REVIVING IRIDIUM

“The brilliance of the technology cannot take precedence over the market case. At the end of the day, if you’re spending $5 billion on the technology, there better be a market for it. And if there isn’t, there will be great humiliation.”

- Herschel Shosteck, a Wheaton-based wireless analyst, in March 2000.

“Iridium failed to match its system to its mission which caused too much pressure on the company to get customers quickly.”

- Leslie Taylor, a consultant for the satellite industry in Washington, in March 2000.

IRIDIUM’S FAILURE

In August 1999, Iridium LLC[1] (Iridium), the world’s largest provider of global mobile satellite voice and data solutions, filed for Chapter 11[2] bankruptcy protection in the United States Bankruptcy Court. The news did not come as a major surprise to the global telecommunications industry since the company’s financial trouble was well known. It had defaulted on US $1.55 billion in bank loans.

Considering the company’s investment loss of US $5 billion, the bankruptcy court imposed a deadline of March 15th 2000 to either bring forth a purchaser or to close its operations. In response, Iridium promised that if it couldn’t attract a buyer by 5 p.m. that day, it would proceed with plans to liquidate. Despite the company’s best efforts, it was not able to convince any party to support its business and it was forced to file for bankruptcy. Following this, many executives in the top management cadre resigned and its satellite services covering an estimated 20,000 subscribers were stopped.

Commenting on the debacle, COO Randy Brouckman said, “I am deeply saddened by this outcome. I particularly regret the impact this will have on our customers. Iridium achieved significant milestones, and I want to thank the more than 160 countries that licensed the service and the distribution partners around the world who helped market Iridium.”

A spokesman for Globestar, one of Iridium’s major competitors said, “We think Iridium could very well have succeeded. There’s nothing wrong with the concept, but with their execution.” Industry analysts commented that Iridium’s chances of coming out of this crisis were very bleak. Many of them even stated that Iridium had all the features of a potential failure right from its inception.

BACKGROUND NOTE

The idea of Iridium was conceived in 1987 by three engineers-Ray Leopold, Ken Peterson and Bary Bertiger-who were working for the US-based electronics major Motorola. They pioneered the concept of a satellite-based, wireless personal communications network that could be accessed from anywhere on earth. The engineers worked hard to bring to life the concept of satellite telephones. They launched gateways[3] in 1988 to facilitate the proposed Iridium satellites to communicate with the existing terrestrial telephone systems throughout the world.

In 1991, Motorola incorporated Iridium to develop and deploy the satellite network system. Besides Motorola, which held a 20.1% stake in the venture, some of the other major partners included Germany’s Vebacom with 10%, Korea Mobile Telecommunications-4.4%, Sprint Corporation-4.4% and Italy’s STET with-3.8% stakes respectively. In 1992, the US Government Federal Communications Commission (FCC) issued an experimental licence to Iridium. In the same year, the World Administrative Radio Conference (WARC)[4] decided to work towards establishing guidelines to regulate worldwide radio spectrum rights and facilitate the building of Iridium systems.

In 1992, Iridium also signed a US $3.37 billion contract with Motorola for construction, delivery and system development. This made Motorola the prime contractor for supplying satellites, gateways and communication products for Iridium. By the end of 1993, the company had raised US $800 million as equity. After the second round of equity financing in 1994, Iridium’s capital increased to US $1.6 billion. In 1995, the Federal Communication Department of the US government granted an operational license to Iridium.

In 1996, Motorola launched the first Iridium satellite. In the same year, Iridium also entered into agreements with various mobile satellite service providers. The agreements were expected to facilitate their cooperation in the company’s efforts to secure global authorizations for the use of radio frequency spectrum[5] through ‘frequency-use plans. [6]’

In the same year, it also managed to secure additional investment of US $315 million, bringing the total project capital to US $1.915 billion. Meanwhile, it also arranged for a credit of US $750 million from BZW and Chase banks. The company appointed Edward F. Staiano as CEO and Vice Chairman.

By 1997, Iridium launched 49 of the proposed 66 satellites successfully into the orbit. The same year, the company entered into strategic agreements with Kyocera to develop and market its wireless phones and with AlliedSignal to develop wireless telecommunication products for aircraft passengers and the crew. In the same year, Iridium came out with its IPO (Initial Public Offering) of $240 million and obtained $800 million in debt financing.

In 1998, Iridium selected Sprint Telecenters[7] to manage its global customer care centers. The company also obtained an additional US $350 million by issuing high yield bonds. All the 66 satellites were successfully launched by November 1998 and Iridium then launched its global satellite phone paging services. In 1999, Staiano resigned and John Richardson, the then CEO of Iridium Africa Corporation, was appointed the new CEO and Vice Chairman.

Iridium’s venture into the upcoming Mobile Satellite Services (MSS) market marked a new beginning in the field of personal communications. In the late 1990s, analysts expected MSS to grow significantly over the next few years. Thus, the company’s pathbreaking services were being heralded as the technology that would change the face of the global telecommunications industry.

ABOUT SATELLITE TELEPHONES

Satellite telephone systems work on the concept of wireless technology that uses individual radio frequencies to make and receive calls. These radio frequencies are used over and over again by dividing a service area into different geographic zones called ‘cells,’ with each cell having its own transmitter/receiver antenna. These cells could be as small as a building or as big as 50 km across. When a customer makes a call on a wireless phone, the message is transmitted by low energy radio signals to the nearest antenna site, which is connected, to the local terrestrial phone networks. These messages are delivered to the receiver via phone lines if the call is made to a landline phone and by radio signals if the call is made to a wireless phone.

Whenever a wireless phone user reaches the boundary of a cell the wireless network immediately senses that the signal is getting weak and automatically passes the call to the antenna of the cell into which the caller is travelling. Customers can make/receive calls even when they are out of the accessible geographical area with the help of a wireless carrier. This facility is also known as roaming. The services that make use of wireless telephone technology are:

• Advanced Mobile Phone Service (AMPS): It is a cellular standard that transmits voice as FM radio signals. It is the most widely used system in the US. • Code Division Multiple Access (CDMA): It is also known as the spread spectrum technology. CDMA uses a low-power signal that is spread across a wide bandwidth. Each phone call is assigned a code, which identifies it to the correct receiving phone. A large number of calls can be carried simultaneously on the same group of channels, by making use of the identifying code and a low-power signal. • Time Division Multiple Access (TDMA): TDMA is a digital air interface technology designed to increase channel capacity by enabling it to handle simultaneous phone calls. Using TDMA, a signal is divided into pieces and each one is assigned to a different time (fraction of a second) slot. This increases channel capacity. • Global System for Mobile Communications (GSM): This is a type of TDMA that has encryption[8] features. GSM has become a standard in Europe and the US for mobile communications. • Personal Communications Service (PCS): It is a completely digital, two-way, wireless telecommunications system specifically designed for the US metropolitan areas. PCS networks are CDMA, TDMA and global system for mobile communications (GSM).

Satellite telephones are another kind of wireless telephone services that communicate via satellites circling the earth. There are two types of satellites:

• GeoSynchronous Satellites: These satellites, located 22,300 miles above the earth, revolve round the earth every 24 hours and hence they appear stationary. Two frequency bands are used, one each for uplinking and downlinking. Such satellite systems are excellent for data transmission, but not very good for voice communications. This is because of the distance involved and the time taken for electrical signals to make one Earth-Satellite-Earth round trip. Because of the long time taken to send and receive signals, voice communications are usually not carried via GeoSynchronous satellites. • Low Earth Orbit (LEO) Satellites: LEO satellites communicate directly with handheld telephones on earth. They are stationed as low as 900 miles above the earth’s atmosphere. The communications equipment on a satellite catches the call from earth and passes it to an earth-based switching system. Due to the high speed, at which the satellite revolves, it is necessary to hand off a particular call to another satellite that is just rising over the horizon. The process is similar to that of a cellular system, except in this case the cell site moves rather not the subscriber.

The demand for wireless cellular services has increased considerably from a mere 10 million subscribers in 1989 to around 520 million in 2001. Yet, using a wireless cellular service was not very convenient to people who were always travelling. They could not make calls to their desired places once they were out of their home network. Also, making calls to/from places, following different cellular standards or frequencies was not possible. Moreover, the cost for making international calls was high and GSM users had to use only GSM compatible handsets that worked out rather expensive because of high rental and call charges.

Here, MSS came to the rescue of those customers who required a telephone service that could be used anywhere in the world. The market for MSS has increased steadily in the last couple of years. With MSS, customers did not have to take different connections at different locations and change their handsets from country to country. According to a study,[9] the number of MSS subscribers was projected to increase from 0.5 million in 1999 to 8 million by the end of 2002. Also, the revenues from the business were expected to increase from $4 billion in 1999 to $19 billion by the end of 2002. Subscriber base for other services like data and paging was also expected to increase and their revenues were expected to reach around $2 billion by 2002 from $250 million in 1999.

Many players including Globalstar, Odyssey, and Inmarsat-P/ICO entered the MSS market seeing the strong growth potential (Refer Exhibit I). These companies employed different technologies like LEO, MEO and GeoSynchronous satellites to deliver MSS services to customers. The Iridium system used a constellation of 66 LEOs (See Exhibit II for a detailed description of the working of Iridium’s satellite system). However, the success of satellite telephone systems was dependent on a host of factors such as:

• Competition from other forms of service. • Customer demand. • Cost and financing. • The ability of companies to capture different segments of the market. • Access to critical foreign markets. • The success of these innovative new technologies in the long run.

THE IRIDIUM VENTURE

Iridium had invested lot of money in R&D, building, deploying and maintenance of its satellite constellation. Though Motorola realized the fact that the venture would involve substantial time and cost outlays and was very risky, it was perturbed when the venture consumed more time and money than expected.

By 1999, Iridium found itself in deep financial trouble with a huge amount of outstanding debt to be repaid to its bankers and creditors. Chase Manhattan, Iridium’s lenders had already given three extensions for repayment of loans by August 1999. Analysts remarked that the company’s troubles were not due to the concept of satellite telephones, but due to its faulty strategies.

Iridium had to spend a couple of million dollars every month just to maintain its infrastructure. In addition to the 66 satellites being used, Iridium was incurring heavy expenditure to maintain the spare satellites as well (to be launched in case any of the 66 satellites failed). Moreover, the company planned to offer its services to a broad customer base so as to make the business viable.
The company needed at least a million subscribers to get close to the break-even point. This necessitated the maintenance of a dozen gateways, making the infrastructure involved very complex.

From the very beginning, Iridium faced problems in building up a sizeable subscriber base. Iridium targeted global business travelers and certain high-end customers. But this market was not large enough. Consequently, in 1999, it had only 20,000 subscribers as against an estimated 60,000. Customers were not interested in using Iridium’s services for various reasons. First, Iridium’s subscribers’ had to essentially buy the specially designed Motorola handsets. They could not use any other handset. Consumers used to sleek and cheaper handsets were not happy with the bulky handsets that weighed almost a kg[10]. They were not only difficult to carry around but awkward to use as well. Second, handsets were also priced on the higher side at about US $2500 to US $3000, which was as a major deterrent. To attract customers, Iridium reduced the price to $1000. In September 1999, Iridium’s main competitor, Globalstar launched its satellite telephone services with handsets initially priced at $1000 and later reduced to $700. This added to Iridium’s problems.

Iridium’s initial service charges were $7 per minute, which was later reduced to $2 to $4 per minute depending on the location (depending on the country they were used in – for example, in Japan, users paid an initial fee of $77 and a monthly charge of $50, plus actual call charges that ranged from $2.67 per minute to $6.59 per minute). To address the criticisms of high service charges, Iridium slashed its call rates to $1.50 - 2.50 per minute for domestic phone calls, and $3 per minute for international calls in June 1999. However, these charges were still very higher than those for telephone calls made using terrestrial or cellular networks, which worked out to less than a dollar. To add to the company’s problems, Globalstar priced its service charges on the lower side from 73 cents to $3, depending on the location.

Iridium faced another setback when it encountered technical problems during the launch of its services to customers. These problems were not limited to once but several times. The company also faced delays in delivering handsets to its customers. Customers could not get the services according to the schedules announced by the company.

The service costs and handsets were not the only problems. There were many technical glitches as well. The company’s phones did not work indoors, because they could not catch the signals relayed by the satellites. This was very inconvenienced the users who had to go outdoors to answer an incoming call. Moreover, Iridium did not offer any data services[11] initially.

All the above factors landed the company into deep financial problems. In the fourth quarter of 1998, Iridium posted a loss of $ 440 million and in the first quarter of 1999, Iridium reported a higher net loss of $505 million on revenues of only $1.45 million. The company could signup only 10,294 customers as against a projection of 57,000, as stipulated in the terms of the $800 million loan taken by the company. The company’s sorry state of affairs prompted some of its major investors to file an involuntary Chapter 11 petition against it. Iridium’s strategic partners began discussions to work out a financial restructuring plan for the company. However, they were not able to reach a consensus.

Commenting on this development, a member of the Steering Committee[12] that owned about 25% of Iridium’s $1.45 billion in outstanding debt said, “Despite the best efforts of the parties involved, consensual agreement could not be reached on a restructuring plan. It became clear to the various parties at interest that a Chapter 11 filing was inevitable and, unless drastic action was taken, the company’s assets could be at serious risk.”

The company asked its key partners for investments but it did not get any positive replies. Even Motorola refused to invest more money into the failing company. However, it agreed to provide full operational support and a significant amount of technical, sales and marketing support. The company decided to file for Chapter 11 bankruptcy in August 1999.

Iridium also tried to look for some outside buyers, but again in vain. Though Craig McCaw[13] initially showed some interest, eventually he ended up buying one of Iridium’s competitors, ICO Global Communications, which was also bankrupt. With even the last bidder turning away, Iridium had no other option but to decommission its network of LEOs and stop offering its services.

RESURRECTING IRIDIUM

Things changed dramatically for Iridium in late 2000 when Dan Colussy, [14] came to the rescue of the company. He formed Iridium Satellite LLC (Iridium Satellite) and made a bid of $25 million, out of which $6.5 million was paid in cash, to acquire Iridium’s business. This included purchasing all of Iridium’s existing assets, its satellites and the satellite control network. In November 2000, the US Bankruptcy Court for the Southern District of New York approved Iridium Satellite’s bid to purchase Iridium’s operating assets.

Following this, Colussy took many constructive steps towards positioning Iridium as the best mobile satellite service in the market. Iridium Satellite entered into a contract with aviation major Boeing to operate and maintain the 66-satellite constellation instead of Motorola, which now only provided subscriber equipment. He then introduced closely monitored plans to ensure a successful re-launch of Iridium’s services.

Having learnt its lessons the hard way, Iridium Satellite was careful not to repeat its mistakes Iridium had committed earlier. Since Iridium was bought only for $25 million as compared to the $5 billion spent to create it, the new management was not under severe cost pressures. Iridium Satellite decided to make its satellite communications services affordable to customers and refocused on its target customer base. It decided to target all those industry segments that had a particular need for satellite communications like the government, military, humanitarians, heavy industry, maritime, aviation and adventure. Along with voice communications, Iridium also launched a series of data services, Simple Messaging Service (SMS) and paging services for its customers. The company started offering several value-added features that include:

• Flat rates for calls from/to anywhere in the world. • Unlike cellular services where customers had to use different phone numbers for different locations, Iridium proposed to give its customers the facility of using only one phone number worldwide. • Introduction of SIM cards[15] and a host of other Internet-enabled features.

In December 2000, Iridium Satellite got the much needed boost when the US Department of Defense (DoD), awarded a $72 million contract to the company for providing satellite communications services for the next two years. By the end of March 2001, Iridium Satellite had re-launched its commercial services.

The company also incorporated certain technological improvements in the satellites and handsets, which improved quality of voice and equipment performance. The company’s research showed that each satellite could function well for around seven years. Since many of these satellites had already been in orbit for 2-3 years before the launch of the service to customers, they had only 4-5 years of satellite life left. However, with the above improvements, the company ensured longer life for its satellite constellation.

In late 2001, Iridium Satellite also changed the design of its handsets. The company launched handsets weighing less than 400 grams that were as light and small as regular cellular phones. The cost of calls had also become cheaper than that of calls made on GSM mobile phones. Iridium charged a flat rate of $1.50/minute to call any other phone in the world, without any constraint on the duration of the call made. Reportedly, Iridium also claimed to have attained the status of being able to provide 100% global coverage.

The company also took steps to enhance its customer service and support by setting up 24/7-customer support call centers. This improves its acceptance in the market and enhanced its goodwill.

With all these favorable developments, it seemed that Iridium was resurrected and was on the road to success. The company had come a long way into becoming the most advanced telephone and paging service till date.