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[] WP 23.05.02: Iridium Finds Itself In A Contractual Bind],

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Date: Fri, 24 May 2002 10:13:54 +0200
From: Olivier Minkwitz <minkwitz -!
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Subject: WP 23.05.02: Iridium Finds Itself In A Contractual Bind
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Washington Post
May 23, 2002
Pg. E5

Iridium Finds Itself In A Contractual Bind

Va. Firm Must Commit to Satellites, Even as Rivals Pursue New

By Yuki Noguchi, Washington Post Staff Writer

For a soldier in Kosovo, or an oil rigger working in the middle of the
Pacific Ocean, there are few options when it comes to calling home.

Iridium Satellite LLC remade itself to fill that niche. Iridium, a
private company that resurrected a bankrupt satellite-phone business a
year and a half ago, remodeled its consumer phone business into one that
serves mostly military and industrial customers. It is even making
inroads offering data services, which the company says will fuel its
future growth.

Military and industrial customers typically aren't as sensitive to
prices as consumers are, so they wouldn't balk at the $1.50 per minute
it costs to use the phones.

Iridium, which is still privately held by undisclosed investors, has a
two-year, $72 million contract with its largest customer, the Department
of Defense. The company has other government contracts as well, but
sales to private firms -- a division launched only a year ago -- are
growing at more than 20 percent a month and now make up roughly half of
its total revenue. Growth in its data business has outpaced what the
company once expected; customers tend to e-mail and surf the Web longer
than they tend to talk on the phone.

Thanks in part to that growth, the Arlington-based company could have
made enough money to cover its annual costs of $90 million by the middle
of this year, said Gino Picasso, chief executive of Iridium. Instead,
the company decided to create a short-message service, so it won't break
even on its expenses until next year, he said.

But just as its business has started to take off, Iridium is facing a
regulatory predicament that may force the company to change its business
once again.

By July 17, Iridium is required by regulators to sign a contract --
worth $1 billion to $3 billion -- to build and launch its next
generation of 96 satellites.

That's in spite of the fact that its business could change entirely by
2012, the earliest date the company anticipates actually needing those
new satellites.

The contract reserves space on the air waves for transmitting phone
calls and e-mails from satellites. The Federal Communications Commission
is requiring Iridium to sign the contract by July as a financial
commitment for the continued use of those airwaves.

But ICO, a rival satellite company, is lobbying the FCC to allow it to
use a different type of spectrum that would enable ICO to transmit its
signals in urban areas and on the ground -- like a regular cell phone

If ICO gets approval for the terrestrial spectrum, Iridium would seek
similar permission.

"It changes dramatically our business strategy," Picasso said of the ICO
proposal. "That has a profound effect on how we design our system."

With terrestrial spectrum, Iridium could try to establish partnerships
with wireless phone companies or try to compete with them, at least in
part, Picasso said, but he added that Iridium is not yet sure exactly
how use of spectrum on the ground would change its business.

Iridium is planning to abide by the July deadline and sign a contract
for the satellites, but it hopes the FCC will grant it leniency if its
plans change and the contract needs modifying, he said.

ICO, a London-based company with only one operating satellite, wants to
be able to offer Internet connections at higher speeds -- 384 kilobits
per second, roughly comparable to the speed of a cable-modem connection
-- than Iridium's systems, which top out at 10 kilobits per second. ICO
officials say its systems would also offer service everywhere, even in
cities, where Iridium's phones must have a line of sight to the sky or a
special antenna to receive the signal inside buildings.

Without the commission's approval for the terrestrial spectrum, the
current model for satellite communications doesn't make sense, said
Gerry Salemme, a spokesman and lobbyist for ICO. "We do not want to
launch a satellite with a failed business plan," and right now, ICO's
economic viability depends on the FCC approving its spectrum, he said.

Analysts and industry insiders believe the FCC will approve ICO's
request in the next two months.

"I think it is quite likely that mobile satellite operators [both ICO
and Iridium] are likely to get terrestrial service where satellite
spectrum doesn't reach, like in New York City," said Rebecca Arbogast,
an analyst with Legg Mason Wood Walker. "In general, the FCC is trying
to encourage flexible use of spectrum."

That raises a lot of questions about Iridium's future plans, especially
if it tries to compete with cellular providers -- a business it has
tried and failed once before.

Iridium Satellite is the new and improved version of Iridium LLC, a
business that ended in failure only nine months after it launched the
service in 1998 -- primarily because its brick-like phones and its
spotty service couldn't compete with the rapidly growing cellular phone

Cellular companies already have a very firm foothold in the consumer
market, and even in the business users' market, Arbogast said. "Unless
they have somehow managed to make progress in the areas that they
stumbled on before -- high cost and clunky phones -- if they're able to
address those problems, they may have some hope," she said. After all,
"they are able to get a fair amount of mileage" from existing systems.

"They are like a phoenix that keeps rising from the fire," she said.

Olivier Minkwitz___________________________________
Dipl. Pol.
HSFK Hessische Stiftung für Friedens- und Konfliktforschung
PRIF Peace Research Institute Frankfurt
Leimenrode 29 60322 Frankfurt a/M Germany
Tel +49 (0)69 9591 0422  Fax +49 (0)69 5584 81
Mobil   0172  3196 006                            pgpKey:0xAD48A592
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