Craig McCaw's Space Shot

He figures he can make satellite services work--if regulators cut him a break

The satellite communications industry that took off at the end of the last decade crashed and burned in spectacular fashion. Iridium LLC spent $5 billion to create a service that let people use a portable phone around the globe--then filed for bankruptcy in August, 1999, less than a year after its launch. Two weeks later, rival ICO Global Communications Ltd. entered bankruptcy even before it sent its first bird into orbit. Globalstar Telecommunications Ltd. bravely launched a similar service in 2000, failed to attract enough customers, and lost $3.8 billion last year. In a Securities & Exchange Commission filing in April, Globalstar said that it "may be forced to seek protection under the federal bankruptcy laws" if it can't restructure its heavy debt load.

Now Craig O. McCaw, the Seattle entrepreneur who made a multibillion-dollar fortune by helping to found the U.S. cellular-phone business, has a plan that could revive the troubled satellite industry. After buying the assets of London-based ICO out of bankruptcy last year, he is revamping its business plan to try to make it into a profitable provider of voice service and speedy Net connections anywhere in the world. That could restore investors' faith in satellite businesses. First, though, he must persuade the U.S. government, and others around the world, to change the rules of the game. He is petitioning the Federal Communications Commission to let his company, renamed New ICO, use the radio spectrum designated for satellite service for something much like cellular service in urban areas.

WEAK SIGNALS. Here's why: One of the biggest problems with Iridium and other satellite services was that they weren't powerful enough to reach people inside buildings, or even on the streets, in major cities. That made them a big headache for globetrotting execs who wanted to communicate from office towers in downtown Dubai as well as from oil rigs in the Caspian Sea. McCaw's plan would overcome that problem. In rural areas, ICO would work as originally planned, with satellites beaming signals directly to customers' phones or computer modems. In urban areas, ICO instead would send signals from its satellites to radio towers that would be powerful enough to reach customers through glass, concrete, and steel. "We studied the problems [of companies such as Iridium] and figured out what went wrong," says the reclusive McCaw in a rare interview. "You have to figure out how to make it work inside as well as outside. It has to be a total, coherent network."

Execs at U.S. wireless companies are livid over the proposal. They say the FCC gave ICO its spectrum for nothing specifically because it was going to provide satellite service and now McCaw is trying to use those licenses to compete with them. Worse, radio spectrum is a rare commodity in the U.S. these days. Verizon Wireless and others agreed to pay $17 billion for a swath of spectrum earlier this year only to find out they may never get their hands on it. An appellate court ruled in June that the FCC didn't have the right to seize the spectrum from bankrupt NextWave Communications, even though NextWave hadn't been able to pay for it. "We're in a spectrum crisis right now," says Thomas E. Wheeler, president and CEO of the Cellular Telecommunications Industry Assn. (CTIA), the trade group that represents the major wireless companies. "To take a block of prime-real-estate spectrum and throw it out for these purposes without addressing spectrum needs is inappropriate."

The top wireless players are putting on a full-court press to stop McCaw. Verizon, AT&T Wireless, Cingular Wireless, and Sprint's cellular arm sent a joint letter to FCC Chairman Michael K. Powell, asking him to reject the ICO proposal. Among other things, they argue that they need more spectrum to begin offering third-generation (3G) wireless services, including high-speed access to the Net. "There is a significant amount of spectrum that needs to be allocated for 3G," says John T. Scott III, deputy general counsel for Verizon Wireless, the largest bidder in the NextWave auctions. The FCC, which didn't return phone calls seeking comment, is expected to make a decision on the issue this fall.

RURAL REACH. McCaw faces long odds in getting the FCC to change the rules for him, but there is a chance he'll pull it off. For starters, ICO is addressing a key public policy issue--providing fast Internet connections to poor, remote parts of the world. Even in the U.S., some 88% of the land and nearly half of the population don't have access to speedy Net hookups now. Powell has said he would like a fast rollout of broadband, and he wants to leave the task to the private sector, rather than get the government involved. "The FCC is being very accommodating to companies that are rolling out broadband, particularly in rural areas," says analyst Rudy Baca of the Precursor Group, a Washington research firm that tracks regulatory issues.

To help his cause, McCaw has generated a strong lobbying effort to win over regulators. U.S. Senators, including Ernest F. Hollings (Dem., S.C.) and Ted Stevens (Rep., Alaska), have written to Powell in support of the revamped ICO. Even Nelson Mandela, the former President of South Africa, wrote a letter to Secretary of State Colin L. Powell--who is the father of the FCC chairman--urging him to support McCaw's efforts. "The need for basic telecommunications infrastructure remains acute in less developed areas of the world," he wrote.

McCaw has won the support of Mandela and others because he says ICO may not be a viable business unless the FCC and other regulators let him provide cellular-like service in urban areas. When McCaw and other investors spent $1.2 billion for the company's assets last year, they got a business that was largely paid for. ICO's 12 satellites and the cost of launching them into space are almost completely covered. Indeed, the first bird was launched last month. Still, McCaw says ICO may not be able to generate sufficient revenues if it can't operate in urban areas. "If you said to the U.S. post office, `You can serve rural America, but you can't serve New York City or other cities,' how long would they last?" he says. "If we're relegated to being a safety net, I can't see that we can make a valid return."

McCaw, who sold McCaw Cellular to AT&T for $12 billion in 1994, stands to make another fortune if ICO takes off. After a total investment of $1.2 billion, ICO may end up with spectrum that probably would be worth $10 billion to $15 billion if it were auctioned off to wireless companies today. If he wins the FCC decision, ICO could quickly become as valuable as VoiceStream Wireless Corp., the wireless company that was bought by Deutsche Telekom (DT ) earlier this year for $24 billion.

And ICO is not McCaw's only satellite company. With Microsoft Corp.'s William H. Gates III, he founded Teledesic LLC in 1994. While ICO plans to provide high-speed data connections, along with voice service, to customers while they're moving--say, in a car or a train--Teledesic would offer even speedier links to fixed locations, such as a factory in the Brazilian rainforest. McCaw had planned to merge the two satellite companies into one entity, called ICO-Teledesic, and then market their services jointly, but that merger is on hold pending the outcome of the FCC petition and several other issues.

McCaw may be a hard-nosed businessman, but there is a starry-eyed visionary in him, too. He argues that providing broadband Internet connections to remote regions is like building highways or delivering the mail. "Postal service in rural West Virginia may not make economic sense, but it's in the public interest to have that service," he says. Without high-quality communications, people around the world will have to move to urban areas to participate in the global economy. "Whether you look at it domestically or globally, there is a reason to take care of people who don't live in cities," he says. "You don't want to force people to leave where they live. We don't want a billion Chinese moving to the cities." Before he can worry about saving rural dwellers from city living, however, McCaw has to convince the FCC that he is the last best chance to save the troubled satellite industry.

By Peter Elstrom in New York

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