*Iridium On The Edge. Vertical Markets Hold Promise
From the May 3, 1999 issue of Wireless Week
By Caron Carlson
WASHINGTON--The only positive indicator from Iridium World Communications lately was last month's donation of phones
for journalists, aid workers and refugees in the Balkans as military action escalates thereand this news was soon tempered by
user reports of difficulties using the phone.
On its face, the outreach project may not be the wisest use of the troubled company's attention and resources right now, though
Iridium needs a public relations boost. Given the weak initial response from consumers to the novel satellite phone, military and
other government markets may be Iridium's best near-term bet.
Iridium blames its heavy financial woes on marketing and distribution problems, and it says the troubles experienced by existing
users are caused by insufficient training. However, some analysts say Iridium's troubles run deeper, back to a business plan
conceived on an overly bullish view of the commercial marketplace and its own abilities to manage such a costly, complex
undertaking. Even though it billed itself as a nation after the International Telecommunications Union assigned it a unique country
code for dialing, Iridium came up against forces bigger than itself.
For one thing, the company missed major milestones that it had previewed with great fanfare, seemingly impervious to looming
complications that could encumber the $5 billion venture. Technical problems and bad weather repeatedly delayed satellite
launches, pushing the constellation completion date uncomfortably close to scheduled commercialization.
Well before the 66-satellite network was deployed, Iridium executives confidently asserted that commercial service would roll
out at "10:00 a.m." Sept. 23, 1998. By August, the number of satellites that had failed in orbit rose to seven, but the company
tenaciously held to the projected milestone. However, when the September deadline came and went without service rollout, no
one outside the company was surprised. Five and a half weeks later, Iridium initiated partial service while engineers continued
to work out the "bugs."
A second area in which Iridium erred was in pushing subscriber and revenue forecasts that fell far short of the mark. The
company told financiers it would have 52,000 subscribers by the end of the first quarter this year; last week it reported 10,294,
not all of which are paying customers. Having projected $30 million in revenue in the timeframe, it reported $1.45 million.
"A lot about [Iridium] was over-hyped in the first place, and the subscriber growth [forecast] was greatly over-optimistic," said
Bob Egan, research director for the Gartner Group. However, he sees good prospects for the company in several vertical
markets.
While some analysts say the real problem is the market for a service in Iridium's premium price range is too small to support the
complex, expensive network, Iridium steadfastly maintains ample market demand and is revising its business plan to tap into it.
"The company is prepared to make significant changes," Leo Mondale, senior vice president, said last week. "[You may] start
with products that may be very different from what you have five years later."
Strengthening resolve
Iridium is already well-versed in self-reinvention. Back in 1985, whenas lore has ita Motorola Inc. executive's wife
complained that she couldn't place a cellular call from the Bahamas to her home to Arizona, the company hatched the notion of
a satellite phone that works anywhere on Earth.
To the surprise of more than just Motorola executives, the terrestrial wireless industry subsequently blanketed Earth's urban
centers and established widespread roaming agreements. In 1997, after the launch of personal communications services
networks, Iridium revised its business plan to offer a service that employs the costly satellites only where ground-based
alternatives are unavailable. In cities, the company would link to wireless carriers and provide one phone numberwhich some
might say is less beneficial to Iridium subscribers than to those tracking them downand one bill (but not one phone yet).
Even with the revamped plan, Iridium clung to international business travelers as its target market, and only began to talk more
expansively about tapping vertical markets within the past year.
Now, as the company ponders its next incarnation, it is reconsidering pricing and working more closely with Motorola. "We
have seen a strengthening of Motorola's resolve to make it work," Mondale said upon announcing first-quarter results. The
manufacturing giant "brought in some of [its] very experienced people," he said, and trained a direct sales force dedicated to
Iridium.
With a greater emphasis on vertical markets, the new business plan will include efforts to better tailor the service to demand In
this light, Iridium's attention to the war-torn Balkans may be not only humanitarian but strategic as well.
Hand-offs and trade-offs
One of Iridium's most unique technical features is downplayed consistently by the company. Unlike the "bent-pipe" architecture
of its soon-to-be rivals Globalstar LP and London-based ICO Global Communications, Iridium's constellation was designed to
switch calls in orbit; if so desired, the network can be self-contained. In many countries that rely heavily on state-controlled
telecom systems, however, the notion that a foreign network could bypass the domestic network unsettles regulators.
Inter-satellite call hand-off could offer advantages to certain vertical markets, however. Vulnerability to security lapses
decreases as terrestrial wireless links decrease, making switching in the sky attractive to security-sensitive operations.
"Governments are an interesting prospect for Iridium because they may be amenable to certain trade-offs between price points
and security," said Tim Logue, space and telecommunications analyst for Coudert Brothers. "The [Iridium] signal doesn't come
down [to Earth] until it's told to. There are only a couple places where very sophisticated people could get access to it."
The U.S. military became the first major Iridium customer when in 1997 it bought a gateway for use by the Department of
Defense and other federal operations. Last month, DOD granted a $219 million contract to Motorola Worldwide Information
Network Services, Iridium's service provider to the U.S. government. To some analysts, the contract represents a harbinger.
"When you look at the DOD contract, you have to believe Iridium is thinking to itself: Let's use the government as an anchor
until the commercial market becomes more developed," said Marco Caceres, space market analyst for the Teal Group.
Government users seek the flexibility and mobility of new commercial systems as well, and "they're willing to pay top dollar for
it," he said. "That's going to be Iridium's salvation in the end."
Civilian agencies reportedly interested in Iridium include the Federal Aviation Administration, National Aeronautics and Space
Adminisitration and the Federal Emergency Management Agency.
"Iridium has always had a government plan," said Gartner Group's Egan. "Now they have to get a little more aggressive with it."
Iridium appears well-positioned to pursue government contracts more aggressively. Nine of its directors as of March 1 work
for Motorola, several in government-related divisions, and the manufacturer's strengthened resolve can only help satellite carrier
expand this market. "I think Motorola has a network within the government, and Iridium would be foolish not to take advantage
of it," Caceres said. It's clearly one of Iridium's greatest assets."
Iridium is quiet about its government contracts, both foreign and domestic, but Mondale said last week that there have been
discussions with the Australian government. Apparently, there have been more than discussions. According to a report by The
Canberra Times late last month, members of the Australian military will use Iridium satellite phones on a climbing expedition in
the Himalayas. The group's spokesman, Lieutenant-Colonel Peter Lambert, was cited saying the climb would expose the
soldiers to physical and psychological stresses similar to those found in war.
The optimal target market for Iridium may be the military and other government users that find enough value in the network to
justify the premium. The military and, perhaps, Motorola executives' wives.
From the May 3, 1999 issue of Wireless Week
Lawsuits Follow Missed Estimates
By Monica Alleven
The same week Iridium LLC delivered lower-than-promised subscriber numbers, a slew of attorneys filed class action lawsuits
and a bevy of analysts lowered their recommendations.
The suits seek an unspecified amount in damages, but insiders say the toll potentially could reach hundreds of millions of dollars.
Motorola Inc. also is named in the suits, along with former CEO Ed Staiano and former CFO Roy Grant. Most of the
allegations center around financial disclosures and the health of the company.
Iridium had not yet reviewed the specific complaints last week but denied any culpability. "We believe that our corporate
disclosures have complied with the legal requirements and we intend to challenge the suit," said Iridium spokeswoman Michelle
Lyle.
The litigation wasn't Iridium's only problem. Numerous Wall Street analysts downgraded their ratings after Iridium reported a
net loss of $505 million, or $3.45 a share, and substantially fewer subscribers than the company first projected.
Some analysts who were warm to Staiano and Grant saw their departures as a sign of more bad news to come. The interim
CEO, John Richardson, comes from Barclays Bank-BZW Asia, which could mean insiders already expect trouble with
creditors in the offing.
Add to that the uncertainty surrounding Motorola's future financial investments, and the financial front looks more than bleak.
Motorola executives have said their plans for Iridium depend, in part, on Iridium's new business plan, which has not yet been
publicly revealed.
"We don't know if Motorola is going to be there," said John Coates, an analyst at Salomon Smith Barney in New York who
downgraded Iridium to "neutral" based on increased concerns about restructuring risk.
Still, Motorola is an 18 percent owner in Iridium and its potential exposure is about $1.6 billion. Since Motorola and Iridium's
banks already have put so much into the company, they're not expected to walk away, but the question remains as to how
much more Motorola can fork over. A spokesman at Motorola said the company would not disclose how much it has invested
in Iridium since the beginning, which would include research and development costs.
Iridium has until the end of this month to renegotiate agreements related to secured loans from lenders that had given the satellite
company a 60-day extension. Lyle would not comment on what Iridium might do if it is unable to come to terms during those
negotiations.
Those who still hold out hope say Iridium is suffering from the plight of any pioneer, and the competing satellite providers that
follow, while learning from Iridium's mistakes, won't find it an easy market.
"Don't write Iridium off," said Andrew Cole, director of the Global Wireless Practice at Renaissance Worldwide, a Boston
consulting firm that has been working with Iridium. "It's a bit like Iridium is this big tanker in the ocean It takes a while for the
vessel to turn."
Before the departure of Staiano and Grant, Cole and his colleagues had been pushing for a change in management. The old
guard was "slavishly" attached to a business plan that was created years ago, and the company needed a shake-up, he said.
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