Forbes article on I*
Forbes Iridium article - 6/14/99 Part 1
by: PieInTheSky_NeedleInTheEye
6685 of 6706
Iridium botched the launch of its satellite network. It has a comeback plan--but will it run out of time?
High wireless act
by Carleen Hawn
Forbes Magazine June 14,1999
************************************************************************************************
John A. Richardson is your basic swashbuckling Australian. He can't help peppering his conversation with references to his
mountain-climbing feats; you would, too, if you were 55 and had already scaled Mount Everest twice.
Now Richardson struggles with his steepest climb yet: reviving Iridium, the much-hyped satellite-phone network that has run
through more than $5 billion and teeters on the brink of collapse. He ran Iridium's Africa unit and took the top job on an interim
basis in April after Edward Staiano quit as chief executive.
By mid-May Iridium's chief financial officer and top marketer had also left. Iridium was launched on Nov. 1 but signed up just
10,300 subscribers by Mar. 31--one-fifth of what it had promised. Revenue of $1.45 million fell far short of operating
expenses, much less the $100 million-plus it owes creditors quarterly on $3.4 billion in debt. (Iridium sold more stock in
January, just in time for its March debt service.) Its shares have sunk from last year's high of $68 to $9, and its junk bonds,
issued at par, trade at 19 cents on the dollar. Shareholders are suing and Wall Street analysts are drawing up bankruptcy
scenarios.
What went wrong? A lot--the company underestimated the challenges, ran late in getting its phones to market, priced its service
too high and marketed itself with the wrong message. "We did all the really difficult stuff well, like building the network, and did
all the no-brainer stuff at the end poorly," Richardson says.
In Act II, he aims to correct these mistakes, revamping marketing and slashing prices. Iridium started out as a rival to cellular
service, a promise it couldn't fulfill. Now it must resurrect itself as a supplemental service, a satellite phone that works in the gaps
where cellular isn't available. "I know there is a market out there for this product," says Richardson. "But clearly we are never
going to replace cellular. Iridium must start where cellular stops."
This means the new Iridium is no longer the "anywhere, anytime" phone. It wants to be the last line of communication for Alaska
pipeline engineers, container-ship captains and hikers who run out of water. That will narrow the customer base from the broad
swath of 5 million "global citizens" Iridium had hoped to serve. It will cost Iridium millions to restage Iridium, and it will take
time--and Iridium doesn't have much time left.
Industrial customers take six to nine months to try out a new product, but they could resist testing Iridium because they don't
want to be locked into the service if the company isn't going to be around in six months, says Timothy O'Neil of Soundview
Technology Group.
The travails show what can happen when an equipment maker tries to become a service provider. Motorola pushed this project
largely because it wanted to sell hardware--the satellites and handsets. Iridium was conceived by a Motorola engineer 12 years
ago. Its name is that of the element whose atomic number, 77, matches the number of satellites Iridium planned to send aloft. In
the end, 66 satellites went up into low orbit (550 miles up). In 1997 Iridium went public, with Motorola remaining its largest
shareholder, with an 18% stake.
Prior to its product launch last fall, Iridium boldly predicted a market of 12 million satellite-phone users by 2002 and promised
to snag 40% of them. But while cellular service proliferated and prices fell, the cost of building Iridium soared from $2.5 billion
to $5 billion. That required ever more financing, leaving little margin for error. Things began to unravel when the distinction
between "cellular" and "satellite" blurred. The confusion started at the top.
"The message about what this product was and where it was supposed to go changed from meeting to meeting," Richardson
says. "One day we'd talk about cellular applications, the next day it was a satellite product. When we launched in November,
I'm not sure we had a clear idea of what we wanted to be."
Iridium's opening ad blitz didn't clarify things. The campaign, directed by New York-based Ammirati Puris Lintas, was dubbed
"Calling Planet Earth." The "schmoozy, generic ads," the new chief says, failed to distinguish Iridium from other wireless
companies. The ads seemed to promise global travelers the answer for all their calling needs: "Iridium gives you the freedom to
communicate anytime, anywhere."
But it doesn't. An Iridium phone must have a line of sight to one of the 66 birds. It will work at the North Pole, but it won't work
inside an office building in Kosovo.
If the technology didn't match the marketing, neither did the pricing. While most wireless operators subsidize the cost of
handsets to get prices down, Iridium charged premium rates for the handsets and service both. The 7-inch, 1-pound handset
retails for $2,200 to $3,400. Service fees range from just under $2 to $7 per minute. Few globetrotting clients were willing to
replace a handful of $300 cell phones (one for each continent) with an Iridium unit that cost three times as much and couldn't fit
into a breast pocket.
"We were incredibly arrogant in our approach," Richardson says. "We felt we could charge a premium. That won't do."
Software glitches in the satellites delayed the product launch two months. Then manufacturing delays at Kyocera and Motorola
left customers waiting until February to get their phones. Iridium left distribution up to its regional partners, but companies such
as Sprint, which owns 3.5% of Iridium, weren't selling the new service before the launch. Sprint's sales force didn't push the
service, and its stores didn't stock Iridium's phone.
Now such Iridium partners as Telecom Italia and Motorola have begun training their sales forces to push Iridium to their
customers. Sprint PCS will roll out its own Iridium campaign in the next 60 days. The storyboards for Iridium North America's
new ad campaign are in the works.
"This time they will be more regionally specific and focused on the benefits and solutions that the phone can bring to the user,"
says Carolann Gorden, a marketing director at Iridium's North America unit. One spot will depict a fishing boat captain on, say,
the Atlantic's Grand Banks who has just pulled in a load of swordfish and uses his Iridium phone to find the port with the highest
price per pound. The ads should hit the airwaves by next month.
Will that be soon enough? Richardson thinks so. Industrial customers buy in bulk, which could jump-start sales and keep the
company afloat. He also aims to pitch Iridium as Y2K insurance policy: Its network orbits above the earth while land-based
networks could choke on a software problem on Jan. 1 . Moreover, he says, Iridium's main competitors, GlobalStar (in an
alliance with AirTouch) and ICO (born out of Europe's Inmarsat) won't launch their services for at least six months.
"We've already climbed our first ice fall. They're at base camp and haven't even unpacked their gear yet," says Richardson, his
mind perhaps drifting back to Everest conquests.
But he still must renegotiate debt, cut costs and raise $1 billion just to fund operating expenses for the next several months. "And
that doesn't get Iridium to break even on cash unless they have 300,000 subscribers by the end of the summer," says J.P.
Morgan's Marc Crossman. It would be dilutive to sell stock at its present depressed price, and it would be prohibitively
expensive to float more bonds and pay the interest.
Get out your oxygen tanks. |
