WashPost. A Dream Come Back to Earth Missteps, Shortfalls, Glitches Have Iridium Scaling Back Expectations for Its Satellite Phone Service
By Mark Leibovich
Washington Post Staff Writer
Monday, May 24, 1999; Page F12
"Where is a phone? Do we have a phone in here?"
At the downtown headquarters of Iridium LLC last week, the interim chief
executive of this wireless pioneer was seeking his company's trademark,
brick-sized handsets. John A. Richardson would be posing for a
newspaper photograph, and he was asked to hold a phone while he stood
next to a large globe in his office.
It was an easy photographic image for an elaborate concept: the portable
phone service Iridium makes available anywhere in the world through a
network of 66 satellites orbiting 421 miles above the Earth. This ambitious
experiment -- started nearly a decade ago and brought to market last
November -- has made Iridium one of the most celebrated firms in the
telecommunications universe.
But Richardson couldn't find an Iridium phone in his office, and an aide had
no better luck in an adjoining area. (Finally, after about two minutes, a
handset was found.) The search rendered another apt image: the company
CEO scouring his office for a phone so distinctive that its kind has scarcely
been seen by anyone anywhere in the world.
This is the crux of how a space-age vision became an earthly mess. At the
end of March, Iridium had just 10,294 customers, far short of the 100,000
it had expected to have by the end of 1998 and galaxies short of the
500,000 it has said it needs to break even.
That shortfall -- set against the backdrop of a $180 million advertising
campaign and an estimated $5 billion to build the satellite network -- has
turned Iridium into a sobering lesson for the high-tech economy. While
innovation can be dazzling, the laws of supply and demand are harshly
mundane. And they present a puzzle that Iridium has not come close to
solving. The headaches have multiplied at meteor-like speed. Iridium now
must contend with seething stockholders and attendant class-action suits,
impatient lenders, hedging financiers and management turmoil.
"We got the hard stuff right," said Richardson, a plain-spoken Australian
who had run Iridium's African operations. He took over as acting CEO
when Edward Staiano resigned abruptly last month after a dispute with the
board. (A company spokeswoman said Richardson didn't have an Iridium
phone at hand because he's new to his office.) The "hard stuff" Richardson
speaks of is the technological tour de force of building a first-of-its-kind
global satellite network. He notes that the prototype of an Iridium satellite
now hangs in the Smithsonian.
Communications satellites have been in use since the 1960s, and most orbit
more than 22,000 miles up. Because they are so far away, using them from
Earth requires a relatively large dish. Iridium's innovation was to use large
numbers of low-orbiting satellites. Because its satellites are low, Iridium
phones can be quite small. However, the system requires complex
computer coordination; calls must be passed from satellite to satellite as
they are made.
Still, whether Iridium is remembered as a museum piece or a viable
business will be determined by what Richardson calls "the easy stuff."
These are the basics of keeping an ambitious business in orbit. "We're a
classic MBA case study in how not to introduce a product," Richardson
said. "First, we created a marvelous technological achievement. Then, we
asked the question of how to make money on it."
And Richardson's claimed mastery of the "hard stuff" notwithstanding,
Iridium has been bedeviled by technological problems. Some early users
have complained of blocked access, rampant interference and dropped
calls. When first impressions are being formed, such erratic service can be
devastating, and no one knows this better than the company itself.
Richardson called the decision to launch the service in November -- before
it was glitch-free -- "damaging." "We should be rolling out now, not
November," he said. The company said as much in its 10-Q form filed last
week with the Securities and Exchange Commission. "Iridium believes that,
as a result of various factors, significant portions of its target markets have
developed negative impressions about the quality and pricing of Iridium
World Services."
Technological problems, management missteps and customer shortages
have exacted a devastating toll on the company's financial status. On May
14, Iridium said it did not expect to meet terms on $800 million in loans by
a May 31 deadline; it hired New York investment bank Donaldson, Lufkin
& Jenrette Securities Corp. to help restructure its debts.
On March 31, Iridium secured a 60-day waiver period from its bankers to
achieve certain terms of its credit line -- including 27,000 subscribers and
$4 million in sales. But the company later said that it would not meet these
covenants even with the extra time, and its stock price went into a tailspin.
Shares closed Friday at $10; a year ago the stock was trading in the $60s.
Last month, the company said it had lost $505 million in the first quarter of
this year. Meanwhile, Iridium reported revenue of $1.45 million -- a figure
that looks especially puny when compared with the nearly $3 billion the
company borrowed to construct the satellite network. The interest alone
on Iridium's debt costs more than $40 million a month.
A few days before the loss report came Staiano's resignation, shortly after
the departure of Chief Financial Officer Roy Grant for what the company
said were personal reasons. Staiano, a hard-driving and famously impatient
former Motorola Inc. executive, was alternately deemed an asset and an
albatross at Iridium. But many industry-watchers criticized him for a series
of marketing and operational missteps -- especially the company's failure
to provide retailers with phones to sell when Iridium began service.
(Staiano could not be reached for comment through officials at Iridium and
Motorola.)
Into the leadership void comes the 55-year-old Richardson, a
financial-side veteran with experience in corporate turnarounds. Red-eyed
and chronically jet-lagged, Richardson evoked an understandably weary
air in an interview last Wednesday. But his approach to Iridium's
predicament is refreshingly direct. "As the Brits would say, we cocked
things up," he said, echoing the candor he displayed during a testy annual
shareholders meeting Tuesday.
The company Richardson has taken over is one with ambitions that have
been scaled back substantially. The concept was born in 1987, a time
when today's widespread cellular phone service seemed a far-off dream.
Bary Bertiger, an engineer at Motorola, was contemplating a Caribbean
vacation. But his wife, Karen, a real estate executive, was worried about
being in such a remote location, unable to communicate with the home
office. The trip never happened, but a brainstorm did.
Imagine if business travelers could call anywhere in the world with a single,
portable unit? The notion was compelling enough -- and revolutionary
enough at the time -- to attract a heady team of collaborators and investors
(led by Motorola, which retains roughly 18 percent of the company).
In 1991, Motorola formally christened Iridium, after the element whose
atomic number is 77 -- the number of satellites planned for the company's
network; the number was later reduced to 66, but the name stuck.
Bertiger's notion had graduated to corporate status. The company first sold
shares to the public for $20 in June 1997.
Unfortunately for Iridium, the wireless market changed radically in the
1990s. The company's fattest body of potential customers -- business
travelers -- has been largely won over by the cellular industry. Cellular is
dramatically less expensive than satellite service because it uses land-based
antennae rather than far-flung space apparatus. Cellular has spread faster
than anyone predicted, even in developing countries. Cellular phones can
be used inside buildings and in cities, unlike Iridium phones, which
generally work only when there is open sky overhead.
Iridium service costs roughly $4 a minute for international calls, and the
handsets sell for $2,300, plus import taxes for overseas buyers. This is
prohibitive to most consumers, yet Iridium has marketed itself to mass
audiences around the world. Richardson concedes this as another blunder.
"We had a blind spot on identifying [customers]," he said. "Did we want to
talk to the man on the street, or to multinational companies like Shell Oil
who push people all over the earth?" Richardson said Iridium has
disabused itself of being a lifestyle brand. "This is not a product for the guy
who walks into Radio Shack and wants to make a phone call on the way
home."
Rather, if Iridium is to survive, it will do so as a specialty brand. These are
intricate, expensive gizmos that require some training and big customers
willing to buy in big volume.
Still, Richardson is not without optimism. Neither are people who follow
the firm. "We have continued to maintain that there are a series of niche
markets that could make Iridium a powerful force," said Mark Lowenstein,
a global wireless analyst at the Yankee Group in Boston. These markets
include people who work in the remote reaches of the globe: pipeline
workers in Alaska, oil rig workers on the ocean, relief workers in the
desert. By 2005, the satellite phone market is expected to constitute 2
percent or 3 percent of a 1 billion-user mobile-phone market, said Riyad
Said, an analyst with Friedman, Billings, Ramsey Group Inc. in Arlington.
No one familiar with wireless and satellite technology fails to give Iridium
its rightful techie kudos. "They are the first people in the [satellite] industry
to do what they've done, and a lot of people are genuinely hoping they
succeed," said Alex Nourouzi, a telecommunications analyst at Ovum Inc.
in Sydney who has followed Iridium closely. He said that if Iridium doesn't
survive, it will be more difficult to get funding and investment for such
ambitious projects in the future.
"Iridium is the lead company in an area of telecommunications that we're
very excited about," said Dick Tauber, vice president of satellite and
circuits for CNN, the cable news powerhouse whose correspondents have
used Iridium phones during the Balkan war. He said the verdict on the
phones' performance has been inconclusive. "Sometimes they work fine,
sometimes not," Tauber said. "We're still evaluating."
So is Motorola, Iridium's founder and biggest shareholder, as it decides
whether to add to the $1.66 billion it has already invested in the company.
"We haven't made any additional commitments beyond those that already
exist," said Motorola spokesman Scott Wyman.
"Motorola's position in all this is the great unknown," said Mike French, a
satellite analyst at ING Baring Furman Selz in New York. If nothing else,
continued commitment from Motorola and other investors will buy Iridium
time -- to smooth its technical rough spots, hone its marketing strategy,
speed up its distribution channels.
And to install a management team. Richardson said Iridium is "not terribly
far along" in its search for a new CEO. He said his first priority is to bring
Iridium's debt, credit and cash-flow problems under control. "The financial
dimension has to be resolved before we can make a credible pitch to a
CEO," Richardson said. He said he could be a candidate for the
permanent position.
Whoever gets the job will inherit a cosmic salvage operation. "Iridium is in
a major Catch-22," said Tim O'Neill, an analyst at SoundView Technology
Group in Stamford, Conn. "Financing people want to see customers before
they put up money. Customers want to see financing before they commit to
buying the product."
Either way, Iridium seems destined to be that rare company that will be
remembered whether it succeeds or fails. "A lot of great engineering went
into making Iridium possible," said Hershell Shosteck of Shosteck
Associates, a wireless market analyst in Wheaton. But the company, he
said, could be doomed by the greater lesson it has come to embody.
"Iridium can serve as a reminder to the entire wireless industry in the
future," said Shosteck. "They are a reminder not to let technological
exuberance override business prudence."
A LOOK AT IRIDIUM LLC
Business: Owns and operates a low-earth satellite system that allows
customers to make and receive phone calls virtually anywhere in the world.
Headquarters: Washington
Founded: 1991
Acting chief executive: John A. Richardson
1998 revenue: $186,000
1998 loss: $1.26 billion
Ticker symbol: IRID on Nasdaq
Employees: 536
Web address: www.iridium.com
Source: Company reports, Bloomberg News
© Copyright 1999 The Washington Post Company
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