Satellite Phone Company Struggles for Life

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 inremote areas by tapping into a constellation of 48 satellitessounded good to many investors, but the business hasn’t panned outfor a variety of reasons, analysts say.

Part of the problem has been poor execution by Globalstar’smanagement, but the San Jose-based company also has been hurt byseveral factors beyond its control.

Previous Burnouts

The extenuating circumstances include the failure of two rivalsatellite phone companies, Iridium LLC and ICO GlobalCommunications, which spooked consumers about the stability of aservice that requires an upfront investment of several hundreddollars.

The increased range and declining costs of cellular phones alsohave made satellite phones tougher to sell.

“Unless you are stuck on an oil rig somewhere, you really don’tneed a Globalstar phone,” said Manuel Marquez, a San Franciscowireless dealer who said he hasn’t been able to persuade anyone tobuy one of the company’s phones.

Add it all up, and Globalstar has only a fraction of thesubscribers it needs to stay alive. In a statement released withits third-quarter results earlier this week, the company said ithad $286 million in cash — enough to stay in business through May2001. The company lost $652 million on revenues of $2.5 millionthrough the first nine months of the year.

The trouble has ravaged Globalstar’s stock, which was tradingThursday at $2.94 — 95 percent off its 52-week high.

All this has left stakeholders wary about Globalstar’sprospects.

Financing on Hold

Loral Space & Communications, which has parceled more than $1billion on its 38 percent stake in Globalstar, won’t invest anymore money unless the company’s fortunes improve, according toGlobalstar chief executive Bernard Schwartz.

Qualcomm Corp., which owns 7 percent of Globalstar, Thursdaysaid it hasn’t reserved against possible losses on its $600 millioninvestment in the company. Some analysts had speculated thatQualcomm would write off its Globalstar investment. In a conferencecall with analysts, Qualcomm CEO Irwin Jacobs said Globalstar is“performing well.”

With $2.9 billion in debt, Globalstar “is in an untenablesituation,” said analyst Jeffrey Wlodarczak of CIBC World Marketsin New York. “They don’t have a lot of time left.”

Merrill Lynch analyst Marc Nabi was even harsher in hisassessment of Globalstar in a research report downgrading thecompany’s stock earlier this week.

Nabi concluded that, as an ongoing business, Globalstar is worthnothing; the only value left, he said, is in the company’s $4billion satellite network that relays phone service in 30 countrieson six continents.

Nabi figures Globalstar needs 1.6 million subscribers to breakeven. 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 subscribersaren’t using the phones as much as anticipated. In the thirdquarter, Globalstar billed 2.3 million minutes, or a monthlyaverage of 36 minutes per subscriber. Industry analysts believeGlobalstar needs to average at least 100 monthly minutes persubscriber to break even.

Pricing Itself out of Range?

The prices for Globalstar’s service may be discouraging moreusage. The rates range from about $1 to $3 per minute, depending onthe calling location and the retailer reselling Globalstar’sservice.

After using Globalstar’s satellite on a trip to Italy last week,Perry Taormina of San Jose concluded the service isn’t worth theprice. “The phone is a joke,” he said. “It wasn’t easy to useand there was a delay so when I said ‘Hello,’ the person I wascalling wouldn’t hear me for another five seconds. It was veryfrustrating.”

Globalstar spokesman Mac Jeffery said Taormina in is the “tinyminority” of customers who don’t like the service.

“Whatever people might say about our finances, almost everyonethat 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 turnthings around.

The reorganization includes increased emphasis on selling toindustrial and government users more likely to be in locales wherecellular phones aren’t an option. Globalstar also is acceleratingits “above and beyond cellular” marketing campaign, and slashingprices to entice more customers.

It probably won’t be enough to save Globalstar, said analystMike French of ING Barings.

“It’s too bad, because there are a lot of people who arestarting to realize that you don’t have to give up being connectedjust because you are away from the home or office,” French said.“But it doesn’t look like Globalstar has enough capital or timeremaining to develop that market.”