Reviving Iridium

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The Iridium Venture

Iridium had invested lot of money in R&D, building, deploying and maintenance of its satellite constellation. Though Motorola realized the fact that the venture would involve substantial time and cost outlays and was very risky, it was perturbed when the venture consumed more time and money than expected. By 1999, Iridium found itself in deep financial trouble with a huge amount of outstanding debt to be repaid to its bankers and creditors. Chase Manhattan, Iridium's lenders had already given three extensions for repayment of loans by August 1999. Analysts remarked that the company's troubles were not due to the concept of satellite telephones, but due to its faulty strategies.

Iridium had to spend a couple of million dollars every month just to maintain its infrastructure. In addition to the 66 satellites being used, Iridium was incurring heavy expenditure to maintain the spare satellites as well (to be launched in case any of the 66 satellites failed). Moreover, the company planned to offer its services to a broad customer base so as to make the business viable. The company needed at least a million subscribers to get close to the break-even point. This necessitated the maintenance of a dozen gateways, making the infrastructure involved very complex. From the very beginning, Iridium faced problems in building up a sizeable subscriber base. Iridium targeted global business travelers and certain high-end customers. But this market was not large enough. Consequently, in 1999, it had only 20,000 subscribers as against an estimated 60,000. Customers were not interested in using Iridium's services for various reasons.

First, Iridium's subscribers' had to essentially buy the specially designed Motorola handsets. They could not use any other handset. Consumers used to sleek and cheaper handsets were not happy with the bulky handsets that weighed almost a kg¹⁰. They were not only difficult to carry around but awkward to use as well.

Second, handsets were also priced on the higher side at about US $2500 to US $3000, which was as a major deterrent. To attract customers, Iridium reduced the price to $1000. In September 1999, Iridium's main competitor, Globalstar launched its satellite telephone services with handsets initially priced at $1000 and later reduced to $700. This added to Iridium's problems.

Iridium's initial service charges were $7 per minute, which was later reduced to $2 to $4 per minute depending on the location (depending on the country they were used in - for example, in Japan, users paid an initial fee of $77 and a monthly charge of $50, plus actual call charges that ranged from $2.67 per minute to $6.59 per minute).

To address the criticisms of high service charges, Iridium slashed its call rates to $1.50 - 2.50 per minute for domestic phone calls, and $3 per minute for international calls in June 1999. However, these charges were still very higher than those for telephone calls made using terrestrial or cellular networks, which worked out to less than a dollar. To add to the company's problems, Globalstar priced its service charges on the lower side from 73 cents to $3, depending on the location.

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10] The more popular cellular phones weighed less than 100 grams as compared to the heavy satellite phones and were small enough to fit in the customer’s pockets.