McCaw Relaunching Satellite Hopes
Is Craig McCaw about to carry the world past another technological milestone?
That is what the satellite communications industry is hoping, at least. Because the Washington-based entrepreneur, a pioneer in cable television and cellular phones, has been focusing his attention and money on a business afflicted with bankruptcies and technological uncertainties.
This month alone, investment groups headed by McCaw have committed more than $300 million to rescue two failing satellite communications companies from bankruptcy. The deals, involving London-based ICO Global Communications and Washington-based Iridium, would require McCaw to raise at least $1 billion more as the systems get back on their feet.
But that price could be a bargain if McCaw can use the systems to jump-start his own dream of a larger network of communications satellites.
The centerpiece of McCaw’s strategy has long been Teledesic, a private partnership he founded with the ambitious goal of providing high-speed Internet services globally, starting in 2004, from a constellation of 288 low-Earth-orbiting satellites. Among the investors are Microsoft’s Bill Gates and Saudi Prince Al Waleed ibn Talal ibn Abdulaziz al Saud, but the partners have thus far raised only about $1.5 billion of the estimated $10-billion to $12-billion cost.
But the bankruptcies of ICO and Iridium, which have made their assets available at fire-sale prices, give McCaw the opportunity to establish a Teledesic-style network in space relatively quickly without waiting to raise billions of dollars and launch hundreds of satellites over several years. Even McCaw representatives concede that the original Teledesic plan may be dead for now.
“It looks like there may not be enough interest in Teledesic as a 288-satellite constellation,” says Robert A. Ratliffe, vice president of McCaw’s Eagle River investment fund. “That would be hard to fund right now.”
McCaw’s investments underscore his conviction that broadband communications--the high-speed connections that allow higher-quality video and other multimedia to be distributed over the Internet--will be most efficiently delivered via satellite, rather than cable or ground-based wireless transmission.
“Craig’s doing this for a couple of reasons,” Ratliffe says. “He strongly believes in satellite systems as distribution for broadband. But he also wants to stabilize the satellite industry.”
Indeed, McCaw’s burst of spending has established him as the closest thing to a savior among satellite communications investors.
That’s because the August bankruptcy filing by Iridium, which was heavily backed by Motorola Corp. and was already providing mobile telephone service to users from 66 satellites, cast a desperate pall over the entire fledgling industry. Unable to raise needed financing in the wake of Iridium’s fall, ICO filed its bankruptcy petition two weeks later. That in turn forced a suspension of work by Hughes Electronics on ICO’s 12 unlaunched satellites.
Other satellite companies are also reportedly struggling, including Globalstar, which is backed by Loral Space & Communications Ltd. and has 52 satellites in orbit.
“Craig McCaw has incredibly deep pockets, great vision and great respect,” says James Schaeffler, an analyst at the Carmel Group, a telecommunications research firm. “For him to invest is a remarkable validation of what space-based services will become.”
Schaeffler is not underestimating the power of the McCaw record. The second of four sons of a Washington-state radio and cable entrepreneur who died in 1969, leaving a debt-burdened estate, McCaw rebuilt the cable interests into a franchise he could sell in 1987 for $755 million.
He then invested much of that windfall in cellular telephony. Defying the conventional wisdom of the time, which held that cell phones would never serve more than a niche market in the U.S., he assembled a successful nationwide cellular network. In 1994, McCaw Cellular was sold to AT&T; for $11.5 billion.
Since then, he has spent months sailing around the world, divorced and remarried. (His divorce settlement left the former Wendy McCaw with nearly half a billion dollars in stock, although Forbes magazine still pegs McCaw’s net worth at $6.4 billion.)
He has also turned his attention to new ventures. Besides the satellite business, they include a 20% holding in Nextel, a digital wireless communications network, and the founding of Nextlink, which provides wireless and fiber-optic communications to businesses across the country.
“He’s one of the people I’ve met in my life whose IQ starts with a 3,” says Leo Hindery, the former cable television and AT&T; Internet executive who is now at Global Crossing and is a close friend of McCaw’s.
“People said there would never be more than 2% to 3% of people using a cell phone, but he saw it,” Hindery says. “People said satellite was at best a high-end video service. He sees data and information and smart cars, and getting one telephone number that you can keep to the end of your life. He’s going to weave Nextel, Iridium, ICO and Teledesic into a tapestry of multiple uses. When it comes, it’ll be democratizing and ubiquitous.”
For all that, McCaw (who declined to be interviewed for this article) scarcely resembles the model of a modern major industrialist. Capable of inspiring remarkable devotion among colleagues and employees, McCaw is detail-oriented but not a hands-on manager, preferring to surround himself with skilled operating executives and entrust them with building on his strategic blueprint.
That approach might be partially a reflection of his mild dyslexia, a reading disability he shares with such other farsighted businessmen as Charles Schwab and Ted Turner.
“Maybe it’s a strategic asset,” he told the Seattle Times in 1993. “I can’t go to a piece of paper and organize things as most people would. I have to explain conceptually what we want to accomplish, and then somebody else has to translate that into a concise, organized plan.”
McCaw’s satellite deals are nothing if not concisely organized.
On Feb. 4, he reached a final agreement to complete a $500-million cash infusion into ICO Global and invest as much as $700 million more to buy as much as 75% of the company. ICO had already spent $3.4 billion of a planned $4.7 billion to launch a 12-satellite voice and data network when its financing ran out in August with two satellites under development.
The Iridium investment is still a work in progress. McCaw’s investment group agreed last week to put up $74.6 million to keep the 66-satellite mobile phone network operating through mid-June. Meanwhile, he will “aggressively” subject Iridium to scrutiny to determine whether he wants to spend about $600 million to take control of the struggling company, according to Ratliffe.
(That plan does face opposition from Iridium bondholders, however, whose stakes would be wiped out if McCaw takes over. A bondholders group threatened Friday to sue to stop the deal unless some of their billions of dollars in claims are honored by Motorola, which they say is responsible for Iridium’s obligations.)
Industry observers say there could be more deals in the offing. All eyes are on Globalstar, a $3-billion, 52-satellite system that has reportedly run into trouble obtaining handsets from suppliers. Whether Globalstar is in financial trouble will not be known for sure until next year, when it must report to lenders, but it is being closely watched by the industry.
“Globalstar is a test of whether there’s really a market for satellite phones and how big it is,” says Marco Caceres, space analyst at Fairfax, Va.-based Teal Group, “or whether the whole industry is just a mistake.”
That suggests that reanimating the satellite communications business may demand all of McCaw’s vision and strategic skill. There are few technologies that inspire enthusiasts and critics with such equal passion--unsurprising, given its complexity and the years required to establish a network in orbit.
In fact, timing was one of Iridium’s pitfalls. The project, a mobile phone system for businessmen in remote regions or at sea, took nearly 10 years from concept to the completion of its 66-satellite constellation.
By then terrestrial wireless networks had evolved to the point that they could provide much of the service Iridium hoped to have to itself, and for far less than the $5 a minute Iridium charges. Even worse, Iridium’s satellites, which were designed for the low-capacity demands of voice conversations but not for video and multimedia content, today look as obsolete as Edsels.
“McCaw is creating buzz, but the issue comes down to what can be offered in terms of data capability by satellites that can’t be offered at lower price and more robustness on the ground,” says Herschel Shosteck, a Maryland-based communications analyst, who cautions that he has not discussed McCaw’s business plan with the entrepreneur or his staff. “Even if McCaw buys Iridium for $1, there’s still no business case for it.”
Others say, however, that satellites may well be the best means of delivering broadband to a global audience.
“Satellite broadcasts everywhere,” says Carol Sorrick, chief general manager of the Intellicom unit of Softnet Systems Inc., which has developed a technology to provide two-way broadband service to users via satellite. “That’s the best part. I can send all over the world.”
Industry executives say demand for broadband capacity is certain to explode over the next few years.
“Demand for broadband is underestimated right now because it’s viewed only as how many people will want to watch streaming video and Web pages,” says Andrew Cromarty, Softnet’s chief technical officer.
But new applications, including Internet-based phone calls and others not yet envisioned, will be large consumers of broadband capacity. That makes McCaw’s investments canny moves, many observers say.
One thing McCaw understands better than anyone is the value of a spectrum of telecommunications frequencies, notes a prominent satellite communications executive. “There’s only so much of it, like beachfront property, but applications are rising exponentially. So he’s amassing lots of it.”
The low price of acquisition also gives McCaw the flexibility to test a wide range of business models and technologies.
Iridium’s system, which was designed for mobile phone communications, is considered unusable as a broadband platform. But acquiring Iridium for pennies on the dollar would give McCaw a plaything to gain experience operating a satellite network and to solidify his relationship with Motorola, a prime contractor for Teledesic. As Iridium’s satellites expire over the next five to 10 years, moreover, they could be replaced by more advanced models suitable for a wider range of services.
ICO is probably a surer bet for McCaw because its first satellite is not to be launched until next month. Industry experts speculate that a recently renegotiated contract between ICO and Hughes anticipates that the unbuilt “birds” will be upgraded to accommodate broadband data transmission.
“When you buy a system as cheaply as he is, you don’t have to be completely right,” says Thomas Moore, chief executive of Denver-based ISky, which plans to launch a $1.2-billion, four-satellite network to deliver high-speed, two-way Internet service to residential customers.
Of course, whether McCaw is right may affect whether the entire industry has a future.
“The market is just waiting to see if Craig pulls this off,” says one industry executive. “If it doesn’t work with him, it won’t work with anybody.”
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Satellite Technology
Cell phone billionaire Craig McCaw has recently invested heavily in two bankrupt satellite communications companies, Iridium World Communications and ICO Global Communications. Here are snapshots of the two companies:
*
Iridium
Operates global wireless communications systems through a network of low-Earth-orbit satellites, 15 ground stations and agreements with cellular carriers.
* Number of satellites: 66
* System cost: $5 billion
* 1987: Motorola engineers develop a plan for communications using low-orbiting satellites.
* 1991: Motorola incorporates Iridium as a separate company.
* 1997: Places 47 satellites into orbit; IPO stock offering of $240 million.
* 1998: 66-satellite network completed; system enters commercial service.
* 1999: Files for Chapter 11 bankruptcy.
* 2000: McCaw’s investment group spends $74.6 million to keep the company operating through mid-June.
ICO Global Communications Ltd.
ICO plans to provide global, satellite-based voice and data communications through 12 satellites, being built by Hughes Electronics, and 12 Earth-based stations.
* Number of satellites: 12
* System cost: $4.7 billion
* 1995: ICO Global Communications established.
* 1998: Begins service.
* 1999: Files for bankruptcy for debt restructuring.
* 2000: McCaw invests $500 million, with plans to invest as much as $700 million more.
