ORBITRAX

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).

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

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.

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

$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

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!

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

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.

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