Iridium
From Invertopedia, the encyclopedia of how things fail
Iridium was a satellite phone network backed by Motorola[1]. It spent $5 billion building and launching 66 satellites[1][3], opened for calls on November 1, 1998[4][5], and filed for Chapter 11 on August 13, 1999, about nine months later[5][6]. It had about 10,000 subscribers against a forecast of 500,000[1]. In late 2000 a group of investors bought the dormant system for $25 million[3].
Contents
The bet
A phone that worked anywhere on Earth, routed through a ring of 66 satellites[1], would sell at a premium to people who travelled. Iridium forecast 500,000 subscribers by the year after it started[1].
The money was borrowed against that forecast. Iridium's bank loans came with covenants that set minimum subscriber and revenue numbers it had to reach[2].
What happened
| Nov 1, 1998 | Iridium service opens. The first call is made by Vice President Al Gore.[4][5] |
|---|---|
| 1999 | Subscribers number about 10,000, against a forecast of 500,000.[1] |
| Mar 1999 | Iridium misses the subscriber and revenue minimums in its loan covenants. Lenders extend the deadline three times.[2] |
| Aug 1999 | Iridium defaults on two bank loans of $800 million and $750 million, with a $90 million bond interest payment coming due.[2][6] |
| Aug 13, 1999 | Iridium announces a Chapter 11 filing. CEO John Richardson calls it "the most efficient way to conclude Iridium's restructuring negotiations."[2][5][6] |
| Mar 2000 | With no buyer found, a bankruptcy judge lets Iridium cut off service, and it says the 66 satellites will be steered down to burn up in the atmosphere. Motorola, its lead investor, is willing to let them go.[7][8] |
| Late 2000 | Investors buy the dormant system out of bankruptcy for $25 million. Iridium had debts of $4.4 billion; the sale wipes out more than $4 billion of them.[3][8][5] |
| Dec 2000 | The US government agrees to pay $72 million for a two-year service contract.[3][5] |
| Mar 28, 2001 | The new Iridium Satellite LLC relaunches for industrial users in remote places, with phones under $1,000 and airtime under $1.50 a minute.[3] |
The kill shot
It was designed for a world without cell towers, and by the time it launched the towers were already up. Its $3,000 phone did not work inside buildings or cars, which is where most people make calls.
While the satellites were being built, cellular networks spread across most large developed countries. Cellular did not reach everywhere, but it was far cheaper[1]. Iridium's phones could not be used inside moving cars, inside buildings or in many urban areas[1], so the people most likely to pay for a premium phone already had one that worked better where they were.
The debt made the gap fatal. Iridium's loans depended on hitting subscriber and revenue targets[2]. When it reached about 10,000 subscribers instead of the half million it had forecast[1], it missed the covenants, defaulted on $1.5 billion of debt and filed for bankruptcy[1][2][6].
Red flags ignored
- Priced for a tiny market. A $3,000 handset and talk time of up to $5 a minute[1].
- It didn't work where people are. No calls inside buildings, in moving cars or in many cities[1].
- A cheaper rival was being built at the same time. Cellular networks were spreading while Iridium's satellites went up[1].
- Loans tied to a forecast. The covenants required subscriber numbers the business never came close to[1][2].
The cost
$5 billion to build and launch the network[1][3]. Iridium defaulted on $1.5 billion of debt[1], and its bankruptcy was one of the 20 largest in US history at the time[1]. Motorola owned 18 percent and had guaranteed the $750 million loan that went into default[2].
The whole system sold for $25 million in late 2000[3], and the sale wiped out more than $4 billion of debt[5][8].
The inversion
If your project takes years to build, price it against what the cheap alternative will look like on launch day, not on the day you started. And make sure it works where your customers actually are.
What survived
The satellites. Dan Colussy, a retired airline executive, led the group that took over the system and ran it more cheaply, aimed at customers such as the Defense Department[4][7]. It relaunched in March 2001 with Boeing running the network[3].
The company that grew from it, Iridium Communications, still runs the network and has replaced the original satellites with a new generation, Iridium NEXT, launched on SpaceX Falcon 9 rockets from 2017[5][7].
References
- ^ “The 10 Biggest Tech Failures of the Last Decade: Iridium”. Time (Douglas A. McIntyre, 24/7 Wall St.), May 14, 2009. Motorola backing, the $5 billion cost, 66 satellites, the $1.5 billion default, 10,000 subscribers against 500,000 forecast, the $3,000 handset, $5 a minute, no use in cars, buildings or cities, cheaper cellular, one of the 20 largest US bankruptcies.
- ^ “Iridium charts bankruptcy plan”. RCR Wireless News (Reily Gregson), August 16, 1999. The voluntary Chapter 11 filing, loan covenants on subscribers and revenue, the missed March deadline and extensions, the defaults, Motorola's 18 percent stake and its guarantee of the $750 million facility.
- ^ “Iridium Satellite launches service”. Computerworld (Todd Weiss), March 28, 2001. The relaunch, the 66-satellite network, the $5 billion build cost, the $25 million purchase, phones under $1,000, airtime under $1.50 a minute, Boeing as operator, the $72 million Defense Department contract.
- ^ “The Iridium global satcom system, Part 3: Very nearly crash and burn”. Microcontroller Tips (Bill Schweber), November 5, 2020. Service opening on November 1, 1998 with Al Gore's call; Motorola's plan to deorbit the satellites; Dan Colussy, retired Pan Am chief, leading the buyers.
- ^ “Iridium Communications”. Wikipedia. Cross-check: November 1, 1998 launch, the August 13, 1999 filing, the December 2000 $72 million government contract, the $4 billion of debt erased by the sale, Iridium NEXT launches.
- ^ “Iridium to enter Chapter 11”. The Register (Tony Smith), August 14, 1999. The August 13 Chapter 11 announcement, the $800 million and $750 million loan defaults, the $90 million interest payment, John Richardson's quote.
- ^ “Review: Eccentric Orbits”. The Space Review (Jeff Foust), July 11, 2016. Motorola's willingness to deorbit the constellation, Dan Colussy's takeover aimed at customers like the Defense Department, the Iridium NEXT launches on Falcon 9.
- ^ “Flaming end for satellites”. BBC News, March 18, 2000. Court permission to cut off service, the plan to deorbit the 66 satellites, Motorola as lead investor, Iridium's $4.4 billion of debts.