Inmarsat’s Low-Speed Service Grows Despite Availability of BGAN

PARIS — Mobile satellite services provider Stratos Global Corp. expects that its sale to a Canadian company backed by Inmarsat of London will not conclude until late this year given the time it will take U.S. regulators to decide the issue.

Bethesda, Md.-based Stratos also said it has been surprised by the recent increase in use of a lower-speed mobile data communications service, which was predicted to decline once Inmarsat’s high-speed product, called BGAN, became available.

In an Aug. 1 conference call with investors, Stratos Chief Executive Jim Parm said the company still expects the




United States and other military customers gradually to adopt BGAN – or Broadband Global Area Network – in the coming months as they finish testing the new product.

BGAN is Inmarsat’s flagship service offering and is expected to drive future growth as BGAN-type terminals are introduced into the maritime and aeronautical markets in addition to the current land-mobile segment.

BGAN revenue remains modest. Stratos said its BGAN revenue in the three months ending June 30 was $3.7 million, a 15 percent increase over the three months ending March 31. The number of Stratos-sold BGAN terminals in service increased by 24 percent, to 3,683, during the same period.

The market takeup of BGAN, which was introduced in December 2005, is one of the most closely watched metrics by Inmarsat and its distributors because of its role in these companies’ long-term growth forecasts.

Compared to the lower-speed services, Stratos earns less per minute of BGAN airtime because Inmarsat owns the land Earth stations that handle BGAN. Inmarsat’s distribution partners own these Earth stations for the other Inmarsat services.

Stratos shareholders and Canadian regulators have approved the company’s purchase, for $624 million, or 7 Canadian dollars per share, by CIP Canada, a company created with Inmarsat financing.

The U.S. Federal Communications Commission (FCC) is the only major regulatory body yet to sign off on the purchase. Inmarsat and Stratos competitors Iridium Satellite LLC and Vizada Services LLC – the former France Telecom mobile satellite division now owned by Apax Partners – have voiced opposition to the purchase.

Both companies – plus Telenor Satellite Services of Norway, which is in the process of being purchased by Vizada – have expressed concern that a linkup of Stratos with Inmarsat will reduce competition in global mobile satellite services, including those offered to the U.S. government.

Parm said that because of the current backlog of cases at the FCC, final approval of the CIP Canada purchase likely will be delayed until late this year.

Stratos is Inmarsat’s largest distribution partner, and Inmarsat services account for some two-thirds of Stratos’ total revenue




.

The CIP purchase will begin a process of bringing Stratos and Inmarsat closer together over the long term. But for now, Stratos is profiting from its size, winning volume discounts under Inmarsat’s contract with its distributors.

The expiration of the current Inmarsat contract with its distribution partners is scheduled for April 2009. Inmarsat officials have made clear they will insist on less-generous conditions for their distributors once the contract comes up for renewal.

In the first six months of 2007, Stratos secured $10 million in volume discounts for Inmarsat services following Stratos’ reaching milestones in the sale of Inmarsat airtime. These milestones are reset at zero each January.

Stratos said it expects that it will realize another $14 million to $17 million in Inmarsat volume-related discounts in the second half of the year.

Stratos Chief Financial Officer Alfred Giammarino said during the conference call that these volume discounts accounted for two-thirds of the growth in earnings in the company’s mobile satellite services business for the three months ending June 30.

Stratos said that for the six months ending June 30, revenue




increased by 14 percent, to $294.5 million, with all four of its business segments – land, aeronautical, maritime and leasing – reporting increases.