**Why Cell Phones Succeeded Where Iridium Failed
August 23, 1999
Manager's Journal
By Jagdish N. Sheth and Rajendra Sisodia. Mr. Sheth is a professor of
marketing at Emory University. Mr. Sisodia is a professor of
marketing at Bentley College.
The Iridium satellite-phone project, with its 66 satellites orbiting at 17,000
miles an hour, is a technological, logistical and regulatory triumph. The
satellites were launched and deployed in a year, creating a wireless
communications network that spans the globe. But Iridium, which filed for
bankruptcy earlier this month, has been a huge marketing failure. To
understand why, it's helpful to evaluate it in terms of what we call the four
A's, all of which must be strong for market success:
Acceptability: Does the service meet customer expectations?
Iridium compares poorly with its competitors on all facets of
acceptability. The one-pound handset is huge by current standards,
and service reliability and call clarity were poor (especially early on).
The phone cannot be used inside buildings or cars. Iridium's
coverage is advertised as global, but in fact excludes many countries
in Europe, Asia and Africa.
Affordability: Are customers able and willing to pay for it? In an
era of $100 miniature cell phones, the Iridium handset cost $3,000,
and airtime prices ranged from $4 to $9 a minute before recent
reductions. Even people who can afford such prices usually aren't
willing to pay them.
Availability: Can customers readily acquire and use the service?
Iridium can serve only about 25,000 users at a time. What's more,
the sales force is inadequate and customer service is poor.
Awareness: Are customers well-informed about the service? This is
where Iridium excelled. In addition to receiving huge amounts of
free publicity, the company orchestrated a $180 million media blitz,
running ads in The Wall Street Journal, Fortune magazine and 37
airline magazines. In addition, it launched a major direct-mail
campaign in 20 markets and 20 languages. It is safe to say that most
executives in Iridium's target market were quickly made aware of
the service.
The media blitz, however, wasn't enough to overcome the technological
and marketing shortcomings of the system. In just the first quarter of its
advertising and direct-mail campaigns, Iridium received 1.5 million inquiries from potential customers. But only a few thousand signed up.
Iridium's target market--business executives who frequently travel
internationally--amounts to perhaps eight million people. Its subscriber
base is a mere 20,000.
By contrast, consider the success of cellular telephony. A late-1970s
market-research study commissioned by Bell Labs, which invented the
technology, predicted a subscriber base of only 800,000 by 2000, and
concluded there was "no market at any price." AT&T stayed out of the
business, leaving it to local phone companies and others.
In the early years, it appeared the forecast was right. Phone companies
targeted only an elite market of business executives. The service came up
short on all the four A's: The service was expensive; handsets cost
thousands of dollars; choice was limited; service was unreliable and only
available for cars; installation was cumbersome. Result: Low volumes
weren't enough to offset the large infrastructure costs, so cellular
companies suffered huge losses.
All of that changed when cellular companies adopted some marketing
innovations. They broadened their target market to include sales people,
professional service people and women concerned with safety and others.
They started offering below-cost handsets with service contracts, removing
up-front barriers to adoption. They lowered airtime prices and created
multiple pricing packages to appeal to different segments. They stepped up
promotional efforts and expanded their distribution channels to include
electronics retailers, mass merchandisers and even kiosks. Better
technology helped, too. Handsets became smaller and were detached from
cars; voice quality and network coverage improved.
The industry took off and experienced explosive growth rates of 40% to
50% a year. By next year there will be an estimated 80 million subscribers
in the U.S. alone--100 times as many as Bell Labs had predicted. Cellular
users now can roam in 62 countries, with more to come.
Cellular's success is an important reason for Iridium's failure. Long-running
projects must be vigilant for signs of obsolescence, and be prepared to
change direction or even abandon the project if necessary. Iridium's
backers seem to have fallen into a classic "sunk cost" fallacy. Having
already spent billions of dollars and years of effort on the project, they
were loath to abandon it. Instead, they redoubled their efforts, and spent
more billions.
The company put too much stock in being the pioneer--the first company
to offer global satellite-based telephony. Unless a company has strong
patent rights (as in pharmaceuticals) or the ability to reduce costs and keep
up with demand, the advantages of pioneering are fleeting and the risks are
many, especially with fast-moving technology. Innovative "fast followers"
benefit from the pioneer's experience to fine-tune their own four A's and
use more powerful and cost-effective second-generation technology, more
precise targeting, better pricing and so on. In fact, a 1993 study by Peter
Golder and Gerard Tellis found that pioneers were market-share leaders in
only four out of 50 product categories.
Iridium is now operating under Chapter 11, with a revamped marketing
strategy. If it succeeds in writing off its $5 billion in development costs, the
venture might yet become a marketing success. But it is almost certain to
remain a business failure. Even if the company gets a million customers, it
would have to net $1,000 a year from each of them just to pay its $1
billion annual operating costs.
Several other companies are waiting in the wings with their own satellite
projects. Based on Iridium's experience, we cannot anticipate clear skies for them.
Copyright ¸ 1999 Dow Jones & Company, Inc. All Rights Reserved. |
