Iridium 20th Century Case


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Iridium 20th Century Case

  1. 1. Iridium: The Largest International Project of the 20th Century When Motorola Inc. executives dreamed up a globe-girdling satellite communications system to connect wireless telephone users anywhere on earth, it seemed like a grand idea. Motorola's engineers built a 66-satellite orbital network with technology so complex that Motorola CEO Christopher B. Galvin has called it ''the eighth wonder of the world.'' -- Business Week, August 30, 1999 Endeavours like this are not rare at Motorola. During it’s nearly 70 year history, Motorola successfully negotiated commercial and technological risks while enjoying the rewards associated with being first to market. One of the company’s first successes -- the first battery free car radio – only emerged after two bankruptcies. A series of economic recessions during the company’s early days and several failures resulted in its founder Paul Galvin being quoted as saying: "Do not fear mistakes. Wisdom is often born of such mistakes. You will know failure. Determine how to acquire the confidence required to overcome it. Reach out." 1 Global Announcement On June 25th, 1990, senior Motorola executives announced their ambitious plans to the world at simultaneous press conferences in Beijing, London, Melbourne and New York. In its initial 1,151 word press release, the company described the market for its constellation of low earth orbit satellites as: Anticipated Users The Iridium system will support millions of users worldwide, with a total capacity more than 10 times greater than current geosynchronous satellite systems. For low-density areas lacking cellular phone networks, Iridium will be an ideal alternative for mobile telephone service. In sparsely populated or underdeveloped areas lacking basic telephone service, Iridium can be a foundation for an eventual ground telephone system. For ships and aircraft, Iridium will provide voice or data links and positioning information without the sophisticated on-board telecommunications hardware now required. Since Iridium is not dependent on land-based communications links, it also would play a crucial role in disaster-recovery efforts following earthquakes, hurricanes or other natural calamities. -- Burson-Marsteller, June 26, 1990, New York, NY The costs for this space based capability were projected to be in the area of US$2.1B and would require about 6 years to complete. With 700,000 subscribers paying an estimated US$3.00 per minute, company officials said that the system would achieve break-even. Various media sources at the time reported that Iridium would probably be successful despite the immense technological and political challenges the company would have to overcome. The relative weight of issues discussed in its first press release appeared to confirm that belief. For all the hoopla, the Schaumburg, Illinois company’s stock declined $3.125 to US$81 on the day following its US$2B+ announcement (1989 sales were US$8.9B). Analysts, enthusiasts and critics alike agreed on one thing -- that Iridium was going where no company had gone before -- creating a pan- national, born global firm that would simultaneously launch business operations in more than 100 countries on its commercial birthday. 1 Harry Mark Petrakis. The FoundersTouch. 1965, p. 226
  2. 2. Iridium: The Largest International Project of the 20th Century I Initial Concept Inspiration & Development During the mid to late 1980’s, Durrel Hillis lead Motorola’s Space Systems and Technology Group (SSTG) in Chandler, Arizona. There he assembled a cadre of 15 engineers to help the firm diversify its government business into more commercial endeavours. Three of those newly hired engineers, Bary Bertiger, Raymond Leopold and Ken Peterson would go on to develop the Iridium concept. In a National Air and Space Museum interview, Peterson credits Bertiger with the original idea 2. Various media reports and personal web statements attribute the inspiration of the Iridium concept to his fiancé, Karen. The story reads like a novel: In late 1985, Karen and Bary were planning a honeymoon vacation to Green Turtle Cay in the Bahamas and learned that there was no wireless coverage. As a realtor, Karen knew that constant communications was essential and refused to go. She asked her very smart husband- to-be why he couldn’t design a phone system that would work all over the world. Her website statement recalls the conversation as follows: “If you are such a smart guy why can you patent the communications system used in the Voyager spacecraft and bring back astronauts' voices from the moon, while people still can't make a cellular phone call from anywhere on earth? 3” In the end, they didn’t take a honeymoon but Bertiger returned to his office and consulted with his colleagues. With the benefit and experience of notable space careers, the three contemplated moving the cellular infrastructure from the ground into space. The principal disadvantage of terrestrial systems was signal coverage that could in theory be eliminated simply by moving the cell towers from land to space. The opportunity was appealing for both Mr. Hillis’ diversification goals and the promise of truly global communications to and from anyplace on the planet. Uncontested media reports described Motorola’s innovation process as groups of warring tribes vying for scarce resources that tend to put forth the best opportunities. Infighting has often been criticized at Motorola since it tends to hide the real competition. For example, the delays caused by internal jockeying caused Motorola to lose the market race in 1986 for the second generation of its highly successful 68000 microprocessor 4. Senior executives such as former CEO George Fischer supported the peculiar culture insisting that “out of conflict comes catharsis” 5. He admits that he was “uncomfortable” and “amazed” at the internal conflict during the early stages of his Motorola tenure and that in fact some meetings became verbally violent. Despite the uniquely emotional style, the “survival of the fittest” philosophy resulted in the identification and correction of mistakes – something prized by a company that was one of the first winners of the prestigious Malcolm Baldrige National Quality Award. To turn the radical “cellular network in space” idea into a working concept the effort drew on Motorola’s unique innovative processes. From late 1985 through 1988, the three worked in secrecy because they believed their idea would draw criticism from other groups seeking the same corporate resources. They considered many options such as flying airships and unmanned aircraft, but in the end the more reliable and expensive satellite alternative proved a practical alternative. Minority Reports 2 Martin Collins. “One World… One Telephone: Iridium, One Look at the Making of a Global Age’, History and Technology”, 21:3, 301-324. Mr. Collins is a curator at the U.S. Smithsonian’s National Air and Space Museum, Space History Division, Washington, D.C. 2005. 3 Karen Bertiger. “Karen Lee Bertiger's Resume & Professional Affiliations”, <> (accessed on November 27, 2009). 4 G. Christian Hill and Ken Yamada. “Staying Power: Motorola’s Record Shows Giants Can Be Nimble Too”. Wall Street Journal (Asian Edition). Dec 10, 1992. p.1. 5 Ibid. 1
  3. 3. Iridium: The Largest International Project of the 20th Century The first major challenge the three faced involved getting approval for development resources. The group’s immediate boss felt the project too large and expensive however, Motorola engineers had another option that was designed to keep information flowing to the top freely. Using something akin to a “minority report”, ideas could bypass a Motorola employee’s supervisor if the person felt that their proposal should be given further consideration. The original 68000 microprocessor was one example of a minority report and the Iridium concept was another 6. So when Chairman Bob Galvin and Vice- Chairman John Mitchell came to town in 1988, Bertiger made his pitch to the top two executives at the firm. According to the Wall Street Journal, after hearing the pitch, Motorola’s Chairman Galvin turned to a somewhat hesitant Mitchell and said “If you don’t write a check John, I will.” 7 “Out of my own pocket.” 8 II The System The newly established Iridium development group would face a multitude of hurdles such as regulatory, financial, political and commercial challenges, but the most pressing was an initial technical design that could be locked-down and validated. The technical dimension represented a Motorola competency and insiders believed that they would be able to solve those challenges. The system was broken down into three main segments: the Space Segment, the Ground Segment and the Service Provider Segment. Space Segment The satellite system options included existing geostationary satellites (GEO) which were fixed and located about 22,300 miles above the earth’s surface, medium earth orbit satellites (MEO) which orbit in the five to six thousand mile altitude range above the earth, and low earth orbit (LEO) satellites which fly in the range of 400-700 miles above the earth. Geostationary systems that cover a fixed area of the earth and require only three birds were quickly eliminated because the minimum round trip propagation delay of 240 milliseconds (nearly one quarter of a second) was estimated to be a poor quality consumer experience. In addition, the longer transmission distance required much higher handset power levels and users in higher latitude locations would suffer from lower elevation angles which could interfere with signal reception. MEO’s and LEO’s presented the best option considering power, safety, usefulness and a good customer experience. However, the tradeoffs were costly. MEO’s required 10-15 satellites for full global coverage and LEO’s needed estimated 40-80 satellites depending on the orbit altitude 9. For Motorola engineers, the LEO option reduced the propagation delay as well as permitted the construction of smaller and lighter satellites with sufficient onboard fuel for an estimated 5-7 year lifespan 10. Table 1: Satellite Communication Propagation Delay Delay LEO MEO GEO (Altitude, miles) (480) (5,000-6,000) (22,300) Minimum (ms) 2.60 34.5 195.0 Maximum (ms) 8.22 48.0 370.0 Source: Flystveit and Johannessen (1988) For complete global coverage, the LEO constellation would require a total of 77 satellites positioned in 11 polar orbits. Each satellite would have an onboard telephone switching computer that would be able 6 Ibid. 7 Ibid. 8 David Bennahum, “The United Nations of Iridium”, Wired, October, 1998: p. 134-138. 9 Flystveit and Johannessen. “Global Mobile Personal Communications by Satellite”. Telektronikk, February, 1998. p. 22. 10 With an orbit of 485 miles above the Earth, LEO satellites would only require a 6 foot diameter satellite antennae as opposed to 30 foot antennae diameters for other systems. 2
  4. 4. Iridium: The Largest International Project of the 20th Century to route calls based on the number dialled just like terrestrial systems. Further, Iridium satellites were designed to utilize three main types of connections: one to its telemetry tracking and control center for daily space flight plans and maintenance, voice/data crosslink’s to each of the four surrounding satellites within its view (one each to the North and South and one more each to the East and West) and a third voice/data downlink that would be used to interconnect Iridium calls to terrestrial networks so users would be able to call terrestrial fixed and mobile phones or pagers. This interconnectivity provided the Iridium System with a number of technological advantages. First, satellites were able to route calls around troubled spacecraft and they would also be able to utilize “least cost routing” for terrestrial interconnect during a time of expensive international long distance rates. Second, crosslink’s provided for true global coverage versus other systems based on a bent-pipe architecture because they could theoretically route all calls among spacecraft to a single earth station for terrestrial interconnection or directly to another Iridium user without any terrestrial interconnection. Competing systems such as Globalstar’s “bend-pipe” architecture required more than 125 earth stations to be constructed globally such that a gateway earth station would have to be within sight of the same orbiting satellite as the caller. Additionally, bent-pipe systems were not able to provide back-up redundancy for either damaged or disabled earth stations or provide polar or oceanic coverage. It was true that Iridium was the only planned system to be able to offer complete global coverage. Ground Segment In addition to providing interconnection with public networks, gateway earth stations also became a political and regulatory asset. The initial design of the Iridium System only consisted of a single earth station and was planned to be operated by Iridium, Inc. for the sole purposes of interconnecting Iridium satellite calls to the public network. When regulator’s challenged the original design based partly on sovereignty concerns, engineers had to come up with a new design that would appease control oriented regulators who wanted to maintain their ability to “monitor” international communications from within their own country. Gateways were then re-positioned as an investor bonus and regulatory stick. Motorola executives initially planned to solicit equity from partners based on their financial strength and market access capability and planned to offer investors dividends and equity appreciation based solely on the earnings of Iridium, Inc. When it became apparent that political and regulatory factors threatened the licensing effort, Motorola and Iridium executives redesigned the technical architecture by creating a gateway wholesale operation to placate skittish regulators as well as offer investors control over a quantifiable revenue stream. 11 Gateway operating organizations (Gateway’s) were then created much like a franchise territory and were appointed three main functions: (1) to prosecute frequency and commercial operating license applications in every country of their assigned “territory”, (2) to build and operate earth stations for the purpose of providing network interconnection and wholesale billing, and (3) to select and contract with distributors and other retail sales entities within their assigned territory. Earth station purchases were available exclusively through a Motorola Gateway Equipment Purchase Agreement (GEPA) that included three to four antennae, PSTN interconnect, switching, a control center and maintenance at a typical configuration cost of about US$25-30M. In exchange for this increased level of investment and operational involvement, the Iridium Inc. business plan was revised to include a recommended 10% revenue sharing to be retained at the gateway business 11 The national security was an issue that required significant technical modifications. In order to provide for national monitoring and control of communications, it would be necessary to design and construct several physical earth stations to connect the local PSTN to the Iridium Satellite Constellation. Since it wasn’t feasible to install earth stations in every country, they were carefully offered as regional Gateway solutions and left to the discretion of the local investor’s. Regional investors would offer an earth station as a last resort in order to obtain a frequency or commercial license. 3
  5. 5. Iridium: The Largest International Project of the 20th Century office. In total, one dedicated military and fourteen commercial gateways had to be engineered and constructed. In order to facilitate this additional level of financial and operational commitment for example, Iridium SudAmerica, the South American gateway operator was eventually capitalized in the neighbourhood of US$330M 12 . Gateway investors thus assumed a meaningful operational position within the Iridium system, not merely a financial or political asset. Service Providers The final responsibility for Iridium end user sales and service fell on the last entity in the value chain, the Service Providers (SP’s) [see Exhibit II: Iridium Operational Architecture]. In exchange for sales and service, it was suggested that service provider’s would earn 10% off the top, sending the remaining 90% of billed subscriber revenue to the Gateway (who then retained 10% and forwarded the remainder to Iridium, Inc.). Service Provider’s were envisaged to be existing, experienced cellular network operators (CNO’s). Iridium Gateway operators along with Iridium marketing executives visited hundred’s of potential service providers from 1995 through 1998 to gauge interest, collect market feedback and to create a database of technical specifications for billing and provisioning system inter- operation. Service provides were expected to be in the best position to sell Iridium services since a segment of their customers would constitute the typical “professional traveller” (Iridium parlance) or international corporate business traveller – Iridium’s target customer 13. Multiple consultants as well as Iridium executives and Gateway personnel were involved in the effort to assess the capabilities of CNO’s and identify gaps between their existing systems and the requirements of the Iridium Billing and Service Delivery System (IBSS). Andersen Consulting was the lead firm responsible for developing a global billing system that included more than 10M lines of code necessary to correctly bill and settle real-time call data records from a multitude of cellular systems around the world. Some Gateways encountered resistance signing up potential service providers because many perceived Iridium as a substitute to their own cellular offer instead of a complement despite ongoing dialogue on the part of Iridium, local gateway representatives and significant differences in retail cost 14. Concurrent with the investment road shows, the technical architecture underwent improvements in signal strength owing to changes in satellite orbits and fuel requirements that permitted Motorola system engineers to decrease to 66 (from 77) the number of required operational satellites 15. Including six in- orbit spares, the new constellation design would require just 72 satellites 16. Early critics were mildly silenced after Motorola and Iridium successfully petitioned the Federal Communications Commission (FCC) for an experimental license. That critical milestone would subsequently permit the FCC to lobby in favor of a worldwide frequency plan that reserved spectrum for all Mobile Satellite Service providers at the 1992 World Administrative Radio Conference. However, until Iridium was able to secure a worldwide frequency assignment, potential investors were reluctant to make financial commitments. At the same time, Iridium needed to address another political 12 This included: (1) an 8.9% equity investment in Iridium, Inc., (2) costs to build and operate a single gateway earth station with four antennae located outside Rio de Janeiro, Brazil, (3) the costs associated with establishing a commercial office to prosecute frequency, equipment and commercial licenses, and (4) the costs to establish distribution in the 26 countries which comprised the territory of Iridium SudAmerica (South America and the Caribbean). 13 The Professional Traveler term most likely resulted from the original AT Kearney “Study of Demand for Mobile Satellite Services by the High Income Professional Traveler”. 14 David Hartshom “LEO’s: Protector or Predator?” Communications, 1992. 29 (11) p. 41. 15 Robert Nelson (1998).”Iridium from Concept to Reality” p.3, Via Satellite. Motorola engineers were able to eliminate one polar orbit reducing the constellation size by 6 satellites and altering orbit altitudes such that the onboard fuel required to maintain constant orbits was also reduced. 16 Christian Hill, “Iridium Unit Revises Plan for Global Phone Network”. Wall Street Journal, August 13, 1993. P. B6 4
  6. 6. Iridium: The Largest International Project of the 20th Century hot button: bypass 17. If Iridium were to be successful, developing country post, telecommunications and transport (PTT) entities would suffer from the loss of hard currency revenues that previously resulted from international calls made by Iridium’s globetrotting travelling professionals within their territories. In addition, circumventing the national telephone networks would create an unmonitored and uncontrolled communications link to the outside world. Suddenly, the attractiveness of this new technology came with significant financial risks for a large majority of countries whose votes Iridium critically needed in order to be granted spectrum and market access. Many PTT administrations were also logical business partners or prospective sources of capital funding so developing an attractive value proposition for developing countries and their PTT’s was a top priority. In order to obtain the spectrum votes in advance of WARC-92, Iridium officials would have to address these issues. Iridium 2.0 As part of a secunded group of Motorola executives, Iridium’s first official employee was Leo Mondale. Known as a strategic thinker with a distinguished legal background in the satellite and political arena’s, Mondale set forth to create the Iridium Global Ownership Program for developing countries. It was a program that would preserve the cash settlement’s earned from international long distance and provide an opportunity for developing countries to leapfrog their telecommunications profiles into the 21st century. In addition, the program offered free Iridium minutes and financed shares of the Iridium common stock for governments at the IPO price of US$13.33 each. Iridium business and technical plan’s also evolved due to market feedback that suggested the target service providers were still not convinced that Iridium would not be a competitor. About three years prior to the commercial launch date, Iridium and it’s now active gateway investors delivered Iridium System presentations to service providers in order to begin the process of signing retail distribution agreements. During this process, it became clear that the intended last and most critical sales/service entities in the complex system were not completely convinced that Iridium was such a good deal -- not to mention a potential competitive threat. Comments citing the functional similarities and a yet to be revealed phone size, shape and form met with scepticism among many prospective service providers. Meanwhile, Iridium engineers were already designing software to interoperate with the common cellular billing systems and discovered that they were building a unique capability -- the ability to correctly bill and collect for wireless calls for most countries on the planet. In light of this new capability amidst the growing scepticism of a cellular substitute, Iridium refocused its marketing and technical strategy to explicitly offer a new service that would explicitly complement terrestrial cellular services: Iridium World Roaming. This new concept would make the Iridium phones dual mode units capable of using both the local cellular networks when in cellular range or looking to the sky for Iridium’s Satellite Constellation when out of range... all made possible through the use of their Iridium SIM card and Iridium’s global billing system. Table 2: Iridium Service Offers Iridium World Voice Service GSM based digital voice transmitting at 4800 bps utilizing a handset with an extended antennae or a vehicle kit. Provides full global coverage. Iridium World Paging Service Alphanumeric paging similar to Sky Tel terrestrial services transmitting at 2400 bps. Included a names and contact database along with time, weather and other message data. 17 At the start of the 1990’s, offering international telephone service (utilizing emerging technologies such as Skype) without a license nor adhering to the international settlements system was considered illegal ” bypass” in many countries for both financial and security reasons. 5
  7. 7. Iridium: The Largest International Project of the 20th Century Iridium World Data Service Circuit switched modem service with transmission capacity of 2400 b ps. Requires an Iridium handset 9500 or better. Iridium World Roaming Service A global roaming service where callers may use their Iridium handset and GSM SIM card along with a terrestrial cellular cassette (optional handset accessory) to access terrestrial cellular systems based on popular wireless standards. All told, Iridium was then able to present a comprehensive service offer to CNO’s. Through repositioning the complementary nature of their service offer, Iridium was thus able to promote the new service as an augmentation to the typical CNO’s revenue stream via claims that they would now be able to earn higher margin roaming revenue when their subscribers were travelling outside their home network service areas 18. Financial: Capital Funding and the Motorola Equity Sell-Down At the onset, Motorola did not intend to become a major telephone company. John Mitchell, Motorola’s Vice Chairman in an early news briefing said that “the company was more interested in building the system than in operating it...” 19. Relying on its strength as a technology powerhouse, the company believed that similarly respected firms involved in the delivery of telecommunications services would step-up as partners. Despite advances with regulatory and distribution efforts, major telecom operators were still reluctant to make even non-binding commitments to partner with Iridium. AT&T in the US and British Telecom in Great Britain were top choices but the calls to partner went unanswered for more than a year. Inmarsat, an existing global satellite communications provider which utilized suitcase sized equipment was the defacto provider and maintained long standing interconnection relationships with the major telephone companies around the world. They were also considering a similar satellite project, dubbed Project 21, which planned to compete with Iridium, but utilize far less expensive technology. Secondary telecoms providers such as MCI (USA) also remained hawkish with respect to equity commitments in the Iridium consortium; some waiting to see how the plans and offers from more than a half-dozen other MSS providers would evolve. Motorola thus turned its fundraising attention to lesser capitalized yet more interested emerging market investors such as Thailand’s United Communications Company and Brazil’s Ministry of Communications while it continued to solicit funding from more widely known operators 20. Private Placements Motorola did woo enough investors the following summer to complete its 1st funding tranche despite missing its own self imposed funding deadline in December 1992. With plans in hand to satisfy regulatory and frequency concerns and the introduction of a new roaming service offer, Motorola successfully completed the first of two planned US$800m private placements in August, 1993. Equity investors included a hodgepodge of interests with telecommunications and related project capabilities. For example, Beijing’s China Great Wall Industry Corporation and the Russian Federations Khrunichev Enterprise both satellite launch providers held just under 5% and Italy’s telecommunications holding company along with US Sprint held another 5%. US controlled investment was reduced to just 18 During the mid-1990’s, international cellular roaming was practically non-existent. When a CNO’s lucrative customers were on the road, cellular usage ceased in their home markets. Iridium was now able to position their offer as an incremental source of revenue as callers would be able to use their Iridium SIM card to make and receive cellular calls around the world seamlessly with one number. Executives also claimed that the margins would be higher since the suggested 10% satellite call markup would equal US$0.30 or more per minute. 19 New York Times, “Stock of Motorola off on Phone Plan”. June 27, 1990, Section D, p.4. 20 Yamada, Ken. “Motorola Signs up Some Investors in Iridium Satellite Phone System”. Wall Street Journal, Dec 23, 1992. p. B6. 6
  8. 8. Iridium: The Largest International Project of the 20th Century 39% at the conclusion of the initial private placement which was to date the largest in commercial history. Table 3: First Round Investors, August 3, 1993 21 Investor Expertise Approximate Lead Country Ownership China Great Wall Launch services 5% China Khrunichev Enterprise Launch services 5% Russia Lockheed Satellite Manufacturing 2.5% USA Raytheon Earth Station Antennas 2.5% USA DDI, Kyrocera Long Distance & Handset 15% Japan Manufacturer Societa Finanziaria State Owned 5% Italy per Azioni (STET) & Telecommunications Holding US Sprint Company Long Distance BCE Mobile Cellular Operator 5% Canada United Cellular and Paging Operator 5% Thailand Communications Industry Corporation Muldiri Investments, Private investor group 5% Venezuela BVI Ltd. Mawarid Group Private investor group 15% Saudi Arabia Motorola, Inc. Prime contractor, creator 34% USA A little less than ten percent ownership entitled equity investors to an Iridium, LLC board seat and five percent entitled interested investors to the rights to a wholesale gateway operating company and earth station if desired. At the completion of the initial private placement, the project was able to continue through the end of 1994 based on its existing cash, vendor financing and its projected ongoing development costs. Motorola officials as stated that a majority of initial investors would also participate in the second placement. Second Round Private Placement In September of the following year, Motorola and Iridium officials completed a second placement which was focused on strengthening their partnership by adding investors with both financial and technical expertise in addition to presence in developed markets. Until the second placement, the Italian holding firm STET was the only European partner, however the second round of equity financing brought a US$70M investment from Germany’s Vebacom, a highly respected telecommunications and industrial conglomerate. Through a new holding company, the South America holding company Iridium 21 Wall Street Journal (Asia Edition). “Motorola identifies for the first time the initial members of its Iridium Inc .consortium”, August 3, 1993, P. 2. 7
  9. 9. Iridium: The Largest International Project of the 20th Century SudAmerica was represented with the formation of a US$140M equity joint venture between Iridium Brasil (a Brazilian construction company), Iridium Andes-Carribe (a Venezuelan holding company) and Motorola International Network Ventures (primarily an investor and passive operator of Motorola’s wireless investments throughout the world). With the second round completed, Iridium had raised US$1.573 billion in equity while approximately 4,000 people were working on the project around the world 22. Debt Investors in the Iridium project anticipated substantial debt to fund the program’s completion. Its initial short term US$750M facility was arranged by Chase Securities along with a group of 62 global banks in August, 1996. In July, the company announced an additional US$800M issuing bonds (speculative grade, 13-15% coupon to yield). At the time, Iridium officials also revised the cost of the system from US$2.1B to $US3.4B as a result of technical modifications and system upgrades. Five percent ownership stakes were reportedly sold for US$80M. Based on the two equity placements with a total value of US$1.6B and a debt of approximately US$1.5B, financial analysts estimated that the terms of the accumulated deals implied something close to a 50%-50% debt to equity ratio. Iridium’s financial strategy contemplated refinancing the various interim facilities and on Dec 23, 1998 the company closed a US$1.95B refinance which included an US$800M secured credit facility, a US$750M guaranteed credit facility (Motorola), and US$400M in vendor financing (Motorola operations and maintenance contract). The newly financed secured credit facility loan covenants included strict sales targets and periodic interest only payments. Countdown Motorola and Iridium executives were undeterred by the criticisms that the challenging market and political landscapes offered. Insiders, analysts and critics alike were inspired. Iridium’s Chairman, Robert Kinzie was quoted in a trade magazine as saying: "The main reason that Iridium is a success [and other would-be competitors haven't been] is because of Motorola's invention, interest, and participation," says Robert W. Kinzie, chairman and CEO of Iridium Inc. "When they put their name on a worldwide project like this, no matter how futuristic it is, people around the world want to share in that system. The key has been Motorola's involvement." -- Industry Week, December 19, 1994. Telecoms analyst and Silver Spring Md. critic Herschel Shosteck said: "I'm in awe of Motorola's power…We gave about 0.6 percent probability of this happening. This demonstrates the enormous power of Motorola in the world." – Industry Week, December 19, 1994. Motorola’s Satellite Communications Division revolutionized the satellite manufacturing process utilizing concepts of lean production based on assembly line manufacturing in order to produce enough satellites to meet the commercial launch date. Iridium satellites were built and packed every four and a half days as compared to more than three years for the manufacture of traditional satellites 23. According to the original plan, the first rockets were scheduled for lift-off during 1996 however a variety of technical issues delayed the program. Issues such as thermal protection, inconsistent telemetry files, vibration dampening and inclement weather required Motorola and its US based launch provider McDonnell Doulas to reschedule the first launch that was scheduled on January 8th, 1997. During that short three day delay, a similar Delta II rocket for another customer exploded causing Iridium’s initial launch to be postponed indefinitely. 22 Brian Moskal, “Iridium ,Inc.”, Industry Week, December 19th, 1994, p. 50. 23 David Bennahum. “The United Nations of Iridium”, Wired Magazine, February, 1998. 8
  10. 10. Iridium: The Largest International Project of the 20th Century Satellite launch services were provided by three government space agencies while space vehicle transport to launch sites was provided with a standby Boeing 747 capable of transporting up to 7 satellites from Motorola’s Chandler, Arizona manufacturing facility to any one of the launch providers. TABLE 4: IRIDIUM LAUNCH HISTORY: Launch Date Launch Vehicle Launch # of Launch Provider Satellites Site 5 May 1997 Delta II Boeing 5 Vandenberg, California 18 June 1997 Proton Krunichev 7 Baikonur, Kazakhstan 9 July 1997 Delta II Boeing 5 Vandenberg, California 20 August 1997 Delta II Boeing 5 Vandenberg, California 14 September 1997 Proton Krunichev 7 Baikonur, Kazakhstan 26 September 1997 Delta II Boeing 5 Vandenberg, California 8 November 1997 Delta II Boeing 5 Vandenberg, California 8 December 1997 Long March China Great Wall 2 Taiyuan, China 20 December 1997 Delta II Boeing 5 Vandenberg, California 18 February 1998 Delta II Boeing 5 Vandenberg, California 25 March 1998 Long March China Great Wall 2 Taiyuan, China 30 March 1998 Proton Krunichev 7 Baikonur, Kazakhstan 6 April 1998 Delta II Boeing 5 Vandenberg, California 2 May 1998 Long March China Great Wall 2 Taiyuan, China 17 May 1998 Delta II Boeing 5 Vandenberg, California Calendar Days: 377 72 Source: Global Personal Communications by Satellite, (Arild Flystveit, 1998) In terms of launch vehicle capability, the Russian Proton offered a large payload capable of transporting 7 satellites at one time. It was also a more capable performer in inclement weather due to its sheer size and weight. The Chinese Long March rocket was the most inexpensive and had a payload of 2 satellites while the US built Delta II would be able to transport five satellites. The full constellation consisted of 66 satellites and one spare in each of 11 polar orbits inclined at 86.4 degrees at an altitude of 780 kilometres (485 miles) 24. On May 5, 1997, Iridium finally launched and successfully placed into orbit its first group of 5 satellites. As the network was assembled in space, the Iridium constellation became the largest satellite system known to man. III Building a Business: from Motorola to the Service Providers As the satellites were being built and launched in space, commercial work began in earnest on the ground. Gateway operators were busy establishing themselves and hiring telecoms, regulatory, and 24 According to Nelsen, the specific LEO altitude was chosen to be within the range of 370Km and 1,100 km which would place the satellites above the residual atmosphere (which would adversely affect its lifetime) and below the Van Allen radiation environment (that required external shielding). 9
  11. 11. Iridium: The Largest International Project of the 20th Century marketing and information system specialists in anticipation of integrating their operation into the global system. While Motorola’s leadership was obvious in terms of technology, its leadership also extended into the gateway operation with assistance in multiple commercial areas. In September 1995, Motorola’s Network Ventures Division (NVD) 25 based in Schaumburg, Illinois established a task force at the direction of Vice Chairman John Mitchell to develop a complete list of tasks necessary to “commercialize” Iridium. Motorola NVD was the original partner in many of the gateway territories and responsible for the ongoing sell-down of Motorola’s equity in the project 26. The mission of this 15 member task force was to ensure that Iridium would not suffer any further delays in meeting its commercial launch. This program was intended to be a “cook book” for gateway operators to use as they built up their operating organizations. The schedule included key areas such as business establishment, regulatory, distribution, earth station design and engineering, distribution, and system testing and trials [see Exhibit VI]. The task force members included specialists from all Motorola Iridium program areas (e.g. SATCOM, Cellular Subscriber Group, Government Relations Office MNVD as well as the South American Gateway, Iridium SudAmerica) and completed the production of its “cook-book” roughly six weeks after it began. Though not compulsory, gateways adopted this guide in most of the territories where Motorola had influence. Iridium LLC’s 27 business operations staff subsequently released its own program management guide in January, 1996 as a development guide for the remainder of the Gateways which was adopted from Motorola’s initial work. Early gateway commercialization activities included securing approval for service licensing and frequency assignment as well as the purchase, configuration and installation of the earth stations as necessary 28. Local gateway partners on multiple occasions visited regulatory agencies and international telecommunications operators to solicit licenses and negotiate interconnection for calls which either originated or terminated within their local territories. Progress was slow as the concept of Mobile Satellite Services did not exist and a rather extensive educational process had to occur before seating the appropriate decision makers in any negotiation. Meetings often grew from one or two individuals to entire rooms full of interested observers. Where beneficial, Motorola Government Relations would use its relationships in order to gain entry to senior decision makers in the local government or telecoms ministries. Since most governments did not have a process to address mobile satellite services, Gateways had to collaborate with government officials on the technology and suggest a fair process in order to grant frequency assignments and service licenses. In Chile for example, Iridium SudAmerica and Chile’s Ministry of Transport and Telecommunications co-developed an application process in conjunction with the Universidad de Chile in Santiago. Meanwhile, Iridium’s growing Washington DC based business development team released the first edition of the Gateway Business Office Organizational Design document in July, 1996. Prepared by Iridium consultants, Booz, Allen and Hamilton, it was a time sensitive document that illustrated the functional requirements and evolution of an gateway organization from a development stage entity through to a fully functioning wireless wholesaler. 25 Motorola NVD was the only group within Motorola that had hands-on expertise in managing the “operations” of cellular companies. Its mission was to create a marketing channel by investing in or creating foreign cellular operators with little technological or operational expertise. At the time of the case, NVD had board representation and equity investments in approximately 26 wireless operators around the world with a market capitalization of over US$4B. 26 Motorola initially held 100% equity in the individual Iridium territories and its NVD group was responsible for selling down its interests within these territories over time to potential investors. It retained however significant ownership and board representation in Iridium territories across the America’s (INA, ISA, ICAM). 27 Iridium was originally established as Iridium, Inc. however it re-organized itself into a limited liability corporation after an exhaustive analysis of the US tax ramifications of a global consortium of international investors, the majority of whom were not US entities and not otherwise subject to US taxation. 28 Not all gateway organizations needed a physical earth station. Gateway earth stations were shared where political and technical factors were favorable for a gateway sharing agreement (e.g. Iridium Germany and Iridium Italia) 10
  12. 12. Iridium: The Largest International Project of the 20th Century Figure 1: Gateway Business Office -- Functional Evolution •IBSS Requirements Implementation (1997->FOC •Distribution Channel 23 positions) •Call center Strategy management •SP & RP draft •Market trials •Channel management agreements •IBSS installation & test •Financial Planning and Design •Operations integration management (1996 - 12 positions) of SP's Managing and Operating (Post-FOC -- 34 positions) Key senior positions included a CEO or president, marketing director, information systems director, and finance and administration directors. A total of 34 positions were recommended to be implemented prior to commercial activation and each position was profiled by Iridium’s consultant based on best practices in the US wireless industry. For example, the Business Operations Director position was a direct report to the CEO or gateway president and carried a targeted salary of US$150k annually in exchange for 10- 15 years experience in the wireless industry with a particular emphasis on billing systems and information management. Table 5: Position Profile – Business Operations Director - Key Responsibilities (post FOC hire): Recruitment Profile: - Service delivery 1) Manage all aspects of GBO operations, 10-15 years of operational experience in - Customer care - including: wireless industry, 3-5 of those years in billing - Billing and collections system and information management - Financial settlements - Solid background in voice service, preferably - Fraud management GSM or messaging - Knowledge of local market conditions and operating practices in Gateway territory Establish and managed 25+ person staff 2) Develop and enhance processes for day to ranging from entry level to middle day operations as business needs evolve management - US$150K+ per year with 20-30% at risk based 3) Manage interfaces with and provide Salary Range: support to internal functions (i.e., marketing, finance) as well as external on meeting predetermined milestones - Interface with Iridium, LLC NSO for the business partners (PSTN’s, Roaming partners) Relationship to Iridium, LLC: - Interface with Iridium GBO Team for the 4) Build and Maintain industry relationships, purpose of usage process management, CDR including roaming partners. auditing, resubmission, and settlement 5) Perform operational and subscriber trials as purpose of managing policies and system well as ongoing system and process testing enhancements as well as resolving inquiries for new services 6) Quality control for all aspects of GBO Adapted from: Iridium Gateway Business Office Organizational Design, July 1, 1996 11
  13. 13. Iridium: The Largest International Project of the 20th Century Partly due to the fact that Iridium was a completely new concept and that many investors lacked actual wireless industry operating experience, the Iridium GBO team also developed a Gateway Cost Model based in Microsoft Excel that would serve as an interactive, “what if” scenario manager that was capable of modelling the costs and organizational needs of a variety of gateway territories (both complex single country and complex multiple country territories). The cost model included as inputs subscriber forecasts and a gateway estimate of the functional capabilities of each of the service providers they contracted with. Some service providers for example would not provide 24x7 customer service as required by Iridium or would only be able to activate phones from the Gateway handset inventory. Other territory specific variables that the cost model considered were the number of taxing authorities within the territory, the number of PSTN interconnection providers, inflation rates and currency conversion requirements, for example. Figure 2: Gateway Cost Model Operating Personnel and Other Costs Personnel and Assumptions Headcount Cost Summary Output •Subscriber forecasts •Productivity Measures •Currency conversion •None: Uses •Service Provider •Personnel Availability requirements data from Support Levels (std, • Service levels by task •Wholesale value of previous enhanced, full) (7x24 v. 7x12, etc) equipment units modules •# PSTN's, Dealers, •Operating Assumptions •Inventory carrying cost SSP's, Regulators, •Number of (% hurdle rate) Taxing Authorities Management •Inflation Rates Personnel •Cost Asumptions: labor, load factors, currency hedging Source: Iridium Operational Cost Model, July 1, 1996. Major cost model outputs included the number of personnel required to perform each task (including supervisory personnel), cost for currency conversions, inventory carrying costs and personnel headcount by GBO function. According to the “generic gateway design” (20k subscribers in 1998, growing to 164k in 2002), the typical “generic” gateway was able to forecast an operational budget of US$2.7M and a headcount of 43 individuals in 1998 and a budget of US$25.7M and a headcount of 91 by 2002. The GBO operational cost model utilized a “bottoms up” approach to estimating costs based on actual wireless industry practices. The plan was for Gateways to use this to either launch or refine their business operations, adapting those recommendations with respect to local needs and business practice. Not all were pleased with the level of resources called for or the timing of the activities. For example, Gateways were instructed to implement earth station control centers and fully staff them a full two years prior to commercial launch for training and testing purposes. During an operating committee meeting, Alberto Finol, Chairman of the South American gateway simply told Motorola executives “No” and asked what else these technical people would be doing besides “pushing a bunch of buttons for two years”? During the final two years as a development stage organization, the Gateways themselves became the driving political force in the Iridium system and began to make important decisions and accept responsibility for decisions on resources and policy. Balancing the power of Motorola and Iridium, the Gateway Advisory Council or GAC became the de facto operating committee for the consortium. 12
  14. 14. Iridium: The Largest International Project of the 20th Century Investors designated their key operating executives to represent their interests at quarterly GAC meetings, the first of which commenced in September, 1996. Gateway Advisory Committee meetings would discuss and debate the division of labor as well as the roles and responsibilities shared between Iridium, LLC, the Gateways and the SP’s with respect to common activities (e.g. customer care, advertising expenditures, handset inventory, trials and testing, etc.). Introducing Iridium On June 22, 1998, Iridium launched the world’s largest, simultaneous, global advertising campaign in 45 global markets under the direction of Amirati Puris Lintas, Ltd (APL). The campaign targeted the global business traveller with print, television, indoor and outdoor advertising as well as emerging media such as interactive 29 and internet methods. The advertising theme was the result of a joint team of APL executives from 18 countries. Its goal was to develop a message that transcended cultural and national borders. The final result: “Calling Planet Earth”. In order to reach these global travellers, the initial six month campaign included conference and event exposure, Antarctic journey sponsorships, in-flight advertising on 26 airlines, and traditional media such as The Economist, The Wall Street Journal, and The Far Eastern Economic Review. Its television advertising was shot on location in the Namibian desert, the Seychelles, and Katamandu featuring voice- overs from actor Alec Baldwin based on the themes: “Alone”, “Vacation”, and “Experience”. Referencing the target market, APL client director Rob Quish said: “These executives travelling around the world have more in common with the person sitting next to them [in the airplane] than they do with their neighbours back home” 30. Martin Puris, APL CEO and Chief Creative Director said that “our campaign breaks the confines of traditional communication engaging customers in fresh new ways”...”Iridium’s communication [advertising message] is a worldwide team effort that truly reflects a global perspective 31. The advertising program was considered a success: a total of 1.5 million responses and 140,000 qualified sales leads poured into Iridium’s customer response centers around the globe. As the project neared its launch, the downstream effects of the delayed launches began to emerge. For example, the final handset software tuning to be delayed to the point that it was not possible to conduct many test calls. Those tests that were conducted showed low completion rates and poor sound quality. Accordingly, Iridium’s CEO Ed Staiano announced on September 9th that commercial activation would be delayed from September 23rd until November 1, 1998 sending shock waves throughout the Iridium community. The same day, Standard & Poor’s lowered its outlook on the stock to negative from stable. Other complications that Staiano had to resolve were a lack of handsets. Motorola handsets were in short supply as a result of last minute software updates and those from its second supplier, Kyrocera were unavailable until late March, 1999. According to press reports, the entire European market did not receive any handsets until Christmas 32. Iridium needed 50,000 subscribers to meet its 1998loan covenants yet JP Morgan analyst and prospective Iridium customer Marc Crossman said that by year’s end Motorola only produced 20,000 handsets with the majority going to promotional agencies, celebrities and relief efforts such as Hurricane Mitch in Central America. 33. Analysts estimated that Iridium had only 10,000 paying subscribers by year end 1998. Despite significant improvements in call quality (see Exhibit VIII) on March 1, 1999 Iridium reported that it expected to miss its first quarter target of 52,000 subscribers. CEO Staiano also reported that the company needed US$120M per month in revenue to meet its cash flow break even which included 29 An example of emerging “interactive methods” was the use of lasers to project Iridium’s logo into the clouds. 30 Financial News, June 19, 1998. “Iridium Advertising Launches Worldwide” 31 Ibid. 32 Wall Street Journal, “European Gateway Missing Phones”, December 20, 1998. 33 Mobile Satellite News. “Missing in action, the case of Iridium handsets”, January 31, 1999. p.1 13
  15. 15. Iridium: The Largest International Project of the 20th Century marketing funds to reach its projected 1999 subscriber base of 500,000. Searching for an improvement, Staiano re-organized Iridium’s marketing and distribution organization and told the Wall Street Journal that “were driving it from Washington”...”trying to fix things faster than in the past quarter”34. Later that month, CFO Roy Grant resigned for personal reasons. A few weeks later, on April 23, 1999 Iridium announced that its CEO Ed Staiano resigned over differences in distribution management. Staiano thought that Iridium’s gateways were not doing enough and sought to take full control of distribution in Washington, however, the Iridium Board didn’t agree. Analysts believed creating a global sales and marketing organization would have proven too rich for an already over extended investor consortium. In July with an estimated 20,000 paying subscribers, Iridium officials signalled that they would exercise the firm’s right to take an extra 30 days to make its US$90M interest payment due on August 15th35. However on Friday, August 13, 1999, just 10 months after opening for business, Iridium filed for protection from creditors under the Chapter 11 Bankruptcy code. 36 Discussion Questions (A) 1) What was the primary cause of Iridium’s failure? Describe what happened. What factors contributed to the failure of Iridium’s business plan? 2) Describe the development strategy Motorola utilized to create Iridium? What elements did Motorola and Iridium employ to advance the project (resources, venture structure, etc.)? How did this impact the projects progress/success? 3) Iridium targeted international business travelers in its initial launch. Why do you think it selected this segment as its target? Discuss the pros and cons of its market segmentation and targeting strategy. 4) Did Motorola’s corporate culture have an impact on its leadership of the project at its various stages of development? Would you follow the same leadership strategy? Why or why not? 34 Quentin Hardy, “Global-Minded Iridium Has Down to Earth need: Profit – Despite Product Delays, Wireless Firms Big Loss is narrower Than Expected”. Wall Street Journal, January 26, 1999. p. B4. 35 Peter List, “Crash and burn?” Project Finance, October 1999. p. 18. 36 Leslie Cauley. “Iridium Files for Bankruptcy Protection After its Bondholders Submit Petition”. Wall Street Journal. August 16, 1999. p. A3. 14
  16. 16. Iridium: The Largest International Project of the 20th Century Exhibit IA: Iridium Operational Architecture Iridium, Space System Operation & Upgrades, Global Settlements, LLC Brand, Corporate & Product Development Licenses, Earth Station Construction Gateways & Operation, PSTN Interconnection, Distribution, Service Provider Billing (15*) & Settlement Service Subscriber Sales, Provisioning & Providers Service, End User Billing and (FOC: 200+) Collection, Market Feedback Exhibit IB: Iridium Gateways Gateway Service Territories Iridium Middle East China Spacecom Iridium North America Nippon Iridium Corporation (Hong Kong) Iridium Central America Iridium Africa Pacific Iridium and Mexico Telecom. Co. Ltd. Iridium Korea Corporation Iridium Eurasia Iridium India Iridium Sud America P.T. Bakrie Southeast Asia Communications Iridium Services Corporation Iridium Italia Iridium Deutschland 1 1 Motorola Confidential and Proprietary 15
  17. 17. Iridium: The Largest International Project of the 20th Century Source: Motorola Iridium University Presentation (8/97) Exhibit IIA: Iridium Historical Timeline (Space Segment) Source: Diane Stamp, Iridium Satellite – March 2005. Slide 2, Company Presentation. Taken from web on 12-24-2009: Exhibit IIB: Motorola Iridium Contact Values Iridium System Costs (1995-1998) US$ millions Year Space System Ground System O&M Total 1995 802 802 1996 836 64 900 1997 577 74 651 1998 589 139 728 1999 6 129 135 Total $3,216 16
  18. 18. Iridium: The Largest International Project of the 20th Century Exhibit III: Iridium Market Potential Wireless Subscriber Growth Demonstrates IRIDIUM Market Potential Worldwide Growth of Cellular and Paging Subscribers 350 300 250 Subscribers in Millions 200 Cellular 150 Paging 100 50 0 1995 1996 1997 1998 1999 2000 2001 Source: 1996 MTAEMCI SERVICE PROVIDER PRESENTATION, PAGE 10 REV 1 Source: Iridium Service Provider Presentation (8/96) Exhibit IV: GBO Marketing and Sales Organization Marketing *Market Planning Channel Development *Strategic Planning End-User Sales Communicatoins Manager Manager Manager Manager** Manager •Public Relationns •Subscriber Services •Management of •Management of •Management of Management and Product Service Provider Long Range Strategic Dealer Sales •Advertising Management Development Plans •Management of Management •Market Growth •Management of •Provide Input to Direct Sales •Marketing Analysis Alterrnative Budgeting Process •Management of Communications •Pricing and Service Channels •Provide Input to Telemarketing Management Plan Management •Development of Mergers, •Industry Relations Multinational Acquisitoins, and management Accounts Partnerships •Country/Region •New Product Management Development •** This position •Application assumes the Management gateway will be (airline, phone providing direct sales booths, MXU) •* This is a post FOC •* This is a post FOC to dealers and •Roaming Partner position agents and providing position. Management full support to the SP. Source: Iridium GBO Organizational Design, 7/1/1996. 17
  19. 19. Iridium: The Largest International Project of the 20th Century Exhibit V: Gateway Project Task Force Elements & Risks No. Process Description Identified Risk Areas (10/95) 1 Business • Mission definition • Key management staffing Formation • Local market analysis (timing) (10 pgs) • Organization development • Operating strategy definition • Operating strategy (timing) • Tactical work plans • Business planning • Financial plan 2 Regulatory • Obtain frequency licenses in every • Key regulatory resources (11 pgs) country (as few as one and as many as (consultants, political allies, 26, depending on the gateway territory) message) • Obtain commercial licenses • Political action planning • Obtain cross border equipment licenses o Bypass (handset movement) o National sovereignty o Freq. auctions • Reporting and tracking of progress 3 Generic Facility • Package of designs and drawings that N/A Design describe layout and facilities that support (4 pgs) technical equipment (switch, interconnect A SATCOM task subcontracted to & antenna control systems Bechtel National, inc. 4 Site Planning • Physical land sites capable of: • Selection of suitable sites and Analysis o Horizontal visibility to satellites (alternatives) (7 pgs) o Low precipitation, low frequency • Selection delays (decision rain/snow events making) o Local interference • Site acquisition delays o Employee and utility access (purchasing, permits) o Environmental factors May be subcontracted to Nouva Telespazio (part of the STET family of companies) 5 Engineering, • Construct facility suitable for SATCOM to • Inability of gateway operator to Procurement o Approve facility design, engineer, construct center on time to and test link margin, furnish and install provide for SATCOM’s Beneficial Construction custom equipment specific to gateway Occupancy Date (BOD) (6 pgs) design 6 Service • Planning and implementation of gateway • Lack of primary market research Provisioning distribution channels that maximize • Inefficient understanding of local (16 pgs) o Marketing/sales market regulations (capability) o Service activation • Marketing / Channel o Customer care management resources 7 Business • Development and implementation of three • Cross-system call detail record Systems (IBSS) tiered business support system to provide (CDR) formatting (6 pgs) Iridium (IBSS), Gateways(GBSS) and • Numbering plan (regional Service Providers (SPSS) support for: interconnection and billing) o Service delivery • Fraud control o Customer care • Testing and integration of IBSS o Clearing and settlement (Iridium business support o Billing and collections system, 3 months) o Decision support 8 Customer Delivery of voice and messaging equipment Primarily a Motorola Cellular Premises including: Subscriber Group and SATCOM Equipment • Handheld portable phone responsibility. Gateways: (23 pgs) • Mobile exchange unit (adapter for small • update market and service PBX) forecasts (7/96) • Alphanumeric pager • Support technical operational • Radio channel unit’s for special use: and market trials o Phone booths • Contract with various o Aeronautical equipment providers for o Accessories volume commitments 9 Terrestrial Includes contract milestones associated with N/A Network the design, development, and documentation Development of the Gateway segment (gateway technical A SATCOM responsibility to Iridium, Contract elements) in two major releases: Inc to benefit gateway (4 pgs) • R1: call processing, control, emergency calling, basic telephony services Implemented through the Engineering, • R2: call completion, multi-party and bearer Furnishing and Installation task (No. 18
  20. 20. Iridium: The Largest International Project of the 20th Century services, and messaging 11 below) 10 Space System Design, development, documentation, N/A A SATCOM responsibility to (6 pgs) production, delivery and installation of the Iridium, Inc. Space System (constellation) 11 Engineering, Gateway to execute a Gateway Equipment • Gateway failure to fund/execute Furnishing and Purchase Agreement (GEPA) that provides GEPA on a timely basis (12/95) Installation gateway specific equipment engineering, • Gateway failure to obtain (11 pgs) furnishing and installation of earth terminals regulatory permits, frequency (Scientific Atlanta) , telecoms switch (Siemens and commercial licenses and D900) and other equipment and software import licenses on a timely basis associated with the messaging and voice • Failure to obtain interconnection service. with PSTN 12 Trials and Four level system wide tests including: Tests mainly conducted by Motorola Testing • Laboratory segment tests: Space Vehicle, with service provider and end user Gateway, CPE & IBSS) trials managed through the gateway • Technical trials: total system trial including marketing office. IBSS • Risks include failure to properly • Operational trials: Total system trials train SP’s and end users on use Including service providers of the system. • Market Trials: Total system trials including “Friendly” customers N/A: Not a gateway specific responsibility or activity, for reference only. Source: Iridium GBO Organizational Design, 7/1/1996. 19
  21. 21. Iridium: The Largest International Project of the 20th Century Exhibit V(b): Service Delivery (Provider) Value Chain SERVICE DELIVERY VALUE CHAIN 1 2 3 4 5 6 7 8 Sales Lead Post Sales Generation Sales Support Billing and Support/ Terminal Fraud Control Delivery Service and and Terminal Activation Collection Customer Maintenance & Deactivation Qualification Sales Service • Branding/Communications INCREMENTAL COST ELEMENTS •Advertisement •Sales Force •Shipment •Cost of •Cost/Bill •Salaries CSR • Cost repairing •Fraud/subs. •Sales Force •Commissions •Inventory Activation •Bad Debt •Infrastructure terminal •Deactivation •Demo Units • Training Cost •Staff •Credit Card •Training cost •G&A •Logistics/Staff •Training commissions •Marketing, •Late Payments promotion, •Staff retention •Training Acquisition Costs On Going Costs (Retention) 20
  22. 22. Exhibit VI: Gateway Business Office -- Key Position Hires Function/Process 1996 1997 Post-FOC President/CEO • President/CEO Marketing and Sales • Marketing & Sales Director • Marketing Communications • Strategic Planning Manager • Channel Development Manager Manager • Communications Specialist • Account Executive (3) • Planning analyst (2) • Contract Administrator • Marketing Assistant • Marketing Analyst • Market Administrator Business Operations • Customer Care Manager • Training Specialist • Quality Assurance Manager • Settlements Manager • Inventory Manager • Billing Manager • Director of Business • CC and SD Analyst • PSTN Manager Operations • Contract Administrator • Network Operations Manager • Fraud Manager • Billing Analyst • Payables/Receivables Clerk • Staff Engineer (2) • Collections Administrator • Fraud Analyst Information Systems • Director of Information Systems • Systems Analyst • GBS Manager • Hardware Specialist • Software Development Manager • LAN/WAN Manager • Applications • Specialist • Networking Specialist Finance • Director of Finance • Financial Administration • Financial Clerk Manager • Accountant • Controller • Financial Analyst Administration • HR Manager • Office Services Manager • Compensation and Benefits Specialist • Director of Administration • HR Specialist • Facilities Assistant Legal/Government • Government/Legal Affairs Director • Regulatory Compliance Manager Affairs • Regulatory Assistant • Licensing / Standards Manager • General Counsel • Contract Manager
  23. 23. Iridium: The Largest International Project of the 20th Century Exhibit VII: Iridium World Communications (IRIDF) Quarterly Earnings & System Progress (Thousands) Net IBSS Trial Stock Loss Equit Satellite License SP's Gateway Switch (of s (of Date Source Qtr Price (M's) Asset Debt y s s * POP's** (of 12) (of 12) 15) 15) 8/7/1997 ILLC 2Q 29.13 48 2935 913 1787 17 -- -- -- -- -- -- -- 10/17/1997 ILLC 3Q 43.25 84 3190 1015 1754 22 -- -- -- -- -- -- -- 1/22/1998 ILLC 4Q 36.5 125.6 3645 1327 1634 44 35 100 47M 10 9 1 -- 4/17/1998 ILLC 1Q 59.93 203.5 3628 1340 1437 62 47 180 51M 12 11 12 4 7/14/1998 ILLC 2Q 59.06 244.7 3529 1701 1195 72 86 195 87M 12 12 14 10 10/28/1998 ILLC 3Q 44.18 364.3 3565 1715 834 79 120 270 105M 12 12 14 14 Net Call Stock Loss Equit Revenue License Completio Droppe Date Source Qtr Price (M's) Asset Debt y (M's) s SP's Sub’s n d Calls 11/1/1998 CI 85 12 1/25/1999 ILLC 4Q 34.62 440 3738 1729 477 0.186 140 300 3000 90 6 4/26/1999 ILLC 1Q 16.38 505 3720 1743 214 1.451 -- -- 10294 -- -- 8/13/1999 ILLC -- 3.06 -- -- -- -- -- -- -- 20000 -- -- *Service Providers (SP's) offered Iridium Satellite services Iridium Roaming services or a combination, Roaming Partners (RP's) offered Iridium World Roaming only. ** POP's were the estimated number of existing Cellular Network Operator subscribers covered through the SP or RP agreements Source: Case writer analysis based on Iridium, LLC quarterly 10k filings 22
  24. 24. Iridium: The Largest International Project of the 20th Century Exhibit VIII: Iridium System Overview Source: Iridium University Presentation, Iridium, LLC (8/97) 23
  25. 25. Bibliography Arild Flystveit, A. J. (1998, February). Global Mobile Personal Communications by Satellite. Telektronikk , pp. 22-33. Dolan, R. (1992). Concept Testing. Boston: Harvard Business School. Dolan, R. (2000). Note on Marketing Strategy. Boston: Harvard Business School. Iridium World Communications LTD. (1997, March 14). Form S-1. Registration Statement Under the Securities Act of 1933 . Washington, DC: Securities and Exchange Commission. Jan Janssen, R. W.-M. (1999). Maximum Delay Bounds for Voice Transport over Internet Protocol. IEEE Proceedings of the International Workshop on Satellite-Based Information Services (pp. 48-55). Rio de Janeiro: IEEE. Mahajan, J. (1992). The Overconfidence Effect in Marketing Management Predictions. Journal of Marketing Research , 329-342. Nelsen, R. A. (1998, September). Iridium: From Concept to Reality. Via Satellite , pp. 1-8. Petrakis, H. M. (1965). The Founders Touch. New York: McGraw Hill. Schultz, R. (2001). The Role of Ego in Product Failure. working paper: University of Iowa.