Full Wired article. Iridium: Edsels in the Sky?
by Joanna Glasner
3:00 a.m. 10.May.99.PDT
A few years ago, when Iridium was still
developing its business model, David
Deans had a backup plan.
Deans, then the market development
manager for Iridium's North American
franchise, joked with his co-workers that
they should make a deal with the Franklin
Mint. That way, if the worldwide satellite
telephone network failed, the phones
could still be sold as collector's items.
Maybe the idea wasn't so far off.
See Also: Satellites for Sale, Barely Used
Six months after launching its satellite
phone service, Iridium LLC (IRID) is almost
out of cash. After losing nearly US$1
billion in two disastrous quarters, the
engineering marvel is in danger of
becoming the Ford Edsel of the sky.
Consider these sobering words from
Iridium's own annual report: "Iridium has
borrowed approximately $3.02 billion as of
March 1, 1999, and expects to borrow a
substantial amount of additional funds.
Iridium is not currently generating any
meaningful revenues to fund its
operations or repay its indebtedness."
By April, Iridium had signed up only about
10,000 customers for its satellite phone
and paging services -- far, far short of
the 52,000 it had originally forecast. The
company is scrambling to come up with a
new business model so it can find buyers
in a hurry for its pricey phone service. To
add to its troubles, Iridium's chief
executive and chief financial officer both
resigned in recent weeks.
Meanwhile, Iridium is struggling to make
ends meet. But raising more money could
be a big problem. In late March, the
company negotiated a two-month
reprieve for paying back its lenders,
according to its financial filings. As of
February, Iridium had delayed payment of
$176 million for services to Motorola, its
biggest investor and contractor, and will
probably have to defer more. To keep its
satellites working, it will need to pay
billions more.
In short, Iridium is running out of time.
"They have to get their act together
before the end of this year," said Betsy
Kulick, an associate at Leslie Taylor
Associates, a consulting firm that follows
the mobile satellite business. She
estimates that Iridium will need to get
more than 200,000 customers before
2000 in order to stay afloat.
Iridium executives claim they're working
on a plan to get the company out of this
mess, but they declined to specify how,
saying it would be inappropriate to
discuss financial strategy while they're
still negotiating with their banks.
Iridium's 66-satellite network is the time
bomb in its financial strategy. Each
satellite is designed to work for only
about five years. After that, Iridium has
to shoot up a whole raft of replacement
satellites to keep its system running.
"What they have started is a business
that never goes to bed," said Ray Jodoin,
a telecommunications analyst for Cahners
In-Stat Group, a market researcher.
"They have to constantly keep
reinventing the satellite system. They
never can say, 'OK, we've done it.
They're finally in place.'"
It's possible that Iridium could get the
satellites to work for longer than five
years, but that won't fix its fundamental
problem: Almost no one is using them.
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Marketing Iridium phones has proven to
be one of the most complicated
undertakings in the history of start-ups.
The company and its distributors
managed to negotiate agreements with
140 countries to allow the satellite phone
service to operate. But actually selling
the phones has been the more formidable
task. Critics fault Iridium for trying to sell
phones all over the world instead of
focusing on markets that can't be served
by cell phones. An initial shortage of
phones from Kyocera, a key
manufacturer, didn't help sales.
The company's original marketing plan,
which predated the rise of cell phones,
targeted business travelers. But since
travelers can use a cell phone even in
Irkutsk, Russia, Iridium has had to shift its
marketing efforts to concentrate more on
military contractors, oil drillers, and
geologists -- a far smaller population of
potential customers.
At best, the market for satellite phones is
about 2 or 3 percent of the mobile-phone
market, according to Riyad Said, an
analyst with Friedman, Billings, Ramsey.
That's still a sizable market, but it's
quickly becoming a crowded one. Other
than Iridium, Globalstar, ICO, and Ellipso
are chasing the same customers.
Iridium's troubles don't bode well for the
rest of the satellite-phone business.
Shares of Globalstar (GSTRF) have been
stagnant since Iridium's commercial
launch. ICO Global Communications'
(ICOGF) shares have nose dived since the
beginning of the year. Iridium's own
shares closed Friday at $14.38, down 80
percent from the stock's all-time high of
$72.19.
To its credit, Iridium has found a few
more buyers. On Monday, Iridium said
that it had sold $52 million worth of
phones and calling services to the US
General Services Administration. The
Defense Department's Information
Systems Agency also recently signed on
for $219 million of Iridium services.
But Iridium can lose money as fast as it
makes it. Just paying the interest on its
debts costs more than $40 million per
month.
Some analysts are still hopeful, even in
the face of ceaselessly horrible financials,
that the company will pull through.
"They can't spend a great deal of time
fooling around with this. It's got to be
intense, and it's got to be now, and they
have to be aggressive," Kulick said.
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But Iridium probably won't be able to rely
on Motorola, which designed the network
and spun it off into a separate company.
It currently owns about one-fifth of
Iridium, but has been trying to reduce its
exposure to the satellite phone
company's losses.
In the worst-case scenario, Motorola
could be liable for as much as $1.6 billion
of Iridium's debt. So, Iridium has agreed
to "use its best efforts to reduce the
Motorola exposure to no more than $275
million by the earliest possible date,"
according to Iridium's latest annual
report.
"It has never been Motorola's intention to
be the primary element of financial
support for Iridium," said Scott Wyman, a
Motorola spokesman. "We therefore
structure our financial support to be
relatively expensive to encourage Iridium
to find other sources of financial
support."
Motorola's huge stake in the Iridium
project hasn't been ignored in
class-action lawsuits filed against the
satellite phone company. At least 11 law
firms have sued Iridium in the past few
weeks, claiming that the company tried
to conceal its grave financial troubles
from investors.
"By using Iridium, Motorola ensured that
its reputation would not be tarnished if
the project failed and also ensured that it
would not be required to completely
bankroll the satellite project," claims a
suit filed against Iridium and Motorola in
April by the Washington firm Cohen
Milstein Hausfeld & Toll.
Motorola and Iridium officials declined to
comment on the lawsuits.
Analysts point out that Motorola still
stands to lose more than anyone else if
Iridium goes down. Iridium plans to pay
Motorola a whopping $2.89 billion over
the next five years for maintenance and
operations. An Illinois company has put
top engineers on the Iridium project for
nearly a decade.
"Motorola has a bundle invested in this
that can never be recovered," Jodoin
said.
Of course, when Motorola started
planning the Iridium system about a
decade ago, no one foresaw the growth
of the cellular phone business or the
burgeoning market for wireless Internet
services.
"I'll bet they wish they could bring the
birds down and retrofit them with some
decent data capabilities," said Bruce
Egan, senior fellow at Columbia
University's Institute for Tele-Information.
Data probably won't be part of the new
and improved business strategy Iridium
has been promising for the last few
weeks. The company has hinted that it
will cut both handset prices and calling
prices -- the latter of which can range up
to $8 a minute.
As Iridium struggles to turn itself around,
there will be history to consider. The
company charted a new course in global
telecommunications when it launched its
network. The Smithsonian's National Air
and Space Museum has an Iridium
satellite in its collection.
Hopefully, Iridium won't also go down in
history as the creator of the first satellite
museum in outer space.
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