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Satellite Firms Buckling Under Weight of Iridium's Woes

The market's become skeptical of propositions that don't have subscribers in place.

Iridium's

(IRID)

fall to earth is causing shock waves in the satellite-phone business that the company was supposed to revolutionize.

Iridium has fallen so far that rivals are trying to put a galaxy away. Chatter at the fourth annual

Space and Satellite Conference

in New York, which ended Wednesday, focused on how Iridium's failure to generate paying subscribers was burying the industry's financing prospects.

"Iridium's failure has created turmoil" in the financial markets, says Sara L. Porter, managing director of

Ascent Communications Advisors

, a wireless communications consulting firm.

"Iridium has left a bad taste in investors' mouths," says John Bensche, a satellite analyst for

Lehman Brothers

. "There won't be any IPOs this year, barring an act of God." Lehman Brothers hasn't underwritten for Iridium.

Competitors such as

Globalstar

(GSTRF)

and

ICO Global

(ICOGF)

are cringing as investors shy away from the financing deals the companies need to complete their networks. Last week, ICO Global was forced to extend a $500 million rights offering because it found itself some $93 million short of its goal.

During Wednesday's session, Scott Moskowitz, senior managing director for

Bear Stearns

, warned satellite executives that "in the past year, investors have re-evaluated what needs to happen for these

TheStreet Recommends

satellite companies to become successful."

"Technology is not as important as business-plan execution, particularly in acquiring large customer contracts early on," Moskowitz explained. In a skittish, skeptical market, investors want to see "tangible evidence" of sales, he said.

Launched with a good dose of hype in November, the Iridium service was aimed at the international business traveler. But from the beginning, Iridium's promise exceeded its reach. The company planned to launch 77 low-orbit satellites but settled on 66. The satellite phone system did not work everywhere and connections cost a whopping $7 a minute. The clunky phones made by

Motorola

(MOT)

cost as much as $4,000.

Blame it on engineers who set up the company for failing the marketing test, says Vijay Jayant, a Bear Stearns analyst.

Instead of the hoped-for hundreds of thousand of subscribers, Iridium had signed up a paltry 10,300 by March 31. With quarterly revenue of $1.45 million, and over $3 billion in debt, Iridium has had to seek refinancing to stave off bankruptcy. No wonder Iridium shares were trading at 7 15/16 Thursday morning, down from a 52-week high of 61 5/8. Lenders have given Iridium until June 30 to expand its customer base to 27,000.

The Sky's Falling
Iridium shares keep slipping.

Source: BigCharts

The financial turmoil has taken its toll on management. In April, CEO Edward Staiano quit, followed by the chief financial officer and the head marketer a month later. On Tuesday, Mauro Sentinelli, executive vice president of marketing and distribution, failed to speak at the conference as planned.

Merrill Lynch

analyst Thomas Watts said that Sentinelli's contract with Iridium ran out and was not renewed at the end of April. Merrill Lynch served as an underwriter for Iridium. Calls to Iridium's news hotline were not returned.

Lately, Iridium has attempted to mend its ways. Merrill's Watts says to expect price reductions this week. Iridium phones now cost $2,000 to $3,000 and airtime ranges from $1.89 to $4.25 per minute, according to industry sources. The company also laid off 15% of its workforce as part of a cost-cutting plan.

"Iridium has been the Achilles' heel of the satellite industry," says Jayant. "Iridium's failure has caused investors to become extremely skeptical of multibillion, multistage satellite constellations with no customer contracts in place." Bear Stearns is an underwriter for competitor Globalstar, which plans to offer satellite telephony service by the end of the year.

Wall Street used to invest money when a company launched its satellite successfully, Jayant says. But "now Wall Street doesn't pay when a satellite goes up. It kills you if it explodes," he says.

In the narrowband arena, a technology that allows limited two-way data communications, satellite communications providers are also taking pains to explain how different their businesses are from Iridium's. "Ours is industrial, not commercial," explains Scott Webster, Chairman and CEO of Orbcomm Global (a venture founded by

Orbital Sciences

(ORB)

, a low-earth-orbit satellite provider of low-cost, two-way messaging). "Iridium connects to people and we connect to things. Our business is tracking and monitoring assets for multinational corporations and governments."

Even Teledesic, the "Internet-in-the-sky" venture backed by

Bill Gates

and Motorola, is not immune. Teledesic has raised $1 billion in capital but may need as much as $15 billion to launch and operate 288 low-earth-orbit satellites for service beginning in 2004.

Carole Winkler, a former NASA consultant, is now working as a technology writer and computer consultant in Boston. She has no position in any of the companies mentioned in the story.