9 – 6 0 1 – 0 4 0R E V : N O V E M B E R 2 8 , 2 0 0 1
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Research Associate Kerry Herman prepared this case under the supervision of Professor Alan MacCormack. This case was developed frompublished sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources ofprimary data, or illustrations of effective or ineffective management.
Copyright © 2000 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may bereproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical,photocopying, recording, or otherwisewithout the permission of Harvard Business School.
A L A N M A C C O R M A C K
K E R R Y H E R M A N
The Rise and Fall of Iridium1
“Rune Gjeldnes and Torry Larsen had been skiing towards the North Pole for twenty-six dayswhen they heard the bad news. On a Monday in early March 2000 their expedition coordinatorcalled from Norway to tell them that the Iridium global phone on which they were speakingtheonly satellite phone which could work in the Arctic and on which they were entirely reliant forcommunicationswas about to be de-activated. Permanently.”2 With another sip of aquavit burninga line of fire down their throats, the explorers tried their handset one last time and listened for thereply. It never came. Just the hiss of static, increasingly lost in the howling winds of the Arctic.Iridium was dying.
Chapter One: The Freedom to Communicate. Anytime. Anywhere
“But we cant go on vacation now, Im just getting close to making this deal work. How can Iclose it from Green Turtle Cayits one of the most remote islands in the Bahamas! They wont evenhave a phone.” Karen Bertiger, a real estate broker in Arizona, complained to her husband Bary inthe winter of 1987. Bary Bertiger had worked at Bell Labs, had designed radars, and had helpeddevelop the Safeguard anitballistic missile system. As a chief engineer in Motorolas strategicelectronics division, Karen wanted to know, why couldnt he devise something simple and useful,like a global telephone system that worked? So goes the legend of the beginning of Iridium.
Back at Motorola, Bertiger raised the possibility of a global phone network with two fellowengineers, Ray Leopold and Ken Peterson. Bertiger, Leopold and Peterson worked in MotorolasSpace and Systems Technology Group, located at the companys satellite facility in Chandler,
1 Much of this cases historical data on Iridium draws on company documents filed with the SEC; David Bennahum, “TheUnited Nations of Iridium,” Wired, 6.10 (October 1998): 134-138, 194-201; and Joe Flower, “Iridium,” Wired, 1.05, November1993
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Arizona. All three had cut their teeth on the race to the moon and other adventures in space.Leopold, a former Air Force pilot, had worked on secure communications for the military with theMilstar satellite system in the 1980s. Peterson created the algorithms that tracked and controlledmilitary satellites. They had been brought together, along with twelve other engineers, in the late1980s by Durrell Hillis, the groups general manager, who was charged with diversifying andcommercializing Motorolas government-dependent space business as the end of the Cold War beganto dawn on the horizon.
At the time, cellular phone technology was just breaking the airwaves. This rapidly proliferatingnew communications technology relied on ubiquitous radio towers that provided coverage for alimited geographic area (called a “cell”). As the caller moved out of the range of the first tower, hercall signal was transmitted on to the tower in the next cell. While the global cellular market in 1985totaled only 250,000 subscribers, it was expected to reach 4 million by 1990. Indeed, AT&T wasforecasting up to 30 million cellular subscribers in the United States alone by the year 2000.3 Theproblem with cellular however, was that there was no reception in areas where towers had not yetbeen built; at the end of the 1980s, reception was therefore limited to a few high-density, urban areas.In addition, physical obstacleslike mountains or tunnelstended to interfere with reception,resulting in a poor quality experience for the user.
The three engineers played with a number of ideas for creating a global communications networkwhich could overcome the limitations of cellular, including a network of high altitude airships, and aweb of remotely-operated airplanes that could serve as transmission links.4 Finally however, Bertigerwent back to the cellular analogy; “Why not flip the whole thing over so it hangs overhead?” hethought, putting towersor, in this case, satellitesinto the sky.5 As they orbit the Earth “whizzingby at 17,000 miles an hour,” the satellites, or “cells,” would move over the caller while she stayedstationary; the call signal would be relayed to the next satellite in succession, as each birddisappeared over the horizon. In this way, reception would not be limited by geographicinconveniences like lack of towers, mountain ranges, polar ice, or oceans.
The engineers ambitious ideas captured Durrell Hillis attention. As the general manager of theSpace and Technology Group, Hillis faced the challenge of reinventing Motorolas space division inthe face of fewer and fewer lucrative cold-war era, government-funded projects. Hillis saw thecommercial arenas of satellites and mobile communications as ideal means for Motorola to make thetransition from its current status as a component-supplier to, eventually, a builder of entire systems.Hillis encouraged the trio to work out the kinks in their plan, funding the project out of MotorolasResearch and Development resources, but keeping it under wraps to protect it from intra-companyR&D competition. As he recalled, “I created a bootleg project with secrecy so no one in the companywould know about it.”6
By August 1988, after 14 months of research and rewrites on the business plan, Hillis felt the teamwas ready to present the idea to Bob Galvin, Motorolas chairman. Galvins response was immediateand enthusiastic, advising Motorola CEO John Mitchell to throw Motorolas full support behind the
3 Judith Bird, “Cellular Technology in Telephones,” data processing, vol. 27, no. 8 (October 1985): 37.4 Bennahum (1998): 194; and Charles F. Mason, “Iridium forges ahead with its grand PCN plan,” Telephony, 1, vol. 25, no. 18(November 1993).5 Bennahum (1998): 194.6 Hillis, as cited in Bennahum (1998): 195. Bennahum cites “ferociously competitive” research projects at Motorola, alljockeying for R&D dollars.
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project. As Galvin said, “If you dont write a check for this John, I will.”7 Finally, in November 1989,Mitchell approved $6 million for another year of development, bringing the skunk-works project intothe open.
Defining the System Architecture
In the late 1980s, communications networks relied upon both cable- and satellite-based links.Underground cables blanketed the globe; those that were underwater were laid by submarine, acostly and sometimes unreliable process.8 Communications satellites tended to orbit the earth at fixedpoints above the equator, about 22,300 miles out, in what is known as a geo-synchronous orbit (orGEOsee Exhibit 1). GEO satellites match the earths rotation, making them appear stationary to aground-based observer. Transmitting/receiving stations (called “gateways”) can therefore send andreceive signals without having to rotate to track them. Given the high orbits of GEO satellites, they“see” a large part of the earths surface. As a result, only three to five of them are required to provideglobal coverage, each with an associated gateway to route outgoing signals up to the satellite andreceived signals back into the land-based telecommunication network.
Unfortunately, Bertiger, Leopold and Peterson knew GEO satellites would not work for theirsystem. While they were highly reliable, they sat too far out in orbit for the weak one-watt signalstransmitted by a mobile phone. Using a higher wattage signal to overcome these problems woulddamage human tissue. The team would need a new kind of communications satellite, placed in a lowearth orbit (LEO). Orbiting the earth between 450-1000 miles out, LEO satellites could provide ahigher quality service, while requiring far less poweranywhere from 200 to 2000 times lessthan aGEO system.9 While some competitors felt that the energy a GEO system required could be solvedwith larger antennas in space rather than more powerful phones, Leopold disagreed. These antennaswere not a proven solution in 1989, and would be extremely costly. Nor did they address otherquality issues, such as the time lag associated with signal transmission. The transit time to GEO wasa quarter of a second each way. A signal to LEO more closely matched the service provided by land-based phones, taking only two to eight milliseconds.10
The advantages of a LEO-based system however, did not come for free. While a lower orbitwould mean smaller satellites, which were easier and less expensive to launch, it also resulted in adiminished field of vision on the earths surface, requiring more satellites for global coverage. Andgiven each satellite remained in view of the caller for only a brief period of time, calls had to beswitched from satellite to satellite very frequently as they passed overhead and disappeared over thehorizon. A low orbit also made satellites more susceptible to “shadowing” (the blockage of signalsby buildings or hills that similarly disrupts cellular service). Finally, since they orbited the earth more
7 Bennahum (1998): 195.8 Satellites provided almost 10 times the telecommunications capacity of submarine telephone cables for almost 1/10th theprice. This price differential was maintained into the late 1980s, when TAT-8 cables (the first fiber-optic cables) were laidacross the Atlantic. In the early 1990s, satellites still maintained two advantages over cable: first, reliability (despite protectivecoating, submarine-laid cable were frequently damaged by trawling gear from fishing vessels, significantly impactinginternational telecommunications) and second, they could be used for point-to-multi-point broadcasting. David J. Whalen,“Communications Satellites: Making the Global Village Possible,” 18 February 1997
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rapidly, moving frequently through damaging temperature transitionsfrom the heat of the sun tothe cold shadow of earth11 LEO satellites would need to be replaced every five years.
One of the biggest obstacles to a LEO system was that communications satellites typically did notrelay signals from satellite to satellite; they only sent/received signals to/from gateways.12 In orderto provide global coverage, a LEO system would therefore require a large number of gateways,substantially increasing the cost of the system.13 To overcome this problem, Bertiger, Peterson andLeopold proposed a radically new concept: a cross-linked network of satellites, flying in low-earthorbit, which communicated directly with each other. With this ability, only one gateway would berequired on the ground to act as a central control, switching all mobile-to-landline calls into theexisting telephone system. Mobile-to-mobile calls would be relayed around the satellite networkuntil they reached their target without using any gateways. The key to such a system was moving thecall-routing information up from the gateways and into the sky, with switching decisions made by acomputer on-board each satellite. It would be the worlds first true satellite-based mobilecommunications system. The three engineers began to converge on a design with 77 satellites inseven orbital planes of 11 satellites each. With an array of 77 satellites, Iridiumthe 77th element ofthe periodic tableseemed the perfect name.
Iridium was not alone in targeting the skies for the next installment of the communicationrevolution. By 1990, several other firms had also proposed satellite ventures, using GEO, LEO andMEO (middle earth orbit) systems (see Exhibit 2). For example, Globalstar, had proposed a LEOsystem similar to Iridiums, but with only 48 satellites, each placed in a higher orbit.14 As a result, thesystem would have significant black-out areas over the poles and oceans. In addition, Globalstarssystem did not use satellite-to-satellite call routing like Iridium, and would therefore require between50-70 ground-based gateways to transfer signals to/from each satellite. Another company, Ellipsat,planned to use satellites placed in elliptical orbits, skewing coverage to more populated areas. AsCEO David Castiel pointed out, “Frankly, my business plan can do without the people on EasterIsland.”15
By comparison with other satellite ventures, the Motorola system was by far the mostsophisticated. Satellites with on-board call routing were complex: They needed computers, andtherefore consumed greater power; they needed to talk to each other, and therefore requiredadditional antennae with more precise positioning abilities.16 Yet while the system was complex, itwas the best answer to the problem; it could handle the greatest number of calls, had the widestcoverage, promised the highest quality of service, and delivered the best level of overall systemreliability. Iridium would be orders of magnitude more effective than the emerging technology ofcellular with its patchy network. And with only one gateway, it would minimize the earth-boundinfrastructure required for global coverage.
11 Bruce Gerding, “Personal Communications via Satellite: An Overview,” Telecommunications, vol. 30, no. 2 (February 1996):35, 77.12 This kind of satellite communications technology is referred to as “bent-pipe architecture,” since the signal is sent up fromthe caller to the satellite, and is then bent back down to the gateway in an upside down U.13 Estimates of gateway costs were around $25 million per location. Marc Crossman and Lior Bregmen, “SatelliteCommunications. Iridium World Communications,” CIBC Oppenheimer (10 December 1997); Casewriter estimates.14 Globalstar planned to locate its satellites in an orbit 900 miles out, in contrast to Iridiums 450 mile orbit.15 Flowers (1993).16 Iridiums satellites would have to send signals to one of four adjacent birds, and “would thus need four separatetransmitting antennas, each pointed to one of the companion satellites. For receiving calls, a satellite would also have 48 spotbeams pointed at Earth, each beam covering an area 375 miles in diameter. One satellite would therefore cover around 3million of Earths 197 million square miles.” Bennahum (1998): 195.
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Chapter Two: Launching the Venture
On June 26, 1990, Hillis and his team formally announced the Iridium project to the public atsimultaneous press conferences around the world: in Beijing, London, Melbourne and New YorkCity. Iridiums system was primarily targeted at voice customers, but would provide paging servicesand some data transmission capability (see Exhibit 3 for Iridiums planned service offerings). Theproject, ambitious at every level, was estimated to cost $3.5 billion to build, with the 77-satelliteconstellation expected to be fully deployed by 1996. Motorola, which had privately funded theproject up to this date, insisted that while they would remain involved and carry a great deal of therisk, the project should stand independently and raise funds from public markets and privateinvestors.17 In 1991 Iridium LLC was therefore incorporated by Motorola as a separate limitedliability company, in order to develop and deploy the network.
With the announcement, skeptical public reaction was unleashed. The press noted in particularthe high cost of service projected, and the significant funds Iridium still needed to raise before anyservice could be offered.18 Skepticism ranged across a spectrum of concerns, including unproventechnology, frequency spectrum licenses yet to be granted from various governing bodies, targetmarkets, revenue models, and competitive pricing factors between Iridium and existing cellularservices. Even Iridiums competitors felt that while a mobile satellite service (MSS) was the way to go,an effective system could be deployed with fewer birds at a fraction of the cost. For example,Ellipsats proposed 12-24 satellite system would charge callers only 50¢ a minute, versus Iridiumsplanned $3 a minute charge.
Iridium executives were undeterred. With its technical solution in place, and 30 employeesalready aboard, Iridiums architects hit the road.19 They conducted extensive research to assess themarket, service needs, and rates; Iridium had to be able to compete with every phone service offered.The management team built a model documenting telephone-call fees between 239 countries, andcame up with close to 60,000 rate variations with which Iridium could potentially compete. Theyresearched the patterns of their target marketpeople on the movescreening 200,000 people,interviewing 25,000 individuals in 54 cities, across 42 countries, and 3,000 corporations with remoteoperations. Their research concluded that most calls made while traveling were made to a callershome city or country. Long distance calling from overseas to home remained one of the last frontiersof high-margin telephony at the end of the 1980s; this would be a lucrative market for Iridium.
17 By 1998, according to analysts, Motorola and its industrial partners would spend more than $150 million on research anddevelopment for Iridium. Steve Franck, “Iridum World Communications (IRIDF): A New Shoe for Get Smart,” U.S. InvestmentResearch, Morgan Stanley Dean Witter (18 March 1998): 30.18 Initial estimates were that each phone would cost $3000, and per minute calling costs would be $3 and up. See Green, “Cashtriggers Iridium countdownMotorolas satellite project has taken the lead,” Financial Times (4 August 1993): 20; and KerryFehr, “Iridium Phone Project Rests With Money,” The Phoenix Gazette (11 June 1993): E1.19 As Bennahum noted, “In 24 months . . . Bertiger made at least 50 visits to potential service partners and investors in 24countries, gaining 30 pounds on airline food. Leopold essentially lived on airplanesMitchell logged over a million miles inthe air while suffering from extreme arthritis, which gnarled his hands. Hillis, while traveling to Guyana, was bitten so badlyby mosquitoes that two weeks later his right leg had swollen, covered with red dots; the malady remains undiagnosed, and henow takes Dapsone, a leprosy drug, daily.” Bennahum (1998): 199.
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Forecasting the market however, was a tricky issue. There were often as many forecasts as therewere forecasters. In 1991, industry analysts estimated that MSS subscribers would exceed 1.8 millionby 2001, and 2.3 million by 2006.20 Iridium itself however, projected a user-base of 1.4 millionsubscribers in 1996, its first year of operation. Furthermore, while the Iridium system could supportup to 10 million subscribers, the company calculated it would be profitable with merely 700,000.21
With such a rosy scenario, Iridium thought it would have little trouble getting financed.They planned to raise approximately $800 million by partnering with a small number of big, blue-chip telecommunications companies like AT&T, and NTTthe Japanese phone monopoly. ButIridiums satellites also functioned as switching stations, relaying calls from satellite to satellite,switching over into landline services only for the last mile. The venture looked very much like aservice provider in this light, and could be seen as a direct competitor to these companies. Notsurprisingly, the big telcos declined the offer. Iridium would have to rethink its financing strategy.
Further problems loomed in securing the valuable spectrum required to operate the service, giventhe team had announced Iridium before the FCC had allocated the desired frequencies. The companyalso had at least 170 countries to lobby in order to get a global spectrum allocation from the WorldAdministrative Radio Conference (WARC). Unfortunately, some countries saw the project as animperialist move by the Americans to monopolize the market for satellite communications. Itrepresented a direct threat to their own Postal, Telephone and Telegraph (PTT) systems, which werepredominantly state-owned at this time, and which generated significant revenues for the state. Asone reporter noted, “It was a case of geekish can-do enthusiasm getting ahead of the ploddingnuances of global lobbying and diplomacy.”22
In response to these problems, Iridium promoted Leo Mondale to take over their internationalefforts, appointing him vice president of Iridium International in December of 1991. Mondale, alawyer by training, had garnered technical and political acumen working for Fairchild Space andDefense Corporation and the French aerospace concern Matra Marconi. In order to get the regulatoryapproval Iridium needed to operate in 170 countriesmany of whom depended heavily on revenuesfrom their PTT authoritiesMondale realized that the technically elegant engineering plan had to becompletely rethought in terms of geo-political realities. The crux of the problem was the singlegateway that would circumvent crucial revenues for many countries over which Iridium hoped toprovide service; the plan, as initially conceived, would never get support from these countries.
Evolving the Plan
Rather than looking for a few major investors, Mondale proposed that Iridium offer portions ofthe company to a broader range of international investors for about $40 million a piece. Instead of asingle gateway, the satellite system would be redesigned to interface with many gatewayseachrepresenting an investment opportunitythat plugged into local PTT systems. These “regional”gateways, each independently managed by an investor and granted board membership, wouldperform uplink and downlink duties, as well as handling switching interfaces to the terrestrial phonenetwork. Billing, location and routing information would also be monitored at these gateways. In 20 Lloyd Covens, “Mobile Satellite Poised for Worldwide Growth,” Communications, (February 1991): 25-30. This was furtherbroken down: 42% business; 18% government and 40% private, including private aircraft, vacation boats, and rural and travelapplications. By comparison, cellular subscribers were forecast to reach 38.7 million by 2000. S&P Industry Surveys,Telecommunications (15 November 1990).21 Covens (1991). See also Thomas F. Watts and Daniel P. Rheingold, “Comment, Iridium World Communications Ltd. GlobalWireless Telephone System Poised For Take-Off,” Merrill Lynch (15 July 1997).22 Bennahum (1998): 196.
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addition, Mondale reworked the investment offer to suit many developing countries: low cashdemands up front, with guaranteed revenue from call traffic on the back end, and freedom to setrates for Iridium calls heading outside their borders. As Mondale put it; “We will give you the samemoney as AT&T, plus discounted shares in Iridium, discounted telephones, and free minutes forgovernment use.”23
By the time of the WARC conference in Spain in 1992, Iridium had gathered enough support fromdeveloping countries to counter the clout of the developed nations who saw Iridium as a threat. Thefirst investor, United Communications Industry Co. of Thailand, signed on and acquired the rights toa gateway in Southeast Asia. One major investor made it easier to attract others to the plan. In 1992,Iridium signed a $3.37 billion contract with Motorola for system development, construction anddelivery.24 Motorola would be Iridiums prime contractor, supplying satellites, gateways, andcommunication products for the Iridium system.
By 1993, 160 countries had agreed to allocate part of the spectrum for LEO systems. As of July,Iridium had secured 14 investors, and raised $800 million in cash; 11 of these investors were to buildand operate gateways. One unanticipated by-product of this new investment strategy was that theboard of directors expanded exponentially. The first meeting of this board in 1993 was heralded bymany as signifying the birth of the first truly multinational corporation, perhaps even the model of a21st-century corporation. As Wired reporter David Bennahum described:
Four times a year, 28 Iridium board members from 17 countries gathered to coordinateoverall business decisions. They met around the world, shuttling between Moscow, London,Kyoto, Rio de Janeiro, and Rome. Resembling a United Nations in miniature, board meetingswere conducted with simultaneous translation in Russian, Japanese, Chinese, and English.25
In September 1994, a second round of equity financing to raise another $800 million wascompleted, bringing total funds raised to $1.6 billion. In 1995, the FCC granted Iridium anoperational license. With the spectrum space finally allocated and the design of the system almostcomplete, the date for commercial activation of the system was set for 1998.
Building the Infrastructure
In the early 1990s there were six companies providing fixed satellite service to the U.S., operating36 satellites with a net worth of over $4 billion dollars. Each year, ten to twenty morecommunications satellites were launched by international providers, including the U.S., Indonesia,Japan, India, Australia, Brazil, France, Germany, Mexico and others.26 Although these numbers hadbeen growing steadily since 1958, no single company had attempted to do what Iridium needed to
23 As cited in Bennahum (1998): 196. As Bennahum noted, the shares were especially appealing: Iridium offered governmentsand other large investors options for the purchase of up to 20,625 Iridium shares at $13.33 a piece. Developing countries couldaccrue dividends on the options, which could then be applied to acquire the stock. In other words, if the country waited a fewyears, the amassed dividends would essentially cover the cost of exercising the optionsmeaning they were, for all intents andpurposes, free. This was not the only benefit for a developing nation; an Iridium system would leap-frog a technologicallybackwards nation straight into the twenty-first century, providing them with a quick and ready-built infrastructure forcommunications, media, etc.24 In addition to the contract to deliver the initial system, Iridium also signed an Operations and Maintenance Contract (OMC)with Motorola. This fixed-price contract was worth an additional $3.184 billion. It stipulated that if anything went wrong withthe satellites that was Motorolas fault, Motorola would replace them at no cost. Crossman and Bregman (1997).25 Bennahum (1998): 136.26 Whalen (1997).
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do: deploy 66 satellites (plus 8 spares) into orbit over a two-year period.27 As Iridiums primecontractor, Motorola faced an unprecedented technical challenge. Foremost among them, Motorolawould have to significantly redesign its satellite manufacturing process.
Traditionally, satellite manufacturing involved clearing a spot on the factory floor, then buildingup the satellite by bringing everything to itit was essentially custom built. Given the large numberof satellites involved in Iridium however, Motorola would have to design an assembly line forbuilding satellites. Hillis commented on how they began:
We had a manufacturing team involved up-frontdoing a lot of pathfinding thingslikebuilding mockup payloads, structures, and antennas, then assembling them. Weve done dryruns of the entire satellite manufacturing process.28
Instead of the traditional vertical environment, where the satellite was built from the ground up,Motorola switched to a horizontal environment. The Iridium spacecraft and subsystems weredesigned as modules, to be assembled horizontally; the bus (the body of the satellite) moved fromstation-to-station through a 12,000 sq. ft. factory that could handle five satellites under constructionsimultaneously. A special wheeled dolly carried the Lockheed-built bus, which permitted rotisserie-like rotation for ease of access during assembly. From the start, parts and subassemblies weredesigned to simplify manufacturing, assembly and testing.29 The assembly line relied on “just-in-time” deliveries from suppliers, eliminating the need for storerooms and “bonded” facilities in thefactory. Motorola did not inspect incoming parts, instead requiring partners and subcontractors todeliver “perfect-quality material” (traditionally, 60% of satellite assembly time was devoted to testingmaterials before they went into the vehicle). As a result, what used to be an 18-36 month process wasreduced to one in which a finished satellite rolled off the line every four and a half days.
Motorola delivered the first complete satellite in 1996. As part of continued funding efforts, $315million in additional equity finance was secured, bringing total project support to $1.9 billion. InDecember, Iridium installed a new leader at the helm; Business Week called CEO Edward Staiano,former president of Motorolas General Systems Sector, a “big gun,” ready to back the multi-billiondollar bet on satellite communications as Iridium headed into the final stages of deployment.30 Asthe year closed, the first ground station was inaugurated in Japan and Iridium began a $140 millionglobal advertising campaign, pitching its phones to businesspeople on company expense accounts.
On 5 May 1997, the first five Iridium satellites were successfully launched on a Delta II rocketfrom Vandenburg Air Force Base in California.31 Fresh on the heels of this success, in June 1997,Iridium raised $240 million through an initial public offering on the NASDAQ (see Exhibit 4 forinvestors as of the IPO).32 At the time, analyst comments were extremely favorable, and many 27 As system development continued, the design team realized they could make do with 11 less satellites (one less orbitalplane) than the 77 that had originally been planned. However, no one asked to change the name to that of element 66,Dysprosium, especially given its root meaning is “bad approach.” Flowers (1993).28 William B. Scott, “Iridium On Track For First Launch in 1996,” Aviation Week & Space Technology (3 April 1995): 5729 According to Larry Casey, Motorolas Iridium manufacturing manager “On a classic satellite, it might take three weeks todisassemble and replace a module in the center. The Iridium system is designed so [modules] can be replaced in 60 seconds.”As cited in Scott (1995).30 Keith H. Hammonds, “A Powerful Boost for Iridium,” Business Week (23 December 1996): 46. Staiano had been anindependent director on Iridiums board prior to his appointment as CEO.31 Launch services were contracted to McDonnell Douglas, using Delta II rockets (five satellites per launch) and RussiasKhrunichev Enterprises, using Proton rockets (seven satellites per launch).32 The stock was issued under the name Iridium World Communications Ltd., which had been registered in Bermuda inDecember 1996 to serve as the public investment vehicle for the company.
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registered the company as a strong Buy. The reaction was not uniform, however (see Exhibit 5). Oneanalysts skepticism summed up the contrarian view: “Until commercial launch in September 1998,there is no quantitative data to defend either bullish or bearish fundamental analysis.”33 Despite this,the stock performed well (see Exhibit 6).
As the satellite launches increased in frequency, development also began to heat up on thesubscriber equipment. The most significant development was a decision to redesign the phone. Inaddition to satellite calls, Iridium now planned to send and receive cellular signals through the use ofremovable cards that enabled the phones to work over nine of the major cellular standards. Thiswould allow Iridium to sell a more flexible offering of services; using cellular where it existed, andswitching to satellite where it didnt. As Staiano acknowledged “[We] underestimated the growth ofcellular.”34 The design change also allowed Iridium to cover a weakness their engineers haddiscovered in the system during early tests: the phones did not work well in buildings, or on thestreets of cities with tall buildings. The development team was less than excited about the redesign,since it meant changing millions of lines of software in the call-tracking and billing system. RandallBrouckman, director of software systems, recalled giving his developers a window of coping time: “Ilooked at my watch, and told them they had 10 seconds for fear and anguish. They shouted Yourenuts! I said, Nine. I hate this. Eight. We counted down, then we went to work.”35
By the end of 1997, Iridium had 47 satellites in orbit, allowing the first pager message to bereceived by Iridium board members. By mid-1998, as the system neared completion, the stock pricehit a new high of $72. Finally, on September 9, the full constellation of Iridium satellites was inplace.36 To mark the occasion, Vice President Al Gore37 placed a call from the White House toAlexander Graham Bells great grandson in Virginia. Bells immortal words“Watson, come here, Ineed you,” were relayed once again, this time being beamed through the earths atmosphere. As onereporter wrote:
For Bary Bertiger, Ken Peterson, and Ray Leopold, Iridium is their masterpiece, the mostambitious and complex commercial space venture of our time. Peterson, sitting at a golfcourse a mile and half from the Iridium launchpad at Vandenberg, has the look of a verycontented man, sipping beer from a plastic cup while colleagues stop by to shake his hand andcongratulate him. He recounts how he recently went out prairie hunting in Arizona with somefriends: We were sitting around a campfire after a great dinner, and pretty soon I saw a LEOwhiz by. And a little later came another. We saw five in one night. Peterson smiles and lookstowards the launchpad. After a millenia of people looking up at the same night sky, were thefirst to put up a new constellation since God. Its never going to be the same again.38
33 Crossman and Bregman (1997): 1.34 Staiano as cited in Quentin Hardy, “Iridium Creates New Plan for Globular Cellular ServiceSystem Would Enable Phonesto Work Over Most Transmission Standards,” The Asian Wall Street Journal (19 August 1997): 18. As early as 1995, analystsforecasts of U.S. cellular subscribers in the year 2000 began to exceed 100 million.35 Brouckman, as cited in Hardy (1997): B6.36 Note that the total cost of building the Iridium system far exceeded the roughly $2 billion of equity raised. The balance wasfunded through bank debt, lines of credit, and the issuance of notes bearing interest rates of between 10.8%-14.5%. For acomplete discussion of Iridium funding and debt structure, see Ben Esty, Iridium, LLC, HBS Case N9-200-039, Rev. March 21,2001.37 Also known for his role in the invention of the Internet, and the infamous “pregnant chad” scandal.38 Bennahum (1998): 201.
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Chapter Eleven: What Goes Up Must Come Down
Iridium had an impressive launch record with its satellites, while other MSS providersmostnotably Globalstarsuffered several losses.39 Unfortunately however, the much-hyped launch ofcommercial service, originally scheduled for September 23, 1998, had to be postponed, due to delaysin handset deliveries and software glitches. Iridium had initially proposed a beta-testing period forthe first seven weeks of operation, which was subsequently reduced to five in the haste to beginservice. But as one analyst remarked, “We do not believe five weeksor seven for that matterisenough time for the company to learn anything meaningful from its Beta subscribers.”40 OnNovember 1, 1998, service finally began.
Early reactions to the phones were mixed. Users reported blocked access, rampant interference,and dropped calls. The phone could not be used in buildings, and initially, could not be used in citieseither. The handset listed at $3,000, with calls costing about $3 a minute, or $7-$8 for internationalcalls. Some expressed surprise at the size of the phoneit was the size of a large brick, and wascarried in a small suitcase. To ensure that a call could be made from anywhere, an array of additionalparaphernalia was also needed. But others saw this size and attendant gear as a potential strength:
The Iridium phone is a virility totem. Its hugeness is a sign of potency, of supremacy andexclusivity, the human equivalent of a silver stripe on a dominant male gorilla. Holding aprototype of the phone, which is about the size of a shoe, with a colossal antenna resembling ajumbo cigar tube, [John] Windolph [Iridiums executive marketing director] recounted thethrill of playing with it at a café in Geneva accompanied by Iridium chairman Robert Kinzie. Ipulled out the prototype, and [everyone] wanted to talk to us. . . . Its so beautiful, thatphone.41
From a competitive standpoint, some of Iridium advantages also appeared to have narrowed.Iridium had originally touted their service as the only truly global offering, but by 1998 cellulartechnology had expanded in unforeseen ways. (See Exhibits 7 and 8.) As one observer noted:
Nineteen-nineties technologies are changing so fast that it is hard to keep up. Iridium [was]designed from a 1980s perspective of a global cellular system. Since then, the Internet hasgrown and cellular telephony is much more pervasive. There are many more opportunities forroaming than were assumed in 1989. So there are fewer businesspeople who need to look foran alternative to a cell phone while they are on the road.42
Of course, for those who needed to make that crucial call while travelling in the jungles of theAmazon, nothing could beat Iridium. As service began, CFO Roy Strong confidently announced that
39 Cynthia M. Motz and Robert J. Hordon “IridiumUp, Up, and Away!” Credit Suisse First Boston Analyst Report (18December 1998): 6, 17. By December 1997, Iridium had lost only 2 satellites, at a cost of $90 million to Motorola. Projectingforward, analysts at CIBC Oppenheimer concluded “Iridium paid an extra $2.5 billion for peace of mind[for the operationsand maintenance contract]for the same amount or less, Iridium could have bought an entire second system, which would beneeded should the first system truly require $3 billion worth of replacements.” Crossman and Bregman (1997): 1.40 Marc Crossman, Lior Bregman, and Ahn Nuyen-Steininger, “Iridium World Communications Delays Highly PromotedCommercial Launch,” CIBC Oppenheimer Equity Research (10 September 1998): 1.41 As cited in Bennahum (1998): 200.42 Professor Heather Hudson, director of the telecommunications program at the University of San Francisco, as cited inBennahum (1998): 200.
The Rise and Fall of Iridium 601-040
11
by the end of 1999, 600,000 subscribers would be signed, meaning Iridium would be operating atbreakeven and could begin to start paying down its debt.43
As the hype of initiating commercial activation faded, subscriber numbers failed to rise in linewith forecasts, and critics began to voice concern. Analyst reports cited “leads” of between 400,000and 850,000 potential customers that Iridium had received in response to its marketing efforts in 1998,with 40,000 “intentions to purchase,”44 but these leads and intentions did not appear to translate intopaying customers. By the end of 1998, Iridium had only 3,000 subscribers.45
As the numbers fell short, Iridium tried to revamp its marketing strategy. Initially, the phone hadbeen aimed primarily for individualsa horizontal market. Perhaps the real market was verticalgovernments and organizations working in remote areas such as oil fields and war zones. So Iridiumrefocused on a new set of targets identified by a well-known consulting firmthe“corporate/industrial user”encompassing industries such as the media, energy, electrical utilities,construction, oil and gas exploration, mining, forestry, shipping and fishing.46 Some successes weremadefor example, CNN was an exemplary client, with much of their coverage of the Balkan Warmade possible by Iridium phones. Despite these changes, however, the figures continued todisappoint.
By March 1999, Lehman Brothers analysts reported that only 7,294 net additional subscriberswere signed up for the first quarter, raising the number of subscribers to just above 10,000.47 Thatsame month, Iridium received a 60-day waiver from its bankers to meet certain terms of their $800million line of credit, includingcruciallya covenant requiring 27,000 subscribers to be signed inthe next quarter. Each successive month, the projected number of subscribers began to slip furtherand further below projections (and more importantly, debt covenants). Iridiums management was inturmoil.
In April 1999, CEO Edward Staiano resigned abruptly, and was replaced by John Richardson.Rumors abounded that Iridiums board sought to head the company with someone they believedcould execute Iridiums business plan effectively and, more importantly, quickly, something they feltStaiano was not doing. Chairman Robert Kinzie said, “Ed has done a magnificent job in getting thesystem to where it is. Now as we move into an era of marketing and financing, basically the boardfelt that new blood was needed at the top.”48 But analysts couldnt agree whether the news was good 43 Roy Strongs comments were reported by Credit Suisse First Boston analysts. Motz and Hordon, “Iridium,” Credit SuisseFirst Boston Corporation (15 January 1999): 3.44 In September 1998, analysts at ABN-AMRO Equities, an Australian firm, reported that Iridiums global advertisingcampaign of July-August attracted 400,000 queries and 40,000 “intentions to purchase.” They acknowledged that subscribertargets were “far more optimistic,” reaching 1 million by 2000, and 5 million by 2003. Ian Martin, Zara Lyons, and RadekBarnert, “Iridium LLC. Delay in mobile satellite service launch,” ABN-AMRO Flashnote (10 September 1998): 1. In December1998, analysts from Credit Suisse First Boston reported that “Iridium had received responses to its marketing efforts from over850,000 prospective customers, with another 200,000 inquiries directed towards Iridium service providers.” The analystsconcluded “Our estimates for the companys subscriber growth are considerably lower than what Iridium is projectingthroughout the model. For example, although Iridium believes it can reach five million customers by the end of 2002, we haveshown total subscribers of only 2.87 million by that time.” Motz and Hordon (1998).45 Rajiv Chandrasekaran, “CEO Steps Down At Troubled Iridium; Firm Having Difficulty Gaining Customers,” The WashingtonPost (23 April 1999): E1.46 Booz-Allen projected more than 270,000 adopters in these vertical markets alone. Tom Watts, “Iridium WorldCommunications Ltd. Full Speed Ahead,” Merrill Lynch Bulletin (22 January 1999): 1.47 John M. Bensche and Robert S. Peck, “Iridium LLC,” Lehman Brothers Global Equity Research (3 May 1999): 1. According toLehmans analysts, “The company attributed the lower than expected numbers to delays in handset manufacturing anddistribution problems.”48 Kinzie, as cited in Chandrasekaran (1999).
601-040 The Rise and Fall of Iridium
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or bad; while Credit Suisse First Boston changed their rating from Buy to Hold in April, LehmanBrothers upgraded the stock from Outperform to Buy in May, and established a year-end target priceof $80.49 As one analyst commented:
Is it the dealer, the cards that have been dealt, or is it the game itself that is the problem?.This is an entirely new industry. Iridium is the first one; there are no comparables up andrunning yet. Hence there is no such thing as more seasoned managers in this specificindustry. When we look at the cards Iridium as a company has in front of it, we are notcertain if any player can pull in a winning hand (i.e. it may just simply be that the businessmodel is too challenging).50
The confused reaction was in part due to mixed signals about Iridiums long-term viability. Atthe end of April 1999, Iridium announced that the United States Defense Department had signed a$219 million three-year contract with Motorola for Iridium equipment, which included the purchaseof 28 million minutes a year.51 By end of May, however, subscriber numbers had still not increasedsignificantly. Contributing to Iridiums problems, Kyocera, the handset manufacturer and an Iridiumconsortium member, was several months late in delivering equipment; without handsets, it madelittle sense to try to sell a service, especially when service providers had several other options to sell.In addition, while several service providers had inked distribution agreements, not even Sprint, anIridium consortium partner, had trained its sales force in time for the launch of Iridiums service.52
In June, Iridium slashed its prices, selling handsets for $1,000, down from the original price of$3,000. Richardson also announced that the company had simplified its pricing structure on airtimecharges; international calls were reduced to $3 a minute, national calls to between $1.60 and $2.50 aminute, and Iridium-to-Iridium calls to $1.50 a minute.53 Richardson exuded confidence: “With ourannouncement today, weve positioned ourselves to be a competitor with anyone in the industrialmarkets. Im confident well be successful.”54
With its heavy cash burn rate, and overwhelming debt responsibilities, however, Iridiumcontinued to sink fast. On August 17, 1999, Iridium filed notification that the companys reported netloss would be “significantly more” than the losses projected in March. The notification also reportedthat on August 13, 1999, less than a year after activation, Iridium had voluntarily filed Chapter 11,and was pursuing a comprehensive financial restructuring. Richardson reiterated his confidence inthe company, “There is no doubt there is a market for this product. Once we get this financialrestructuring out of the way, we are a very competitive element in the marketplace.”55
49 Bensche, “Notes from the Sell Side,” Red Herring (August 1998).50 Motz and Hordon, “Iridium. Changing our Rating from Buy to Hold,” Credit Suisse First Boston Equity Research (23 April1999): 2.51 Bensche and Peck (1999): 2. As the analysts noted: “This is just one of many contracts Iridium expects will be announcedover the next several quarters.” Analysts expected a typical user to consume 50-70 minutes a month.52 Brian Taptich, “Earthbound,” Red Herring August 1999
The Rise and Fall of Iridium 601-040
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By the end of 1999, Iridium had signed only 55,000 subscribers.56 Revenues were reported at $1.54million for the first month of 2000,57 falling far short of covering operating expenses, much less the$100 million-plus per quarter Iridium owed creditors on its $3.4 billion debt. (See Exhibit 9 forIridium financials.) In March 2000, Iridium announced the end of commercial service. In June, thestock was suspended from trading at $0.81.58 Finally, on August 31, 2000 at 4 p.m., the system wasturned off. Permanently. Richardson commented, “Were a classic MBA case-study in how not tointroduce a product. First, we created a marvelous technological achievement. Then, we asked thequestion of how to make money on it.”59
Epilogue: We Are Attempting Re-Entry
Iridium faced one last challenge: How to safely decommission and de-orbit their constellation ofsatellites weighing more than 53 tons? U.S. policy required satellite makers to remove defunct objectsfrom orbit within 25 years; in 2000 the U.S. Space Command tracked about 9,000 orbitingmanufactured objects. For the most part, these objects were brought safely to ground (or ocean) bycontrolling their reentry and timing the final thruster firings properly. As experts noted, Iridiumhardware was within government guidelines for acceptable riskthere was a less than one in 10,000chance that falling debris would hit a person on the ground. Yet no one had decommissioned anorbiting system of such size and complexity.60
While Motorola was working out how to do this, offers to save Iridium were still beingcontemplated. As late as mid-September 2000, former CEO Edward Staiano and a group of investorswere attempting to raise enough funds to buy the system. According to the Chicago Tribune, “Thedealincludes a provision under which the U.S. Department of Defense would agree to pay anunspecified amount for Iridium phone service, thereby ensuring the system would have a certainlevel of revenues.”61 Other ideas for Iridium were also being contemplated: One federal agency evensuggested that the Iridium system might make a good gift for the Neimann-Marcus Christmascatalogue.62
56 Eric Nee, “Iridiums Folly,” Fortune, 20 March 2000
601-040 The Rise and Fall of Iridium
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Exhibit 1 Alternative Satellite Communication Systems
GEO
GEO (geo-stationary orbit) satellites orbit the earth 22,300 miles out. Their orbit takes 24 hours, hencethey move with the earth, appearing stationary to a ground-based observer. A GEO system requiresonly three to five satellites and a small number of ground stations to provide full global coverage.The satellites themselves however, are much larger and more complex than LEO or MEO satellites, inorder to handle the higher level of power required to transmit and receive signals at this distance.They are highly reliable, and suffer less from the rapid decay that lower orbit satellites experience;they therefore last longer (about 7-15 years), making a system less expensive to build and maintainover time. Disadvantages include that they are large, expensive to construct, and expensive to launch;they impose high power requirements on ground units; and they require large cumbersome antennaof some 30 in diameter. GEO signals travel a great distance, creating a noticeable time lag (of up to0.5 seconds), meaning that voice quality is not on a par with landline systems.
MEO
MEO (middle-earth orbit) satellites orbit the earth between 6200 to 9400 miles out. They completetheir orbit in about six hours, so are typically “in view” of a caller for around 90 minutes. A MEOsystem can provide coverage over every inhabited area of the Earth with a small number ofsatellitesas few as 10-12with associated ground stations. Fewer satellites mean fewer launches.Compared to LEO satellites, MEO satellites orbit the earth more slowly, lessening the damagingeffects of frequent transitions from the suns heat to the earths cold shadow. They do not thereforeneed to be replaced as often. Their orbit is close enough to avoid the significant time delaysassociated with a GEO system, although still noticeable at 0.1 second. MEO satellites fly high enoughto reduce the “shadowing” effect of hills and tall buildings experienced by LEO satellites.
LEO
LEO (low-earth orbit) satellites orbit the earth between 450-1000 miles out, traveling at approximately17,000 miles an hour to offset the pull of gravity. They complete an orbit of the earth in about 90minutes, remaining in view of a caller for only a brief period of timearound 15 minutes. Hence callsignals have to be switched between satellites frequently. The footprint, or coverage area of eachsatellite, is comparatively small. It therefore takes many LEO satellites to cover the globe; at least 50for complete coverage. If call-switching technology is not carried on the satellites, many groundstations are required in order to send/receive signals to/from each satellite. LEO systems have lowtransmitting power requirements for both satellite and users transceiver. Each satellite requires anantenna of only 6 diameter. LEO satellites have an average life span of only 5-8 years, primarily dueto damage from radiation and frequent temperature transitions. Because they orbit earth so closely,LEO satellites are susceptible to “shadowing” (signal blockage from hills or buildings). A LEOsystem will continue to operate with the malfunction of one, or even several, satellites. The timedelay for voice or data signals is negligible in a LEO system.
Source: S&Ps Industry Surveys, Telecommunications: Wireless; (June 2000); Richard Dreher, Lawrence Harte, Steven Kellogg,and Tom Schaffnit, The Comprehensive Guide to Wireless Technologies, (Fuquay-Varina, North Carolina: APDGPublishing, 1999) ; Bennahum (1998); casewriter estimates.
601-040 -15-
Exhibit 2 Some Proposed Mobile Satellite Service (MSS) Systems
System (Owner) Application SystemSatellites(spares) Gateways
TargetedLaunch
Actual/ProjectedLaunch
SystemCost
Subscriber UnitCost (phone)
Per Minute Costof Service
Orbcomm (Orbital Sciences Corp.,Teleglobe)
Remote sensoring,industrial control
Little LEOa
35 4 1996 1996 partial service1998 full service
$190 M $500 $.25 per message
Comsat Planet 1 (Inmarsat) Mobile voice, data GEO 2 1996 1997 $750 M $3,000 $3AMSC Skycell
(Now called Motient)Mobile voice, data GEO 4 40 1995 1997 $5.5 B $2,000 $1-$1.45
VITA (NFP) Messaging and High-speed data
Little LEO 2b
25 1996 1997 $150 M $500 N/A
Iridium (Motorola, others) Mobile voice, data Big LEOc
66 (+6) 11 1996 1998 $4.9 Bd
$3,000 $3
Globalstar (Loral, Qualcomm) Mobile voice, data Big LEO 48 (+8) 38e
1997 2000 $3.26B $750-$1,000 $.35Ellipso (Boeing, Lockheed Martin,
Harris, L-3Com, others.)Mobile voice, high-speeddata
MEO 14-20 1999 2002 $1.5B $1000 $35 per month$.50 per minute
Skybridge (Alcatel, Loral) High-speed data Big LEO 80 Thousands 2001 2002 $4.1B $700 $40 per monthSpaceway (Hughes, DirecTV,
PanAmSat)High-speed data, video,bandwidth-on-demand
GEO 2 (FirstPhase)
Personalsatellite dish
1999 2002 (N. America) $3.2 B N/A $1 per 10mb
Leo One (dBX) Messaging, Hi-speeddata, Vehicle tracking, etc
Little LEO 48 3 (U.S.) 2003 $250 M $75-$400
Teledesic (McCaw, Gates, Boeing,others)
High-speed data, video Big LEO 288 1998 2005 $9-$15B $1,000-64 Kbps,$6,000-2Mbps
$.04
New ICO (Inmarsat Consortium,McCaw, others.)
Mobile voice, data, fax MEO 10 (+2) 2003 $4.6 B $2,000 $1-$2
Astrolink (Lockheed Martin, TRW,Telespazio, Liberty MediaGroup)
Video/Broadband GEO 4-9 4 1999 2003 $1.3B
M-Star (Motorola) High-speed data Little LEO 72 1999 Absorbed byTeledesic
$6.1 M N/A N/A
GE Starsys (GE) High-speed data Little LEO 24 1998 Cancelled. LicenseReturned in 1997.
$170 M $500 N/A
Celestri (Motorola) High-speed data, video Big LEO/GEO
63 2001 Absorbed byTeledesic in 1998
$12.9 B N/A N/A
Odyssey (TRW and Teleglobe) Fixed wireless telephony,cellular extension
MEO 12 7 1997 Cancelled. LicenseReturned in 2000.
$3.2 B $500-$700 $.65
Source: Emmett (1997); Harte, Dreher, Kellogg and Schaffnit (1999); Lo, “Space Jam,” Wired, 6.10 (October 1998);
aLittle LEO systems have fewer smaller satellites, and are designed to provide voice and data service at lower baud rates.bVITA (Volunteers in Technical Assistance) operates a LEO system with 2 satellitescBig LEO systems have numerous larger satellites, and are planned to provide high-speed data and Internet access services (or broadband) to consumers.dAlthough Iridium was initially projected to cost $3.5 billion, by 1997 its cost was anticipated to be $4.9 billion. Emmett (1997).eThis did not provide full global coverage: 50-75 gateways would be needed to achieve this.
601-040 The Rise and Fall of Iridium
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Exhibit 3 Iridium's Planned Services (as of 1991)
Type of Service
Geo-positioning and two-way messaging An RDSS-type unit to be used for automatic locationreporting and two-way messaging.
Digital voice transmissions Two-way, high-quality, 4800-bps voice communication usinghandheld, portable, and vehicle-mounted terminals. Iridiumphones should be available in combination with terrestrialcellular phones with a GPS unit.
Facsimile Two types of mobile facsimile units: a stand-alone and onedesigned to be used with an Iridium phone.
Data transmission A modem that works with the Iridium voice terminal toprovide data transmission at a 2400-bps rate.
Global paging An alphanumeric pager for instantaneous global paging. Itis similar in size and performance to present-day terrestrialpagers and capable of receiving messages inside buildings.
Source: Jim Foley, “Iridium: Key to Worldwide Cellular Communications,” Telecommunications, (October 1991): 23-27.(NB: At that time, Foley was manager of business development at Motorola, Inc.s Satellite CommunicationsDivision).
The Rise and Fall of Iridium 601-040
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Exhibit 4 Iridium Investor and Gateway Structure
Strategic Investor % Owned Regions Served DescriptionMotorola, Inc. 19 North America, Mexico,
Central America, SouthAmerica, Caribbean
Primary contractor to Iridium and gatewayoperators
Nippon Iridium (Bermuda)Limited
11.3 Japan Subsidiary of Nippon Iridium Corporation,consortium consisting of DDI, Kyocera(supplier of Iridium subscriber equipment)and other investors
Vebacom Holdings, Inc. 8.9 Europe, including Austria,Bulgaria, Czech Republic,Finland, Germany, Hungary,Ireland, Israel, Norway,Poland, Portugal, Romania,Spain, Sweden, Slovakia,Ukraine, United Kingdom
Indirectly owned by VEBA AG (Germany)
Iridium World Communications 8.5 N/A Public investment vehicle, traded onNASDAQ.
South Pacific Iridium Holdings,Ltd.
5.4 South Pacific region,including Australia and NewZealand
Subsidiary of P.T. Bakrie & Brothers
Krunichev State Research andProduction Center
4.4 Russia and eight otherrepublics of theCommonwealth ofIndependent States
Russian federation (state-owned)aerospace engineering andmanufacturing company (provided launchservices)
Iridium Middle EastCorporation
4.3 Middle East, Morocco,Egypt, and Central Asia
One-half owned by Mawarid and one-halfowned by Trinford Investments, SA(affiliated with Binladin Group of SaudiArabia)
Iridium Italia S.p.A. 4.0 Europe (including Belgium,Denmark, France, Greece,Italy, the Netherlands,Switzerland)
Affiliate of STET, Italian integratedtelecommunications group (providesvarious engineering service to Motorolafor Iridium system)
Iridium Canada, Inc. 3.8 North America One-third owned by Motorola, two-thirdsby subsidiaries of Bell Canada
Iridium China (Hong Kong) Ltd. 3.8 China, Mongolia, HongKong and Macau
Owned by China Aerospace (subsidiaryChina Great Wall Industries providedlaunch services)
Iridium India Telecom Limited 3.8 Indian Subcontinent Owned by consortium of Indian financialinstitutions and Motorola subsidiary
Korea MobileTelecommunications Corp.
3.8 North Korea and SouthKorea
Subsidiary of Sunkyong Business Group
Pacific Electric Wire & CableCo., Ltd.
3.8 Indonesia, Brunei, PapuaNew Guinea, the Philippinesand Taiwan
Diversified international corporation
Sprint Iridium 3.8 North America Indirect wholly-owned subsidiary of SprintCorp.
Thai SatelliteTelecommunications Co., Ltd.
3.8 Southeast Asia Owned by United CommunicationsIndustry Co., Ltd. of Thailand
Iridium Andes-Caribe 3.1 South America andCaribbean
Consortium of private Venezuelaninvestors
Iridium Africa Corporation 2.1 Africa, excluding Moroccoand Egypt, and Turkey
Owned by Mawarid Overseas CompanyLimited
Iridium Brasil Ltda. 2.0 South America andCaribbean
Majority-owned by Inepar
Lockheed Martin Corporation 1.1 N/A Principle subcontractor to Motorola inconstruction of satellites for Iridium
Raytheon 0.6 N/A Principle subcontractor to Motorola inconstruction of main mission antennas forsatellites
Source: Iridium S1/A Registration Statement (6 June 1997) 116-117.
601-040 -18-
Exhibit 5 Selected Analyst Ratings, Target Share Prices, and Subscriber Projections
Credit Suisse First Boston Lehman Brothers Merrill Lynch Morgan Stanley Dean Witter CIBC Oppenheimer
1997 No coverage. Nov: Initiate at OUTPERFORM.
1998 target share price of $52.
Project 825K subscribers by 1999.Project 3.85M subscribers by 2002.
Jul: Initiate at ACCUMULATE.
1998 target share price of $54.
Project 4.1M subscribers by 2002.
No coverage. Oct: Initiate at HOLD.
No target share price
Project 20,000 (low-end) to180,000 (high-end) subscribers infirst 12 months of service.
1998 Dec: Initiate at BUY.
1999 Target share price $57.
Project 4,000 subscribers in 1998.Project 735K subscribers by 2000.
Jul: Changed to BUY.
1999 Target share price $80.
Project 9,000 subscribers in 1998.Project 1M+ subscribers by 2000.
Jul: Changed to NEUTRAL.Oct: Changed to ACCUMULATE.
1999 Target share price $82.
Project 40,000 subscribers in 1998.
Mar: Initiate at NEUTRAL.
No target share price.
Project 95,000 subscribers in 1998.Project 1.7M subscribers by 2000.
Continue at HOLD.
No target share price.
Project 17,000 subscribers in 1998.
1999 Apr: Changed to HOLD.Jul: Changed to SELL.
Project 91,000 subscribers in 1999.
Aug: Changed to NEUTRAL.
Apr: 1999 Target share price $74.May: 1999 Target share price $30.
Project 478K subscribers in 1999.
Mar: Changed to NEUTRAL. Aug:Changed to Under Review.1999 Target share price $64.Project 600K subscribers by 2000.
Continue at NEUTRAL.
No target share price.
Project 230K subscribers in 1999.Project 860K subscribers by 2000.
No coverage.
Source: Selected analyst reports; casewriter estimates.
The Rise and Fall of Iridium 601-040
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Exhibit 6 Iridium Stock Performance
Stock Price at Month End
0
10
20
30
40
50
60
70
Jun-97
Aug-97Oct-97
Dec-97
Feb-98
Apr-98Jun-98
Aug-98Oct-98
Dec-98
Feb-99
Apr-99Jun-99
Aug-99Oct-99
Dec-99
Feb-00
Apr-00Jun-00
Source: Adapted from OneSource data.
601-040 -20-
Exhibit 7 U.S. Wireless Industry Historical Development (Cellular and PCS)
1991 1992 1993 1994 1995 1996 1997 1998 1999 F2000 F2001
Market penetration (%)a N/A 2.5 6.2 9.2 12.9 16.6 20.0 25.0 29.0 33.0 36.0Subscribers (in thousands) N/A 10,000+ 16,009 24,134 33,786 44,043 55,132 69,200 86,047 107,100 134,500Annual growth in subscribers N/A N/A 45.1 50.8 40.0 30.4 25.6 25.1 24.3 24.5 25.6Monthly $ per subscriber N/A N/A 61.48 56.21 51.00 47.70 42.78 39.43 41.24 42.00 43.00Industry revenues ($M) N/A N/A 10,892 14,230 19,072 23,635 27,486 33,133 40,018 48,025 57,630Annual growth in revenues N/A N/A 39.2 30.6 34.0 23.9 16.3 20.5 20.8 20.0 20.0
Source: Cellular Telecommunications Industry Association, Standard & Poor Industry Surveys, Telecommunications: Wireless (1990, 1991, 1992, 2000).
Notes:aCalculated by S&P based on Census Bureau data. F=Forecasts by S&P. PCS=Personal communications service.
Exhibit 8 Key Indicators for the World Telecommunications Service Sector
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000e
Mobile cellular subscribers (millions) 11 16 23 34 55 91 145 214 319 472 650Main telephone lines (millions) 520 546 574 606 644 691 740 792 844 905 970Intl. telephone traffic minutes (billions) 33 38 43 48 56 62 71 80 90 100 110Revenuea for Services $B (excluding International) 396 419 461 491 530 615 673 702 744 792 840Revenue for Equipment $B 112 119 132 138 161 182 213 237 260 290 320Total Revenue 508 539 593 630 691 797 885 939 1004 1082 1,160Revenue for Services $B: Detailed BreakdownTelephoneb 356 373 394 410 444 497 508 500 500 480 460Internationalc 33 37 43 46 47 53 53 54 56 58 60Mobile 11 15 23 33 47 75 104 129 154 192 230Otherd 29 31 44 48 39 43 61 73 90 120 150
Source: International Telecommunication Union, 2000.
Notes:aCurrent (2000) prices and exchange rates.bRevenue from installation, subscription and local, trunk and international call charges for fixed telephone service.cRetail revenue.dIncluding leased circuits, data communications, telex, telegraph and other telecom-related revenue.
601-040 -21-
Exhibit 9 Iridium Consolidated Statements of Loss (thousands)
1996 1997 1998 1999Q1a Q2b Q3bSep 1999a
(14th-30th)October
1999aNovember
1999aDecember
1999aJanuary
2000a
Total Revenues — — 186 1,451 N/A N/A 591 1,225 1,277 1,490 1,548
Operating Expenses:Sales, general and administrative 70,730 177,474 435,861 181,810 9,908 10,841 10,754 10,166 8,009Depreciation and amortization 674 119,124 551,912 205,901 39,147 7,519 69,144 69,218 68,739Operations & maintenance expense 14,285 25,209 25,209 25,209 25,209Pension expense adjustment (380) (1,770)Total operating expenses 71,404 296,598 987,773 387,711 N/A N/A
Operating loss 71,404 296,598 987,587 386,260 N/A N/A 63,551 41,799 106,384 106,083 103,505
Other income and expenses:Interest (income) expense, net (2,395) (3,045) 265,214 119,141 3,567 7,519 7,391 7,981 8,574Loss before income tax provision 69,009 293,553 1,252,801 505,401Provision for income taxes 4,589 — — —
Loss before reorganization items 73,598 293,553 1,252,801 505,401 N/A N/A 65,936 109,872 111,221 114,064 108,983
Reorganization Expense Items:Professional fees 1,104 2,847 1,212 1,810 2,241Employee retention costsc 2,374 2,474 2,176Workforce reduction costsd 1,140 (19) (6)Interest income (445)e (1,031)e (587)e (862) (812)
Net Loss 73,598 293,553 1,252,801 505,401 N/A N/A 67,7335 111,669 114,214 114,506 112,588
Source: Iridium LLC Annual and Quarterly Reports; casewriter estimates.
Notes:a1999 and 2000 figures are unaudited.bQ2 and Q3 reports were not filed.cEmployee retention figures not available for October 1999.dWorkforce reduction costs not available for December 1999.eInterest earned on accumulated cash resulting from Chapter 11 proceedings.
601-040 The Rise and Fall of Iridium
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Exhibit 10 Iridium Time Line
1987 Motorola engineers Ray Leopold, Bary Bertiger and Ken Peterson conceive Iridium system andbegin research and development.
1988 Iridium gateway concept is developed; satellite constellation system will interface with existingterrestrial telephone systems around the world through ground station gateway.
1990 Iridium system announced at simultaneous press conferences around the world.1991 Iridium, Inc. is incorporated. The U.S. government reserves radio frequencies for Iridium LEOs.1992 The World Administrative Radio Conference (WARC) and the global regulatory body (the
International Telecommunications Union, or ITU) allocates spectrum for Global Mobile SatelliteService (MSS) providers. The FCC grants experimental licenses to Iridium. Iridium signs a $3.47billion contract with Motorola for system development, construction, and delivery. Motorola,Lockheed, and Raytheon commence full-scale research and development. Motorola becomesprime contractor supplying satellites, gateways, and communication products for the Iridiumsystem.
1993 Iridium completes the first round of financing, securing $800 million in equity. Space System andOperations and Maintenance Contracts with Motorola are effective.
1994 Iridium, Inc. completes second round of equity financing; $1.6 billion total capital raised.Preliminary design reviews of Iridium system are completed. Gateway Authorization Agreementsexecuted.
1995 FCC grants Space Segment license, essentially an operating license for the Iridium system. Datefor commercial activation set for 1998. Registration statement with the U.S. Securities andExchange Commission is filed. Board of directors adopts Iridium Global Ownership program.Critical design reviews for the Iridium system completed. Terrestrial Network DevelopmentContract with Motorola executed. Eleven Gateway contracts signed with investor organizations.Prototype phones become available for lab testing.
1996 Iridium secures an additional $315 million in funding, and obtains $700 million bank facility. Full-scale manufacture of Iridium satellites begins. First ground station inaugurated in Japan. Kyocerabegins development of Iridium subscriber equipment. Iridium agrees with other MSS providers toa frequency-use plan, allowing them to cooperate in efforts to secure global authorizations forradio-frequency spectrum use.
1997 First Iridium satellite launched May 5; 47 satellites successfully placed in orbit. Offers a total of$240 million in stock through an IPO, and completes debt financing of $800 million, representingfull funding through the beginning of commercial operation. Receives authorization from nationalgovernments to proceed with construction and testing of nine ground station gateways. Mastercontrol facility substantially completed. System testing begins with prototype phones. First pagermessage delivered by orbiting satellites, received by Iridium board members. Company obtainsadditional service providers, roaming agreements and operating licenses worldwide.
1998 Iridium completes deployment of 66-satellite constellation on May 17. Agreements negotiatedwith some 165 service providers and 155 roaming partners. All 12 Gateway stations become fullyoperational. Commercial voice operations begin November 1; commercial paging operationsbegin November 17. Iridium donates telephones and airtime to Central American relief efforts inthe aftermath of Hurricane Mitch.
1999 Relief organizations in the Balkans receive free Iridium telephones and airtime in Kosovo refugeecrisis. Iridium LLC announced comprehensive financial restructuring through a voluntary Chapter11 filing.
2000 Iridium ended commercial service 17 March. Iridium system shut down on 31 August.
Source: Company information; Motz and Hordon (1998); casewriter research.
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