07.13.10
How to spoil a decent product launch
Inmarsat has now launched its ISatPhone Pro, which I was lucky enough to try out the other week. Although the phone itself is not particularly attractive, the call performance was better than I expected – voice quality was good (with the other party easily recognizable), and the ability to ‘walk and talk’ was far superior to my experience with the TerreStar Genus phone. Latency was also somewhat better than on the Genus phone. The main limitation was that the phone only registers on the Inmarsat satellite when the antenna is extended and pointed in the direction of the satellite, which means there is a delay of 1-2 minutes before a call can be made, and calls will rarely, if ever, be received on the phone (assuming the user doesn’t want to carry it around with the antenna extended).
Though Inmarsat’s phone is not expected to perform well at high latitudes (particularly in Alaska), it should generally be a good alternative for those MSS voice users who aren’t worried about carrying such a large device. The phone itself has been priced very aggressively, with pricing currently around $599 and in some cases close to $500.
However, the most surprising development is the airtime pricing that Inmarsat has set. Postpaid wholesale pricing has been set very low, leading to retail offers of $150 per year with 60 free minutes of calls. Even more extraordinary is the prepaid pricing, where a user can buy a 25 minute card, valid for 2 years, for only $20.
In my view the fact that Inmarsat has selected a uniform 2 year expiry date on its prepaid cards is a huge mistake, which I can only assume is due to the limitations of Inmarsat’s prepaid billing system (note also that prepaid service is currently not available in the US, due to patent litigation over the prepaid platform that Inmarsat uses). Iridium has previously indicated that about half of handheld MSS users are “glovebox”-type customers, who only use the phone for emergencies (and rarely use any minutes). To date such users have been paying at least $30 per month for satellite phone service (apart from occasional dual mode roamers on Thuraya), but now they will be able to get service for less than $1 per month. Inmarsat has thus completely undermined the economics of a significant part of the handheld MSS market, making it impossible for its service providers to justify targeting these customers (especially as SPs are busy competing away the margins which Inmarsat expected would be available on its handsets). In addition to leaving large amounts of money on the table, this action may also create added costs for Inmarsat, as these users are the least likely to be familiar with the limitations of satellite communications and thus may well end up consuming disproportionate levels of customer support resources.
Inmarsat may well have had a reason to act in such a destructive manner a few months ago, when it thought it might have the opportunity to prevent Iridium gaining funding in the public markets to pay for its NEXT contract. However, now that Iridium can rely on more money than expected from COFACE, such a calculation looks less sensible.
Despite having an attractive proposition for low end users, Inmarsat may still prove less successful than it hopes amongst higher volume users. In particular, these users will gain less of an advantage from the low occasional use tariffs, and may be somewhat reluctant to churn after making a substantial investment in buying an Iridium or Globalstar handset in recent years. Inmarsat has stated that it believes the average lifetime of a satellite handset is around three years, but in reality Iridium and Globalstar handsets are used for up to 8 years (and there is a thriving market for secondhand phones). As a result, churn in the handheld MSS market is much lower than Inmarsat apparently expects (even for Globalstar users, who have had to cope with a lack of two-way service in recent years), which will make it difficult to persuade large numbers of existing users to switch over rapidly to Inmarsat’s new service. On the other hand, competition from Inmarsat will potentially force Globalstar to offer rather more aggressive pricing as it tries to rebuild its subscriber base in 2011 and 2012.
In the end therefore, Inmarsat may end up being able to trumpet a fairly large number of handheld subscribers (potentially up to 150K by 2014), but many of these will be less desirable customers and ARPUs may be rather lower than expected. Thus the overall impact for the handheld MSS market of Inmarsat’s new service (even when combined with Globalstar’s two-way relaunch in 2011) may remain subdued, and at best we expect wholesale revenue growth of no more than 10% p.a. in the next five years. Indeed a more pessimistic view, assuming significant erosion of ARPUs at the low end of the handheld market could put wholesale revenue growth at less than 5% p.a. over this period.
