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REVIVING IRIDIUM

Case code - BSTR031Published - 2002

"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 ifthere 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 thecompany 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 satellitevoice and data solutions, filed for Chapter 11[2] bankruptcy protection in the United StatesBankruptcy Court. The news did not come as a major surprise to the globaltelecommunications 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 ofUS $5 billion, the bankruptcy court imposed adeadline of March 15th 2000 to either bringforth a purchaser or to close its operations. In

response, Iridium promised that if it couldn'tattract a buyer by 5 p.m. that day, it wouldproceed with plans to liquidate. Despite thecompany's best efforts, it was not able toconvince any party to support its business andit was forced to file for bankruptcy. Followingthis, many executives in the top managementcadre resigned and its satellite servicescovering an estimated 20,000 subscribers werestopped. Commenting on the debacle, COORandy Brouckman said, "I am deeply saddenedby this outcome. I particularly regret theimpact this will have on our customers.

Iridium achieved significant milestones, and I want to thank the more than 160 countries thatlicensed the service and the distribution partners around the world who helped marketIridium."

A spokesman for Globestar, one of Iridium's major competitors said, "We think Iridium couldvery 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 verybleak. Many of them even stated that Iridium had all the features of a potential failure rightfrom its inception.

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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 beaccessed from anywhere on earth. The engineers worked hard to bring to life the concept ofsatellite telephones. They launched gateways[3] in 1988 to facilitate the proposed Iridiumsatellites to communicate with the existing terrestrial telephone systems throughout theworld.

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 partnersincluded Germany's Vebacom with 10%, Korea Mobile Telecommunications-4.4%, SprintCorporation-4.4% and Italy's STET with-3.8% stakes respectively. In 1992, the USGovernment Federal Communications Commission (FCC) issued an experimental licence toIridium. In the same year, the World Administrative Radio Conference (WARC)[4] decided towork towards establishing guidelines to regulate worldwide radio spectrum rights and facilitatethe 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 supplyingsatellites, gateways and communication products for Iridium. By the end of 1993, thecompany had raised US $800 million as equity. After the second round of equity financing in1994, Iridium's capital increased to US $1.6 billion. In 1995, the Federal CommunicationDepartment of the US government granted an operational license to Iridium.

In 1996, Motorola launched the first Iridium satellite. In the same year, Iridium also enteredinto agreements with various mobile satellite service providers. The agreements wereexpected to facilitate their cooperation in the company's efforts to secure global authorizationsfor the use of radio frequency spectrum[5] through 'frequency-use plans[6]. 'In the sameyear, it also managed to secure additional investment of US $315 million, bringing the totalproject 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 ViceChairman.

By 1997, Iridium launched 49 of the proposed 66 satellites successfully into the orbit. Thesame year, the company entered into strategic agreements with Kyocera to develop andmarket its wireless phones and with AlliedSignal to develop wireless telecommunicationproducts 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 the66 satellites were successfully launched by November 1998 and Iridium then launched itsglobal satellite phone paging services. In 1999, Staiano resigned and John Richardson, thethen 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 newbeginning in the field of personal communications. In the late 1990s, analysts expected MSSto grow significantly over the next few years. Thus, the company's pathbreaking services werebeing heralded as the technology that would change the face of the global telecommunicationsindustry.

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1] LLC or limited liability company is a hybrid legal entity that has the characteristics ofa corporation and a partnership. An LLC provides its owners with corporate-likeprotection against personal liability, although it is treated as a non-corporate businessorganization for tax purposes.

[2] Often referred to as 'business reorganization,' Chapter 11 bankruptcy is one of themost complex areas of the US bankruptcy law. Organizations/individuals can file forChapter 11 bankruptcy to deal with their financial problems of a large magnitude. Thosewho file for Chapter 11 can propose a payment plan and their creditors can vote on thisplan. If a stipulated number of creditors vote in favor of the plan, it is approved. Once itis approved, Chapter 11 essentially rewrites many of the contracts the debtor has withthe creditors and thereafter both parties act according to the new agreement.

[3] Gateways interconnect a satellite constellation with public switched telephonenetworks, thus facilitating communication with handheld phones and any other telephonein the world.

[4] WARC was held in 1992 at Torremolinos, Spain, on behalf of the Committee onRadio Astronomy Frequencies (CRAF). CRAF works on behalf of the European Sciencefoundation that is responsible for coordinating the use of frequency bands so as to keepthe frequency bands used by astronomers free from interference. It also discusses issuesrelated to the use of radio frequencies by different government organizations as well ascorporations.[5] It is considered a national asset and a scarce resource that had to be used keeping inmind the best interests of all those organizations that use it.

[6] The plan made for radio frequency bands and services in use or intended to be usedin a particular frequency band.

[7] Sprint is a global communications company, which provides outsourced call centerservices for many Fortune 500 companies and multinational firms. It is the leader inadvanced data communications services and also one of the world's largest carriers ofInternet traffic. Sprint entered into a long-term multi-million dollar contract with Iridiumfor managing the of 24-hour customer service centers named Iridium Global CustomerCare Centers.

ABOUT SATELLITE TELEPHONES

Satellite telephone systems work on the concept of wireless technology that uses individualradio frequencies to make and receive calls. These radio frequencies are used over and overagain by dividing a service area into different geographic zones called 'cells,' with each cellhaving its own transmitter/receiver antenna. These cells could be as small as a building or asbig as 50 km across.

When a customer makes a call on a wireless

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phone, the message is transmitted by lowenergy radio signals to the nearest antennasite, which is connected, to the local terrestrialphone networks. These messages are deliveredto the receiver via phone lines if the call ismade to a landline phone and by radio signalsif the call is made to a wireless phone.Whenever a wireless phone user reaches theboundary of a cell the wireless networkimmediately senses that the signal is gettingweak and automatically passes the call to theantenna of the cell into which the caller istraveling. Customers can make/receive callseven when they are out of the accessiblegeographical area with the help of a wirelesscarrier. 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 transmitsvoice 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. Alarge number of calls can be carried simultaneously on the same group of channels, bymaking 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 phonecalls. Using TDMA, a signal is divided into pieces and each one is assigned to adifferent 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[1] features. GSM has become a standard in Europe and the US formobile communications.

Personal Communications Service (PCS): It is a completely digital, two-way,

wireless telecommunications system specifically designed for the US metropolitanareas. PCS networks are CDMA, TDMA and global system for mobile communications(GSM).

Satellite telephones are another kind of wireless telephone services that communicate viasatellites 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. Twofrequency bands are used, one each for uplinking and downlinking. Such satellitesystems are excellent for data transmission, but not very good for voicecommunications. This is because of the distance involved and the time taken forelectrical signals to make one Earth-Satellite-Earth round trip. Because of the longtime taken to send and receive signals, voice communications are usually not carriedvia 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

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atmosphere. The communications equipment on a satellite catches the call from earthand passes it to an earth-based switching system. Due to the high speed, at which thesatellite revolves, it is necessary to hand off a particular call to another satellite that isjust rising over the horizon. The process is similar to that of a cellular system, exceptin this case the cell site moves rather not the subscriber.

The demand for wireless cellular services has increased considerably from a mere 10 millionsubscribers in 1989 to around 520 million in 2001. Yet, using a wireless cellular service wasnot very convenient to people who were always traveling. They could not make calls to theirdesired 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 formaking international calls was high and GSM users had to use only GSM compatible handsetsthat 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 couldbe used anywhere in the world. The market for MSS has increased steadily in the last coupleof years. With MSS, customers did not have to take different connections at different locationsand change their handsets from country to country. According to a study[2], the number ofMSS subscribers was projected to increase from 0.5 million in 1999 to 8 million by the end of2002. Also, the revenues from the business were expected to increase from $4 billion in 1999to $19 billion by the end of 2002. Subscriber base for other services like data and paging wasalso expected to increase and their revenues were expected to reach around $2 billion by2002 from $250 million in 1999.

Many players including Globalstar, Odyssey, and Inmarsat-P/ICO entered the MSS marketseeing the strong growth potential (Refer Exhibit I). These companies employed differenttechnologies like LEO, MEO and Geosynchronous satellites to deliver MSS services tocustomers. The Iridium system used a constellation of 66 LEOs (See Exhibit II for a detaileddescription of the working of Iridium's satellite system). However, the success of satellitetelephone 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.

1] Encryption is one way of ensuring data security. To read an encrypted file, a user musthave access to a secret key or password that enables him to decrypt it.

[2] Leslie A Tailor of Leslie Tailor Associates conducted a study on Market Demand for MobileSatellite Services, Satellite Statistics in 1999.

THE IRIDIUM VENTURE

Iridium had invested lot of money in R&D, building, deploying and maintenance of its satelliteconstellation. Though Motorola realized the fact that the venture would involve substantial

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time and cost outlays and was very risky, it was perturbed when the venture consumed moretime and money than expected.

By 1999, Iridium found itself in deep financialtrouble with a huge amount of outstanding

debt to be repaid to its bankers and creditors.Chase Manhattan, Iridium's lenders hadalready given three extensions for repaymentof loans by August 1999. Analysts remarkedthat the company's troubles were not due tothe concept of satellite telephones, but due toits faulty strategies. Iridium had to spend acouple of million dollars every month just tomaintain its infrastructure. In addition to the66 satellites being used, Iridium was incurringheavy expenditure to maintain the sparesatellites as well (to be launched in case any of

the 66 satellites failed). Moreover, thecompany planned to offer its services to a

broad customer base so as to make thebusiness viable.

The company needed at least a million subscribers to get close to the break-even point. Thisnecessitated the maintenance of a dozen gateways, making the infrastructure involved verycomplex.

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 marketwas not large enough. Consequently, in 1999, it had only 20,000 subscribers as against anestimated 60,000. Customers were not interested in using Iridium's services for variousreasons. First, Iridium's subscribers' had to essentially buy the specially designed Motorolahandsets. They could not use any other handset. Consumers used to sleek and cheaperhandsets were not happy with the bulky handsets that weighed almost a kg[1] . They were

not only difficult to carry around but awkward to use as well. Second, handsets were alsopriced on the higher side at about US $2500 to US $3000, which was as a major deterrent. Toattract customers, Iridium reduced the price to $1000. In September 1999, Iridium's maincompetitor, 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 perminute 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 chargesthat ranged from $2.67 per minute to $6.59 per minute). To address the criticisms of highservice charges, Iridium slashed its call rates to $1.50 - 2.50 per minute for domestic phonecalls, and $3 per minute for international calls in June 1999. However, these charges were stillvery higher than those for telephone calls made using terrestrial or cellular networks, whichworked 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 itsservices to customers. These problems were not limited to once but several times. Thecompany also faced delays in delivering handsets to its customers. Customers could not getthe services according to the schedules announced by the company.

The service costs and handsets were not the only problems. There were many technicalglitches as well. The company's phones did not work indoors, because they could not catch thesignals relayed by the satellites. This was very inconvenient for the users who had to go

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outdoors to answer an incoming call. Moreover, Iridium did not offer any data services[2]initially.

All the above factors landed the company into deep financial problems. In the fourth quarter of1998, Iridium posted a loss of $ 440 million and in the first quarter of 1999, Iridium reporteda higher net loss of $505 million on revenues of only $1.45 million. The company could signuponly 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 someof its major investors to file an involuntary Chapter 11 petition against it. Iridium's strategicpartners 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[3] that owned about25% of Iridium's $1.45 billion in outstanding debt said, "Despite the best efforts of the partiesinvolved, consensual agreement could not be reached on a restructuring plan. It became clearto the various parties at interest that a Chapter 11 filing was inevitable and, unless drasticaction 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 toprovide 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[4]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 itsservices.

[1] The more popular cellular phones weighed less than 100 grams as compared to theheavy satellite phones and were small enough to fit in the customer's pockets.[2] Facilities to connect to the Internet or a corporate network with the help of a satellitephone form anywhere on earth. Using this, the customer can browse the Web, send/

receive email and transfer files.[3] Iridium's major investors formed a steering committee called the 'InformalCommittee of the Holders of the Senior Notes of Iridium.' Members of this committeewere called the members of steering committee.[4] A pioneer in the cellular telephone industry and a leading name in the globalwireless communications industry. He was the Chairman and Co-CEO of Teledesic, theleading US based telecommunications company. He initially made a $ 75 million offer tobuy Iridium but later backed off.

RESURRECTING IRIDIUM

Things changed dramatically for Iridium in late 2000 when Dan Colussy[1], came to the rescueof the company. He formed Iridium Satellite LLC (Iridium Satellite) and made a bid of $25million, out of which $6.5 million was paid in cash, to acquire Iridium's business. This includedpurchasing all of Iridium's existing assets, its satellites and the satellite control network. InNovember 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

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steps towards positioning Iridium as the bestmobile satellite service in the market. IridiumSatellite entered into a contract with aviationmajor Boeing to operate and maintain the 66-satellite constellation instead of Motorola,which now only provided subscriberequipment. He then introduced closelymonitored plans to ensure a successful re-launch of Iridium's services. Having learnt itslessons the hard way, Iridium Satellite wascareful not to repeat its mistakes Iridium hadcommitted earlier. Since Iridium was boughtonly for $25 million as compared to the $5billion spent to create it, the new managementwas 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 segmentsthat had a particular need for satellite communications like the government, military,

humanitarians, heavy industry, maritime, aviation and adventure. Along with voicecommunications, 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 differentlocations, Iridium proposed to give its customers the facility of using only one phone numberworldwide.Introduction of SIM cards[2] and a host of other Internet-enabled features.In December 2000, Iridium Satellite got the much needed boost when the US Department ofDefense (DoD), awarded a $72 million contract to the company for providing satellitecommunications services for the next two years. By the end of March 2001, Iridium Satellitehad re-launched its commercial services.

The company also incorporated certain technological improvements in the satellites andhandsets, which improved quality of voice and equipment performance. The company'sresearch showed that each satellite could function well for around seven years. Since many ofthese satellites had already been in orbit for 2-3 years before the launch of the service tocustomers, they had only 4-5 years of satellite life left. However, with the aboveimprovements, the company ensured longer life for its satellite constellation.

In late 2001, Iridium Satellite also changed the design of its handsets. The company launchedhandsets weighing less than 400 grams that were as light and small as regular cellularphones. The cost of calls had also become cheaper than that of calls made on GSM mobilephones. 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 tohave 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 improved its acceptance in the market and enhanced itsgoodwill.

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

telephone and paging service till date.

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1] An aviation industry businessman who had previously served as Chairman, President andCEO of the US based aviation major UNC Inc.; Chairman, President and CEO of CanadianPacific Airlines and President and COO of Pan American World Airways.

[2] Subscriber Identification Module (SIM) card is a 'smart' card that allows users to make andreceive calls. The SIM card identifies the user to the network and contains a microprocessorchip, which stores unique information about the user account, including his phone number andsecurity number. SIM cards have many functions like providing memory space to save up to100 names, phone numbers and 15 short text messages (SMS).

QUESTIONS FOR DISCUSSIONS

1. What were the reasons for Iridium's failure during the first phase of its launch despite

substantial support from banks, creditors and suppliers? Explain in detail.

2. Identify and explain the critical success factors for a company operating in the mobilesatellite services industry. How did Iridium fare on all these counts?

3. Conduct a SWOT analysis for Iridium Satellite LLC. Using this analysis, comment on thefuture of the company's services.

1] Gypsy was not a volume generating vehicle for MUL.

[2] Government's policy of disinvestment in Public Sector Units, included Maruti Udyog Limitedalso along with other profit making PSU's.