09.07.11

May the Force be with you…

Posted in Globalstar, Handheld, Inmarsat, Iridium, Operators, Services at 8:40 am by timfarrar

So Iridium has announced its “vision for the future of personal mobile satellite communications”, Iridium Force, including a range of new products and services. These new products and services are not exactly what was rumored last week (no commercial Netted Iridium service or standalone Bluetooth device). Instead they include the new Iridium Extreme (9575) phone, which includes integrated tracking capability and an SOS button, a new smaller 9523 voice and data module (which could potentially form the core of a standalone voice-capable device) and the AxcessPoint WiFi hotspot which provides data capability through a 9575/Extreme or 9555 phone.

It seems the aim of the AxcessPoint hotspot will be to increase usage of existing phones, via a low incremental cost (~$200) accessory, which is likely to provide a better financial return for existing service providers than a more disruptive low cost standalone device. Indeed Iridium expects to achieve a premium price for the new Extreme phone and does not see a need to lower the price of the 9555 for now (given its strong sales so far this year despite competition from the ISatPhone Pro).

If the two phones are sold (at retail) for say ~$1200 and ~$1000 then it wouldn’t surprise me if up to 80% of Iridium’s handset sales for the rest of this year are of the new Extreme phone (assuming adequate stocks are available). That would certainly be positive for Iridium’s 2011 equipment revenues, which to date have not declined compared to 2010 as the company originally expected. However, Iridium intends to keep the 9555 in production, providing it with optionality on pricing next year, once Globalstar comes back into the handheld market.

What will be really interesting is how Globalstar pitches itself, given that Inmarsat has not achieved much revenue success with the ISatPhone Pro at the low end of the market. It seems Globalstar will need to challenge Iridium and focus on the medium and high end of the handheld market in order to achieve reasonable ARPU levels. In that case, how important will a low price handset be to Globalstar (given this strategy hasn’t yet enabled the ISatPhone Pro to penetrate the high end of the market)? Will unlimited usage packages be a better strategy to pursue, or will Globalstar’s other attributes (consumer distribution channels, better data speeds, low latency and good voice quality) be sufficient to achieve a different result to Inmarsat? Whatever course Globalstar takes, Iridium’s success in the handheld market over the last 12 months means I’m not convinced that lower handset prices are as important to future revenue growth as some people previously expected.

14 Comments »

  1. ORBITRAX said,

    September 7, 2011 at 9:36 am

    From a competitive viewpoint. It appears that the 9523 will be similar in functionality to the Qualcomm Satellite Data/Voice Modem GSP-1720. With much, lower uncompressed data rates 2.4kbs on the Iridium model as compared to 9.6kbs on the Globalstar unit. We would expect a standalone voice/data capable Bluetooth modem device from Globalstar in the near future as they reactivate full duplex services. Using the Call Times Tool on the Globalstar web site, it currently shows call availability in the “temperate latitudes” of about 52%. With 5 July launch satellites still in “phasing orbit”. The raising of those satellites should bring duplex availability to about 75%. A successful October launch and raising will should bring duplex availability in North America to 98%. The equatorial regions will require the full 4 launches.

    We also question the appeal of needing to add yet another device, “AxcessPoint” to achieve very low speed data rates 2.4kbs to a laptop/smartphone at $1/minute. This kind of reminds me of when Staiano walked into a Morotorla board meeting dumping a bag full of cables and accessories onto a table that were required to make a 9500 functional. Seems overly complicated. Globalstar has a similar Bluetooth breakout device for the GSP-1700 called the GBT-1700. Again, too cumbersome to make it convenient outside of a car kit installation in our opinion.

    As far as Globalstar’s handset and service pricing goes. With 60MM in inventory of second generation handsets, and Globalstar’s need for cash. We would assume that “monetizing” handsets at nearly any price provides a bigger “bang for the buck” than trying to ring out a couple of additional dollars in ARPU. For Globalstar, every dime of every user terminal sale from their existing inventory falls directly to the bottom line.

    ORBITRAX

  2. timfarrar said,

    September 7, 2011 at 1:18 pm

    I’m not convinced that ‘“monetizing” handsets at nearly any price’ is such a great idea. First of all, I very much doubt that you could sell 100K+ handsets in less than a couple of years, unless you were to nearly give them away (for say $200) and you then have to buy more handsets from Hughes (assuming they are ready in time) at a higher price and presumably raise prices to cover your costs, thereby upsetting customer expectations. I would be quite surprised if Globalstar sets its prices below what will be needed to cover the cost of replacement Hughes handsets. That probably means similar pricing to the ISatPhone Pro, albeit with subsidies if you take a high end service contract.

    Looking at the relative return on equipment vs ARPUs, doubling current handheld ARPUs (i.e. still slightly below Iridium levels) would add ~$20M of incremental service revenues per year. For comparison, if you want to try and sell 100K handsets in a year, you’d probably need to have a very low price for both the handsets and the service charge (say $250-$300 including a year of activation, with calls in addition?). That would be a one off $25M-$30M with no guarantee those customers could be retained after a year, and every possibility that many current customers would opt for such a cheap deal, so you couldn’t increase their ARPU much from current levels. Then you have to go and buy Hughes handsets for future customers.

    Obviously there’s the opportunity to offer a free handset if you sign up for say a $80 per month unlimited usage package, but that’s not going to shift anything remotely close to 100K+ handsets. Therefore I’d opt for a focus on increasing ARPU, rather than on selling cheap handsets to low end customers. If the old handsets take a few years to be sold off then that will be good for those IGOs who don’t upgrade their gateways.

  3. geoff goodfellow said,

    September 8, 2011 at 11:15 am

    thanks tim… would be Very Interested in hearing any [more] thoughts, ideas, et al. from you (or anyone else wanting to chime in here) regarding: what would you do if you were Globalstar’s CEO to “game change” the MSS market, induce a maximum impact sales of devices (handsets, mifi modems, etc) and “cheap” can’t resist service to load/fill-up in the shortest possible time (with the best AMPU) the fully (and wanting/sitting nearly “empty”) replenished constellation to service that would blow away the competition’s (having had the benefit of all these launching delays, etc. to observe Inmarsat’s and such) “non traction”?

  4. timfarrar said,

    September 8, 2011 at 7:56 pm

    Geoff – good question. But I’d prefer to rephrase it as “is there anything you can do to game change the MSS market?” For the handset business I’d say not much (ask TerreStar!), but for the data business perhaps a fair bit more. I think the SPOT Connect/Iridium inReach concept has quite a lot going for it and it will be interesting to see how it evolves. I’d be happy to bet that there will be more MSS devices with that form factor (albeit mostly for low ARPU tracking solutions) than traditional MSS handsets in 10 years time. However, I’d also expect that (without another war) we may never fill up all the MSS capacity that is out there (with the sole possible exception of a few Inmarsat beams before/during the transition to GX).

  5. ORBITRAX said,

    September 9, 2011 at 11:47 am

    A couple of thoughts here. We think the plan is for them to run the RAN’s “side by side” for a period of time. Probably till 2015. The parts and assemblies for the Qualcomm RAN are not in abundant supply, and the RAN maintenance support will end in 2012. The Hughes RAN does not support Qualcomm CMDA according to our sources. They will transition users from Qualcomm user terminals to Hughes RAN enabled user terminals in early 2014. The Qualcomm RAN will be basically EOL’ed and removed from service in about 2015. Thus, there is a very short term “incremental increase in service revenues” associated with those user terminals, versus a relatively large return on equipment. Even at $250, with a cheap service plan. Thus they have a very short time period to “dispose” of the existing inventory, and the additional 50MM in Inventory currently held at Qualcomm. According to our figures, their landed cost is about $480 for the GSP-1700, and $240 for the GSP-1720 (part of the original 60MM in inventory now in stock), there are some car kits, and other items, but we suspect there is about 100,000 in modems and 60,000 GSP-1700 sitting on the shelf. All of these items go into the dumpster in late 2013 due to the RAN EOL in 2015. So we believe their choice is to either sell them for $250 or $300 to perhaps existing SPOT users, or get a “goose egg” for them in 2014. The preverbal “Truck of rotting tomatoes”.

    There is 60MM in Thermo Capital sitting in the “paid in full” inventory, and we doubt they are keen on dumping it in a dumpster somewhere in 2014. Same goes for Qualcomm. They have 50MM in inventory that become “dumpster” fill, so we expect there to be a good “working relationship” in order to reap some value from this inventory. The key will be to generate rapid uptake of the inventory. The only way to do that is with a very low cost user terminal and service pricing. On another note. there is currently no contract for Hughes to build a second generation phone. It is expected that they will move to an all IP Core Network implementing VOIP, and will likely provide voice as a data service via external Hughes ASIC equipped hotspot modems in mid 2013.

    It is no secret that much of Iridium’s voice subscriber growth over the last 4 years has come at the expense of defecting customers at Globalstar. These are not necessarily subscribers that “require global coverage”. We suspect, Globalstar is out to recover a good portion of those North American subscribers, while attempting to “sell the tomatoes before they go rotten”.

    ORBITRAX

  6. timfarrar said,

    September 9, 2011 at 12:24 pm

    So your plan would be to acquire and then force 100K new subscribers off the network within a couple of years? LightSquared’s having a difficult enough time persuading their (much smaller number of) customers to transition, and they have offered a free terminal replacement.

    Think about how many MSS customers are using their phones for (what they would characterize as) “safety critical” applications, and what happens when you do something that impacts that type of service (like interfere with GPS!) without offering to pay to make those affected users whole.

    Unless Globalstar is going to be capacity/spectrum constrained (e.g. because the spectrum is needed for ATC), I think it would be much better to find a way of keeping both the Hughes and Qualcomm RANs in place and selling the inventory at a more reasonable price over a longer period of time.

  7. ORBITRAX said,

    September 9, 2011 at 1:37 pm

    Not really “my plan”, but more like the realities of the situation as we understand it. The Qualcomm RAN’s are 14 years old from when they were designed in 1997. There is a certain amount of spare parts that are available from gateways that were built, but not installed. Also a number of “mothballed gateways”, like Nicaragua, Saudi Arabia, South Africa and Italy which will either be, or are in the process of being restarted or moved. Eventually, everything in Electronics becomes EOL’d at some point.

    Qualcomm is not interested in “extending the life of the RAN’s”, as they were not interested in providing a second generation air interface for Globalstar.

    The Hughes RAN will not be available until mid 2013 in North America, and the eventual loss of the Qualcomm RAN although “unfortunate” is “inevitable”. What would you do with 60MM in “paid for” user terminal inventory that is going to turn into a “pumpkin” in a couple of years? At what price do you think you could sell them for, given the fact that they may be/will be unusable in a couple of years. Our guess. CHEAP!! Which will not necessarily be a positive development for Globalstar’s competitors.

    As it said in their 2010 10-K:

    ” We and Qualcomm have mutually agreed to terminate our business relationship when Qualcomm’s current contractual obligations to deliver second-generation phones, data modems and accessories is completed in January 2012. Although we have contracted with Hughes and Ericsson to provide new hardware and software for our ground component, there could be a substantial period of time in which their products or services are not available and Qualcomm no longer supports its products and services.”

    ORBITRAX

  8. timfarrar said,

    September 9, 2011 at 4:46 pm

    I can understand why one would focus on selling inventory on the cheap if the sole objective was to monetize this asset, without regard to the impact on the future handheld business (e.g. in the aftermath of a bankruptcy and/or conversion to a pure spectrum play). However, if you want to generate enough money to pay back COFACE and hopefully provide a return to the equity holders based on a satellite-oriented business plan, the key thing will be how much you can grow total revenue to by say 2014-15.

    I don’t think trashing the handheld market (by giving customers the impression your handheld business is going to be based on $250 handsets and sub $10 per month ARPUs) is the way to do that. Inmarsat was quite content to trash the handheld market if it put Iridium and/or Globalstar out of business, but Inmarsat didn’t need the handheld revenue in the first place.

    I don’t see how you row back from “fire sale” mode, unless you say very explicitly that “this handset will self destruct in 2 years” (or in your phrase is a “rotting tomato”), which I suspect will probably prevent you from selling most of the phones and also screw up relations with the rest of your customer base and distributors. Sounds like Mission Impossible to me!

  9. ORBITRAX said,

    September 10, 2011 at 2:30 pm

    Points well taken. But, let us not forget that the introduction of the ISatPhonoe Pro effectively lowered the pricing bar by 50% to the $500 range. Where Iridium, Terrestar, and Globalstar (when commercially acceptable service was available) were selling near the $1,000 price range. So I think the concept of simple next generation basic voice MSS phones could sell at retail for $250 to $300 is NOT a wide stretch of the imagination. You need that kind of pricing to drive wide-spread adoption. Look at the HP TouchPad that got gobbled up at $99. Now, there is a dead-end product, i.e. “rotting tomatoes”. Still the crowds showed up in hoards. I think a $250-$300 phone offered to the existing SPOT user base with contracted unlimited voice service for $30 per month would be wildly popular, perhaps with a $5 per month discount for dual SPOT/Sat Phone users who Sync their existing SPOT contract to the new Phone Contract. Given the service pricing (models) we have seen for the InReach.

    $249.00 equipment -
    $24.99 per month recreational plan includes 40 messages (tx or rx) and 200 tracking points.

    A combination unlimited SPOT/Sat Phone user at $35 per month (with combination discount), would provide far greater functionality than an InReach and similar functionality of the 9575 w/ SOS. You could also “a la carte” tethered 9.6Kbs data services to those users for additional potential ARPU. Something that will never be available via the InReach. Globasltar knows where the “low hanging fruit” are, because they are already their customers. Something like 200,000 of them. Some SPOT users have moved from SPOT, SPOT2, now to SPOT Connect. Now reason to think you can’t find a percentage that would add voice / 9.6Kbs data services via a GSP-1700

    You can then monetize your existing inventory, perhaps the Qualcomm inventory, and bump your voice ARPU TO $25, while maintaining your SPOT ARPU at ~$10. At the same time, turn the company profitable by monetizing the inventory that they paid for several years ago. They do have COFACE adjusted EBITDA covenants to meet. That will be tough to do attempting to sell 1700′s for $900 and a $50 per month contract which includes 15 minutes of airtime per month, through a dealer network.

    However, back to your comments. I don’t think anyone has talked about sub-$10/month ARPU as you indicated. Their current Voice ARPU is below $20 anyway. So I doubt that anyone out there is paying over $20 a month for Voice Service anyway, so maybe not so much ARPU to destroy, and or customer base relations to “screw up”. Most of their dealers offer the Unlimited Service Plans anyway. The key is to get a user terminal into the hands of users that would likely “a la carte” some data service. Then walk the data users into the 2nd Generation RAN in late 2013 with a SmartPhone connection to a 256kbs data and VOIP via a Hotspot Modem with maybe a Phone Trade-In program.

    They are already selling the 1700 for $499 through a dealer network with probably at least a 25% margin for the dealer which nets them no more than $375. Versus selling them direct to their existing SPOT users which may only net them $250-$300, but would increase margins on the service contract.

    So I guess to answer your question. There is no “rowing back” from the fire sale price. Only competitors that will have to “row forward”.

    ORBITRAX

  10. geoff goodfellow said,

    September 10, 2011 at 3:11 pm

    tim: adding further to the above comment, do you remember after apple intro’d the iPhone, they did a survey of what was the #1 barrier/customer objection to buying an iPhone? it was price… and the survey that showed “The “sweet spot”of consumer interest appears to be $100-$299. http://blog.compete.com/2007/09/07/iphone-price-cut-double-interest/ “… so apple and at&t “went to work” :D and lowered the price. of the handset.. and, as they say, all the rest is history. :D

    even jay monroe commented on your esteemed MSS CEO session at SATELLITE 2011’s MSUA-8 that ““The key is driving down the costs of your infrastructure. If you look at history, the one-rate plan from AT&T altered the way people thought about cellular services. It changed the way people connected. People could afford to be connected. I don’t expect $100 ARPUs in the handheld market, however, I think $500 for a handset is too high. I think it will come down and we will be coming out with a phone for much less than that.”… http://www.satellitetoday.com/eletters/satellite2011_daily/fromtheshowfloor/36388.html

  11. timfarrar said,

    September 10, 2011 at 6:19 pm

    The current phones from Inmarsat, Globalstar and Iridium all cost something like $350-$400 to make (in production runs compatible with sales of a few thousand units per month). This excludes NRE cost which is typically millions to a few tens of millions of dollars (first new handset would be at the higher end of this range, e.g. ISatPhone Pro, updated handset, e.g. Iridium 9555/9575, towards the lower end). The disparity in price charged for these handsets is a decision by the companies concerned and doesn’t have anything to do with differences in manufacturing costs. However, to date none of them sell below cost (i.e. $350-$400 cost + $100-$200 margin for the distribution channel).

    If you can’t row back on a $250 price, then unless the manufacturing cost of the new Hughes handsets is going to be dramatically less than the current ones, i.e. $150 or so (and I know of no evidence to suggest that), you are left with subsidizing the phones like in the cellular world. No one has done this to date because there is little evidence of significant price elasticity, or much pent-up demand for the phone itself (like there was for the iPhone, and remember Apple gets paid about $500 for every iPhone it sells).

    We haven’t seen much evidence of elasticity with the ISatPhone Pro vs Iridium, and in fact so far those customers who would pay $500 but not $1000 have typically been people who generate sub $10 per month ARPUs (the 10 minute prepaid card in China for example). The high end subscribers still seem to be relatively happy to pay $1000+ for an Iridium phone. I’m not at all convinced the answer will be any different if you look for new satphone customers who will pay $250 but not $500.

  12. ORBITRAX said,

    September 11, 2011 at 10:30 am

    We are still a bit confused on your reference to a Hughes handset? There is no contract for the development of a Hughes handset. The existing contracts are for air-interface development, RAN development which includes 9 RAN’s installed (Wasilla,Alaska / High River,Smith’s Falls, Canada / Clifton, Sebring, Cabo Rojo, PR / Manuas, Petrolina, Presidente, Brasil/ and France.) The contract also includes the development and delivery of a 100,000 ASIC’s which will serve as a single chip Satellite Data Voice Modem supporting mobile data rates up to 256k/bs.

    I personally spoke to Paul Monte via phone at the ASM in April of this year, and he verified that the Hughes prototype ASIC was in house in Milpitas, and that given the current performance under simulation. An additional “spin” through the Fab would not be necessary.

    Cost of the ASIC to integrators is targeted to be about $10 with a $1 “royalty” payable to Hughes.

    While I agree 100% with your viewpoint of a lack of “pent up demand” for MSS voice based products. However, We believe there is a huge pent up demand for MDR data (256k/bs) to “HotSpot” types of devices. Iridium Force’s “unique vision” is centered on the concept of a shift from a “voice centric” model to a “data centric” model. Unfortunately, sharing a 2400 baud data connection at $1 a minute to a couple of laptops over Wi-Fi seems untenable to us.

    There were those that believed that a MSS based product like SPOT could never get down to $99 equipment costs, nor was there demand for such a “consumer”" product. Globalstar, out of survival, made the MSS eco-system rethink that viewpoint and are now rushing to emulate it.

    At the end of the day, the pricing trend points “down”. Lower equipment costs, and much lower service pricing. I am sure there are many “high end customers” that do not consider a GEO based provider as a “direct substitute” for a LEO based system. Not to mention that Inmarsat’s “pre-paid” low-cost pricing options are still DOA in North America due to “IPR litigation”. Thus the “price premium” for a LEO maintains, so far. However, a LEO based system with better call quality, and faster data rates (even at 9600 baud) will be viewed as a “direct substitute” by a portion of these “high end” voice customers.

    The 9555 is already being offered in Australia for $715 US, WITH a 3 year contract.

    Will the competition “defend”, or “defer”?

    ORBITRAX

  13. timfarrar said,

    September 11, 2011 at 11:24 am

    When I say Hughes handsets, I mean a handset based on the Hughes chipset. Whether it will be made by Hughes or someone else, I can’t believe that Globalstar is going to get out of the handset business (and I don’t think that is what you are suggesting).

    What is the MDR device you are talking about going to look like and cost? The Hughes chipset and RAN may be capable of processing a 256kbps packet data connection, but the power and gain needed on the uplink for anything close to that data rate would be far greater than is feasible with a handset/SPOT-sized battery and omni-antenna. You might be able to deliver more on the downlink, but with a low gain omni-antenna the satellite capacity would be pretty limited.

    Also remember that for LEO, the satellites are moving so a BGAN-like form factor is not practical. Thus you might expect a practical 256kbps down/64-128kbps(?) up device to be only a bit smaller than an OpenPort terminal/antenna. Not exactly a mass market solution (and BGAN isn’t either, as we know).

  14. ORBITRAX said,

    September 12, 2011 at 9:03 am

    Yes, of course, 32 – 64 k/bs on the reverse link, up to 256k/bs on the forward link single channel uncompressed to a near stationary mobile device. Slower to a moving device. What the exact form factor will be or retail cost is still anyone’s guess, and it would be a misrepresentation to provide that type of estimation in our opinion.

    ORBITRAX

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