Service providers reveal sky-high Iridium tariffs

In the absence of any last-minute technical disasters, commercial global mobile connectivity became a reality on 1 November as Iridium LLC's service went live in 120 countries and territories. But in the wake of the technical triumph of getting such a system working, potential users and analysts raised doubts over prices and the service's labyrinthine system of tariffs.

"Here on Wall Street people are in the top 2%-3% of the United States for disposable income, and the thinking is that those price points are ridiculous." according to one investment bank analyst.

International calls over the satellite system will cost between $6-$9 per minute according to details made public by a handful of Iridium's service providers. This far exceeds the $3 a minute commonly cited as a ballpark figure for international Iridium tariffs.

Moreover, the pricing is not uniform nor centrally managed by Iridium itself Instead, each of the 15 regional partners owning a gateway, and their associated 300-or-so service providers, are free to price and sell the service as they see fit.

"Iridium pricing is one of the most misunderstood things out there. They are setting up a huge matrix of what it would cost to make a call through normal means. like a cellular phone, and tacking a 20%-30% premium on top of that," said Armand Musey, a satellite analyst with New York-based investment bank Unterberg Towbin.

That means a call may cost up to $9 a minute to some regions, yet as little as $1.10 in others if the call remains within a national boundary. And it is possible that the range of tariffs may be even wider once all the service providers publish their price lists.

Is the price structure too confusing? "Within a service region from a given service provider, I don't think it's confusing." said a representative of one of the service providers. That said, he added, "without a good explanation and consultation from a sales rep, it could be confusing. And the more of the pricing you look at, the more confusing it becomes."

Iridium chief executive Edward Staiano denies that the pricing structure poses a marketing problem: "It's no less confusing than trying to make international calls anywhere in the world."

Michelle Lyle, senior manager, corporate communications at Iridium, said the $3-a-minute price was from the old business plan and is no longer valid. "The price depends on the service provider, who includes a lot of things like gateway markup, service provider markup...they have to pay the PTT as well. Some of them are going to charge whatever they can get away with, especially in places like Japan where there is a lot of demand. The pricing will go down, obviously, with competition."

The price a user pays depends on: a structure set first by the regional partner, and then by the service provider the customer has chosen in his or her region; whether the service plan is international or domestic; from where the call is placed; its destination; and whether the call is going over the Iridium satellites or using terrestrial cellular roaming infrastructure.

Iridium has more than 300 distribution agreements with more than 270 service provision partners. Their cut of the revenues is 33% for international calls and 10% for domestic ones, after the costs paid to long-distance companies for connection into the public network are deducted, Musey said.

At $6 a minute or more, the price may be prohibitive for many of those well-heeled international business travelers that have been the initial target for the world's first global mobile telephony system. On the other hand, MCI WorldCom, for example, is charging U.S. calling card customers $4.50 to $6.55 for a one-minute call from Paris to London, so in comparison, the Iridium prices are not that much higher.

Some industry watchers expect Iridium to lower its prices once its global satellite competitors start operating in late 1999 and 2000. "They're going to be the only game in town until Globalstar and ICO, really," said the Wall Street source. "Why not get the early adopters at those price points-the technophile who will pay anything?"

But Staiano denies any suggestion that the charges are artificially high. "We don't plan any change when Globalstar comes on," he said. "Globalstar only talks about domestic pricing, which is in the area of $1.50 per minute, and our pricing for [in country] service, which is $1.10-$2 a minute. will be about the same as Globalstar's."

Just how cutthroat the pending mobile satellite services (MSS) price wars will become is anybody's guess. Lyle points out that ICO and Globalstar may not be as cheap as everyone seems to assume. "It's easy for them to quote a number now being a year and a half away from service." she said.

ICO will set wholesale prices, expected to be $1.95 a minute on average. with the expectation that this will result in low retail prices, said Joe Tedino, director of communications. North America, at ICO Global Communications.

But ICO will not try to establish a price structure for its service providers, as Tedino notes that, at least in the United States, such a step could be construed as price fixing, which is illegal.

No uniform pricing

The Iridium service providers have met a few times but have no uniform pricing agreement or guidelines. At one point, Iridium suggested uniform pricing but the service providers did not want to adopt such a structure. Lyle said in theory there is nothing to stop an individual from signing up with a service provider outside their territory to get the best price for usage.

So far there is no evidence that service providers are competing with each other, but that could come with commercial rollout. "It's been acknowledged as a concern that regions will compete with each other," said one service provider.

In the United States, Motorola Cellular Services Inc. (MCSI) has a policy to only sign up customers with a U.S. billing address, said a Motorola official, who also spoke on condition of anonymity, "and I would suspect similar provisions are in place in other regions of the world."

MSCI also has a policy to sell the Iridium phone and service as a package, but he noted that nothing is in place to stop service providers from selling equipment only, or to prevent customers from buying outside their region.

As the real prices have become known, analysts are scaling back their projections for the number of Iridium subscribers during the first year of operations, when the company will have the handheld mobile satellite telephone business to itself. Iridium has changed its first-year focus away from those affluent travelers to focus on "vertical markets like oil rigs and mining communities, markets that are incredibly price insensitive," said Musey.

Lyle acknowledged that Staiano has said that up to 80% of the first year's revenues may come from vertical markets, such as the oil and mining industries, rather than the affluent travelers. "The business traveler is still a very important target market but it will take longer to go after," said Lyle.

But there is some good news for Iridium: The constellation appears to have been working better during the past two to three weeks as software patches have been uploaded to the satellites. Analysts say Iridium is aiming for an 80% call-completion rate and will then work on improving that to 90% by year end.

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