While companies like Iridium Satellite LLC and Globalstar LLC have been able to recover after a shaky first stab at the market, the mention of those names and Mobile Satellite Services (MSS) in general likely will generate memories of the high profile bankruptcies the companies in this sector faced rather than the successes those same companies are currently enjoying.

But one has to wonder if those companies were able to come to market with an ancillary terrestrial component (ATC) to provide that coverage boost in urban and other highly developed areas and whether they would have met the same fate of financial hardship. TerreStar Networks Inc., which just announced that Space Systems/Loral has begun work on the company’s first satellite, will be putting that theory to the test when it launches service in early 2008.

“The most salient lesson [from the MSS failures of the past] is that without the ability to have true ubiquity in terms of being able to attract customers in the urban and built up areas, mobile satellite services are at a disadvantage,” TerreStar President and CEO Wharton “Zie” Rivers, told Satellite News. But with the Federal Communications Commission reaffirming its decision on ATC, Rivers believes the consumer markets will be more open to MSS as a competitive alternative to terrestrial wireless.

Erasing The Past

The offering of ATC to fill in the gaps in urban areas is only a part of Rivers’ plan to put a different face on MSS. The other potential key component will be the hardware. Currently satellite telephones are bulky compared to terrestrial wireless telephones, even with the technological advances that have allowed current satellite phones to be slimmer than first generation satellite phones. But Rivers said his service will replace the image of bulky phones of the past with models that resemble the wireless phones on the market today.

“In previous versions of mobile satellite services, the handsets had to be larger to accommodate more significant battery power in order to enable them to communicate with the satellite,” Rivers said. “With the antenna size that we are placing on the satellite, this antenna is powerful enough so the handset you will have is comparable to the ones you have now, with small batteries with limited battery power. Those handsets will be able to communicate with the satellite. Because of the large reflector we are placing on our satellite, it will allow us to have the more elegant handsets similar to the cell phones today or the ones you will see in three to four years.”

Another part of the TerreStar service that looks to be a departure from the past is pricing. Satellite telephone service historically has been more expensive than its terrestrial wireless counterparts, providing another reason for the service to not see the uptake many of the early MSS providers where hoping for when they initially launched service.

“From a pricing standpoint, we certainly expect to be very competitive in terms of pricing along side the more traditional wireless carrier,” Rivers said. He did not disclose any specifics of TerreStar’s anticipated pricing for its service.

Likewise, Rivers also mentioned that the service would be more than just a telephony offering.

“With ATC and the advanced capabilities that we are building in our satellite, [we are] offering a more diverse set of products and services that are keeping up with the advances in technologies, especially broadband,” Rivers said. “We think the addition of those services and capabilities will also add to our prospects for success. That of course is a step forward from the past offerings of MSS.”

Seeking Partners

In looking back at the high-profile financial failures in the MSS sector, one of the problems the companies could not overcome was getting the critical mass in terms of number of subscribers to cover the upfront capital costs required to put the satellite and ground infrastructure. And from that perspective, TerreStar is going to face the same challenges the first generation of MSS providers faced.

Rivers said the potential value of the satellite contract alone is approximately $500 million, and that does not include launch costs, insurance costs and ground system costs. And with the average local wireless bill generation a little more than $50 a month according to CTIA-The Wireless Association‘s latest industry survey, TerreStar will need to pull in a significant amount of customers to cover the upfront capital costs and turn a profit.

TerreStar does have a plan on how to address the capital costs, though. Specifically, the company is looking for partners to help alleviate the impact of those upfront capital costs. And some of those early partners could come from terrestrial wireless players.

“The other thing we certainly look at is in addition to the possibilities of competing with terrestrial carriers [is working with them]. This is a compliment to them,” Rivers said. He declined to say what companies TerreStar has approached for partnership opportunities, but the partnering concept is generating some interest.

“We are getting some positive reaction from a variety of players,” Rivers said. “In order for us to speed our delivery to the marketplace, we would certainly from a strategic standpoint hope that partnerships will be developed before we launch our satellite.”

An Uphill Climb

Even with ATC and the possibility of terrestrial partnerships, TerreStar still faces an uphill climb to not follow in the footsteps of those who first walked in the MSS segment.

“TerreStar has a credible argument for its business case and it makes sense on the surface,” Roger Rusch, president of consultancy TelAstra Inc., told Satellite News. “However, I remain skeptical based on past experience.”

Rusch noted that the cost and complexity of space-based systems typically is underestimated and the capacity and service quality typically is overestimated. Plus without clear pricing information, it is hard to assess the viability of the business case.

“It is not sufficient to say that the pricing will be competitive,” Rusch said. “To win market share, the price must be significantly lower than the competition. TerreStar does not claim to have lower costs or better service quality.”

But while he was critical of TerreStar’s plan, he was not completely negative on the company’s potential, providing the company is able to secure an established terrestrial wireless company as a partner.

“The case would be much more convincing if there were an established cellular service provider that would make a big investment in the business and took a major equity stake,” Rusch said. With that thought, he added, “I suspect the company will have an extremely difficult time raising hard cash for construction” of its network. Given that four MSS systems have gone bankrupt, it will be amazing if TerreStar actually is built and becomes self-sustaining. Anything can happen and [TerreStar’s approach] has much better prospects than the prior attempts, but it will be extremely difficult.”

A representative from SkyTerra, one of TerreStar’s major investors, declined to be interviewed for this article. A call to Motient Corp., TerreStar’s other major investor, was not returned.

–Gregory Twachtman

(Roger Rusch, TelAstra, 310/373-1925; Linda Gustus, TerreStar, 613/742-4168)