Inmarsat plc intends to join the mobile satellite services sector’s handheld voice market, which it sees as a potential outgrowth of its existing, maritime customer base that could use excess capacity on its recently completed constellation of next-generation satellites. The company said it expects to announce a deal with a well-known handset vendor later this year, with service to follow as soon as next year.
The company’s announcement was embedded in a mere sentence in the MSS provider’s 18-page preliminary report on its 2005 results, released last week.
Chairman and Chief Executive Officer Andrew Sukawaty characterized 2005 as a transformational year for the company. Inmarsat completed its constellation of next-generation satellites with two successful launches and executed an initial public offering of stock on the London stock exchange. Inmarsat reported that its MSS revenue in 2005 grew 3 percent to $472.5 million.
But Inmarsat’s intent to pursue voice services in a market segment in which data currently drives growth drew renewed attention to the MSS industry. The MSS market has grown steadily in voice and data services for the past five years, creating a nearly $2 billion global market by 2004, which is the latest year figures are available, according to the Washington, D.C.-based Satellite Industry Association.
Last year’s revenue numbers for the industry are due in June from SIA and those results-fueled by war and natural disasters around the world-are expected to show a significant jump from 2004.
“I call it the `unfortunate niche,”‘ David Cavossa, executive director of the Satellite Industry Association, said of MSS’ recent revenue surge from events marked by human suffering. Demand for handheld devices that depended on satellite rather than battered terrestrial cellular networks surged last year in the aftermath of Hurricane Katrina, earthquakes in Iran and Pakistan and the tsunami off the coast of Sumatra in the last days of 2004.
The industry, however, eschews a strategic interest in episodic disasters as a dependable revenue source. MSS providers have quietly built their business on serving maritime, aeronautical, defense, disaster preparedness and remote terrestrial interests (including natural resource exploration) since their original business model-to compete with cellular carriers for high-flying executives’ traveling needs-faltered in the late 1990s under massive debt and bankruptcy filings by the major players, as well as the success of cellular players’ network buildouts.
London-based Inmarsat’s plan would place it head-to-head in competition for handheld voice services with American rivals Iridium Satellite L.L.C. and Globalstar-both of which have emerged from bankruptcy with robust businesses that largely fly under the radar of wireless consumers and enterprises-and Saudi Arabia-based Thuraya.
Inmarsat’s plans represent a sea change in the company’s attitude toward handheld voice services since its founding in 1979.
According to John Warehand, Inmarsat’s public-relations manager, Inmarsat’s next-generation satellite constellation-a network of 10 geostationary satellites in orbit about 22,000 miles above the Earth-will enable it to join the fray in handheld voice services due to the network’s excess capacity and, Warehand suggested, the aging nature of its competitors’ constellations.
“It will be very expensive to replace those systems,” Warehand said from London. “So customers on those systems, over the next 10 years, must question the sort of services they can expect to get.”
Iridium, for one, took a skeptical view of Inmarsat’s intent. Greg Ewert, executive vice president of privately owned Iridium, said Inmarsat’s logic stumped him.
Inmarsat’s I-4 constellation creates a latency factor for voice of two to three seconds, Ewert contended. He acknowledged that the limitation can be overcome with additional power and bigger antenna size, but that would affect Inmarsat’s declared advantage of capacity.
“The I-4 constellation is originally designed and optimized for data,” Ewert continued. “They will be backing into voice services. I would question the whole strategy. Are the I-4s going to be able to provide a similar-quality service that our customers are used to with the [low-earth orbit] constellation that we or our competitors run?”
Iridium announced last month that it was beginning an engineering review of its current constellation for a future replenishment and replacement plan for its 66 LEO satellites. Independent studies commissioned by the firm project a useful life of the existing constellation for another eight years.
Ewert added that Inmarsat and Iridium would predominantly use the same distribution channels to reach customers for handheld voice services.
“Does that mean that their service is going to be sold for 50-percent less than mine? I don’t think it can. They have the same limitations with respect to price that’s based on their investment in these I-4s that they have up. They don’t have unlimited flexibility to price downwards. Ultimately, when you look at my pricing structure, which is coming out of bankruptcy, I will always have a lower pricing structure than they have. So if at some point I had to lower my prices for another competitor entering the market, I could do it without effectively digging into my cost basis, which I have to protect.”
Ewert conceded that one potentially competitive niche-ancillary terrestrial component, or ATC-has been opened by the FCC, which might offer Inmarsat an opportunity to compete on handset prices and service.
“We’re talking about a finite market out there,” Ewert said. “There’s nothing that Inmarsat can do to significantly lower the price of handsets, unless they plan to get into the whole ATC business in a very big way, where all of a sudden your addressable market share could expand beyond MSS to encroach on the cellular providers. Then you might conceivably get a cellular manufacturer [with economies of scale] to make a handset that can hand off between satellite and cellular systems.”
Iridium addresses four major business segments with mobile voice and data, including handheld voice: maritime, aeronautics, land mobile and defense. “We do a significant business in international waters, for instance,” Ewert said. “We continue to see that as a growing marketplace for two reasons. Number one, the overall macroeconomics of the shipping business is growing. Manufacturing centers such as China and India are drivers of that sector. The increasing movement of goods around the globe is driving the shipping business and Iridium revenues from both voice and data.
“Right now we’re predominantly still voice services, but data is our fastest-growing line. You’re probably talking about a 70-30 split, 70 percent of revenues come from voice, 30 percent from data. But data services are growing at 50 percent, year over year.”
