SNS in the News - June 19, 2002

MCCAW'S ICO CUTS STAFF TO 35 ; KEY RULING AWAITED; SKEPTICISM IS GROWING ABOUT HIS X-RAY VISION

M. Sharon Baker, Special to the P-I

19 June 2002
Seattle Post-Intelligencer

When Craig McCaw spent $1.2 billion to bail ailing satellite phone system ICO out of bankruptcy, it seemed like another huge gamble by a man credited with the ability to "see around corners."

Two years later, ICO has launched just one satellite. Another six are nearly complete and nine more are on order from Boeing Satellite Services. ICO has built 11 ground stations.

But in the past month, the London company, which once had some 500 workers, laid off all but 35 and moved some of its administrative functions to Kirkland as it waits for what could be a life-or-death approval for the company by federal regulators.

Just last month ICO's chief executive, Greg Clarke, decided to step aside, He will be replaced as president by Craig Jorgens, formerly head of wireless investments for private equity firm Texas Pacific Group, at its San Francisco office.

The moves - coupled with problems at McCaw's other satellite venture, Teledesic LLC - have re-ignited speculation about the wisdom of the Seattle-area telecom pioneer who built McCaw Cellular into what would become AT&T Wireless, the nation's third-largest cellular company.

McCaw declined requests through his spokesman to comment for this story. Board member Russ Daggatt said he had no comment. And other board members did not respond to phone calls.

But Larry Williams, senior vice president of business development for ICO, confirmed that the layoffs were designed to save money as the company waits for Federal Communications Commission approval to use ground-based repeaters as part of its satellite service.

"We wanted to cut the burn rate," Williams said yesterday. "We were spending a lot of money while waiting for the FCC. Hopefully we'll gain approval this summer."

That's when the company is widely expected to get an answer to its request for Federal Communications Commission approval to build a land-based repeater or booster stations and to use the radio frequency spectrum now reserved for satellite phones on the ground - like cell phones - as well as in space. The company believes that could allow its system to work well in urban areas where satellite phones have been ineffective. Doing so would also give ICO nationwide coverage.

But if ICO gains that right, its planned system to deliver data and voice communications to mobile workers could become a potent competitor to mobile wireless systems, even in urban areas. Because of that, the nation's largest wireless companies have been fighting McCaw's request for the past year.

Without that regulatory approval, privately held ICO maintains that it can't raise needed money to continue operations.

"It's a very muddy situation and the layoffs certainly underline that," said Mark Anderson, president of Strategic News Service, a Friday Harbor-based online newsletter about the telecommunication and computer industries.

Anderson believes McCaw once again sees value where others do not. He is in the midst of a waiting game, Anderson said.

While the risks are high for McCaw, the payoff could be equally huge.

"If the customer proposal is would you like a cell phone that doesn't drop calls, the answer would be an emphatic yes," Anderson said. "Then McCaw would be a tough competitor to the cell companies."

But the hurdles remain daunting.

"If the FCC approval goes through," said Anderson, who believes it will, "there is still the issue on how to fund this when no one is funding anything in telecommunications. So it may take much longer than originally planned, even if they get permission."

Similar doubts plague Bellevue-based Teledesic, McCaw's other telecommunications effort, a grand vision that would use a satellite network to deliver high-speed Internet and data service to fixed, remote locations around the globe.

Critics have called the Teledesic plan, initially estimated to cost $9 billion, overly ambitious and crazy from its inception. Despite toiling 12 years and raising a reported $1 billion, Teledesic has nothing to show for its work, analysts said.

"For the most part, they've just been a press release company," said Michael Goodman, senior analyst for The Yankee Group, based in Boston." They've never been close to reality."

Marco Caceres, senior space analyst for The Teal Group in Fairfax, Va., has waited for McCaw to deliver on his promises for a decade.

"I've been giving them the benefit of the doubt but all they've done is launch a test satellite and spent all this money," he said. "What do they have to show for it? Nothing."

Unable so far to create a feasible engineering plan with The Boeing Co., its first announced partner, or Motorola Inc., its second, Teledesic is now on its third redesign, with its third manufacturing partner. Teledesic cut 40 percent of its staff a year ago in an effort to conserve cash.

While Teledesic once employed more than 125, fewer than 50 workers remain.

Teledesic also recently lost its co-founder Edward Tuck, the man responsible for the original satellite vision. The 70-year-old Tuck cited his age and his active venture capital commitments as the reasons behind his resignation from the board. But he said he retains his 11.2 percent stake - and his confidence - in the company.

Within the past year, Motorola, which at one time pledged $750 million in cash and technology, quietly divested its 26 percent stake in Teledesic, said a Motorola spokeswoman, who declined to elaborate.

Teledesic is investigating claims that its board may have improperly loaned money as part of the effort to save ICO. That investigation stems from a lawsuit, which includes allegations that Teledesic's board was rife with conflicts of interest in approving the ICO loan, among other charges.

A private company, Teledesic does not release financial figures. But the lawsuit alleging that the Teledesic board may have improperly loaned $200 million as part of the effort to save ICO offers a glimpse into the company's finances.

That lawsuit, being brought by David Montanaro on behalf of the corporation, reveals that the loan left Teledesic with just $100 million at a time when investors were fleeing the satellite market.

Montanaro was Teledesic's former vice president for strategic relations. In addition to draining Teledesic's cash, the lawsuit alleges that Teledesic's board should not have made the loan to ICO because six of its 10 members also held board seats and executive roles at ICO.

"This lawsuit is without merit," said Teledesic spokesman Roger Nyhus, adding only: "We have a company policy of not commenting on ongoing litigation."

Many of the directors contacted, including board member Michael Larson, who manages Microsoft Corp. chairman Bill Gates' investments, also declined to comment.

In response to the lawsuit, though, Teledesic named two new board members to look into the claims: Herbert Bridge, a retired Navy Admiral and co-chairman of Ben Bridge Jewelers, and Peter Byrnes, partner in the Seattle law firm Byrnes and Keller.

"We are in the process of gathering information and interviewing people," Byrnes said. "We will not form any conclusions until all the evidence is in."

Teledesic is "adequately funded at the moment," said Nyhus, acknowledging that more money will be needed. He declined to provide details of fund-raising plans.

But the company has drastically altered its vision from the 840- satellite network it first conceived.

Teledesic's latest plan, announced in February, calls for just 30 satellites, the first two of which will be built by Alenia Spazio, an Italian manufacturer. The deal was announced Jan. 31, a day before Teledesic's spectrum licenses would have expired under FCC deadlines.

Teledesic now hopes to launch commercial service in 2005 with 12 satellites that Nyhus said will cost less than $1 billion.

It's hard to get excited about the latest plan given that Teledesic never delivered on the first two designs, Caceres, the Teal Group analyst, said. While Boeing and Motorola are well known for their satellite expertise, Alenia Spazio doesn't have a stellar reputation as an innovator.

"Sure they've worked on Globalstar, but they've done nothing new," Caceres said.

McCaw " is blowing a lot of hot wind right now. There's nothing that's solid," Caceres added. "The whole mystic about McCaw has died down, and there's nothing he can do by himself to renew expectations in the market."

"This is the last gasp," added Roger Rusch, of TelAstra Inc., a Palos Verdes, Calif.-based satellite consulting company. "They've just barely met the minimum FCC milestone. The next one comes in a year, when they have to have all the satellites under contract. I doubt they'll make that."

McCaw, at an FCC hearing in March, acknowledged his naysayers.

"Industry opinion regarding Teledesic seems divided between those who think we're dead and those who think we will be soon."