S A N F R A N C I S C O, Nov. 6, 2000 -- The stars never seemed to align right for Globalstar Telecommunications Ltd., a mobile satellite phone company in a financial freefall likely to end with a thud if management doesn’t come up with money by next summer.
Globalstar’s plan to sell phones that provide great reception in remote areas by tapping into a constellation of 48 satellites sounded good to many investors, but the business hasn’t panned out for a variety of reasons, analysts say.
Part of the problem has been poor execution by Globalstar’s management, but the San Jose-based company also has been hurt by several factors beyond its control.
The extenuating circumstances include the failure of two rival satellite phone companies, Iridium LLC and ICO Global Communications, which spooked consumers about the stability of a service that requires an upfront investment of several hundred dollars.
The increased range and declining costs of cellular phones also have made satellite phones tougher to sell.
“Unless you are stuck on an oil rig somewhere, you really don’t need a Globalstar phone,” said Manuel Marquez, a San Francisco wireless dealer who said he hasn’t been able to persuade anyone to buy one of the company’s phones.
Add it all up, and Globalstar has only a fraction of the subscribers it needs to stay alive. In a statement released with its third-quarter results earlier this week, the company said it had $286 million in cash — enough to stay in business through May 2001. The company lost $652 million on revenues of $2.5 million through the first nine months of the year.
The trouble has ravaged Globalstar’s stock, which was trading Thursday at $2.94 — 95 percent off its 52-week high.
All this has left stakeholders wary about Globalstar’s prospects.
Financing on Hold
Loral Space & Communications, which has parceled more than $1 billion on its 38 percent stake in Globalstar, won’t invest any more money unless the company’s fortunes improve, according to Globalstar chief executive Bernard Schwartz.
Qualcomm Corp., which owns 7 percent of Globalstar, Thursday said it hasn’t reserved against possible losses on its $600 million investment in the company. Some analysts had speculated that Qualcomm would write off its Globalstar investment. In a conference call with analysts, Qualcomm CEO Irwin Jacobs said Globalstar is “performing well.”
With $2.9 billion in debt, Globalstar “is in an untenable situation,” said analyst Jeffrey Wlodarczak of CIBC World Markets in New York. “They don’t have a lot of time left.”
Merrill Lynch analyst Marc Nabi was even harsher in his assessment of Globalstar in a research report downgrading the company’s stock earlier this week.
Nabi concluded that, as an ongoing business, Globalstar is worth nothing; the only value left, he said, is in the company’s $4 billion satellite network that relays phone service in 30 countries on six continents.
Nabi figures Globalstar needs 1.6 million subscribers to break even. Globalstar puts the figure closer to 500,000. As of Sept. 30, the company had just 21,300 subscribers.
To make matters worse, the company’s relatively few subscribers aren’t using the phones as much as anticipated. In the third quarter, Globalstar billed 2.3 million minutes, or a monthly average of 36 minutes per subscriber. Industry analysts believe Globalstar needs to average at least 100 monthly minutes per subscriber to break even.
Pricing Itself out of Range?
The prices for Globalstar’s service may be discouraging more usage. The rates range from about $1 to $3 per minute, depending on the calling location and the retailer reselling Globalstar’s service.
After using Globalstar’s satellite on a trip to Italy last week, Perry Taormina of San Jose concluded the service isn’t worth the price. “The phone is a joke,” he said. “It wasn’t easy to use and there was a delay so when I said ‘Hello,’ the person I was calling wouldn’t hear me for another five seconds. It was very frustrating.”
Globalstar spokesman Mac Jeffery said Taormina in is the “tiny minority” of customers who don’t like the service.
“Whatever people might say about our finances, almost everyone that uses our phones raves about the quality of the service,” Jeffery said.
Schwartz acknowledged the company’s growth has been “unacceptable,” but stressed management is working hard to turn things around.
The reorganization includes increased emphasis on selling to industrial and government users more likely to be in locales where cellular phones aren’t an option. Globalstar also is accelerating its “above and beyond cellular” marketing campaign, and slashing prices to entice more customers.
It probably won’t be enough to save Globalstar, said analyst Mike French of ING Barings.
“It’s too bad, because there are a lot of people who are starting to realize that you don’t have to give up being connected just because you are away from the home or office,” French said. “But it doesn’t look like Globalstar has enough capital or time remaining to develop that market.”