Defective Satellites Hobble Orbcomm’s AIS Business

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PARIS — Satellite two-way messaging service provider Orbcomm said it is prepared to take its insurers to court to force them to pay a $50 million claim for satellite failures that occurred both during and after the period that the company’s policy was in effect.

Fort Lee, N.J.-based Orbcomm also said one of its key services, providing Automatic Identification System (AIS) data on ships to the U.S. Coast Guard and other customers, is at risk because of an apparently identical defect on six satellites launched in 2008. These satellites are the focus of the insurance dispute.

In a Nov. 11 filing with the U.S. Securities and Exchange Commission, Orbcomm said four of the six AIS-equipped satellites it launched in June 2008 have now failed, with the other two likely to fail in the near future. The company has filed a $50 million claim with its insurers covering the loss of all six satellites.

For Orbcomm, the problem is that the failures occurred both before and after the company’s insurance policy expired. The policy began with the satellites’ launch in June 2008 and expired 12 months later.

Orbcomm insists that even though three of the four failures occurred after the policy expired, and even if two satellites remain in service, it was clear that all six satellites had the same defect and would suffer the same fate. That should trigger a full payment under the policy, the company reasons.

Whether its underwriters will all agree is unclear. It is customary among space insurance underwriters to exclude coverage of known defects from satellite insurance coverage when the policies are renewed.

Orbcomm’s satellite insurance policy was written with nine separate underwriters, each of which makes its own evaluation as to the legitimacy of the claim. In its SEC filing, the company said it may need to initiate binding arbitration or other legal proceedings to obtain the full insurance claim.

The policy includes a one-satellite deductible, meaning Orbcomm’s coverage applies only when a second of the six satellites fails. The first failure occurred in February, and Orbcomm took a non-cash charge of $7.1 million against its first-quarter earnings.

A second satellite failed in July. Ground controllers at manufacturer KB Polyot of Omsk, Russia, succeeded in regaining control of the satellite, but the craft is incapable of providing AIS or normal Orbcomm messaging service, according to Orbcomm.

A third satellite failed in early August, and a fourth — the Coast Guard Demonstration satellite — failed later that month. Orbcomm booked a non-cash charge of some $21.9 million for the three satellites, saying the company assumes they will not be returned to service.

Orbcomm operates 29 other satellites in low Earth orbit and the company’s basic messaging service has been only marginally affected by the failures, according to the SEC filing. But AIS service, which accounted for $540,000 in revenue during the three months ending Sept. 30, is now offered only by the two remaining satellites of the six launched in June 2008.

In a Nov. 9 conference call with investors, Orbcomm Chief Executive Marc Eisenberg said the failures will cause messaging delays in the overall Orbcomm system and also have “hampered attempts to enter new markets. A number of new customers have put off orders” pending a resolution of the satellite issue.

Orbcomm is unlikely to get any in-orbit relief until late 2010 at the earliest. Sierra Nevada Corp. of Sparks, Nev., is building Orbcomm’s 18-satellite second-generation constellation under a $117 million contract signed in May 2008, and has promised to have the first group of six satellites ready for launch starting in late 2010.

The 18 satellites will be launched by five Falcon 1e rockets operated by Space Exploration Technologies of Hawthorne, Calif., under a $46.6 million contract, with the launches to occur between late 2010 and early 2014.

International regulations obliging maritime vessels of a certain size to be equipped with terrestrial AIS systems have lured a half-dozen companies and government space agencies into the field of space-based AIS. Orbcomm has first-to-market advantage currently with its Coast Guard contract and a more recent contract with insurer Lloyd’s of London covering AIS service.

Orbcomm reported revenue of $20.5 million for the nine months ending Sept. 30, up 6.6 percent from the same period a year earlier. Service revenue, at $20.3 million, increased by 19.7 percent but overall results were weakened by sales of Orbcomm subscriber terminals, which fell 89 percent, to $247,000.

Eisenberg said commercial trucking and heavy-equipment companies — Orbcomm’s two biggest markets — have been hit hard by the economic downturn. As the economy recovers, he said, so will sales to these customers.