2. Market Assumptions and Issues (Chapter 4) (30 points) a. How did Iridium fail in terms assessing the industry readiness for a satellite phone product? b. There are at least 3-5 erroneous assumptions that Iridium executives make about the technological changes occurring in the market and the viability of these changes leading to a commercially viable product and the sources of the innovation within Motorola. 1.Identify the assumptions and assess their impact. 3. Customer Assumptions and Issues (50 points) a. Iridium started off with an initial customer strategy and then changed the strategy when the level of subscriptions was not being met. Discuss the initial strategy and the subsequent changes. b. What assumptions did Iridium make about customer adoption and how did these assumptions contribute to the product's failure? c. How did Iridium's value network contribute to its customer adoption issues? 1.What assumptions did Iridium make about its value network being able to support customer adoption? d. Speculatively, how would you forecast demand for this radical product and what assumptions would you need to use when forecasting potential demand?
The Rise and Fall of Iridium TB0179 Copyright © 2000 Thunderbird, The American Graduate School of International Management. All rights reserved. This case was prepared by Professor Andrew Inkpen with research assistance from Meredith Martin and Ileana Fas- Pacheco for the purpose of classroom discussion only, and not to indicate either effective or ineffective management. The Rise and Fall of Iridium The Global Village just got a whole lot smaller. “After 11 years of hard work, we are proud to announce that we are open for business,” said Edward F. Staiano, Iridium LLC Vice Chairman and CEO. “Iridium will open up the world of business, commerce, disaster relief and humani- tarian assistance with our first- of- its-kind global communications service.... The potential uses of Iridium products is boundless,” continued Staiano. “Business people who travel the globe and want to stay in touch with home and office, industries that operate in remote areas, disaster and relief organizations that require instant communications in troubled areas—all will find Iri- dium to be the answer to their communications needs.” Using its constellation of 66 low-earth- orbit satellites, the Iridium system provides reliable communications from virtually any point on the globe. From ships at sea, to the highest mountains to remote locations, Iridium customers will be able to make and receive phone calls on their Iridium phone. For people travelling to urban areas in the developed world, Iridium offers a cellular roaming service featuring dual- mode phones that can be switched to operate with terrestrial wireless services. Excerpts from Iridium press release, November 1, 1998 On November 1, 1998, Iridium began commercial telephone service. Satellite paging service began two weeks later. To build the satellite network, Iridium spent $5 billion, which was raised from a combina- tion of debt, an IPO, and equity investments by various corporate shareholders, including Motorola Inc (Motorola), Kyocera Corporation (Kyocera), and Sprint Corporation (Sprint). Motorola also served as the project’s prime contractor. The estimated number of subscribers needed for Iridium to break even was 400,000, and Iridium hoped to add 50,000 subscribers per month in 1999. However, a variety of problems plagued the company and by May 1999 Iridium had only 10,000 subscribers. In August 1999 Iridium defaulted on its debt and filed for Chapter 11 bankruptcy protection. In March 2000, with only 50,000 subscribers, Iridium terminated its services and announced that it would soon finalize a deorbiting plan for the 66 satellites. Motorola announced that it was “extremely disappointed” that Iridium did not emerge from bankruptcy protection. Motorola’s estimated financial exposure to the bankruptcy of Iridium was $2.2 billion. Satellite Communications Various different systems could be utilized to provide mobile satellite services (MSS). The oldest tech- nology utilized geostationary earth orbit designs. Geostationary satellites were positioned 22,300 miles above the earth’s surface and rotated with the earth in a geosynchronous orbit. From the earth’s surface, the satellite appears to be fixed above a particular point and a global system using geostationary satellites can be built using as few as three such satellites. However, these satellites were expensive, costing ap- proximately $100 million apiece to build and another $10 million each to launch. In addition, the August 1, 2000 For the exclusive use of T. Lawson-Jack, 2020. This document is authorized for use only by Tamunopriye Lawson-Jack in UHCL Spring 2020_Mgmt 5636 taught by DOROTHY KIRKMAN, University of Houston - Clear Lake from Mar 2020 to Sep 2020. 2 TB0179 distance from the earth’s surface to the satellite can cause a quarter of a second delay between sending and receiving, which can be annoying to callers. Low-earth-orbit (the system utilized by Iridium) and medium-earth-orbit satellites did not have a time-delay problem and were much less expensive to produce and launch. However, instead of appear- ing stationary over a particular point on the earth’s surface, these satellites flew overhead at speeds of more than 15,000 miles per hour. Tracking them from the ground and handing off calls from satellite to satellite was complicated and expensive. The expected failure rate of such satellites was around 10% and life expectancy ranged from five to seven years once the satellite was in orbit. The Creation of Iridium Iridium was designed to be a satellite-based, wireless personal communications network which would permit any type of telephone transmission, including voice, data, fax, and paging to reach its destination at any time, at any location in the world. The genesis for Iridium was in 1986 when the general manager of Motorola’s Strategic Electronics Division (which was involved primarily in space-related business) formed a small R&D group within his division. Motorola’s previous space-related experience had been as a subcontractor for defense contracts. Firms such as Lockheed Corporation were the prime contrac- tors and outsourced the electronics work to Motorola and other companies. However, there was a belief in Motorola’s space division that advances in electronics would allow Motorola to change the rules of space competition and become a prime contractor. The R&D group was asked to look for opportunities that could leverage Motorola’s distinctive competence in high-density electronics. In addition, the group was asked to consider commercial and defense applications. In 1987 the Strategic Electronics Division R&D group invented a satellite communication system (see Exhibit 1 for the timing of key events). The system, named Iridium, derived its name from the element Iridium, whose atomic number, 77, matched the number of low-earth-orbit satellites that the company had originally intended to launch. According to a senior Motorola manager: The space industry was almost entirely focused on defense business. The emphasis was on fail- safe systems, redundancy, and space-qualified parts. The result was always gigantic costs over- runs. We took all the conventions of building a spacecraft and changed them. Iridium was designed as a statistically based system in which a single satellite failure would not be a cata- strophic failure. We designed satellites with little redundancy and lowered the cost of building a satellite by a factor of ten. We did not need space qualified parts, which were incredibly expen- sive and not very reliable because of their low volumes. We went to the Motorola automotive division to learn about components for high-volume manufacturing. From late 1987 through 1988, Motorola analyzed the technological and commercial viability of Iridium. In the fall of 1989 Motorola’s CEO, Robert Galvin, announced internally that the company would develop the Iridium project. In early 1990 an Iridium business unit was formed with about 20 people. Motorola announced the project in June 1990 with simultaneous press conferences in Beijing, London, Melbourne, and New York. Radio spectrum was allocated to Iridium in 1992. Obtaining the spectrum required overcoming substantial resistance from INMARSAT, a global satellite communications company owned by about 80 governments. INMARSAT, whose principle service was emergency communications for ocean-go- ing ships, waged an unsuccessful battle to keep Iridium from obtaining an operating license. At the time Iridium was conceived, cellular or mobile phones were of limited use when users crossed international borders. Europe, for example, had many different mobile standards, which meant For the exclusive use of T. Lawson-Jack, 2020. This document is authorized for use only by Tamunopriye Lawson-Jack in UHCL Spring 2020_Mgmt 5636 taught by DOROTHY KIRKMAN, University of Houston - Clear Lake from Mar 2020 to Sep 2020. TB0179 3 a German phone would usually not work in France or Italy. Motorola management saw an opportunity to build a communications network that had a common standard and allowed users to use their phones anywhere in the world. At the time, it was believed that the potential demand for such a service was enormous, especially for voice telephony from the business and military community. Prior to the system’s launch, the company predicted a market of 12 million satellite phone users by 2002 and a 40% share for Iridium. The company also predicted 100 million cellular phone users by 2000. Ownership Structure Iridium, Inc. was incorporated in June 1991 and operated as a wholly owned subsidiary of Motorola. However, Motorola’s intent was never to operate as a service provider. In July 1999 Iridium privately sold shares of common stock to various U.S. and foreign investors. By 1994 Iridium had $1.6 billion of equity financing in place. A further $315 million of equity was secured during the first quarter of 1996. In June 1997 Iridium shares went public at $20, raising $225 million. Investor demand for Iridium shares was strong. As a result of three private placements of equity, five supplemental private placements with addi- tional equity investors, and proceeds received from the initial public offering of Iridium common stock, Motorola’s interest in Iridium was reduced to approximately 19%, for which it had paid $365 million. The Japanese components maker, Kyocera, and affiliates held an 11% stake in the company. Other investors included Sprint, Vebacom (Germany), Lockheed (U.S.), Raytheon (U.S.), Telecom Italia, a consortium built around the Japanese carrier, DDI, a consortia of Middle East, African, and South American companies, and companies from China, Canada, Thailand, South Korea, Russia, Taiwan, and India. Most of the companies involved in the consortia and equity placements were new telecom entrants or second carriers in the telecommunications field. Background on Motorola and Kyocera Motorola. In 1928 Paul Galvin and his brother, Joseph Galvin, purchased a bankrupt battery eliminator business in Chicago and formed the Galvin Manufacturing Corporation. The company’s first product, a battery eliminator, enabled battery-operated home radios to operate on ordinary household current. In 1930 the company introduced the first practical and affordable car radio. Paul Galvin used the name Motorola for the company’s new products, linking the ideas of motion and radio. The company’s share of the car radio business increased rapidly and established the company as a leader in the U.S. market by 1936. In 1940 a communications division was established. Shortly after, this division developed the first hand-held two-way radio for the U.S. Army and the first commercial line of two-way FM radio communications products. By 1947 the Motorola trademark was so widely recognized that the Galvin Manufacturing Corporation changed its name to Motorola, Inc. Over the next five decades, Motorola developed a diverse mix of products that lead to the company becoming a global leader in providing integrated communications and electronic solutions. Over the years, in addition to car and two-way radios, Motorola developed televisions, pagers, transponders, cellular phones and systems, and semi- conductors. In 1999 Motorola’s communications and electronic businesses focused on software-en- hanced communications products and systems, networking and internet-access products, digital and analog systems for broadband cable television, and semiconductors. Motorola was composed of three business units: Integrated Electronic Systems, Semiconductor Products, and the Communications En-