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Monday, October 7, 2002 - Page updated at 12:00 AM

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The birth and demise of an idea: Teledesic's 'Internet in the sky'

Seattle Times technology reporter

This is how a plan to take over the world ended with a whimper.

Last week, Teledesic laid off all but 10 employees and suspended its satellite contract.

With that, the Bellevue company started by Craig McCaw and Bill Gates deep-sixed its plans to build a global broadband satellite network.

Teledesic blames the collapse of the telecommunications industry.

"We think there's still demand in the market for these services," said Todd Wolfenbarger, spokesman for Teledesic. "But absent of some other partner, it's not going to happen."

But while the state of telecom delivered the fatal blow, observers say the satellite industry was on its last legs anyway and the delays and distractions within Teledesic certainly did not help its chances.

Even though this area has heard plenty of company swan songs, the imminent closing of Teledesic feels more bittersweet. Teledesic was about more than Bill Gates, Craig McCaw and the world's biggest data network. It captured the dream that technology could bring the world together.

In the post-bubble world, it may seem ludicrous that anybody would have put money into such a wildly ambitious scheme. But at the time of Teledesic's genesis, most connections to the Internet were simple dial-up modems that poked along at a fraction of today's speeds — if you were lucky. The Internet had just begun to take off; traffic was said to be doubling every 100 days. Then-Vice President Al Gore was proclaiming that the emerging digital divide needed an immediate remedy.

A powerful pair

Originally started in California in 1990, the project really took off when McCaw and Gates each invested $5 million in the venture in 1994. At the time, the pairing was akin to Elvis and the pope on tour together. They were Seattle's most prominent business leaders, both having defied conventional wisdom in their industries to build billion-dollar companies. McCaw's fortune was freshly minted after he sold McCaw Cellular Communications to AT&T. Gates had his Microsoft empire.

What got lost in the hubbub was that Gates was never more than a passive investor. The $5 million he put in was chump change — 0.05 percent of his net worth, the equivalent of someone with $100,000 investing $50.

Still, the two names lent the project weight. It was beyond pie-in-the-sky. It was 840 pies — more than the total number of satellites in space at the time. They called it "Internet in the sky." It would cost $9 billion.

Field hospitals would use it to beam images to consulting doctors in cities. The military could send information to forces in remote areas. Faraway spots that lacked even basic telephone service would be able to access data beamed down at high speeds from orbiting satellites.

Covering the world

Teledesic's executives flew around the world to persuade countries to set aside a portion of the electromagnetic spectrum — the air waves — to carry signals from Teledesic's network. The company persuaded the United Nations, then the U.S., to set aside the spectrum.

Saudi Prince Alwaleed bin Talal invested $200 million. Boeing pledged $100 million. Motorola pitched in $750 million. Based on company announcements and Securities and Exchange Commission filings, the company raised about $900 million in cash.

Euphoria seemed to surround the venture; the company had managed to get the world to support its project and it had raised a vast amount of money for what was still just a start-up.

Where it fell short was actually building and launching satellites.

When the project began, Teledesic said it would begin operating by 2001. When Boeing signed on as the prime satellite contractor in 1997, the design shrank from 840 to 300 satellites. Service would now begin a year later, in 2002.

Then, in 1998, Boeing was replaced by Motorola, pushing the start date to 2003. In 1999, the company and its 100-plus employees moved from Carillon Point in Kirkland into a Bellevue warehouse it named The Broadband Center.

Industry troubles set in

Three months later, the satellite industry began to fall apart. Iridium and ICO, two competing satellite mobile-phone companies, filed for bankruptcy after finding little demand for their services beyond fishing boats and oil rigs. Teledesic's start date was delayed to 2004.

McCaw himself became preoccupied with raising $1.2 billion to buy what was left of ICO and merge it with Teledesic. At one point he invested $74.6 million to keep Iridium afloat, while he debated whether he would purchase that company as well.

Not everyone was pleased with the direction the company seemed to be heading. David Montanaro, a shareholder and former employee, filed a derivative lawsuit against Teledesic's management in October 2001, claiming it used Teledesic resources to support McCaw's interest in ICO.

Meanwhile, the chief-executive office was a revolving door. Russ Daggatt was appointed CEO in 1993, then became president when David Twyver was hired as chief executive in 1996. McCaw fired Twyver a year later, assuming the position of co-CEO himself and hiring Steve Hooper as the other co-CEO. Daggatt was brought back as interim CEO for a period, then the company hired Greg Clarke in 2000. He was eventually replaced by McCaw and Bill Owens, who became co-CEOs.

In 2001 — the year the Teledesic satellite network was originally supposed to light up — the company scaled back. Now with 75 employees, the company was trying to sublet The Broadband Center, and the merger with ICO was called off because of the weak economy.

By the time it signed on its third contractor, Alenia Spazio, replacing Motorola, it was down to 50 employees. The plan was reduced to 30 satellites, the price tag cut to $1 billion.

Reaching an end

Last week, the withdrawal was nearly complete. A contract with Alenia Spazio to build the first two satellites was suspended, and the remaining employees are winding down the company, figuring out what to do with the assets.

Montanaro argues that it was management that let the company down.

"The reason the company failed: It's abuse, neglect, mismanagement, misgovernance. Not that there aren't a lot of challenges in the marketplace but that's not the issue," Montanaro said.

He contends in his suit that resources from Teledesic were diverted to ICO, including a $200 million loan.

The company declined to comment on the litigation.

Ironically, dragging its feet may have saved Teledesic. If the company had signed a $1 billion contract to build the planned satellites, it's likely it would have to file for bankruptcy protection in order to shut down. As it stands now, Teledesic is a solvent company with cash on hand. While the company wouldn't disclose current numbers, in June 2000 it had $95.4 million in cash and investments, plus the $200 million loan it made to ICO.

"They haven't burned up public money so I think that's a big improvement (over its competitors)," said Tom Watts, a satellite analyst for S.G. Cowen Securities.

Economics of wireless

Another factor in Teledesic's difficulties may have been how land-based wireless networks have developed beyond many expectations. When Teledesic started, cellular networks could transmit only voice, and no one had announced plans to handle data on those voice networks.

Fast-forward to this year, and wireless companies from AT&T Wireless to T-Mobile are rolling out data services that run at dial-up modem speeds, with technology-handling broadband rates expected soon.

In addition, because competition among wireless equipment manufacturers has kept a tighter lid on costs, an AT&T Wireless can build a broadband network at a fraction of the price of a satellite network. Land-based wireless companies can also build the service incrementally — one city at a time. A satellite company has to pay for, build and launch the entire network before signing up the first customer.

Still, wireless companies are inclined to build their services mostly in urban areas. Teledesic maintains that government and defense agencies need a way to transmit large amounts of data in remote areas.

Watts says that's moot now, given the collapse of the telecom industry. The capital markets have shut down to telecom-related businesses.

"Given the Globalstar and Iridium failures and global satellite failures, (Teledesic) would be difficult to finance at least," he says. "And in the current economy, money is not available for speculative satellite ventures."

Sharon Pian Chan: 206-464-2958 or schan@seattletimes.com.

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