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Globalstar looks to profit after Iridium flameout

Even as one company prepares to pull its satellites from space, its former competitor begins marketing a similar phone service, convinced it will succeed where others have not.

Even as Iridium prepares to pull its satellites from space, Globalstar Telecommunications has begun marketing a similar phone service and is convinced it will have success where others have not.

The brief history of the satellite-based mobile phone market, which enables users to place telephone calls from almost anywhere on Earth via a revolving network of orbiting satellites, doesn't bode well for Globalstar's chances.

The world's first satellite phone service, Iridium, filed for bankruptcy protection less than a year after becoming commercially available in November 1998. It finally shuttered its service last week. And only a takeover by billionaire investor Craig McCaw saved ICO Global Communications, which also sought bankruptcy protections, from a similar fate.

"There is a market. But are the revenues available sufficient to cover the operating costs of the service? The answer is basically no," said Herschel Shosteck, president of Herschel Shosteck Associates, a wireless industry research firm.

Stock in Globalstar has fallen steadily since January, highlighting investors' concerns about satellite phone systems. Still, Globalstar executives are confident that marketing blunders and a technologically costly network led to Iridium's demise, and that a market exists for satellite phone services.

"It's frustrating for me to try and describe the (satellite phone) market because it's like trying to describe gravity: Even though you can't see it, it exists. You can feel it," said Globalstar chief executive Bernard Schwartz. "The fact is there are millions of people in the world without electronic communications."

Globalstar executives say they are targeting select demographics, including industrial users such as maritime, military, mining and oil exploration businesses as well as developing nations where traditional communications infrastructure is sparse.

"This is not meant for New York City or London, nor is it for people working in the soybean fields for 80 cents a day," Schwartz said. "It's meant for the people who are living in the villages around the world that all have the need to communicate.

"It's a niche, there's no question about it," he admitted. "I really believe Iridium's demise was irrelevant to us because we're looking for a different customer. We wish they had been successful. We have to prove the model now."

Different technology, new approach
Some industry experts say Globalstar could have success because of its different technology and marketing approach.

"The satellite industry is a healthy industry," said Ahmad Ghais, president of the Mobile Satellite Users Association, an industry trade group. "I still think Globalstar has a better chance. They don't do any switching in the sky so it's cheaper to build, and it's cheaper to buy the service."

Globalstar, which recently made its service available commercially for the first time in the United States, believes it has a better business model and technology than that of Iridium.

The company switches its calls on ground-based networks rather than switching calls over satellites in space as Iridium did. And Globalstar phones offer dual cellular and satellite modes, only using the space-based network when cellular coverage is spotty or nonexistent.

Iridium's network is almost universally revered as a technological marvel. But its elegant system, which switched many calls in space, led to costlier service for consumers, experts said.

"Iridium is an engineering masterpiece. As an engineer myself I tip my hat," Ghais said. "But it's not about building a better mousetrap. It's more important to understand the market and then figure out how best to build a system that addresses it."

Globalstar believes it has done just that. However, analysts continue to express disappointment with the two separate phone numbers currently required when using Globalstar's dual-mode phones, as well as the cumbersome nature of the bulky and expensive handsets.

"Their technology may be simpler and their marketing is different, but at the end of the day there are not enough people willing to pay to support the operating costs of the service," Shosteck said. "The writing's been (on the wall) since day one."

Other analysts agree.

"The bottom line is satellite telephony is a niche market," said Mark Zohar, a satellite industry analyst at Forrester Research.

Analysts' concern
Some financial analysts are concerned about subscriber demand for Globalstar's costly satellite-based mobile phone service, the potential for limited availability of the handsets, and lower-than-expected usage time. At least two investment banks recently have downgraded their ratings on Globalstar stock.

Accordingly, the company's shares have fallen steadily since January. Shares have traded as high as $53.75 and as low as $12.63 in the past year. Stock in Globalstar's largest shareholder, Loral Space & Communications, also has been downgraded by Wall Street firms, and Loral shares have dipped since January.

But through it all Globalstar executives remain positive, pointing instead to the differences between their company's system and Iridium's.

"They (built) a system that served only the global roamer," Globalstar's Schwartz said. "It's not a mystery to us that they failed. It's only a mystery that they didn't try to change directions before it was too late."

The global growth of cellular systems severely hurt Iridium, which is why Globalstar has targeted other niche markets.

"(Iridium was) courting the international business traveler," Ghais said. "The reality is cellular has overtaken everyone's expectations and businessmen now have very convenient facilities almost anywhere they go."

Iridium's aftermath
Regardless of its failure, a handful of companies continue to hold out hope of acquiring Iridium's assets at rock-bottom prices. According to various media reports, companies such as Merit Studios and content distribution firm HotJump, among others, continue to submit purchase or takeover plans. Currently, a bankruptcy court order calls for Iridium to dismantle the service and destroy its 66 satellites.

Ultimately, it may take a clear success or failure by Globalstar to put to rest questions about whether Iridium's operational death was more the result of poor leadership and marketing, or simply no market demand.

Forrester's Zohar said: "Iridium kidded itself, somewhat arrogantly so, into thinking it could create a mass market."

The onus now falls on Globalstar.