To all - WSJ article on Iridium.
January 26, 1999
Global-Minded Iridium Is Facing
A Down-to-Earth Need for Profits
By QUENTIN HARDY
Staff Reporter of THE WALL STREET JOURNAL
Iridium LLC promises communications anywhere, anytime. Now the question
is: Where will profits come from, and when?
The world's first satellite-based global wireless telephone and messaging
company blitzed the planet with a $140 million advertising campaign last fall
and began commercial service on Nov. 1. The launch, after a $5 billion
investment, was a mammoth undertaking, requiring world-wide cooperation
among an unusual global mix of manufacturers, investors and cellular-phone
companies, which market Iridium around the world through "gateway" service
providers.
But Iridium has run into a series of
glitches, most worrisome a shortage of its
special handheld phone sets, that have
delayed initial sales. If Iridium doesn't
generate sales quickly, it risks wasting its
expensive ad blitz.
"We've gotten the gateways to operate
with us technically," says Edward F.
Staiano, Iridium's vice chairman and chief
executive officer. "Now we've got to
move on to marketing and distribution."
If the problems are solved, Mr. Staiano
figures Iridium will have 500,000 to
600,000 users by the end of the year, enough to cover the company's $120
million monthly expenses. At that growth rate, an eye-popping increase from
the 3,000 Iridium customers at the end of 1998, Iridium would be profitable by
early 2000.
Monday, Washington-based Iridium reported a fourth-quarter net loss of $440
million, or $3.12 a share. The loss was significantly narrower than analysts'
consensus expectation of $3.46 a share published by First Call. For the year,
Iridium had a net loss of $1.26 billion, or $8.91 a share. Revenue for both the
quarter and the year totaled a minuscule $186,000, due to the late service
introduction. Iridium officials credited the smaller-than-expected loss to tight
cost controls after Iridium delayed its planned launch, first slated for Sept. 28,
because of technical problems.
Iridium offers a wireless phone service through a network of 66 low-orbiting
satellites, plus connections into local cellular-telephone services. There is also a
global paging service. Target customers include globe-trotting executives, who
travel to countries with poor phone service, as well as industrial customers,
such as oil companies, and specialized users like the military and yachtsmen.
Compelling and Problematic
The service is both compelling and problematic. While clearly an engineering
marvel -- the system, designed and built by Motorola Inc., connects an
eight-inch handset with satellites 483 miles overhead -- the current quality of
service isn't as consistent as some land-based cellular systems.
Many analysts also think Iridium's service will quickly improve.
"It's like all new technology," says Cynthia Motz, analyst at
Credit Suisse First Boston. "It starts with high expectations,
doesn't meet them, then slowly gets fixed."
While it does, Mr. Staiano has the edge over his competition. For
one thing, there is none at the moment. Both Globalstar LP and
ICO Global Communications Ltd. are still building their networks.
Iridium also raised $1.95 billion in new financing in the last
quarter, a big enough pile to see it through the expense of
continuous technical improvements.
More troubling in the long run may be the managerial difficulties
of running a global phone service. Iridium's slow start is mainly
attributable to numerous problems in manufacturing and
distributing phones, and in clearing a channel for establishing sales leads and
reaching customers.
Hurting Christmas Sales
The delays lost Iridium most of its planned sales during the Christmas buying
season, since retailers normally stock up on product several months before the
holidays, as well as diluting the effectiveness of the global advertising
campaign.
Whatever the product awareness created by the ads -- something marketers
measure as a percent of people polled -- "as a rule, you lose about two
percentage points of total awareness for every week you can't deliver a
product," says one marketing executive. "If we're not out there by March in a
big way, it's trouble."
Looking for a faster sales response, Mr. Staiano recently reorganized Iridium's
internal sales network, so that teams from headquarters coordinate sales
operations with each of the 14 sales regions. "We're driving it from
Washington," he says, "trying to fix things faster than in the past quarter."
Sales to specialized and industrial markets, which are likely to represent under
50% of Iridium's customers but over 70% of the minutes of use, have become
even more important to Iridium. Companies testing the equipment, Mr. Staiano
says, include Royal Dutch/Shell Group, Exxon Corp., Bechtel Co. and
Monsanto Co. "We've got a blitzkrieg into the top 600 companies in the world.
We'll get some phones into each," he says.
For now, seemingly no one at Iridium is above selling for the company. Each
of Iridium's 28 board members has been given a list of eight to 10 companies
to call directly to sell the service.
In Nasdaq Stock Market trading Monday, Class A shares in Iridium World
Communications Ltd., a stock that tracks the Iridium consortium, rose 87.5
cents to $34.625 a share.
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