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Iridium's sky high losses

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CIOL Bureau
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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.

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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.

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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.

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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.

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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!
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