The report noted that:
"Details remain in flux, the people said, but the project will start with 180 small, high-capacity satellites orbiting the earth at lower altitudes than traditional satellites, and then could expand."
I assume here that "traditional satellites" refers to those in geosynchronous orbit (an altitude of 35,786 km).
Due to the latency experienced when communicating via a satellite in geosynchronous orbit, it is not a pleasant way to have a conversation or surf the Internet. Generally, satellites with high orbits are used for applications like broadcasting or GPS; using them for voice or Internet is a last resort when there is no alternative. Contrary to what you might see on TV or in a movie, a typical voice call uses fiber.
One of the leaders in the global mobile services market is Inmarsat, a British company that operates 11 geosynchronous orbit satellites. Their so-called "Broadband Global Area Network" service offers speeds of up to 492 kbit/sec. This is NOT the area that Google is going to enter.
For truly broadband access, a complicated network of low or medium Earth orbit satellites will need to be launched. This will put Google into competition with the likes of Iridium (NASDAQ:IRDM), ORBCOMM (NASDAQ:ORBC), and Globalstar (NYSEMKT:GSAT).
The founding company of Iridium launched service on November 1, 1998 and promptly filed for bankruptcy on August 13, 1999. The system consists of 66 active satellites plus spares. They orbit at 780 km.
It was estimated that the satellite system cost $6 billion to put into service. In 2001 a group of private investors bought the company for $25 million. Iridium has bounced back of late and is a profitable company with TTM revenue of $391 million.
ORBCOMM launched 35 satellites in the 1990s, 29 of which remain active today and they orbit at 775 km.
Much like Iridium (and Globalstar as we shall see), ORBCOMM filed for bankruptcy shortly after commencing service -- the filing was in September 2000. Just like Iridium, however, the company resurrected itself and is now posting a profit. Its TTM revenue was $77 million.
Globalstar began in 1991 as a joint venture between Loral Corporation and Qualcomm (NASDAQ:QCOM). The system consists of 40 satellites that orbit at 1414 km.
Service began in December 1999 and on February 15, 2002 filed for bankruptcy. The company has not been profitable and its TTM revenue was $84 million.
Is There Opportunity?
The market for low Earth orbit Internet services is currently very, very low. The three companies outlined above that work in this space had a grand total of $552 million in TTM revenue. Essentially, Google will have to create a market where there is none in order for another satellite system to be worth launching.
The cost of creating and launching low Earth orbit satellite systems has routinely been underestimated. I worked in the telecom industry in the 1990s and early 2000s and I well remember the cost overruns and bankruptcies associated with these ventures. I did not even mention Teledesic yet -- another failed venture which never did get off the ground (pun intended).
I have absolutely no doubt that Google's cost will be more than the $1 billion to $3 billion that was cited in my original reference at the top of this article. In fact, later in the article is this:
"History is replete with ambitious satellite plans that failed, according to Roger Rusch, who runs TelAstra Inc., a satellite-industry consulting firm. Google's project will end up "costing far more than they can imagine today," he said, perhaps as much as $20 billion. "This is exactly the kind of pipe dream we have seen before."
To show another opinion, I will include another quote:
But satellites are more flexible and provide greater capacity. In recent years, costs to build and launch satellites have dropped sharply, according to Neil Mackay, CEO of Mile Marker 101, an advisory firm.
Consultant Mr. Farrar estimated that 180 small satellites could be launched for as little as about $600 million.
While it makes sense that the cost to build and launch satellites has dropped, the $600 million figure is hopelessly optimistic in my view. It's worth noting that Mr. Farrar also consulted for Teledesic in the 1990s.
Finally, the end cost to the user must be considered. How much will it cost to connect to the Internet in an extremely rural area? Can the people there afford it?
Perhaps my attitude is a bit jaded since I worked in the telecom industry during many spectacular satellite failures. I certainly think that Google today has a much better shot at making this work than the players 15 years ago did. From a cost standpoint, at least we can be fairly sure that Google will not be adding to the list of bankruptcies.
No matter what the cost of the system, Google will have to create this market -- there is almost none to speak of at this time. They should be rather good at that part of the game and in the long run that expertise might be enough to make this venture worthwhile to Google's bottom line.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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