The rise of the new Iridium Satellite LLC

Investor Dan Colussy ended up purchasing the $5 billion satellite network and Iridium’s assets for $25 million in December of 2000. Colussy merged everything into a new company called “Iridium Satellite LLC” and gave the Iridium idea a fresh start.

Greg Ewert, currently executive vice president of sales and marketing at Iridium Satellite, told TG Daily that this fresh start basically took the “industrial strength iron clad satellite network” and a revised business model that enabled the company to take huge steps towards profitability. “The approach to sell handsets to executive travelers was flawed,” Ewert said. “The fact that these phones are relatively bulky and heavy and need a line of sight to satellites did not make them an attractive consumer product.”

Additionally, Iridium’s board of directors worked like a “dysfunctional United Nations”, according to Ewert: 30 people from different nations around the world, representing different interests made it difficult to implement an economical roaming environment. “The underlying corporate structure was not well thought out,” Ewert said. Today, Iridium is much leaner and focused on military, government, as well as industrial and science markets.

Colussy scrapped the old structure and kept the technology – for a bargain. Not only did he get the satellites for half a penny on the dollar, Motorola also assumed liability for all Iridium-related lawsuits – which have not been entirely resolved until today.  While the company was able to retire an $825 million Puttable Reset Securities PURSSM in February 2003 and settle an $800 million suit brought against the company by Chase Manhattan Bank for $383 million in the following month, the company has still suits pending, claiming more than $4 billion in damages.  The company’s financial filings still carry a footnote cautioning about risks resulting from “unexpected liabilities or expenses, including unfavorable outcomes to any pending or future litigation, including without limitation any relating to the Iridium project.” (However, the Wall Street Journal reported in September of last year that Motorola may be "largely off the hook")

In a second deal, Colussy managed to drop the maintenance cost of Iridium’s satellites. It was speculated at the time that he was able to convince Boeing to manage the network for only 10% of the cost what Iridium originally paid. This, of course, dropped the breakeven point substantially – to an estimated (and not confirmed) 60,000 users.

A contract with the U.S. Department of Defense (DoD) contract allowed Colussy to take a huge step towards that breakeven point. He secured a deal for 20,000 government users on Iridium’s network, which brought in enough revenues to keep all 66 satellites in the sky. Under the terms of that deal, Iridium received $72 million to provide secure voice communications for the Navy and other government users over a 2-year period. The original agreement included the option for the DoD to extend the contract through 2007 for $252 million. Talk about business brilliance.

Iridium confirmed that the DoD contract was renewed through 2005 with a $36 million per year payment, but the company did not release details whether the 2007 option was exercised. However, Ewert told us that more than 31,000 DoD users are currently on Iridium’s network, comprising about 13% of the company’s subscriber base.

Speculations about a possible IPO of Iridium have been around for at least four years, but recent reports indicate that the company could be aiming for 2009 as a possible time frame for going public.


The Iridium network: Feature set

The network originally installed by Motorola includes 66 LEO satellites, which are circling the earth at an altitude of 485 miles and a speed of 16,382 mph.

The satellites are organized in a structure of six orbital planes with eleven units each. Each satellite is cross-linked to four other satellites – to two in its own plane and to two in the next. This feature basically enables the network to seamlessly transfer calls to other calls, if one satellite loses the line of sight to a calling device (each satellite covers a radius of 2209 km or 1373 miles and can remain connected to a device on the ground for a maximum of nine to ten minutes.) While satellite phone to satellite phone calls are completely handled via Iridium’s network, the company also operates “gateways” on the ground (the commercial gateway is in Arizona) to route satellite calls into terrestrial voice and data networks.   

Iridium claims that its LEO network is very reliable: Connections are established for 99% of all calls and more than 98% of calls and data connections lasting up to 3 minutes are completed. Each satellite is capable of handling about 1100 simultaneous connections.

The capability of the network to provide seamless mobile communication anywhere opens a wealth of applications areas. But while the idea of carrying such a phone to remote areas of this world and calling friends from a beach somewhere in the South Pacific sounds enticing, consumers do not represent the majority of Iridium’s customer base. Besides the massive use of the network by the DoD, which uses satellite phone services in Afghanistan and in Iraq, especially the oil and gas and construction industries have adopted the service. Iridium is deeply involved in aeronautical and maritime applications as well.

Voice still makes up the majority of airtime for Iridium, but it is data that is showing the strongest growth. According to Ewert, the use of data was up 226% last year (he did not say how many voice and data minutes were used overall). The data functionality is integrated into a modem and antenna system (which can include GPS features as well) that can be attached to virtually any device for remote tracking purposes. For example, these systems can be used to track cargo and provide telemetry and diagnostics features for equipment on oil rigs.

Data transmission rates are somewhat secondary in these applications. Since Iridium was originally designed as a voice-only network, the basic data rate is only 2.4 Kb/s. But often, a simple text message such as “I’m ok” is enough and is transmitted fast enough. And, Iridium provides actually pretty fast connection speeds, if they are required: The company is offering solutions that enable customers to boost the available bandwidth to up to 128 Kb/s via multiple antenna systems. One of the most impressive demonstrations of Iridium's data capability so far has been a live video feed from the North Pole, using six parallel modems.   

Of course, there are handset applications as well: The model 9505A, currently the only handset available, looks like a mid-90s Motorola handset with a huge antenna attached to it. The rugged device (it is water, shock and dust resistant) weighs 13.2 ounces or slightly more than a soda can, provides 30 hours of standby time and 3.6 hours of talk time. In fact, the look of satellite phones hasn’t changed much over the past decade: They are still too large to enable a mass market adoption of the technology. But Ewert believes that multimode handsets, possibly in much smaller form factors, could become available within three to five years.

What has changed dramatically over the past ten years is the pricing of satellite phone calls. Customers are paying less than $2 per minute or even less than $1, depending on the subscription plan. Iridium prepaid calling cards start at about $145 for 75 minutes and go up to $4250 for 5000 minutes, which translates into per minute charges between $0.85 and $1.93 (calls to Iridium phone from landlines can be very expensive and exceed a cost of $10 per minute). Considering the extreme environments such a handset can be used in, some may consider these rates a bargain. Even if you are simply traveling to Germany and you would expect T-Mobile and its parent company Deutsche Telekom to provide reasonable calling rates, Iridium actually could be the more economical provider. In fairness, we have to mention that the 9505A phone is not subsidized and not really what you would call cheap in today’s world: The device currently sells in the $1500 range.   

And, just in case, you were hoping to use a satellite phone instead of a cellphone in the near future, don’t get your hopes up just yet: “We don’t have to go into the commercial space to be successful,” Ewert said. “The satellite phone is complementary to cellular applications. I don’t see any limitations for our growth in this area yet.” In other words: Commercial services aren’t out of the question, but Iridium isn’t really convinced that a mass market satellite phone is the right business strategy at this time.


Read on the next page: Iridium’s next-generation network, Rival Globalstar, Conclusion