Iridium's Demise: A Case of Misreading the Market

FRAMINGHAM (04/10/2000) - It was with great sadness that I watched the curtain fall on Iridium a few weeks ago. That day, I received dozens of e-mail congratulations from those who had seen Yankee Group research and my own prognostications going back five years saying the Iridium LLC concept was fatally flawed. But I felt terrible nonetheless.

Let's do a postmortem. How could a company as savvy as Motorola Inc. have misread the market so badly?

Let me be forthright: I own an Iridium phone. I paid full retail for it:

$3,500. I sent it into the jungles of Vietnam and Cambodia with my daughter; I took it with me to South America, Australia and Africa.

Did it work well? No. Of the dozens of times I tried to use it, it worked once.

Once. But the amazing thing is that it worked at all.

Why did Iridium fail? Because there was no sustainable need for the service.

But in corporate America, when a CEO wants to believe something, he can find the numbers that will support his "vision." Yes, there are 100 million homes in America, 500,000 vending machines, 122 million cars, 71 million trucks. So what? Yes, there could be remote locations where sheepherders would love to be able to call Mommy in Queens, but the call's cost would be 30 percent of their monthly income.

Usually what happens in these business plans is a CEO takes an extremely large number (six billion people in the world), adds some classic number (half of whom have never made a phone call) and declares a multibillion-dollar number as the size of the addressable market ($20 billion). He then pontificates that his goal is only to get a small percentage of a very large number (5 percent) and gives the seemingly logical conclusion that his market estimate is accurate.

But it's nothing of the sort.

Years ago, The Yankee Group invested money in American Mobile Satellite Corp., whose mission was to put small antennae on trucks, allowing drivers to communicate with their head office as they rolled across America. The idea was the company would use traditional cellular when it was in the cities, reverting to satellite when it was on the open road. By the time we finally got the company up and running, virtually every major highway had been outfitted for cellular.

Iridium was run by Ed Steano, who had previously held the No. 3 job at Motorola. Steano is as smart and tough a manager as you will find - gruff, focused, no B.S. How could such a guy get so blindsided? The answer: He wanted to believe.

Satellites are not fiber optics. For one thing, they start to fall out of the sky the minute you launch them, especially if they are on low-Earth orbit. So while fiber will stay in the ground for 20 years, a $9 billion investment in satellites is going to last just six years - at $1.5 billion per year. If you have only 100,000 subscribers, your cost is going to be $15,000 per year, per subscriber. Even if you have one million subscribers, your cost is going to be $1,500 per year. Assuming that someone used your phone for 25 days per year when they were not within cellular serving areas, the cost comes out to $60 per day - and that's what it costs, not what the company would charge.

In my two years of owning an Iridium phone, I made one essential phone call, so my cost per call was $3,500. I am taking that phone and bronzing it to remind me to be wary of technological feats that suck up money. Before I sound sanctimonious, let me add that it's important to try new things. But maybe we should do better homework on technologies that are elegant but doomed.

In the meantime, is anyone interested in a bronzed Iridium phone that was used only once?

Anderson is senior managing director of Yankeetek, a Cambridge, Mass., venture incubator. He is also chairman of The Yankee Group and the William Porter Distinguished Lecturer at the Massachusetts Institute of Technology. He can be reached at handerson@yankeetek.com.

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