Geography is History ran the global
promotional blitz from Iridium as the last of the 66 satellites was successfully launched
to complete the network. The prestigious project spearheaded by Motorola with several
billion dollars in financing from Wall Street, dozens of global investors and a consortium
of operating companies saw its stock go to an all time high of $70 a share in 1998. But
last week the president of Motorola announced the possibility that if things do not turn
around rapidly Iridium may have to be shut down and liquidated in bankruptcy proceedings.
Are you surprised?
You bet. While a detailed analysis of what ails the giant in the sky is best left to the
experts a few questions naturally come up.
What Iridium is
Iridium is a low earth orbit satellite network (LEOs) of 66 satellites distributed in
multiple planes to effectively cover every point on earth. The biggest advantage of course
would be that a single hand held phone would cover the globe by directly communicating
with the satellite in the area and the call would be handed off satellite to satellite if
the caller were on the move.
Sky-high pricing
Firstly what was the target customer base Iridium planned to address and acquire? In any
product, the customer is willing to pay a certain $x for a perceived value that he or she
feels the need to posses. Iridium's start up service required a handset priced at a little
over $3000 and per minute charges between $3 per minute to $7 per minute depending on the
destination or number of satellite hops. This pricing made it absolutely impossible to
address the mass market. Even the international business traveler would be a little
difficult to acquire at these prices.
Military applications?
Probably one segment that would take this proposal seriously is the Defence and Military
segment. Also any body who is involved in life saving operations, disaster relief, crisis
management units, Oil rigging and mountaineering hospital staff would be ideal targets.
But then do not forget that many life saving operations are non-profit companies that do
not spend dollars on fancy equipment but get them as corporate sponsorships.
Too narrow a niche
Apart from this base which other segment would be attracted to buy global calling service
at premium rates? Agreed that the discerning celebrity would perhaps carry a satellite
phone in a bid to distinguish himself but addressing the celebrity would reduce the whole
exercise to a niche market. And how many celebrities would need to be roped in for a $ 6
billion phone service to turn profits? And how many calls would they have to make
everyday?
Particularly in a rapidly de regulating global industry
where call rates are dropping all the time it is always cheaper to call over seas through
a variety of alternate mechanisms such as international call back and by Internet voice
pre paid cards.
No wonder at all that Iridium fell drastically short of
projections: against a required 50000 subscriber accounts per month, Iridium has barely
made 10000 subscribers in the first quarter.
Low numbers, high usage
Secondly it appears for some unknown reason that Iridium believed in a low numbers, high
usage market. Which is strikingly odd because today no telecom service can survive as a
premium service alone. The costs involved and the rate at which 'silicon economics' can
depreciate the cost of providing that service in the next generation simply demands that
every service has to have a large subscriber base to provide cash flows while a small
premium services segment can provide for higher margins. The best example of this is the
GSM digital cellular service that today has over a 100 million subscribers in over 80
countries. Basic cellular services is inexpensive while advanced roaming services are high
margin services and are used by a premium segment.
Too few handset makers
Thirdly for some reason Iridium handsets are manufactured only by Motorola and Kyocera.
Going back to the cell phone example, there are over a dozen manufacturers of GSM handsets
worldwide. A larger scale manufacture of handsets creates a drop in pricing that reduces
entry barriers for service penetration. There are simply more subscribers when there are
$1000 handsets than when the handset is priced at $3000 a piece. Giving the hardware cheap
seems to be working and the latest to adopt it is the Internet business. Some service
providers in the US are beginning to give away free PC s to lock subscribers into their
ISP service.
Yet another question arises on the satellite bandwidth
front. Iridium must have had a plan to lease satellite bandwidth to other operators in
case of not meeting subscriber targets and facing a financial crunch. There would be
technical issues in using these satellites to inter-work with an existing or up coming
satellite network or other handsets. In any case the network of satellites can be at least
used as a narrow band pipeline in the sky to provide ready bandwidth for those who need
it.
Reusing the satellites
This brings up a more basic issue. If it is true that there is simply no market large
enough to make these multi billion dollar satellite projects financially viable then may
be we don’t need another failure. We can probably learn from one. ICO, GlobalStar and
Teledesic are three satellite based phone systems waiting to take the plunge. If Iridium
failed because it assumed a market that did not even exist, then the best move would be
for these other satellite networks to come together and reuse these resources in an
entirely different way. How?
Redesign the combined network as one large data network in
space and lease the bandwidth to operators, data carriers, ISPs, and telcos worldwide.
This might solve several problems. At least it will reduce the chances of more billion
dollar sat phone projects from crashing, find some good use of orbiting satellites and
provide the needed bandwidth for the Internet.
There is perhaps still hope left for the Iridium project to
survive and turn around provided a completely new revenue economics is worked out.
Affordable hand sets, cheaper per minute rates and mass market appeal will be critical to
make this giant survive. Otherwise it could be the last call to Planet Earth.
What went wrong |
Iridium failed because it assumed a market that did not even exist! |