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Satellite phones: Lost in space

The satellite phone industry has spent the year struggling for survival, and though its end may be near, the decisions investors made long ago continue to haunt corporations.

The satellite phone industry has spent the past year struggling for survival, and though its end may be near, the decisions investors made long ago continue to haunt prominent corporations.

Widely regarded as one of the most spectacular flameouts in technology industry history, Iridium is serving as a noose around Motorola's neck even months after Motorola dumped the service in a bankruptcy fire sale. Satellite phone services such as those offered by failed Iridium never took hold with consumers and are leaving a legacy of financial pain, rather than technological triumph.

Iridium, which paid more than $5 billion to build a network of 66 satellites capable of delivering mobile phone service nearly anywhere on Earth, was sold for just $25 million after it attracted only about 50,000 customers. Globalstar Telecommunications is similarly struggling to gain subscribers.

Some analysts have pronounced the satellite phone industry dead, even though Iridium, which is now under different ownership, will finally launch its service next month for a smattering of companies.

"It was an idea that was generally pretty positively received five or six years ago in the industry. Now, the most exposed are getting burned up on re-entry," said Bryan Prohm, a wireless analyst at Dataquest.

But both Iridium and Globalstar continue to operate, providing headaches anew for their parent companies.

Heading to court
This week, both Motorola and defense giant Loral Space & Communications suffered blows from their investors, who thought they'd sunk their money into a space-based technology that would revolutionize communications.

On Wednesday, Loral was named as a defendant in a class-action lawsuit accusing executives at Globalstar, a satellite phone company in which Loral owns a 41 percent stake, of painting glowing pictures about the company's business while it was missing sales targets. The case marked the seventh such lawsuit against Loral.

A day earlier, Motorola, the world's No. 3 handset maker, learned that a bankruptcy court ruling could put it on the hook for potentially billions of dollars in Iridium-related claims. The court case could set the stage for fellow Iridium investors to sue Motorola for up to $2 billion in damages, alleging that the Schaumburg, Ill.-based electronics giant poorly managed the satellite company, which led to its demise.

The news is just the latest evidence that the Iridium debacle won't go away for Motorola. The parent company already has swallowed millions in losses--Motorola took a $740 million charge against earnings during the fourth quarter of 1999--and may now find itself on the hook for billions more.

Motorola's own records estimate it may have spent about $2.5 billion to cover any financial exposure from Iridium dating back to 1998.

"No entity has lost more money on Iridium than Motorola," said Motorola spokesman Scott Wyman.

But attorneys estimate that the ruling out of bankruptcy court may end up costing Motorola much more. The ruling also carves out about $47 million for a legal fund so that Iridium creditors can sue Motorola, according to court documents.

"It's unfortunate that there is a possibility that the creditors will be able to use $47 million of Iridium's remaining estate to pay attorneys to pursue allegations that are without merit," Wyman said.

Even the latest version of Iridium can't escape the satellite phone's legacy. The new owners of Iridium, which bought the bankrupt company's assets for $25 million, decided not to change its name and are planning to launch the satellite phone system next month for several industrial customers. Its similar name has led to some confusion for the new company about whether it is part of the lawsuits, which it is not, according to a spokeswoman.

Globalstar and Loral could not immediately be reached for comment. In general, most companies rarely comment on pending litigation.

Why satellite phones failed
When Iridium and Globalstar were first being conceived in the late 1980s and early '90s, worldwide cellular phone coverage was sparse. But gaining the necessary international government approvals to launch dozens of satellites in space and to establish on-ground base stations in hundreds of nations took years.

By then, wireless services had exploded in popularity; their prices fell, and the handsets themselves became sleek and sexy--both as communications tools and status symbols. By the time the satellites were ready, cell phones had captured most of the market Globalstar and Iridium were targeting.

In addition, initial satellite phones were large and bulky with sizable antennas. These phones were costly too, with first-generation Iridium handsets going for as much as $3,000. The original services cost as much as between $5 and $7 per minute, quickly relegating satellite phones to the wealthy international business traveler and government agencies that needed communications in remote locations.

The mass-market consumer had hardly heard of Iridium or Globalstar and was certainly unwilling to pay their lofty fees. To be sure, the phones have gotten smaller and cheaper, while costs have come down. Still, these satellite services cost about $1.50 per minute, far higher than even the priciest cellular-based systems.

Some analysts say satellite phone systems amounted to overkill for most consumers, limiting them to a small target audience.

"It is kind of like swatting flies with an elephant gun," said Keith Waryas of market research firm IDC. "Satellite phones are incredibly robust, offering connections anywhere in the world. But Verizon offers a similar product, but much cheaper."

So instead of profits, only financial pain remains.

The latest suit against Loral was filed Wednesday and accuses Globalstar executives of issuing several false statements between Dec. 6, 1999, and October 27, 2000. The suits, in general, accuse Globalstar executives of not being truthful about the sale of satellite phones, its core product.

There are at least six class-action lawsuits from shareholders to be filed against Globalstar in U.S. District Court in Manhattan. The suits will likely all be consolidated into one.

One lawsuit accuses Globalstar executives of issuing several false statements when asked whether the company's financial state was similar to Iridium's, which was sliding into bankruptcy. Globalstar executives have maintained that the company's service and technology is not the same as Iridium and therefore it's not relegated to the same fate.

"The only similarity between Iridium and Globalstar was that we were both satellite based," Globalstar CEO Bernard Schwartz said during an interview in 1999. "Their market was different."

Although satellite phone services have their own unique characteristics, several satellite Internet products are on the horizon. Their phone predecessors raise questions about the space-based Net access alternatives.

Teledesic, for example, is a venture between cell phone pioneer Craig McCaw, Microsoft co-founder Bill Gates, Motorola, Boeing, the Abu Dhabi Investment Company and Saudi Arabian Prince Alwaleed Bin Talal Bin Abdul Aziz Alsaud. Teledesic, formed in 1990, was expected to launch service in 2004, but now some insiders believe 2005 is more likely. Other satellite Net services face similar timelines.