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Weekly Column

The Sky is Falling: If You Think the Internet is Causing Turmoil for Phone Companies on Earth, Look What's Happening in Space!

Status: [CLOSED]
By Robert X. Cringely

This week, Iridium filed for bankruptcy. The satellite phone company couldn't meet interest payments, and so defaulted on $1.5 billion in loans. Iridium, intended to be the paragon of high technology, is in danger of being killed by even higher technology. That's the way it goes.

The idea behind Iridium was clever, that there are people to whom staying in communication is so important that they'll pay almost anything to do so. It also helped that there are parts of the world so remote or so poor or so politically controlled that having a satellite phone is about the only way to reach people there.

It's not that there weren't already satellite phones, but those used geosynchronous satellites, often the same ones used for television transmissions. Sitting 22,300 miles in the sky, these satellites required expensive, high-powered phones and service suffered greatly from the half-second roundtrip to space and back. The Internet's IP protocol hates distances like that so much that it literally will not work without modification. This is just one of the reasons why the geosynchronous Internet services like DirectPC operate strictly for downloads with any upstream data going over a lower-latency telephone connection.

Iridium was to be better, since its satellites in low earth orbit could use lower-powered portable phones and would have much better quality signals. And it might have worked just like that, had Iridium not acquired some satellite competitors and had the world communication markets hurled themselves into Internet-inspired turmoil.

Back when Iridium was still a glint in some Motorola engineer's eye, cellular phone service was much less available than it is today, long-distance phone service was much more expensive, and Iridium looked great. But it takes a long time to build a network in the sky. It took Motorola years just to raise the billions needed to send 72 satellites into orbit and build the ground stations. And while they were raising that money, three other satellite outfits got started — ICO Global Communications, Globalstar, and Teledesic.Four phone companies is a lot of phone companies, but each of these was different in their own ways. Iridium satellites can do a certain amount of communicating between each other while Globalstar satellites talk to each other only through groundstations. That makes Globalstar satellites cheaper. And since there are only 48 Globalstar satellites to 66 (plus spares) for Iridium, Globalstar might have a lower cost of doing business. Globalstar gets away with fewer satellites by flying them higher, though as we know that requires somewhat more powerful phones.

Teledesic, on the other hand, says it isn't really aiming at phone service at all, but satellite-based data service. Teledesic is empire-building on the grand scale that befits its two major backers — Bill Gates and Craig McCaw. Forget 48 or 66 satellites, Teledesic requires a total of 288 satellites to create a network that will deliver data rates of up to 64 megabits-per-second and do so without the need for any ground stations that aren't owned by customers.

Once again, we have a situation where networks optimized for voice service risk being undercut by a data network that can be used for voice. It is just like Internet telephony. Teledesic has to scare the bejeezus out of Iridium and Globalstar because Teledesic can serve many more users at the same time, and provide a variety of services like video conferencing and Internet access in addition to phone.

ICO Global Communications, having already spent $3.1 billion, is having trouble raising the rest of the money to build-out its network. Iridium is in bankruptcy. All of these companies have to be worried — not just because of each other, but because of the rise of competitive ground-based services. Even mighty Teledesic isn't perfect, since its high bandwidth services require operation in frequencies that are significantly affected by rain. Don't expect to watch Teledesic for maps of that approaching hurricane.So there will be a shakeout, it's certain. Not all of these companies will survive. But the more interesting question to me is, what will happen to those that fail? What do you do with a few dozen satellites in low Earth orbit? The technical standards of these systems are all different. So it is not a matter of just adding a few Iridium satellites to the Globalstar network. These are standalone operations.

You can't retrieve the satellites and sell them to somebody else. You can shut them down, but this makes very little sense given that Iridium and Globalstar are already operational. Somebody will operate these systems, that's clear. Even if Wall Street clobbers them and they all go bankrupt, there's still plenty of business to be done by whomever takes over. If you acquire for almost nothing an infrastructure that took billions to build, then running it at a profit should be very easy.

And that's what is likely to happen. The folks who built these systems are — at least some of them — going to lose their shirts. But the systems themselves will survive and eventually be operated at vastly lower cost than was originally expected. Already Iridium has slashed its North American call prices to $1.59 per minute and cut phone prices to $1,495. This is just the beginning.

So we're back to the theme that communications services are just going to get cheaper faster. The fact that this time we are essentially talking about voice services doesn't matter. This is yet another area where bandwidth and channel capacity will be chasing users, driving prices down. Don't expect this to soon create global cellphones at local prices, but the trend is clear. And in this case, at least, we can thank a lot of investment bankers who weren't very smart.

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