Satellite Venture Will Go Down in Flames, Literally
Like 66 flying Edsels, the satellites that make up the pioneering Iridium global communication system will be deliberately incinerated in the Earth’s atmosphere, marking the ignominious end of one of the most costly technological and business debacles in history.
A bankruptcy judge in New York gave the mobile phone company permission Friday to destroy the satellites after it said it had not received any suitable bids and would cease service to an estimated 55,000 customers at midnight.
Washington-based Iridium aspired to be a global wireless phone system for travelers ranging from mountain climbers to businesspeople who, it was reasoned, were desperate for a way to keep in touch with home no matter where they wandered.
But it foundered on some familiar foes of ideas too grand for their moments in time: cost, competition and the hyperactive pace of technology.
Over the next nine months, engineers from Motorola, which conceived of the system in 1987, will nudge the satellites out of their orbits 485 miles above the Earth and into trajectories designed to burn them up over the ocean. The entire process will take as much as two years and cost as much as $50 million--a drop in the bucket, considering that Iridium cost about $7 billion to build and staggered under a debt load of $4.4 billion.
The satellites, which are estimated to have a remaining life of only two to three years, are of little value except as elements of the Iridium system, analysts say.
The end of Iridium caps a stunning corporate embarrassment for Motorola Inc., which as the company’s operator and lead investor has lost billions of dollars. Motorola, headquartered in Schaumburg, Ill., also faces lawsuits from bondholders, who are on the hook for most of the debt.
“It was a very ambitious plan,” said James Walz, head of Iridium North America, an independent company that marketed the service in that region and accounted for about half the total customer base. “Had more things fallen together the right way, it might have succeeded.”
But part of the underlying drama of Iridium was its enormous complexity, both as a technical undertaking and a business proposition. Named after the element with atomic number 77 because that was the number of satellites in its original design, the system was scaled back to a constellation of 66 even before the first bird was launched in 1997.
No less daunting was the task of holding together the system’s consortium of 16 international companies charged with marketing and distributing the service in their regions--some of which had more trouble getting off the ground than the satellites themselves.
“On the whole it was very complex to tie together,” said Walz.
The rest of the story is one of billions bet on a technology that looked cutting-edge when it was conceived but obsolete almost the moment it went into operation.
The Edsel analogy is an apt one. Like that 1950s design and marketing disaster by Ford Motor Co., the system suffered from an overly long lead time from conception to launch--in Iridium’s case, 10 years.
That was a fatal flaw, given the speed with which telecommunications technology roared ahead in that period. Iridium was originally aimed at businesspeople who could not depend on wireless phone service when traveling abroad. The company believed that businesses would pay a healthy price to equip their staffs with phones that kept them reachable wherever they were in the world.
But by November 1998, when service began, cellular service had vastly improved and come down to competitive price in most industrialized countries. Iridium’s prime market had shrunk to encompass relief workers in the wild and oil service workers at sea or in the desert.
“This all took place when the competing technology of cellular phones was developing very quickly,” says Marco Caceres, a telecommunications analyst at the Fairfax, Va., firm Teal Group. “It’s moving so fast that by the time you build it and launch it, it’s old.”
Upon launch, the system promptly displayed some high-profile shortcomings. When the Kosovo crisis erupted last year, squadrons of journalists and relief workers arrived carrying the brick-sized units, only to find out that their connections had a tendency to break off after a few minutes outdoors and weren’t functional at all indoors.
Asked at the time why subscribers had so much trouble using the phones in the field, a company spokesman sniffed: “It sounds like they haven’t had any training. If people don’t use it properly, it won’t work.”
Even on the open sea, another prime marketing niche--one of Iridium’s early ad campaigns stressed the joys of remaining in touch on the main--sailors complained that their connections often cut out when their rigging blocked the signal stream between phone antenna and satellite.
Then there were the phones, so big and unwieldy, with huge antennas, that they became a global joke--when they could be found at all.
Iridium launched its marketing campaign, built around starry vistas and a New Age global sentiment, before it could actually get units into its customers’ hands. The Japanese electronics company Kyocera, an 11% owner of Iridium, ran into quality control problems in its plants that prevented it from shipping significant quantities of phones until March 1999, five months after the service launched. Motorola rolled out its phones on time but not important accessories, such as parts for dual-mode phones that allowed users to switch easily between cellular systems and the satellites.
Price was another hurdle. The phones cost more than $3,000, and discounts were hard to come by. And calls cost as much as $7 a minute. By the time the Iridium service was rolled out, cell phone companies were giving their phones away in order to entice users to run up hefty bills.
The upshot was that Iridium fell drastically behind in its business plan within four months of the launch. By March 1999, the company said in public filings, its bankers had required that it have 52,000 subscribers and $4 million in total revenue. In fact, it only had 10,300 customers and revenue of a bare $195,000.
That placed it in default of its agreements with lenders and bondholders, who forced the company into bankruptcy in August. There followed about seven months of financial brinkmanship. For a brief moment it appeared that cell phone pioneer Craig O. McCaw, who is trying to build his own satellite telecommunications network, might buy Iridium in a fire sale and fold it in with its other ventures, but even he turned up his nose.
In hindsight, the Motorola engineers made some fundamental miscalculations, if only because they were building a 21st century system with 1980s technology. The Iridium satellites were designed as “process payload” units, which meant that they processed the communication signals coming from the ground before sending them on.
That made sense for a system with Iridium’s other design features, including its aim to carry only voice traffic originating in remote places without any communications infrastructure on the ground. But it increased the cost and weight of each satellite and made it hard to reconfigure them to meet new telecommunications demands, like high-speed data traffic.
Many engineers believe today it is better to think of satellite systems simply as “bent pipes” that take signals processed on the ground and reroute them from ground station to ground station.
For all that, many in the telecommunications industry believe, like Walz, that Iridium might have succeeded if it hadn’t been broken by its financing problems.
“It was still attracting customers, even with all the bad publicity,” said Caceres, noting that subscribers had grown to 55,000 from 10,300 in the last year. “What killed Iridium was its debt load. It really ran out of time.”
