious projects and an estimated total investment of $50 billion in other Satcom projects in ensuing years. A big bet.
Importantly there were successful and well-established corporates from around the world backing this bet. Iridium is a consortium led by global telecom equipment giant Motorola and has a host of strategic partners from around the globe. ICO Global Communications is an offshoot of Inmarsat, a naval satellite communications company having around ten strategic investors.
With so much of greenbacks and gray matter backing an enterprise what then went wrong? Reams of newsprint and thousands of bytes have been utilised to analyse this. But, at the moment it would be more important to look at the insights that these analyses provide us with. Some insights:
Dreams die, reality bites: "One thing is for sure, Iridium is an engineer’s dream come true," says ICO Global Communications India, president, Bishnu Pradhan. But then there are other harsh commercial realities too. Iridium had 66 low earth orbit (LEO) satellites zipping across the globe. These would pick up signals from one region and hand it over to another satellite as the location changed.This enabled the caller to maintain continuity of conversation across the globe. Now, satellites are expensive and so are the launches. The LEO satellites have a lifespan of just five to six years. As such, there would be cost increments every five years.
Thus, a technology might be great, but commercial viability is the spine.
Today’s technology tomorrow’s commodity: Commercial prudence makes more sense considering the dynamic nature of the telecom business. It was in 1985 that Motorola executive Barry Bertiger put forth the idea of having a global phone. His wife and he once while on a Carribean beach needed to make a telephone call and there were no mobile phones that could allow them to call from the beach. The idea was picked up and an extensive market study undertaken which involved interviewing 20,000 people.But then somewhere down the line changes in the mobile business were ignored. Since the late eighties, when the Iridium project was conceived, there have been marked changes in the mobile business.
Average costs and the weight of an handset have fallen through. Average weight of a cellular phone previously was around 500 gms; now it is around 150 gms. Importantly, there were players around the world subsidising the costs of handsets making mobile telephony extremely popular.
But then there are markets in Asia (even India) too, where it is not uncommon to see mobiles sold cheaper by the dozen or in sacks, like grain or any other commodity. Then again, the tariff rates have almost halved since the late eighties.
The most significant development has been the spread of GSM standards across Europe and Asia. This took away the wind out of the unique selling proposition that Iridium has -- offering phones that can roam many more territories.Keeping this in mind, the Iridium launch had all the odds stacked against it. The handsets were large and bulky weighing 500 gms, call rates were pegged at $7 a minute, and the handsets cost upwards of $3,000. Consequently, the consortium managed to garner only 10,000 subscribers in five months. This was around 40,000 subscribers lower than that was demanded by banks that had financed $800 million to the company.
Haste certainly makes waste: "The early bird gets the boot", sums up a cellular industry expert succinctly. He points out that there was an unprecedented rush on the part of the management to be the first global Satcom company. They had publicly announced their launch in November last year and botched it up.The speed to set up operations gave rise to severe supply difficulties that could not be handled. There were a limited number of handsets available. The service providers too made a lacklustre effort to spruce things up. Their grouse was that Iridium had not provided them with sufficient training and support to service customers.
To make matters worse, size of the organisation and the sheer diversity of partners made it difficult to maintain a shared vision. While the partners of the Latin American gateway were Venezuelan whose interests ranged from the food business to construction, in India it included financial institutions.
With a little bit of luck
But then along with all this there were couple of accidents and tragedies that also affected the sentiment of the Satcom business. For one, two of the satellites that Iridium had launched failed in the orbit. Then in August 1998, a fifth of Globalstar’s satellites exploded shortly after they had taken off on a Ukranian rocket.
All these factors added to the investor community suspecting the entire Satcom business. Share prices of Iridium started to fall. ICO Global Communications had to scale back their initial public offering. Shareholders shied away from this $4.6 billion project.
The revival
However, not all is lost. Optimism still abounds the players and investors who have smartened after the initial hiccups.
ICO Global Communications and Globalstar plan to price their products more competitively. According to reports, ICO Global Communications would be able to price its services between $3 to 50 cents a minute. ICO will be able to handle this as it has only 12 satellites on a high orbit.
These satellites have a longer life. According to Salomon Smith Barney, a US-based investment bank, the company due to its type of satellite constellation, has a low capacity cost for calls (8 cents a minute) as compared to its competitors.
In addition, the company uses the conventional bent pipe technology where signals are beamed down to earth after being received from the satellite and can be transmitted over terrestrial fibre networks, which it owns.
Meanwhile, Globalstar has the advantage of being a close-knit unit without as diverse an ownership as that of ICO or Iridium. Loral Orion, the US-based aerospace company owns a sizeable chunk of 45 per cent of the equity while the other partners are globally renowned telecom companies.
According to reports, Globalstar proposes to match ICO’s pricing. It plans to price the 250 gm handsets between $1,000 to $1,500 a unit. At the time this article goes to press, it has been reported that Indian media magnate Subhash Chandra has made public his intentions to bid for ICO.
Meanwhile, There are various plans afoot at the beleaguered Iridium as well. It would be unwise to write them off. And, as the industry consolidates, the players take solace from the fact that 80 per cent of the world is still not covered by mobile phones. Salomon Smith Barney expects the mobile satellite services market to serve around 27 million users by 2007.
Further, impressive estimates are being made in the broadband services segments. Satellite systems could offer high-speed Internet access and data transfer that could be matched by few other modes.
At the moment, the Satcom companies are playing it steady, trying to resurrect the bankrupt dreams.