Guest column: Why Iridium fell to earth: lessons from a debacle

Iridium has been on my mind since a reporter called the other day and asked, "How can smart people make such bad decisions? How often does a debacle like Iridium happen?"

Good questions. Iridium is the recently bankrupted joint venture that was initiated by Motorola in the late 1980s to build a network of 66 high-orbit satellites to provide wireless telephone service anywhere on the globe, including developing countries and hard-to-reach areas. Iridium has invested some $US5 billion to date.

Some answers: first, we know that innovations can take decades to commercialise and that there can be many winners and losers along the way. The more time involved, the greater the uncertainty, because much can happen between the laboratory and the mass market. Even if the technology works, lots of alternatives can appear, or customer needs might change radically. The lesson here: reducing time to market can reduce future uncertainty, especially with a rapidly evolving technology and marketplace.

Second, we know some innovations require massive investments in infrastructure before they become viable. The more infrastructure required, the greater the uncertainty of success, especially if the assets are good only for the original idea. The lesson here: reducing infrastructure requirements, spreading investment risk and increasing asset flexibility (like relying more on software than on hardware) can reduce the likelihood of a strategic and financial disaster.

Third, we know substitute products eventually threaten most businesses. Sometimes they come from different industries and are hard to spot in advance. The Pony Express was a great idea, but the railroad and telegraph made it obsolete within about a year, even though those alternatives required daunting infrastructure expenditures. The automobile put horse-and-buggy outfits out of business, even though it took many years to improve auto designs and invest in factories, roads, petroleum refineries and gas stations. The lesson here: think broadly about potential substitutes. If lots of possible alternatives emerge, then the investment is probably bad.

Even "experts" find it difficult to make the right calls. Consultants at Arthur D Little predicted there would be demand for only about a half-dozen computers worldwide after World War II. They failed to foresee innovations in circuit technology (which led to incredible improvements in cost, price and reliability) such as the transistor, which was already in AT&T's Bell Labs. Other consultants dismissed Xerox's copying machine in the 1950s because the new device was so expensive. They didn't foresee cheap leasing, per-copy charges and the addictive nature of copying. RCA wasted hundreds of millions of dollars in the 1960s and 1970s on its ill-fated video disc, which lost out to the VCR.

More recently, Microsoft spent a billion dollars on the original Microsoft Network -- a propriety non-internet system designed to compete with AOL. Bill Gates deftly changed course when he realised his mistake, but we shall see if the Teledesic satellite investment pans out. Teledesic is a high-orbit network of sophisticated satellites intended to bring the internet over wireless devices. This system has also taken years to develop and faces stiff competition and simpler alternatives.

Returning to Iridium: even when it began, it had all the features of a potential failure. The Motorola people knew they needed 10 years or more to deploy the system. They knew it required a huge, risky investment in R&D and infrastructure. Motorola found partners, but planning, designing, financing, building, deploying and debugging the system have taken more time and money than expected. In addition, the service today is expensive and inferior to cheaper alternatives, like new land-based cellular phones and internet communications. Iridium doesn't even work indoors or offer data services yet.

Not surprisingly, Iridium has only 20,000 customers, instead of the 600,000 "planned" for 1999. Producing a new generation of satellites is rocket science -- usually the task of governments, not companies. Bankruptcy was not inevitable, but it is not surprising.

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