A new pricing plan announced by Globalstar Inc. has raised new questions about the company's long-term health in light of the deteriorating condition of its satellite constellation.
Under Globalstar's Unlimited Loyalty satellite airtime rate plan unveiled April 10, customers in the United States can use unlimited satellite voice minutes for calls to the United States, Canada and Caribbean. Customers would pay $49.99 per month for the remainder of 2007, and the fee would be cut to $39.99 per month in 2008 and drop to $19.99 per from January 2009 through June 2010.
In announcing the plan "at prices previously unheard of in the mobile satellite services industry," Dennis Allen, Globalstar's senior vice president of sales and marketing, said "while we prepare to transition to our Globalstar 2 second-generation constellation, our customers have this tremendous opportunity to take advantage of a plan that simply sets a new standard in satellite airtime pricing."
The new plan was unveiled two months after Globalstar warned customers that degraded performance among its first-generation low-Earth orbiting satellites may lead to loss of service as early as next year. Many of the 40 spacecraft suffer from degraded performance in their S-band antennas, and the rate of decline is accelerating, Globalstar said a Feb. 5 filing to the U.S. Securities and Exchange Commission.
"Sometime in 2008 this will have a significant adverse impact on the company's ability to provide uninterrupted two-way voice and data services on a continuous basis in any given location," the company said at the time.
Globalstar has scheduled the launch of four ground spares for May 21, with another four slated for liftoff later in 2007. The company hopes the spares will bolster the failing constellation, but the company has warned it may not be able to repair it or restore service.
In December, Globalstar awarded a contract to Alcatel Alenia Space for a second-generation constellation of 48 satellites, but the first spacecraft is expected to be available in late 2009.
The problems with the current generation and the potential gap in service that could be created until the second-generation spacecraft reach orbit could mean that the pricing offer is too good to be true, said analyst Tim Farrar of TMF Associates.
"The new airtime plan is intended to be a limited time offering, but the question is whether it will be possible for Globalstar to go back to pricing closer to its historic airtime rates," Farrar said in a research note. "In our view, this would require substantial improvements in service quality to be realized from launch of the spare satellites and implementation of workarounds on the existing constellation and also for new sources of demand to materialize during the course of 2007 (for example from a very active hurricane season in the U.S.)."
The new plan may help Globalstar retain subscribers over the next six to 12 months - and maybe even add some new customers,"but if this plan is maintained for long it will have very negative implications for Globalstar's future revenues," Farrar said. "This announcement makes us extremely nervous about the prospects for the company, both for what the first quarter 2007 results are likely to reveal about voice subscriber losses, and in terms of the financing prospects for Globalstar's next-generation constellation."
Globalstar's main satellite telephone competitor also has doubts about the pricing plan. "We think it is 100 percent prompted by their recent problems with the satellite constellation," said Greg Ewert, Iridium's executive vice president. "It's hard to imagine it being anything but out of desperation."
He said that Iridium this week will announce its own new pricing.
"The thing that really sets us apart, too, is that we come with a [service] guarantee," Ewert said, adding that when he visits Globalstar's Web site, "what I see are disclaimers everywhere with regard to network quality availability. I think we're positioning ourselves as the reliable MSS provider and standing behind it with our program."
Tony Navarra, Globalstar's president of global operations, said Globalstar is banking on its customers' standing by them. "We continue to work with many of our subscribers in a reduction of price for their loyalty. Down the road, those subscribers will get some of the best service available for staying with us through a period when there's less service."
He said that his company has kept its investors and customers informed of its difficulties with the constellation. "The investors read all of of our various filings. There were a number of specific statements about the life of the constellation, and the weaknesses and potential weakness. I don't know that the investors are surprised."
He averred "the satellites are degrading in service because they're nearing the end of their design life span," adding that Globalstar was not accepting the degradation of service fatalistically. He explained that by operating the ground stations in a different way, and by changing the protocol in handsets, "we'll be able to extend the satellites' life and improve the quality of the service."
He added that "we're creating some new tools and timing when is best to use the constellation," Navarra added. By gauging the paths and patterns of the constellation's output, they ought to be able to better predict to when conditions for random outages and superior service are moving over the Earth. "That's when we'll tell our best customers when the best times are for sending data" and limit guesswork.
Navarra said that Globalstar will also use the ground spares as stopgaps wherever they are most necessary. optimizing global coverage for the 120 countries the company serves.
"Globalstar continues to develop new international relationships," he said. "What we're going to do is continue to build out services internationally... We've not stopped. We're continuing to grow the business."
He said the company "will use the upcoming eight total satellites in orbital planes where they've degraded the most. They will be in placed in orbital planes to essentially fill the gaps in service. They won't fill it all for the next few years, but only in the near term (up to 18 months)," he said, adding that the company's L-band service will not be affected.
Farrar also warns that a gap in satellite coverage may also call into question whether Globalstar would be able to meet the U.S. Federal Communications Commission's standard for ancillary terrestrial component (ATC) services. ATC systems allow satellite operators to use their authorized satellite radio frequencies to integrate into their satellite service offerings a terrestrial wireless service similar to cellular or PCS.
In January 2006, Globalstar announced it would use its planned system of terrestrial repeaters to boost the availability of its Mobile Satellite Service (MSS) in urban areas and within buildings, with multiple business possibilities growing out of the system.
According to Farrar, Globalstar holds a license conditional to having a full constellation plus one spare in orbit before they commence ATC operations, which he said is currently defined as 40+1 operational satellites.
"Clearly this is unlikely to be realized before launch of the second-generation constellation," Farrar said. "Globalstar could go back and say a full system is 32 satellites, so give us permission to operate with 32 plus one spare. Even that might be difficult to realize before the first 24 second-generation satellites are up, and the change might take the FCC a year to process. It therefore seems probable that Globalstar will not be offering ATC services before 2010."
Globalstar said it currently meets all the necessary ATC gating requirements, "and we are hopeful that the FCC will, sometime this year, release their Notice of Proposed Rulemaking concerning our request for additional ATC spectrum," according to spokesman Dean Hirasawa.
Iridium's Ewert, nevertheless said that "over the longer term, one would have to ask some questions."
Specifically, he wondered, "are they going to be generating sufficient business while necessarily avoiding the churn and meeting their longer-term revenues and meeting the financial needs to meet their next-generation constellation? Are they expecting an increase over existing numbers? They're almost inviting churn, and I would question their next- generation constellation."
Ewert pointed out that "they have contracts with Alcatel, and they have penalties and performance thresholds to be met, and I don't know whether those calls are putting them in jeopardy. I wonder if they will be concerned what their revenue impact will be? I suppose those questions have to be asked right now; they need to be asked in real time."
In response, Navarra said "we're hopeful that we can get some earlier satellites than the fall of 2009. It's not going to be a year, but even if we can get a few months, that will be helpful in bridging the gap between the first- and second-generation satellites."
And lest Ewert worry too much, Navarra insisted "we have sufficient cash now to carry us through the next couple of years."
He said "this company is financially strong. Our owners have majority stock, we have no debt on the books, and the shortfall [to launch the second-generation spacecraft] would be so relatively small that we could make it up. So we're very hopeful. There are reasonable business opportunities to increase funding if we determine we need it. We are watching our revenue flow, and watching the ARPUs."