TerreStar and AT&T have now announced that AT&T will distribute TerreStar’s Genus (Elektrobit) phone to “government, first responders, public safety, energy, utility, transportation and maritime users” and given additional details of the expected pricing for this satellite-cellular roaming service. The phone will cost $800 to $900 (subsidies were not mentioned, which is perhaps not too surprising given that the service is not being targeted at consumers initially), and then in addition to a standard voice plan, subscribers will need to pay $24.99/month for satellite access and an additional usage fee for satellite roaming (in the United States) of $0.65/minute for voice and $5/Mbyte for data.
TerreStar and AT&T are basically targeting the existing handheld MSS market, but expect that the phone will be deployed more widely, because it will become an “everyday” phone for end users, rather than being a shared phone which is kept in a cupboard for emergencies. In our view, the size of the potential addressable market is probably not too far off that for Land Mobile Radio, where we estimate there are around 2.5M to 3M handsets in use in the US today, with about half in public safety and the rest in other government and private sector market segments (parks, utilities, railroads, energy, etc.). Of course only a fraction of those users also carry a employer-provided cellphone, and at this point in time, TerreStar’s solution is more likely to be a replacement for that device rather than for an LMR radio itself. So let’s assume AT&T and TerreStar are targeting a potential market of say 1M people. For comparison, today there are about 170K MSS phones in use in the US and Canada (including many Globalstar phones with limited two-way service at present), of which probably just under 100K are in the lower 48 states (and remember that the TerreStar phone is unlikely to work as reliably as Iridium or Globalstar in Alaska or Northern Canada).
In that context, TerreStar would be doing amazingly well if it could gain 50K subscribers by the end of 2010 and 100K-150K subscribers by the end of 2011 (when SkyTerra also expects to be offering next generation services, and Globalstar will be back in full two-way service). Remember also that in 1999-2000, despite massive advertising (at least in Iridium’s case), Iridium and Globalstar only managed to gain a few tens of thousands of users on a global basis in their first year of commercial service. TerreStar will probably share the end user revenue about 50/50 with AT&T (Iridium and Inmarsat expect to get about 70% of retail revenue but AT&T would likely want a bigger incentive to promote the service) and monthly retail ARPUs (including the satellite access fee but excluding any terrestrial voice plan) might be expected to be between $40 and $50. So let’s assume TerreStar receives $25 per user per month. If there are (in the most optimistic scenario) an average of 20K subs in 2010 (assuming deployment ramps up towards the end of the year) and 100K subs in 2011, then that would generate service revenues for TerreStar of $6M in 2010 and $30M in 2011. There would presumably be additional equipment revenues (although we doubt TerreStar is looking to make a profit on equipment sales) and perhaps revenue from some other services like M2M data (once chipsets are available, which means only a limited amount of revenue could be produced even in 2011).
However, its pretty clear that TerreStar is going to need to raise additional funds to cover its operating costs in the near future, since its cash burn rate even before going into full commercial service is about $25M per quarter, and excluding the money purchase agreement for the second satellite (not part of this $25M cash burn), TerreStar had $110M of cash at the end of June 2009. Thus regardless of what happens to the $430M of preferred shares (which must be redeemed or converted next April), TerreStar will need to raise more money by mid 2010. From mid 2011, TerreStar will also need to begin paying cash interest on its debt, at an annual rate of more than $150M per year in 2012.
Given the relatively limited opportunity in professional markets (at best a few hundred thousand subscribers for TerreStar, once the overall market is shared with SkyTerra and other MSS operators), TerreStar will eventually need to either achieve considerable success in consumer markets (requiring a dramatically different price point for both equipment and airtime) or find a strategic partner interested in buying or leasing the company’s 20MHz of spectrum for a terrestrial ATC deployment (which doesn’t look likely in the near term, not least because TerreStar doesn’t even have an ATC license as yet). In this context, its probably most appropriate to look at TerreStar’s initial service offering as a proof-of-concept (and a means to justify further funding) for one of these two longer term possibilities, rather than as the means to generate an immediate financial return on its own. We’ll see over the next 12 months whether TerreStar is able to provide the proof that both the financial markets and potential strategic partners will be looking for.