Leader of the Space Race - Company Operations

The new Teledesic CEO faces not only sky-high costs but also plenty of terrestrial doubters.

IF YOU WANT TO CATCH UP WITH GREG Clarke, the new CEO of ICO-Teledesic, you'll have to do it on an airplane or in an airport lounge. Based in London, Clarke pond-hops across the Atlantic frequently these days, checking in with the Teledesic half of his company and with his new boss, Craig McCaw, in Bellevue, Wash.

Clarke, who took over the merging companies in July, isn't just out to rack up frequent-flier miles. His task is to reinvigorate one of the most beleaguered businesses in the world today: the satellite industry.

Under the visionary McCaw, who put together a cellular empire in the 1980s and sold it to AT&T for $16.5 billion, Teledesic has been floating the concept of an "Internet in the sky" for the past decade - despite a spate of recent flameouts. Motorola sank billions into the vaunted Iridium satellite-phone system, only to discover that the pricey service and clunky handsets couldn't attract enough globe-trotting customers to justify the huge cost. After trying and failing to find a buyer at pennies on the dollar - including Craig McCaw, who flirted for months with the idea of buying Iridium's assets before bowing out - Motorola will de-orbit the Iridium satellites over the next two years, allowing them to burn up in the atmosphere.

And Iridium isn't alone. Another highflying phone service, Globalstar, has only enough cash on hand to last until spring. Satellite data service Orbcomm filed for Chapter 11 bankruptcy in September. And the London-based ICO never even got off the ground: Its first satellite incinerated in the atmosphere after a rocket failure. Watching these well-publicized debacles, investors have understandably grown wary of the entire sector.

In fact, with wireless and wired solutions rapidly spanning the globe, many observers wonder whether satellite Internet services are still viable. The enormous capital investment, the length of time it takes to get a system off ground and the unproved market present daunting obstacles. "The biggest problem is the lead time," says one engineer who's worked on past satellite projects. "The design cycle is five years, which make it hard to keep up. By 2002, we're going to have 40Gb fiber-optic systems -- and who knows what the next level of systems is going to be?"

That uncertainty now falls on the shoulders of Clarke, a hearty 42-year-old Englishman who left his last position as CEO of Cable & Wireless Communications, the cable-TV arm of British giant Cable & Wireless, when its component businesses were sold off. He's got to convince skeptical investors to fork over billions to build out the ICO service while continuing to lay the foundations for McCaw's grand Teledesic scheme: a broadband wireless service designed to cover the most remote corners of the Earth.

Clarke was hired in July, after McCaw rounded up $1.2 billion to bail out ICO in May. In return, McCaw got $3 billion worth of satellite technology and a way to test the market at which Teledesic is aimed. To run it, he tapped Clarke, who at Cable & Wireless pulled off the first working interactive TV service over cable modems. The digital cable and Internet access service signed 100,000 customers in its first three months.

The new plan, as Clarke described it at Teledesic's Bellevue headquarters during a recent 72-hour stopover, is to upgrade ICO into a Teledesic Lite: an always-on, fast (up to 144Kbps) mobile phone and Internet connection. Scheduled for launch in 2003, ICO will work inside buildings and will use an adapter to piggyback onto existing handsets and portables instead of requiring bulky new devices.

Penciled in for 2005, the Teledesic system has a grander scope. Clarke envisions a larger satellite constellation, separate from ICO's, that will deliver data at hundreds of megabits per second. The system will be based on ICO's terrestrial infrastructure but will use dinner-plate-size receivers. As Clarke readily admits, Teledesic today lives mostly in diagrams and calculations. Getting ICO running will require $2.5 billion on top of the company's investment to date; estimates for Teledesic run as high as $15 billion.

Clarke, who once juggled 50 cellular networks in 33 countries when he was at the mobile division of Cable & Wireless, has attacked his new role with characteristic energy. In his first few months on the job, he has hired a new COO and CFO, and begun to integrate the far-flung ICO and Teledesic operations. He's spent hours with ICO and Teledesic engineers, getting up-to-speed on the intricacies of satellite technology. He's also decided to relocate ICO's staff of 250, as he hates the separate offices of the current London quarters and wants to replace them with an open workplace. When in Bellevue, be works in one of a sea of black-walled cubicles under the lofty ceiling of Teledesic's airy quarters, which was once a beer and wine warehouse.

Teledesic co-chair Russ Daggatt, who helped with the executive search, says Clarke has the perfect background for the job. "We wanted someone with a service focus, who's lived and breathed the problems of a service provider, not technology and manufacturing," Daggatt says. McCaw calls Clarke "one of my most outstanding hires" with "a tremendous amount of raw talent."

Raw talent won't help Clarke answer the $2.5 billion question for ICO: Since terrestrial wireless phone service was able to leapfrog satellite and offer global roaming, who's to say the same thing won't happen with data services? By Clarke's calculation, third-generation broadband wireless will be available in 2003, but only in big metropolitan areas. "I've developed the business plans for most of the western European cellular networks I was responsible for," he says, "and what you see at the moment is cellular companies diverting their money away from geographic coverage into getting more capacity within cities." In Latin American cities like Cali and Medellin, in Colombia, "You go five kilometers out of town and there's nothing. You see these big haciendas and farms, but there's no telecommunications," Clarke says.

Some observers think ICO should compete more directly with cellular, instead of merely filling in the gaps in the hinterland. But Clarke is cautious, stressing the service is a complement to existing wireless. ICO will forgo the consumer market, says Clarke, to target businesses with far-flung operations, like shipping, trucking, oil drilling and mining. Stitching together those niche markets will sustain the company, Clarke adds -- neglecting to mention that other companies have found it difficult to find and sign up those far-flung customers.

Details are scarce, with ICO-Teledesic in a quiet period pending the close of the merger, which should come by the end of the year. But, Clarke says, "You can see why in each case people will buy the service and why it will be easier and more profitable for us to serve them than anybody else."

The larger Teledesic system will likely undergo a major redesign before its first satellite launches. Technological advances have made it cheaper to send up fewer, bigger satellites, and the original plan has already gone through several revisions. If the current scheme changes dramatically, the company would likely have to reapply for a spectrum license with the Federal Communications Commission, according to Marco Caceres, a senior space analyst for aerospace consultancy the Teal Group. One possible scenario: The company may simply stop with ICO and not proceed with the grand plan.

One test for the commercial viability of satellite systems will be how new consumer services, less grandiose than ICO-Teledesic, fare. Launched on Nov. 6, Starband, formerly Gilat-At-Home, offers a 3Mbps service in the U.S. Another startup, WildBlue, is shooting for a 2002 launch. Both services promise broadband Internet access along with satellite TV.

ICO-Teledesic's SEC registration filing makes for some eye-opening reading: Under "risk factors," it lists "damage from meteors or collision with other objects, and solar storms," and "political events in Russia, Kazakhstan or Ukraine [that] may adversely affect our satellite launches." The biggest challenge, however, will be to create a reasonably priced service that stands out from all other broadband connectivity options -- wired and wireless, fixed and mobile -- now in the works. Other than established DSL and cable modem providers, the company could face planned satellite systems like Astrolink, Hughes Spaceway and SkyBridge.

Even for high rollers like McCaw and Bill Gates, an early investor who recently committed another $100 million to the venture, it's a big gamble. But Clarke has shown himself willing to take on other dubious businesses. An avid soccer fan, he recently joined the board of his hometown team, the Leicester City Football Club. "It's a crazy business that doesn't make money," he laughs. "If the team's doing well, nobody cares who you are, and if the team's doing badly they throw fruit at you because it's all your fault."

Leicester's winning now, but Clarke may yet have to get used to ducking some flying missiles.

Moon Calendar

1945

Sci-fi writer Arthur C. Clarke writes about a theoretical satellite in a stationary orbit.

1952

USSR launches Sputnik, the first satellite, to send radio signals to Earth.

1962

Telstar relays the first transatlantic television broadcast.

1968

Intelsat becomes first global communications satellite system.

1982

Inmarsat is established as an international governmental organization for maritime communications.

1990

Teledesic founded as Calling Communications by Craig McCaw, who plans a satellite network to deliver high-speed data.

1994

Craig McCaw files Teledesic plan with the Federal Communications Commission; Bill Gate invests an undisclosed amount as the other primary investor of the "Internet-in-the-sky."

1998

Iridium launched by a consortium led by Motorola.

2000

Iridium goes bankrupt; ICO bailed out by McCaw, to merge with Teledesic.

Craig McCaw: Starry-Eyed

Craig McCaw is known for his ability to pick dark horses, but has he bet on the wrong horse in satellite technology?

In the '80s, McCaw gambled on wireless and built the first nationwide cellular network, McCaw Cellular. In 1994, he sold it to AT&T for $16.5 billion. In 1995, he invested in the struggling Nextel, turning it into a successful wireless service.

Now he's championing an industry where other major backers, like Motorola (with Iridium) and Loral Space Systems (with Globalstar), have lost big. Satellite services have yet to be effectively marketed, and McCaw, a born marketer, could have a better chance at landing the right customers than technology-driven companies like Motorola and Loral.

The ICO acquisition seems to make more sense than an Iridium bailout, which McCaw considered and rejected in February. One reason: Iridium satellites were in orbit already, and its technology made it difficult to add support for data to the voice service. ICO's yet-to-be-launched birds are designed to be upgradable from their terrestrial network of base stations.

Other possibilities loom. It's been said that McCaw is considering acquiring satellite company Globalstar, should it go bankrupt.

Can these services find enough customers to turn a profit? Will McCaw once again find a willing buyer to flip his investment to? Or will ICO-Teledesic simply allow "Craig McCaw and Bill Gates to call each other on their islands," as one industry person quipped? It's too soon to tell. But McCaw has made it clear that for now, he's sticking with satellites.

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