Down to earth reasons for Iridium failure

News Analysis: Disappointing technology and poor management contributed to satellite phone fiasco

IMAGINE BEING in outer Mongolia and having to phone someone sailing 50 miles off the coast of Fiji. Imagine, moreover, that money is no object.

Serving such exotic communication needs with no thought to cost was the fatal rationale behind Iridium, the pounds 3bn satellite-based mobile phone network, which filed for US bankruptcy protection on Friday.

Behind the failure lies a salutary tale that shows how a potentially revolutionary product was hamstrung by unrealistic planning, insufficient management control, bungled marketing and, most surprisingly, technological pigheadedness.

Iridium began as a pet project of Motorola executive Barry Bertinger and some engineers in the mid-1980s after the former's wife famously complained of not being able to phone the US while on holiday in the Caribbean. In Motorola's can-do engineering culture there was considerable attraction to the technological challenge involved in setting up Iridium's constellation of 66 satellites that would ring the world, allowing, in theory, phone calls to be transmitted and received from the furthest corners of the earth.

Iridium's first mistake was to build a stand-alone network in space. A call from an originating handset accesses the network at the nearest satellite, travels through space from satellite to satellite before beaming down to its destination on Earth.

Unsurprisingly, all that technology came at a stiff price. Iridium handsets cost pounds 1,900 and calls were as much as pounds 5 per minute. Worse still, the Iridium handsets were clunky, weighed about 1lb, and harkened back to Motorola's infamous brick phones, common a decade ago.

Those shortcomings proved fatal. Indeed, nine months after its highly publicised launch and a pounds 60m international marketing campaign, Iridium had managed to attract less than 20,000 customers compared with a guarantee of 52,000 specified in lending covenants with a syndicate of bankers that includes Barclays and Royal Bank of Scotland.

Though lots of new products fail to match early expectations, few, it seems, have failed with such an international bang. Insiders say Iridium's internal structure proved too cumbersome. Board meetings of the 28 directors, they say, resembled the UN Security Council replete with headsets and interpreters working in five languages.

But the most damning indictment of Iridium, and of Motorola, its largest shareholder with an 18 per cent stake, must be the system's patchy technology. Handsets depend on strict line-of-sight access between the phone's antennae and the orbiting satellite. It means, unlike conventional mobile phones, that Iridium won't work indoors. Worse, dropped calls are common, completion rates low, while other network functions perform unevenly.

What is more, in an age of pay-as-you go with handsets on sale in supermarkets and ready to use in minutes, the Iridium phone, insiders say, required users to undergo special training. And one of the phone's key features, a cartridge allowing users to switch from satellite to conventional mobile networks when coverage was available, has been almost non-existent.

The mounting technical problems and an unrealistic launch timetable led inevitably to poor execution when it came to marketing. Partners responsible for promoting the service outside the US delayed setting up marketing teams and organising distribution channels. In the UK, Orange delayed offering services until April, a full year after the company agreed to become a service provider. It is understood that idiosyncrasies with the Iridium service, including limited functionality and fraud protection, made the satellite system a difficult sell to corporate mobile users.

Whether the Iridium fiasco drags down the half dozen or so other would- be satellite communications ventures is unclear. Globalstar, backed with pounds 2.2bn by Loral Space of the US, Vodafone Airtouch and others, is due to launch a mobile voice service in October. But Globalstar has chosen a different marketing focus and a different technological approach. Instead of selling services to international business travellers, Globalstar will focus on people in developing countries and remote parts of the US where land-line or mobile phone networks don't exist. Some of its initial areas will be Argentina and South Africa.

Also different is Globalstar's use of Earth-based telecoms networks. Its "bent-pipe" satellites function as simple relays between end-users and ground stations. Call processing and switching are carried out by gateways on the ground. Once a call from a Globalstar user has bounced off a satellite to the nearest local gateway, it is relayed to its final destination via existing telecoms networks.

Hopes for the industry may hinge on the success of Globalstar's launch. Analysts believe the market could reach pounds 10bn by 2005 with 30 million customers. But forecasts aside, if a sustainable market truly exists, Globalstar needs to prove it. As one analyst said: "If Globalstar doesn't go, no one will."

But even if Globalstar fails, another generation of satellite services, this time targeting the burgeoning market for Internet access, are on the drawing boards for launch from 2003. Their strategy is to offer sizzlingly fast Internet service at speeds of more than 2.0 megabits per second - 50 times existing modem speeds.

Probably the best funded is Teledesic, the pounds 6.3bn venture backed by Bill Gates, Craig McCaw, a billionaire pioneer in the US mobile industry, as well as Boeing and Motorola. Teledesic's network, double the price of most others, uses satellite-to-satellite switching technology similar to Iridium's. That's expected to give it the edge in high value-added services like video-conferencing.

Another burgeoning Internet service provider is SkyBridge, half owned by Alcatel, the French telecoms equipment maker. Headed by Pascal Sourisse, a 37-year-old engineer, SkyBridge plans to start putting its 80-satellite, pounds 2.6bn network in place in mid-2002 with Internet service planned to begin in 2003. It is still rounding up financing, however, and could be more vulnerable than others should problems emerge at Globalstar.

Two other satellite Internet systems are also on the drawing board. Spaceway, backed by Hughes Electronics, and serving North America, plans to begin in 2002. Astrolink, headed by Lockheed Martin, is aiming for a 2004 launch.