Business Failures

Failures in the Satellite Telephone Industry

But while some satellite systems have proven successful by offering advantages not matched by ground-based systems, the satellite telephone business has had a more difficult time. This difficulty is in part because cellular telephone companies greatly expanded their reach while the satellite systems were being built. Cellular systems use ground-based antennas, and it is generally much less expensive to use a cellular phone than to place a call with a satellite phone.

Two satellite telephone companies were forced into bankruptcy in mid-1999 because of limitations in their business plans, and because the communications business evolved while the companies were still in development. One of the companies, Iridium LLC, began service in 1998. The firm, however, could not attract enough customers to pay back the $5 billion it had borrowed to place sixty-six satellites in orbit to provide a global satellite phone system that would work anywhere on Earth. In late 2000, the newly formed Iridium Satellite LLC purchased the Iridium satellite system and associated ground systems for $25 million, a fraction of its original cost. Iridium Satellite soon began selling Iridium phone service at much lower prices than those of its predecessor.

Another satellite phone company, ICO Global Communications Ltd., had to reorganize and accept new owners, who bought the company at a large discount. ICO found it difficult to raise money from lenders after the failure of Iridium. ICO evolved into New ICO and developed a new, more diversified business plan that was not limited to satellite phone service. As of early 2002, New ICO had not yet started commercial service.

A third satellite phone venture, Globalstar LP, also ran into financial difficulty shortly after beginning commercial operations in 2000, and the company filed for bankruptcy protection in February 2002. Two other firms, Constellation Communications Inc. and Ellipso Inc., were unable to raise enough money to build their planned satellite phone systems.

The Reasons for the Difficulties

Iridium, ICO, and Globalstar ran into trouble because of the high cost of building a satellite system compared to the relatively low cost of expanded multicontinent cellular service, which relies on less expensive ground-based antennas. Satellites are expensive to build, and a complete satellite system can take years to complete. In addition, rockets can cost tens of millions of dollars to launch and they sometimes fail, requiring companies to buy insurance in case a rocket fails and destroys the spacecraft it was supposed to take into orbit.

These costs helped make satellite telephone systems much more expensive to use than cellular systems, while at the same time cellular networks were rapidly expanding the amount of territory for which they provided coverage. The cost difference, combined with the rapid growth of cellular networks, helped reduce the size of the potential market for satellite phone service during the very time that systems such as Iridium's were being developed.

In addition, satellite telephones are bigger and costlier to buy than cellular phones, and they must have an unobstructed view of the sky in order to work. Cellular phones, by contrast, work even indoors. These disadvantages further hurt the satellite phone industry.

Not all satellite phone companies have been unsuccessful. One, Inmarsat Ltd., has run a strong business providing mobile voice and data services for more than twenty years. But Inmarsat uses just a few satellites in geostationary orbit to serve most of the world, whereas Iridium, ICO, and Global-star designed their systems around relatively large fleets of spacecraft located much closer to Earth. Such low-or medium-Earth orbit systems are intended to reduce the satellite delay associated with geostationary satellites, but they are also more costly and complex to build and operate.

The Related Failures of Launch Vehicle Makers

In addition to costing investors billions of dollars, the satellite phone industry's difficulties also deflated the hopes of several companies hoping to build a new series of launch vehicles designed to carry satellites into space. For example, Iridium and Globalstar each have several dozen satellites in their systems, and the expectation that the companies would have to replenish those spacecraft after several years helped inspire several firms to propose reusable rocket systems to launch new satellites.

The satellite phone systems in service in the early twenty-first century were launched using conventional rockets, which carry their payloads into space and then are discarded. Reusable rockets are intended to save money by returning to Earth after transporting a load into orbit and embarking on additional missions. But uncertainty about the satellite phone industry's future hurt the prospects of companies such as Rotary Rocket Co., Kistler Aerospace Corp., and Kelly Space & Technology Inc., which had looked to the satellite phone industry as a key source of business. Short of funds from investors, these firms have yet to develop an operational launch vehicle.

SEE ALSO COMMUNICATIONS SATELLITE INDUSTRY (VOLUME 1); FINANCIAL MARKETS, IMPACTS ON (VOLUME 1); INSURANCE (VOLUME 1); LAUNCH VEHICLES, REUSABLE (VOLUME 1); REUSABLE LAUNCH VEHICLES (VOLUME 4).

Samuel Silverstein

Bibliography

Gordon, Gary D., and Walter L. Morgan. Principles of Communications Satellites. New York: John Wiley & Sons, 1993.

Richharia, Madhavendr. Mobile Satellite Communications: Principles and Trends. Boston:Addison Wesley, 2001.

Internet Resources

NASA Experimental Communication Satellites.<http://roland.lerc.nasa.gov/~dglover/sat/satcom2.html>.

Satellite Communications. <http://ctd.grc.nasa.gov/rleonard/regcontents.html>.

Whalen, David J. "Communications Satellites: Making the Global Village Possible."NASA Headquarters. <http://www.hq.nasa.gov/office/pao/History/satcomhistory.html>.