Insiders Insight By Roger Rusch

Lessons Learned from Iridium, ICO, and Globalstar – Part 3

The aerospace industry has been notorious for over-runs on government programs. However, the commercial space industry has been operated like a responsible enterprise. It is obvious that high prices can destroy a business. Over the past 30 years, most commercial satellite contracts have been Firm Fixed Price. In some cases, competitive procurements and cost control have been stressful for the manufacturing companies. Generally, contract value has been constrained.

Iridium and the other Big LEO systems did not fit that pattern. These systems exhibited staggering cost growth. The required investment for these programs grew by a factor of three to five. This is vastly more than the growth experienced by commercial GEO systems. We monitored funding closely because we were aware from the beginning that the estimates were far too low.

Optimistic business plans grossly understated the funding required. Ten years ago, some people did not understand the magnitude of these underestimates. An argument was made that large production runs would permit much lower satellite costs. Iridium demonstrated that the capital cost increases after launch because short lifetime LEO satellites fail and must be replaced. At least 11 Iridium satellites failed within the first 18 months. Globalstar [GSTRF] has launched four spare satellites and built another eight spares for replacements.

The 1991 FCC filings only included estimates of the space segment, satellite control station, and first year of operation. These early estimates didn’t include many cost elements or shifted capital investment to the service operators. The Globalstar system requires a large number of gateways to cover the world because it does not have satellite crosslinks. It asserted that the gateways would be inexpensive, but the actual cost of a complete gateway was substantially higher than in the original plan. Later, the number of gateways was reduced significantly.

Not everyone believed the low prices. Experienced cost analysts prepared more realistic figures at the time of the initial proposals. Few people paid attention to those who challenged the low estimates. How can you argue that the cost is too low? Everyone wants a low price. Competitors who said that the appraisals were unrealistic were scorned.

LEO mobile systems were always unaffordable, but initially they appeared to be much less expensive. Furthermore, thedevelopment and construction of these systems required several years longer than planned. This eroded the size of the addressable market and delayed the return on investment. Perhaps these systems would never have started if the investors had believed realistic costs and schedules. More investment funds could have been applied to worthy endeavors.

Lesson Three: Investors should obtain more than one professional satellite cost estimate. Be sure to include all of the cost elements.

Roger Rusch is the president of satellite consultancy TelAstra Inc. The views expressed in the Insider’s Insight column are his and do not necessarily reflect the opinions of Mobile Satellite News. Please direct comments on the column to him at 310/373-1925 or via e-mail at [email protected].