The Ominous Return of the Satellite Phone

satellite-terrestrial-11-croppedTerreStar (s tstr) expects to launch a satellite that costs some $500 million at the end of June, and with it, hopes to reinvent the failed satellite service model from the 90s. Even though TerreStar’s service will launch at the end of this year with normal-sized phones that also work on cellular networks, the likelihood of success doesn’t seem high. But in addition to offering better cell coverage, TerreStar is still pursuing partners to help it build out an alternative 4G wireless network. It hopes to create a combined satellite and terrestrial network using its spectrum holdings in the 2 GHz band under a regulatory scheme known as Ancillary Terrestrial Component, or ATC.

TerreStar has been seeking partners for that venture for a couple of years, but the bankruptcy last Friday of the North American business of ICO Global Communications (s icog) may have put a damper on things. Both TerreStar and ICO had permission from the Federal Communications Commission to deploy these ATC networks, despite vigorous complaints from the cellular industry. When ICO shareholder and spectrum speculator extraordinaire Craig McCaw decided to take cash rather than a larger position in ICO last week, as decisions related to the bankruptcy filing were being made, analyst Tim Farrar noted that that the value of the ATC spectrum had diminished. The rules governing an ATC network require the launch of two very expensive satellites and the construction of a land-based network.

Farrar said in an interview with me, “There’s so much spectrum out there — even the Clearwire (s clwr) spectrum could come back onto the market — so there are lots of options that don’t have the complex ATC angles. The best they can hope for is ATC being 3-5 years away.”

TerreStar’s CTO, Dennis Matheson disagrees. He says the launch of chips from Qualcomm (s qcom) next year will enable handsets and data cards that can deliver LTE-speeds in the 2 GHz spectrum that TerreStar owns. He says that network could be deployed in 2010 and working by 2011. Harbinger Capital Partners, the hedge fund that owns a significant stake in TerreStar as well as other large spectrum holders, has been pitching this hybrid wireless network to potential investors such as Google (s GOOG).

But that’s an uncertain project, so in the meantime, TerreStar will offer handsets to consumers and governments through a partnership with AT&T (s T). The soon-to-be-launched satellite will be able to deliver uninspiring speeds of 64 kbps down on the smaller, consumer-style handsets, while truck-mounted phones such as those used by emergency workers could receive speeds of up to 400 kbps down. Matheson says the plan is to market the phones as providing more extensive coverage than cellular, and as a fail-safe in the event of disaster.  Given the speeds and the fact that satellite phones offer better coverage primarily in uninhabited, rural areas, but not underground or inside buildings, where most consumers experience dropped calls, I think the consumer opportunity is pretty small.

So if no one buys into the ATC efforts, TerreStar may be reliving rather than reinventing the failed satellite model of 15 years ago.

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