*WSJ good article. Motorola Outlines Grim Options For Struggling Iridium Venture
July 15, 1999
By G. CHRISTIAN HILL and DAVID P. HAMILTON
Staff Reporters of THE WALL STREET JOURNAL
Iridium is looking more like Icarus with each passing day.
The $5 billion satellite-telephone network was supposed to usher in a new
age of wireless communications, letting users make cellular-phone calls
from the jungles of New Guinea to the streets of Paris. But when Iridium
World Communications Ltd. began operations last fall, it struggled to
attract customers, soon placing it in violation of its bank-loan agreements.
Wednesday, Iridium's general contractor and
largest investor, Motorola Inc., warned that
the project might have to be shut down and
liquidated in bankruptcy-law proceedings unless an agreement can be
reached on a restructuring that is likely to produce enormous losses for
both investors and creditors. Shares of Iridium World Communications
plunged $1.4375, or nearly 18%, to $6.75 in late Nasdaq Stock Market
trading Wednesday. Iridium shares peaked last year at $70.
In a conference call with security analysts, Robert Growney, Motorola's
president, said that liquidation is a worst-case scenario, and that Motorola
still thinks it is possible for Iridium to develop a viable business plan. Some
analysts say Motorola may be adopting a threatening posture to win
concessions from its partners.
But Iridium's position is dire. To pay its bills, it requires hundreds of
millions of dollars in new financing, but has hardly any revenue. Even if
creditors exchange their debt for the partners' equity, it would bleed red
ink. And without equity, the partners would no longer have any incentive to
operate Iridium's numerous overseas units.
Iridium's new chief executive officer, John Richardson, denies that Iridium
has ever considered liquidation as an option, and says he was "irritated"
that Motorola felt necessary to state the point explicitly. "What [Motorola]
said about the alternatives was, from an academic perspective, absolutely
correct, but from our perspective, it's simply not on the radar screen," he
says.
Mr. Richardson adds that Iridium has slowed its cash consumption
considerably in recent months and that it is in no danger of a shortfall in the
short term, although he declined to say how quickly the company is
currently running through its cash supply. The real challenge, he says, is to
complete the company's marketing makeover to focus on specialized
markets such as shipping lines and oil rigs.
'Phone in a Nuclear Bunker'
"We have to do better than in past in terms of managing the expectations
of the consumer," Mr. Richardson says. "Giving people the impression that
you can use the phone in a nuclear bunker is clearly not the right way to
go."
Indeed, industry executives are increasingly concerned that other planned
global satellite-phone systems, such as GlobalStar and ICO, may
encounter similar problems, as well as even more ambitious high-speed
networks planned for the future, such as Teledesic, an
"Internet-in-the-sky" project supported by wireless tycoon Craig McCaw
and Microsoft Corp. Chairman Bill Gates.
"There are too many other projects at risk if the problem is with the
concept and not Iridium's execution," says Timothy O'Neil, an analyst with
SoundView Technology Group.
But slogging through niche markets for customers isn't apt to generate a lot
of users very quickly. Iridium had planned to add 50,000 new subscribers
a month this year, but got only 17,000 customers by the end of the first
quarter.
The company lost $1.25 billion last year, and appears to be losing money
at close to the same rate this year. Iridium's banks, which are owed $800
million in a secured line of credit, could demand the Iridium partners' $2.2
billion of equity as part of any restructuring. Bondholders have already lost
most of their stake, with the issue maturing in 2005 trading Wednesday at
$20.50 per $1,000 bond, down from as high as $108 early last year.
Iridium has a total of $1.62 billion in senior notes outstanding, and $1.1
billion of bank debt.
Motorola has the most to lose. It has written
off its $365 million equity interest in Iridium,
but its nonequity exposure amounts to $2.2
billion, according to a preliminary company
estimate. That includes its guarantee of a $750
million bank loan, about $762 million of assets
committed to Iridium, its holdings of $157
million of Iridium bonds, vendor financing of
$355 million and other obligations. Analysts
estimate Motorola has established a reserve of
about $1 billion against these potential losses.
Should it end up liquidating Iridium, Motorola
says it will continue to operate and maintain
the Iridium satellite network, another hefty
expense that few analysts believe it would
bear for long.
'Good Money After Bad'
"Motorola is probably scratching its head, trying to decide whether it's
throwing good money after bad," says one Iridium consultant.
People close to the situation say Motorola intends to pressure other key
suppliers, notably Lockheed-Martin and Raytheon, to share in the losses,
and that Iridium will appeal to its gateway partners for additional equity.
But a former top Iridium executive says that some of the gateways have
already contributed more equity than they had expected, and are reluctant
to participate further.
The gateway companies consist of mostly private investors in Europe, Asia
and Latin America, as well as some state-owned telecommunications
firms. As for the banks, they are unlikely to lend more money without
ironclad guarantees from Motorola and the other suppliers.
At core, Iridium is struggling with an incongruity between its design and its
market ambitions. It was originally intended for millions of globe-trotting
business travelers, and it was launched with a $180 million world
advertising campaign last year aimed at that market.
But when Motorola began operating the system on Nov. 1, the Iridium
handsets weren't powerful enough to work within buildings or urban areas.
As a result, a vast network intended for a mass market was usable only by
niche groups, such as mariners, oil-rig workers or the military. Such niche
markets are unlikely to provide enough users to support Iridium's huge
costs.
It's not clear why Iridium thought business travelers would accept a service
unavailable in cities. The Motorola executive who conceived Iridium, Bary
Bertiger, said in an interview that the company contemplated building a
system that could provide service inside buildings, but the idea was
abandoned early on because it would have doubled the network's cost.
Iridium demonstrates another peril its competitors also face: that of
committing to a long-term project in an era of rapid technology change.
When it was planned in 1990 and 1991, there was little competition for its
service. But in the years since, a single terrestrial cellular standard has been
adopted in Europe, Asia and Latin America, making it easier for travelers
to roam about with a single inexpensive handset and stay connected at low
rates. Until recently, Iridium has been charging up to $3,000 for its phones
and a rate as high as $7 a minute.
Iridium's potential competitors insist they will avoid its fate because their
services will be cheaper and more versatile. "We think that there is a broad
market, and we don't depend solely on the global traveler," says Gerald
Helman, vice president for international and government affairs of Ellipso
Inc., Washington, D.C.
Ellipso is one of four other companies hoping to launch global satellite
telephone service by early in the next century. When it begins service in
2002, Ellipso expects to be able to offer wholesale phone service to fixed
sites for 8 cents a minute, and to mobile users for 35 cents a minute, says
Mr. Helman. By contrast, Iridium on July 1 cut its rate for international
calls to $3 a minute.
Cellular Networks
Iridium competitors say their services will use phones that look very much
like conventional cellular phones, and will work on many cellular networks.
Indeed, shares of both of Iridium's publicly traded prospective competitors
rose Wednesday: Globalstar Telecommunications Ltd., Bermuda, rose
$2.125 to $29.875, and Ico Global Communications, Washington, D.C.,
rose 12.5 cents to $6.0625.
Moreover, the satellite-phone companies say they do not see Iridium's
troubles hurting their quest for capital. Ellipso's Mr. Helman said investor
interest did slow last fall when Iridium began having problems, but has
since recovered. Ellipso has raised roughly $400 million of the $1 billion it
says it will need to start commercial service.
"I think when the information with Iridium first hit, the market was a bit
stunned," he says. But "people understand it's a young industry that is going
to have those kinds of problems," he adds.
Officials at Teledesic LLC, which plans to build a satellite-based,
high-speed "Internet in the sky," say they have little to worry about from
Iridium's troubles. "Our services and market are totally different," says a
spokesman for Teledesic. The company hopes major corporations will use
its satellites to link their computers into global networks, bypassing the
conventional Internet.
Teledesic last week chose Motorola to build the 288 satellites it wants to
put in low-earth orbit by 2003, and Lockheed Martin Corp. to launch
them. Despite reports of technical glitches with Iridium, the Teledesic
spokesman says, "We're fully confident in Motorola's ability to deliver the
optimal network for Teledesic."
Teledesic has raised more than $1.5 billion so far, and the spokesman said
fundraising has not been affected by Iridium's troubles.
But like Iridium, Teledesic faces rapidly increasing competition, in its case
from a huge expansion of global fiber networks that can operate at higher
speeds, and from new terrestrial wireless networks that will offer relatively
high-speed data services within three or four years. As for the group of
companies competing directly with Iridium, they are unlikely to all survive if
they all target on limited niche markets.
Iridium also needs to absorb an internal shakeup. Iridium's gateway
partners, the foreign consortia that own the rights to operate in overseas
markets, ousted its management two months ago. And the new managers
are trying to cut both its costs and its rates, reducing the price of its
handsets to $1,000, for example, and laying off workers.
Says Iridium's Mr. Richardson: "In terms of moving forward, we have
enough liquidity for the short term. My concern is the year 2000 and
beyond, when we'll be tackling the strategic issues of the balance sheet. As
we move forward into next year, as hopefully our marketing relaunch picks
up momentum, some form of restructuring, deferment and recapitalization
has to take place."
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