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Will Globalstar Be the Next Satellite
Phone System to Plunge to Earth?

By David Armstrong   Fox Market Wire
NEW YORK — With Iridium preparing to send its satellites crashing to Earth, some believe Globalstar Telecommunications' future is looking less stellar than ever.

Globalstar has struggled with high costs and slim customer demand in the satellite phone market

By allowing customers to make telephone calls from nearly anywhere on the planet through orbiting satellites, Iridium and Globalstar seemed destined to lead the mobile phone generation to the next level.

But such early promise has quickly faded, as costs have mounted and customer demand remains slim.

Last week, Motorola — the controlling shareholder of Iridium — said it planned to cut off the system's 66 satellites, leaving 55,000 customers without service and a $5 billion investment to burn up in the Earth's atmosphere.

Beset with $4.4 billion in debts, Iridium told a bankruptcy court in a written filing that it had been unable to find a qualified buyer.

And earlier this month, another satellite phone company, ICO Global Communications, announced it was on the verge of bankruptcy before it even had a chance to put a satellite in the sky.

That leaves Globalstar as the only player in the relatively new game of satellite phone communications. But while the failure of a competitor usually boosts a company's prospects, Globalstar's stock price has slid as analysts question whether a viable market for global satellite phone service exists in the first place.

Globalstar's stock plunged from a 52-week high of $53.75 in early January — a time when Globalstar announced a series of successful launches — to close Thursday at $17.38.

Despite sinking investor confidence, several analysts believe that the long-term prospects of global telephone service still are strong. But because of tremendously high entry costs, any company hoping to capture a global market must navigate the tricky terrain of foreign government regulations, currency fluctuations and partnerships with numerous telecoms and service providers across the globe.

For instance, Globalstar juggles some 48 satellites, providing service to 41 countries. It has plans to add 30 more countries to the list by the end of the year, making it well on its way to blanketing the globe.

The idea of being able to use a hand-held telephone from anywhere on the planet was hot when Globalstar and Iridium first launched. But the exploding popularity of cheaper, land-based cellular phones and roaming service plans deflated much of the excitement. And some critics say satellite phone systems must adopt a cheaper pricing scheme to stay afloat.

"Over time (cellular phone) coverage has built out aggressively," said Timothy O'Neil, a satellite analyst with the Soundview Technology Group, who downgraded Globalstar's stock from a "buy" to a "hold" a year ago. "You can get cell phones for free, and the price per minute is closer to ten cents."

Iridium charged as much as $3,000 per phone, and up to $7 per minute for calls. Although prices for calls and the phones were cut last summer, some believe it was too late to restore customer confidence.

Meanwhile, a typical Globalstar phone costs about $1,500, while a standard service package costs $50 a month. And on that plan, calls cost close to $1.50 a minute.

In addition, customers cannot yet use a Globalstar phone on a U.S. plan in Europe, and vice-versa — a failure that seems to defeat the purpose of using a satellite phone network in the first place.

Such costs and inconveniences have led many analysts to sour on the sector.

Earlier this month, a Merrill Lynch report cast doubt on Globalstar's ability to meet its predicted 500,000 customer base by the end of the year. It predicted that the number of subscribers likely would fall to 200,000, a number that could hit the company with "liquidity issues."

As a result, the brokerage firm downgraded Loral Space & Communications, Ltd., the parent company of Globalstar, from a "buy" to an "accumulate."

But not everyone believes Globalstar is headed for doom. After all, the company has said the price of its phones and service will fall, as marketing strategies with local telecoms and bundled wholesale service packages are put into place.

And as more cross-border alliances are forged between local telecom companies supporting the Globalstar system, a single phone will be able to work anywhere in the world.

Company officials also point out that there are still vast and populated spaces on the globe where land-based phones, cellular or otherwise, do not work. Globalstar hopes that the transportation and maritime industries, in particular, will use its phone network as opposed to more expensive radio systems.

Gregory Spear, a stock watcher and editor of the financial newsletter, The Spear Report, believes Globalstar's depressed price makes it a good time to buy the stock.

He believes Globalstar has shown it can transmit Internet access across the phone satellite network, a development that would allow users to connect phones to their laptops and surf the Web in the middle of the Antarctica, or on top of an oil rig in the Gulf of Mexico.

"I think what's going on is very typical when a revolutionary technology hits the market," Spear said. "Wall Street doesn't know how to read it."

The sound quality and call reliability of the Globalstar system is also thought to surpass that of "terrestrial," or Earth-bound, cellular phones, Spear said. He also believes Globalstar has strengthened its position by partnering with major telecoms in countries it serves. For instance, British telecom Vodafone Airtouch is a major stakeholder.

The company's marketing strategy is to allow local telecoms to sell the phones and services, with the idea that Globalstar will pick up service when and where a local telecom cannot.

"Globalstar has enrolled just about every major telecom in the world to market its product," Spear said. "All the major telecoms in the world are distributing for Globalstar. By enlisting the telecoms into its marketing stream, it's way ahead of its competition."

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