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This chapter is from the book

Calling Big LEO

Blame Arthur C. Clarke. In 1945, long before he created the highly successful Space Odyssey films (2001 and 2010) with Stanley Kubrick, Clarke came up with the idea of a global network of communications satellites, circling the earth in geostationary orbit. Using this concept and the technology, anyone would be able to talk to and eventually send data, faxes, and video to anyone just about anywhere in the world. Since then, thousands of these satellites have been launched into orbit, and satellite communications has become a multibillion dollar industry.

But most of these satellites serve fixed terminals (the phone on your desk, for example), and handle mainly international traffic and phones in rural or remote areas, such as oil rigs miles out in the ocean. Eventually, commercial aircraft and ships began to use mobile satcom services. More recently, satellite networks have been developed that enable people to use a portable phone, not much bigger than most cellular phones, to call anyone in the world at any time simply by dialing their satellite phone number.

A significant technical achievement, but who needs this? Initially, the developers of this technology thought it would be an immediate and huge success in underdeveloped and developing countries, most of which are saddled with antiquated telecommunications infrastructures. Satellite-based kiosks would be set up in even the most rural locations so that anyone could call long-lost colleagues and family members anywhere in the world. Also, government agencies, businesses, and even VIPs who must always be in touch could take advantage of this new communications opportunity. In time, as the price of the phones and the rates came down, the service would trickle down to small- and mid-level business travelers and small business owners.

One possible scenario: You're sitting in your office in Bridgewater, New Jersey, and your partner is in Malaysia, on her way to make a sales presentation to a potential new client. You just came up with some new numbers that will vastly enhance your chances of getting the account. You have no idea where she is at the moment but, judging by the time, she's probably somewhere in downtown Kuala Lumpur, en route to her meeting. Fortunately, you can reach her by simply direct-dialing her portable satcom phone, just as you would make any other phone call.

It sounded pretty good during the nearly 15 years that Motorola and others promoted this technology and dumped literally billions of dollars into developing it. But the hype, which included literally hundreds of articles in business and telecom industry magazines (some of them produced by Motorola's own engineers and marketing staff), countless presentations at conferences and seminars, and a very slick in-house-developed quarterly magazine with a "we are the world" flavored text, got way ahead of the reality, which led to some very costly failures.

What can you say about a company that began commercial operations on November 1, 1998, filed for Chapter 11 bankruptcy protection on August 13, 1999, and officially terminated its service on March 17, 2000? The company, known as Iridium and created and supported largely by Motorola, projected in 1997 that it would have 650,000 voice subscribers and 350,000 paging subscribers worldwide by 2000. That should be enough, it said, to meet its market goals. In fact, with a total of fewer than 55,000 subscribers at that point, Motorola was ready to allow its satellites to "deorbit"; that is, literally fall into the ocean rather than continue supporting them.

Iridium wasn't alone. In 1994, Craig McCaw, who had just sold his company, McCaw Cellular, to AT&T for $12 billion, and Microsoft's Bill Gates pooled some of their fortunes and formed Teledesic LLC to develop a high-speed network of 840 communications satellites. With great fanfare, McCaw and Gates said the new space-based network would be in operation beginning in 1998. Those plans were still on hold in 2001 while McCaw tended to his other mobile satcom property, ICO Global Communications Ltd., which filed for bankruptcy only a few weeks after Iridium sought the same protection.

Another mobile satcom hopeful, Globalstar Telecommunications Ltd., a consortium led by Loral Space and Communications and Qualcomm (other partners include China Telecom, DaimlerChrysler Aerospace, and Vodafone Group plc), announced plans to launch a 48-satellite system with operations beginning by 1997. That start date slipped a few years and with only 44,000 subscribers (analysts believe that Globalstar needs 1.6 million customers just to cover its costs and service its debt), Globalstar told the Securities & Exchange Commission in April 2001 that it "may be forced to seek protection under the federal bankruptcy laws" if it couldn't restructure its debt. In February 2002, with only 66,000 subscribers, Globalstar filed for Chapter 11 protection but said a new company will be created whose assets will be held by the company's bondholders and unsecured debt holders.

Part of the problem for Iridium seems to be that its leadership got a little too excited by the rapid growth of cellular and the Internet and thought this would quickly translate into an instant opportunity for totally portable, if somewhat pricey, direct-dial global communications. But how many people who have been using a cellular phone (which may have been free, along with hundreds or thousands of free airtime hours) really need another phone that's nearly twice the size of a cellphone and that costs $3,500 to purchase and $3 to $9 a minute per call—even if it does receive direct-dial calls just about anywhere in the world? Another problem either glossed over by Motorola or discounted as not a big issue was that Iridium's radio signals and those of the other mobile satellite services were not powerful enough to reach inside most buildings where people work and live and spend a lot of time. They have enough problems reaching the streets between tall city buildings. McCaw figured this out fairly early and has been trying to overcome these problems by getting Federal Communications Commission approval to install enough radio towers in key locations so that ICO would resemble a cellular system in urban areas, with its signals reaching everywhere.

How did all of this get started in the first place?

Iridium was first conceived by Motorola as a network of 77 satellites (hence, Iridium, the element whose atom has 77 orbiting electrons) orbiting 420 miles above the earth, transmitting voice and data satellite-to-satellite until they reached the nearest ground station. At this point, they would be connected to the public telephone network and switched to the caller or callee, just like any other phone call or data connection. However, even before the first satellite was launched, engineers figured out a way to reduce the number of satellites needed for the system to 66. (Motorola had already invested so much in the system and the name that it decided to stick with Iridium.) In generic industry terms, the Iridium satellite system was usually referred to as a Big LEO because it offered both voice and data and operated in low-earth orbit. Little LEOs, which were to come later, provided data-only services.

Things started to get a little complicated when two long-established communication satellite service providers, the International Maritime Satellite Service, or Inmarsat, which provides global communications to the shipping industry, and the International Telecommunications Satellite Organization, now known simply as Intelsat, a consortium of 139-country signatories providing voice, data, and video communication services, decided they wanted a piece of the global mobile satcom action.

As international treaty organizations, Intelsat and Inmarsat had important advantages over the new mobile satellite services. One of these was easier access to orbital slots in space as well as to the most efficient spectrum assignments. Another was tax privileges and antitrust immunities that the private companies would never have. Any private concern that wanted to compete with Intelsat and Inmarsat was also required, under the treaty agreements, to coordinate its business plans with the treaty-protected organizations to ensure that they did not significantly harm or cause technical interference to Intelsat and Inmarsat. It didn't take long for the U.S. General Accounting Office (GAO) to publish a study questioning the fairness of Intelsat's entry into the mobile communication satellite arena, which the GAO said, "may be impeding the flourishing of a private market and the benefits it can bring to consumers."

McCaw managed to save ICO in May 2000 with an infusion of $1.2 billion and a new plan to reintroduce the service as a smaller, slightly less ambitious version of Teledesic. Like Iridium, ICO said that it intended to go after niche markets like shipping and long-haul trucking. Rescheduled for launch in 2003, New ICO—an interim name used by McCaw—planned to use a special device that attaches to existing portable handsets rather than developing new, costly, and dedicated phones for its service. The tab for getting this venture off the ground was an estimated $2.5 billion on top of what had already been invested in the venture. More recently, however, with McCaw at the controls, Teledesic said it would reduce the size of its global satcom network to just 30 satellites and signed a contract with Alenia Spazio, an Italian firm, to produce Teledesic's first two satellites. The contract represents the bare minimum required for Teledesic to hang on to its spectrum assigned to it by the FCC. Teledesic now plans to be in operation in 2005, but it must obtain new regulatory approvals for its new orbital satellite scheme, which will focus on delivering high-speed data services. McCaw had considered merging ICO and Teledesic into a single company, probably called ICO-Teledesic, and marketing its services jointly. That's no longer likely, because McCaw says he wants to keep ICO and Teledesic independent as the needs of satellite services evolve globally.

Iridium, meanwhile, has regrouped, also under a new name. The bankruptcy sale has been approved, and a new CEO who, with other investors, has acquired its assets for $25 million, has taken over what is now Iridium Satellite LLC. The new Iridium team has thrown out the old marketing plan in favor of attacking niche markets, such as maritime, petroleum, construction, forestry, and emergency services. It also signed the U.S. Defense Information Systems Agency to a $72 million service contract.

Will these systems now fly commercially? Going after vertical businesses and the military should work if the Big LEOs can hold down their operating costs. Under the new marketing plan, subscribers get a second-generation Motorola handset, which is much cheaper and closer in size to a cellular phone than the original model, and will pay about 80 cents a minute for phone service. The easy answer is that time will tell, but the niche and high-speed Internet approaches the Big LEOs plan to pursue may be their last chance to succeed.

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