(FORTUNE Magazine) – On a typically cloudy spring morning in the Pacific Northwest, Craig McCaw stands by the window of his office at Eagle River, his private investing company in Kirkland, Wash., on the far side of the Evergreen Point Floating Bridge from Seattle. He stares pensively at the stunning sawtooth vista of the Olympic Mountains rising beyond Lake Washington and Puget Sound. "It's optimistic," he says cryptically, pointing into the gray skies. Asked to elaborate, McCaw pauses. "I like looking towards the west. It symbolizes possibility. It helps me think about the future."

An aura of calm and good cheer is not what you would expect from a man who has had far more downs than ups in recent years. Then again, Craig McCaw has never been the archetypal multibillionaire. Over the past several years the father of the U.S. cellular phone industry has invested billions to prepare for a new global empire, one that would literally overshadow every other domain in telecom, reaching from the earth to the heavens.

There is broadband provider XO, with fiber links that carry data at high speed; wireless carrier Nextel, which can let businesses communicate with all their employees simultaneously; and at the pinnacle Teledesic and New ICO, two constellations of satellites, as yet unlaunched, that would be like fiber-optic and cellular networks in the sky.

Presiding over it all is the shy, curious, thoughtful McCaw, 52, who sat down with FORTUNE in one of the few interviews he has given in recent years. Among the least conventional thinkers in American business, McCaw is an idealist as well as an entrepreneur--not in itself so unusual but still not what you'd expect from someone whose net worth at its greatest ran to 11 figures. He wears a Casio watch with a plastic band and dresses in a sweater, corduroy pants, and brown loafers. He has spent time and money to save Keiko the moviemaking whale, and to promote education and literacy. He believes that a space-based communications system can help alleviate poverty in Africa, and he speaks with an openness and sincerity that make him seem quite vulnerable.

Which indeed Craig McCaw is, at least financially. The recession has been cruel to his nascent empire. XO has just filed for Chapter 11, and McCaw will probably lose his 18% stake, once worth $5 billion and now worth $2 million. Nextel's share price has fallen from a high of $80 in March 2000 to about $4 today. Teledesic has drastically scaled down its original plans. And ICO still needs government approval for a crucial part of its service.

In all, FORTUNE estimates that Craig McCaw's net worth has shrunk from $13 billion to about $1.8 billion in the past two years. Those are mostly paper losses, to be sure. But that's shrinkage of more than $15 million a day. Much of the wealth that remains is highly illiquid, tied up in privately held companies with uncertain futures. What's more, he has borrowed heavily--more than $100 million--in part to make investments in other telecom companies, and could face a terrible cash crunch.

With potential ruin staring him in the face, McCaw still clings to optimism. "Since the inception of the Bell system, there's never been a better time to invest in telecom," he insists. But it's a bet against odds that many people wouldn't take. Asked to comment on Teledesic, Roger Rusch, president of consulting firm TelAstra, says, "I don't think they have a prayer."

McCaw either has a serious case of denial or knows things that nobody else does--which would not be outside the realm of possibility for a man who helped create an industry. He acknowledges that the telecom meltdown was worse than he expected, with stocks in the S&P 500 Telecom Service Index plummeting 60% since March 2000. "The way things are going in the industry," he said in a recent speech, "it feels as though I'm on an episode of Survivor and could be voted off the island at any minute."

McCaw's response has been to refocus his attention. He recently ended a hiatus of sorts after spending the past couple of years on what he calls "creative time" (he and his second wife, Susan, have had three children in five years). "Being detached is no fun," says McCaw. It also didn't help his businesses. He is again playing a day-to-day role in the operations of his companies. "I like being much more involved," he says, "rather than being an investor kibitzing from a distance."

McCaw has made a career pulling rabbits out of hats. After his father's death in 1969, McCaw found himself in charge of his family's failing cable business in Washington State. Taking on massive debt, he first bought other cable operators, then gambled further by snatching up cellular licenses. McCaw sold the cable systems in 1986 for $790 million to Jack Kent Cooke, late owner of the Washington Redskins, and stitched together the first nearly nationwide wireless network. Along the way he assembled a loyal following of smart young businessmen who advised him on his investments. Their hard work paid off in 1994, when he sold McCaw Cellular to AT&T for a record $11.5 billion, netting him about $1 billion.

The deal made McCaw one of AT&T's largest shareholders, but he turned down a seat on its board because he wanted to avoid any potential conflicts of interest. Within days of completing the sale, McCaw founded a fiber-optic company that would later become XO Communications. It offered broadband voice and data service to small and medium-sized businesses and aimed to compete with the Baby Bells.

XO's story is typical of the telecom boom. In 1997 the company went public. A year later it had networks in 23 cities in seven states. By March 2000 its market cap had swelled to $18 billion. Then, even more quickly, it fell prey to the brutal telecom collapse.

If McCaw ever had a Midas touch, it deserted him at XO. Although the Reston, Va., company has outlasted other startups, like Teligent and Winstar, it has never made a profit and is staggering under $5.1 billion in debt. With its stock at 3 cents a share and with two refinancing deals having come to naught, XO filed for bankruptcy on June 17.

Shareholders are angry. Last winter 18 class-action lawsuits were filed against XO, charging that management misled investors into thinking the company's cash would last longer than it actually did. A federal judge recently dismissed the consolidated suits, but the plaintiffs are likely to appeal.

McCaw vehemently denies wrongdoing in any of his companies and dismisses comparisons with scandal-ridden telcos. "Lots of companies managed their earnings, and I think it's okay within reason. But when you're creating bogus revenue, that's wrong," he says, alluding to companies like Enron and Global Crossing. "I'm horrified. It is just unbelievable."

McCaw's second big post-cellular venture is in far better shape than XO, yet it isn't faring well on Wall Street either. When McCaw became involved with Nextel Communications in 1995, it had carved out a niche in the wireless world by putting together slivers of spectrum formerly used for old-fashioned radio dispatch and paging--taxicab companies talking to their fleets and the like. But Nextel was mired in an expensive transition from analog to digital transmission technology. McCaw swept in and invested $1.1 billion over six years. Nextel's wireless handsets have a unique push-to-talk button that connects two parties within the network immediately--perfect for fleets and other work groups in the business markets Nextel targets. It is now the nation's fifth-largest mobile-phone company, with 9.2 million customers.

These days that isn't enough. Because of slowing in the wireless industry's growth, as well as financial problems, Nextel saw its market cap slip from a March 2000 high of $61 billion to $3.4 billion today, while its debt grew to $13.8 billion. CEO Tim Donahue, who used to head the U.S. central region at McCaw Cellular, believes that investors are unfairly lumping Nextel with other telcos. "We've had a strong four quarters," he says. "We have met or exceeded Wall Street's expectations in every single metric." Morningstar wireless analyst Todd Bernier backs him up, arguing that the company's customers give it an edge: "Nextel focuses on business markets, the sweet spot in the industry."

That may be so, but sustaining rapid growth among business customers will be difficult. Nextel has yet to turn a profit, and its international unit, NII Holdings, declared bankruptcy in May--three months after Nextel took a $1.7 billion charge for its investment in the subsidiary.

Asked about these post-cellular setbacks and all the billions of dollars he's lost, McCaw pauses to consider, and says, "Clearly I'm not happy to see what's happening with XO. Of course I hate it. But as with many startups, I started it with very little money. Losing a really large amount over whatever share prices were at the time..." He trails off, raises his eyebrows, and shrugs. As for Nextel, McCaw, who owns 8.1% of the company, says that it's "a victim of a lot of naysaying and negativism" and will triumph when the recovery kicks into gear.

These disappointments ratchet up the stakes for the most audacious element of McCaw's second empire: the mammoth satellite enterprise he has been struggling to get off the ground since the mid-'90s. During that time he has scaled back his plans and witnessed the dramatic implosions of Iridium and Globalstar. McCaw still seems driven by the idealism that has informed his venture from the start. He asserts, for instance, that satellite communications will improve the lot of those who live in developing countries. "Rural or less fortunate areas suffer economically because they don't have access to the Internet," he says.

But he has not yet been able to translate his beliefs into a business. McCaw's satellite empire would actually consist of two realms: Teledesic, the equivalent of a fiber-optic network in outer space, which would carry data primarily for telcos, governments, and multinational corporations; and New ICO, a satellite phone service for businesses, government, and individuals. Both companies are at a crossroads. Teledesic needs to sign up major new customers that would not only bring in cash but help it build credibility. And ICO is facing a make-or-break ruling from federal regulators this summer.

McCaw's most far-reaching ambitions still rest with Teledesic, which he founded in 1990, eventually enlisting a group of heavy-hitter investors, principal among them Bill Gates. When McCaw finally unveiled his plans in 1994, their grandiosity caused some to doubt their seriousness. He proposed launching a network of 840 satellites that would orbit 435 miles above the earth--close enough to avoid the transmission delays that made the earliest satellite phone calls so annoying. Signals would pass from satellite to satellite as the constellation wheeled in the sky above earthbound users.

The impracticality of the plan soon became manifest. The total number of satellites launched in all history was fewer than 840 at that point, and at $9 billion in construction and launch costs, financing the project was going to take more than just two billionaires. "Typical Craig," laughs his friend Wayne Perry, former president of McCaw Cellular, former CEO of XO, and an advisor to McCaw since 1975. "Leave it to him to try something greater than the sum of the whole world's experience." In 1998, McCaw scaled down the project to 288 satellites. Today he plans to send up only 30, albeit in a higher orbit so that the network will still have global coverage.

Teledesic co-CEO Bill Owens argues that the company is better off today. It has learned from others' mistakes, he says, and has a better grasp of the ins and outs of technology and regulation. A couple of big hitches remain. For one, Teledesic will need more money. Kevin DeSanto, an associate at investment bank Houlihan Lokey Howard & Zukin, estimates that the company raised about $1 billion through 2000--less than 20% of the cost of building and launching even a scaled-down constellation. (While fewer in number, the new satellites will be bigger and more expensive.) "People envisioned money coming in hand over fist," DeSanto says. "But investors are a lot more skeptical and are demanding much better terms for their investments today."

McCaw also has to sign up some customers. Says analyst Rusch of TelAstra: "These companies need tremendously large cash flows to be profitable." The latest hope is that Teledesic can sign up one of the biggest data generators in the world: the U.S. military, which could use the network to help support logistics and supply operations, respond to military and civilian disasters, and keep abreast of developments on the battlefield--say, by relaying video from unmanned vehicles.

Bill Owens is a key to that plan. He may be the only person in the world who can list McCaw, Bill Gates, and Vice President Dick Cheney as personal references. He retired from the Navy as a four-star admiral in 1996 after serving as vice chairman of the Joint Chiefs of Staff under Colin Powell, and is the author of the 1999 book Lifting the Fog of War, about technology and military readiness. "He's basically the godfather of information warfare," says James Lewis, the director for technology and public policy at the Center for Strategic and International Studies.

Tapping into his global network of contacts from his military days, Owens has been jetting around the world meeting with potential Teledesic partners. He has also been a big influence on McCaw, who asserts that satellites will be crucial in a politically unstable world. "On Sept. 11, nearly all of the Federal Emergency Management Agency's communications were carried by satellite," says McCaw. "If you're a soldier or a reporter, you could get shot in Afghanistan or Bethlehem and need a reliable way to communicate." Indeed, unrest may help Teledesic's story. Telecom analyst Herschel Shosteck, generally a McCaw skeptic, says, "If there are more terrorist attacks, he has a business case."

To date, the U.S. military hasn't been much of a market. Its contract for data communications with scaled-down Iridium amounts to only $3 million a month. Though he agrees that the financial marketplace is not ideal at the moment, Owens says, "We're just fine." He refuses to release details of the company's finances except to state that it has no debt. But the most important statistic is the one that nobody needs to disclose: The grand total of Teledesic satellites in orbit so far is zero.

With Teledesic slow to gain traction, McCaw has placed a bet on a plan with a greater chance of immediate commercial gratification: satellite phones. In May 2000, McCaw led a group of investors, again including Bill Gates, in buying the assets of bankrupt British satellite venture ICO (redubbing it New ICO). McCaw's Eagle River put up about half of the $1.2 billion price.

This won't be the first satellite-phone venture, and all the ones before it except Inmarsat have run into trouble. Iridium and Globalstar tried to offer wealthy jet setters a wireless phone that would work around the world so that they wouldn't have to switch cellphones from country to country. But the services didn't catch on for a host of reasons. Calls cost up to $3 per minute, a high price for convenience. The systems didn't offer truly global coverage, with big holes in Asia and Africa. Urban users had problems when tall buildings blocked out the satellites. To top it off, because the handsets had to power the signals all the way to the heavens, they were enormous--clunky and heavy as a brick.

McCaw has found a way around these problems. To keep handsets light and compact, ICO will give each user a personal base station to relay signals from the phone to the satellite. About the size of a small soup bowl, the device can be mounted in any location with a direct line of sight to a satellite; it will communicate with the handset using unlicensed low-powered radio frequencies. ICO's 12 satellites are mostly paid for; ten are in various stages of construction, one is aloft, and one blew up on launch (that's the satellite business) and will be replaced with insurance money. Most of the launch costs have been settled too.

ICO initially intends to target government agencies and large businesses that have facilities in out-of-the-way places, like maritime and oil companies, and people in remote areas who could mount a base station to a boat or country house. ICO plans to offer rates that are similar to premium cell services--less than $1 per minute.

Those markets are limited, though, and for ICO to make money, it also has to serve users in urban areas. To do so, ICO wants to install larger-scale wireless base stations around town like the ones cellular companies use. Just as cellular companies do, ICO would use some of its licensed radio spectrum for that purpose.

And there's the rub. ICO needs FCC approval to use its spectrum with the urban base stations. The major wireless carriers are outraged at the prospect and have filed letters with the FCC arguing that ICO would be creating what is essentially a cellular phone system using spectrum it got free from the FCC exclusively for a satellite service; the cellular companies paid billions for their spectrum. "It's a pretty slick business proposition," says Rudy Baca, global wireless analyst at the Precursor Group, an independent research firm in Washington, D.C.

ICO spokesman Gerry Salemme argues that ICO is targeting not ordinary cellphone users but high-end institutional customers, plus people who live in areas where there is no digital cellular coverage anyway. Salemme has rounded up letters of support from several senators and representatives (primarily from rural states). He even has a letter from Nelson Mandela. The shy McCaw has also put in time lobbying influential people in Washington, D.C. In March he gave his first public speech in about a year in front of the Federal Communications Bar Association. An FCC decision is expected as early as July. ICO won't say what Plan B is if the ruling goes the wrong way. But it would almost certainly need a couple of big corporate or government contracts to have any kind of chance.

Should his next retirement come sooner rather than later, McCaw will not be short of things to do. He is renowned for his generosity, and a big influence in this part of his life is his wife, Susan, a former investment banker whom he married in 1997 shortly after a high-profile divorce from his first wife. Susan McCaw is both a principal at Eagle River and busy with her husband's philanthropic ventures through the Craig and Susan McCaw Foundation, which has donated $44 million to charity since 1999. Among the projects it has funded is a tutoring program in Seattle's public schools. "He struggled as an elementary school student," says Susan McCaw of her husband, who is dyslexic. The McCaws are also working with Bangladesh's microlending foundation, the Grameen Bank, to give rural entrepreneurs Internet and wireless service.

Craig McCaw does indulge in some rich-guy pursuits, such as flying one of his many planes. A longtime yachtsman, McCaw joined with Microsoft co-founder Paul Allen to enter a boat in the America's Cup, to be held in New Zealand next year. At McCaw's direction, the yacht will be environmentally friendly (it will recycle rainwater to wash gear), and the venture will plant 10,000 trees around the race course to replace oxygen depleted by the boat engines.

In the business world, though, doubters abound. Among other things, they call McCaw crazy. "I probably am," he replies dryly. He honestly doesn't seem to care what other people think, politely dismissing their opinions with a wave of his hand. "It's easy to be skeptical," he says simply. Asked how he will feel if his accomplishments in the cellular industry are tarnished by failure in satellites, McCaw looks unbothered. "If you're worried about your legacy, you're worried about the past," he says. "I'd rather not focus on the past."

As the interview ends McCaw is asked to describe himself. "Oh, I don't try!" he replies, looking down at his shoes. "Should I?" After a long silence, he says, "I'm a well-intentioned introvert." He pauses again, and adds, "And I have a fundamental belief that anything is possible." He's about to find out if that faith is enough.

FEEDBACK cchen@fortunemail.com reporter associate Jessica Sung