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News: Analysis & Commentary: Telecommunications
Can Iridium Beat the Clock?
Lenders grant an extension, but they want fast action
Last November, Iridium made lots of promises to investors and lenders as it prepared for the long-awaited launch of its $5 billion global satellite phone service. The Motorola-backed outfit proposed to offer phone service to virtually anywhere on Earth by means of a network of 66 satellites. By the end of March, the execs pledged, they would have 52,000 subscribers from among the world's business elite, $30 million in revenues, and hope of making Iridium pay.
Not quite. Analysts figure Iridium generated just $4.6 million from 15,000 subscribers. That puts it in technical default on an $800 million loan--on which the banks granted a 60-day extension on Mar. 29. That's the same day CFO Roy Grant resigned, citing personal reasons. Iridium's stock sank to 15 1/8 on Mar. 31, down 79% from its high of 70 11/16 last May. "Iridium is only going to hit bad news until late this year," says Tim O'Neil, an analyst at SoundView Technology Group.
The only way it's going to see good news after that is if it can cobble a new strategy. When Motorola Inc. executives began planning Iridium in 1985, they failed to anticipate that cellular systems would quickly spread around the globe, making the places where most execs go accessible. And by the time Iridium started marketing, it was clear that there weren't throngs of people ready to pay $3,000-plus for handsets and $7 a minute for calling when a digital cellphone is maybe $50 and calling can be as little as 10 cents a minute. "Until the phones are competitive with terrestrial phones, there might not be a market," says one industry executive.
Iridium admits some mistakes--mainly in how it tried to sell its service. "We haven't done a great job training our distribution partners," says Craig W. Bond, Iridium's vice-president for marketing development. Iridium relies on major investors that operate the system in 15 countries. There are also distribution deals with 360 partners--mainly cell phone companies--in 136 countries. These allies have less costly and more popular services to push than Iridium has to offer. And delays in handset deliveries from Motorola and Kyocera Corp. earlier this year didn't help.
Now what? Iridium is reorienting its marketing to industrial and government contracts, rather than business travelers. It's also trying to take a more active hand in sales and technical support. Under the Godfather Plan, it has assigned top managers, including CEO Edward F. Staiano, to work with each of the 15 national partners. At least some shareholders are waiting to see if this will pay off. "On a longer term basis, I strongly believe in the market opportunity," says Jeffrey N. Greenblatt, partner in Baker Nye Greenblatt LLC.
Meanwhile, rival satellite-phone ventures are coming on tap. For instance, Globalstar LP, which will launch in September, will sell cheaper $1,000 phones and calls averaging 65 cents a minute.
For now, Iridium must struggle to overcome its shaky start. If it doesn't, it may find itself permanently grounded.By Catherine Yang in Washington with Roger Crockett in Chicago