Inmarsat adapts to changing horizons - Company Business and Marketing

CommunicationsWeek International, Nov 15, 1999 by Theresa Foley

Inmarsat is seeking a less costly alternative to Horizons, long promoted as the key to its future. But it will need a strong business case to meet investor approval.

Horizons, Inmarsat's proposed $2-billion satellite system to provide mobile data connections to mobile devices, is dead. According to officials at Inmarsat, privatized in April, the over-priced Horizons project fell victim to the changing times at the former intergovernmental organization.

The London-based global satellite cooperative is still keen to develop a satellite multimedia system. But while a smaller, less costly alternative is expected to be proposed soon, to win approval a strong business and commercial case will have to be made for a new satellite system--Inmarsat's fourth.

"Horizons was always tenuous to begin with. The users were reluctant to fund it, and the frequency allocation was never rock solid," said an analyst familiar with the situation, speaking on condition of anonymity.

For the last three years, Horizons has been promoted as key to Inmarsat's future as a private company, and has been at the center of Inmarsat's strategy post-privatization when it no longer has the special privileges granted to intergovernmental organizations, such as special tax status.

For current shareholders--which include former monopolies such as BT, France Telecom and Telstra, as well as associated companies such as Comsat Corp.--the value of their holdings in Inmarsat will depend on how well the financial markets receive Inmarsat's long-term strategy. A new Horizons-like project will be crucial to the success of an initial public offering, tentatively scheduled for April 2001.

New rival

And Inmarsat will need to move fast. Following Craig McCaw's announcement in late October that he would invest $1.2 billion in ICO Global Comnmnications Ltd., industry observers believe ICO may be redirected to target the mobile data transmissions market, which Inmarsat hoped to capture with Horizons.

"Inmarsat better find something quick to replace [Horizons]. ICO is coming to eat its lunch, and Inmarsat is going to be back at square one, wondering what it's going to do in five years," said Jeremy Rose, principal consultant at communications systems Ltd., of St. Albans, England.

Inmarsat chairman Richard Vos said the cooperative's management has been asked to come up with a replacement proposal for Horizons before year end, although as yet there is no concrete timeframe for the construction of a new system. Meanwhile, a new chief executive, Michael Storey, started early in October.

The new mobile multimedia satellite proposal should look much different to the company's fleet of global mobile telecoms satellites already in geostationary orbit: the satellites will be fewer in number, less risky to build, and have requirements much more closely aligned with trends in the terrestrial mobile industry. For example, it will likely be compatible with the Universal Mobile Telecommunications Standard (UMTS) and offer data rates of 400 kilobits per second.

According to Tom Collins, vice president and general manager of Comsat Mobile Communications, of Bethesda, Maryland, Horizons failed to win support prior to Inmarsat's privatization because its owners were not convinced by the arguments for the system and refused to stump up the money to get it started. Comsat, a 17% shareholder in Inmarsat, was the U.S. signatory to the organization and represented the U.S. position at decision-making meetings. In fact, U.S. opposition to Horizons was enough to stop the project.

As a privatized company, Inmarsat is still owned 17% by Comsat, and Collins sits on the Inmarsat board. But now decisions about new programs are made by the chief executive and board of directors, rather than a group of government representatives.

In addition, Inmarsat can use commercial financing mechanisms for its projects, so Comsat will no longer be required to put a share of funding, equivalent to its equity stake in the organization, into a new project. Vos said financing for the replacement for Horizons will be "easily achievable," adding that Inmarsat can fund at least part of the project from its $400 million in annual revenues. "For Inmarsat to get the business opportunity across, it has to convince its investor base," Collins said. "It couldn't do that for Horizons. Now it's up to the board and the shareholders. There's no such thing as a veto."

Across the Atlantic, Washington DC-based satellite consortium Intelsat also is making changes to improve its commercial position as it heads towards privatization, scheduled for April 2001. Intelsat is expanding the number of orbital slots it occupies from 17 to 19, and a new 10-year business plan calls for annual revenues to grow from their current level of about $1 billion a year to $3 billion.

Business segments such as telephony will remain relatively flat, according to Intelsat, so it must look to new areas for the growth. John Stanton, Intelsat's vice president for sales and marketing, said the organization will look at whether it makes sense to become a content distributor and access point provider for Internet services, in addition to the basic backbone connection service it currently provides. Intelsat also will push rural telephony solutions, particularly in developing countries, that combine satellite and wireless local loop more aggressively, he said.