What’s the Message for Investors in Telecom Companies’ Satellite Plans?

One half of the world’s people have never made a phone call. And fewer than 12 phones for every 100 people is the global average, with less than one phone for every 100 in China and India. The United States has 60 phones for every 100 people.

But that situation will change dramatically in the next 10 years as most of the world’s people get phones in their hands and begin making calls through networks of satellites orbiting the Earth.

Yes, satellites. It is now clear that the satellite will be to the new telephonic age what telephone lines and undersea cables were to the century just concluding, with major consequences for business and investment.

Satellite networks can be built and launched for a fraction of the cost of laying phone cables in the developing countries of Asia and Africa. And satellites offer mobility to telephone users with the convenience of being able to carry their cellular phones from one city to another.

That’s why major companies are launching more than half a dozen multibillion-dollar satellite networks. Motorola Inc. last week announced its third major satellite venture, a $13-billion 63-satellite system that will bring global customers Internet and video transmissions, starting in 2001.

That Motorola network, called Celestri, presents a direct challenge to the plans of entrepreneurs Craig McCaw and Microsoft’s Bill Gates for a similar satellite network called Teledesic.

Motorola also launched seven more low-orbit satellites last week for its Iridium network for voice transmissions.

And the European company Matra Marconi Space announced a $2-billion satellite effort last week.

At the same time, TRW Inc. briefed investment analysts on its Odyssey network, a $3-billion venture that will put 12 satellites in orbit in 2001 and 2002 capable of relaying phone calls from 6,000 miles up.

Meanwhile, Qualcomm Inc. and Loral Space & Communications prepared for the 1998 start of their Globalstar system, which will launch 40 satellites and has permission to relay phone calls in China, among other countries.

Hughes Electronics and Comsat Corp. readied their 12-satellite ICO Global Communications network.

And the French company Alcatel, in partnership with Loral, prepared SkyBridge, a 64-satellite network for computer data.

The commitments for all those satellite systems total $44 billion, one of the largest private business undertakings in world history.

Yet financial markets aren’t balking at the big spending plans. Motorola stock, which has been floundering, hit a new high after its Celestri announcement and Iridium launches.

“The markets see opportunity,” says Jim Schaeffler of Carmel Group, a satellite industry consulting firm.

*

Do the markets see correctly? There are lessons in the often confusing interplay of satellite technology and investment opportunities. Different companies are pursuing different strategies and visions.

TRW, the Cleveland-based automotive equipment firm with space and defense operations based in Redondo Beach, is trying to be the low-cost provider to emerging markets. Placing its satellites in what are called medium orbits, 6,000 miles up, it can cover a greater area with fewer satellites. Thus it hopes to do for $3 billion much of what Motorola’s 66-satellite Iridium network, at 400 miles up, will do for $5 billion.

Analyst Douglas Christopher of Crowell Weedon, a Los Angeles investment firm, is impressed. “TRW has an operational understanding of the business,” he says.

Qualcomm, the San Diego-based maker of advanced cellular telephones, is backing its own technology with its investment in the Globalstar system. Qualcomm developed a multiple-line cellular phone system, called CDMA, that for a time was questioned by experts but now is coming into its own.

“Japan has just adopted CDMA technology. China, India and Chile have too,” says a Qualcomm spokesman. The Globalstar network will accept and transmit calls from all varieties of phone systems, but Qualcomm’s participation can’t help but spread the success of CDMA, which has taken it from $100 million in sales to $1.5 billion in just five years.

Motorola has the most ambitious plans for satellites. It has announced three proposed networks so far, involving 201 satellites and $30 billion of investment over the next decade. The company last week also declared its intention to become the world’s largest manufacturer of satellites. It is the kind of grand plan that hurt its stock a year ago.

Motorola, a giant of communications with $28 billion in sales of cellular phones, semiconductors, two-way radios and pagers, took its lumps last year for a 35% decline in earnings. Competition from Nokia of Finland and L.M. Ericsson of Sweden had taken cellular phone leadership away from Motorola. Professional investors questioned the company’s penchant for investing hugely in long-term projects.

Yet this year, the stock has risen.

“The company is creating a new business it can lead in,” says analyst Jeffrey Schlesinger of UBS Securities, the investment arm of Union Bank of Switzerland. “With competition reducing profits in phones, Motorola is moving on to satellites,” he adds.

Those words resonate. In its 70-year history, Motorola has always succeeded when it has moved on. Founded on car radios, it went into semiconductors because radios needed them. Then it became a leader in cellular phones, which use a lot of semiconductors, and now it is moving into satellites, the delivery system for global telecommunications.

*

Motorola won’t have a walk in the park. Hughes Electronics, the subsidiary of General Motors, is working hard to be the world leader in satellite broadcasting and communications.

And the whole satellite field faces challenges.

“Entrepreneurs with other technologies, such as fiber optics, will battle for the lucrative markets in major cities,” suggests analyst Jeff Maul of the Arthur D. Little consulting firm in Cambridge, Mass.

So what should investors think? “That satellites and telephones today are changing the world. The opportunities are not minor,” says George Sollman, founder and vice chairman of Centigram Communications, a San Jose telecom software firm. “Companies should be studied not for one quarter or even one year. Technology investing by its nature is long-term,” he says. “It requires risks, but it pays rewards.”