Saved in Space
November 10 2011 by Jennifer Pellet
In 2000, talk swirled around a literal flame-out faced by satellite telephone company Iridium. Unable to find backers or buyers a year after filing bankruptcy, the company was forced to set a date to let its 66 orbiting satellites—a network Motorola spent $5 billion developing—drop to crash and burn in the Earth’s atmosphere. Then, a group of investors swooped in to save the sky from falling for Iridium, paying fractions of pennies on the dollar for the world’s largest commercial satellite network.
For $25 million, those investors now owned a network capable of providing voice and data services anywhere outdoors around the globe, explains Matt Desch, who joined the company as CEO in 2006. The question was what to do with it. Previous management had fatally attempted to market Iridium as a consumer product—failing to realize that cell phone networks would soon become so pervasive as to eliminate the need for even the most frequent of travelers to invest in a pricey, wireless phone that worked anywhere on the globe.
To Desch, the company’s future lay in serving commercial markets with a need to make voice and data transmissions in areas still not covered by cellular service—approximately 90 percent of the Earth. “Ninety-nine percent of the areas where people live are probably covered now,” he says. “But cell phone towers typically have less than a 10-mile coverage; so, if you’re looking to track assets being shipped across remote areas or by sea, those will be out of coverage.”
He set about transforming Iridium to service companies and people with a need to communicate from such locations—such as oil platforms at sea, mines in mountainous terrain and military operations in the desert. There are key lessons in the steps of that transformation effort that are applicable to any company looking to leverage technology.
Lesson One: When the market won’t bear the price you need to charge, something has to give.
Desch’s first turnaround move was to address Iridium’s value proposition. “We took out a lot of cost, getting Boeing, for example, to fly the satellites for a fraction of what Motorola was spending,” he recounts.
Lesson Two: Don’t fall in love with technology for it’s own sake—it must meet a business need.
Repricing alone wasn’t going to save Iridium. That demanded a business model shift, says Desch, who, coming into the company as an outsider, was able to take a fresh perspective on its customer base. “We vectored the business from a consumer business to a wholesale business selling airtime,” he says.
The move paid off. Today, Iridium is closing in on 500,000 subscribers drawn from five different business areas: maritime, aviation, handheld, the Department of Defense and machine-to-machine communications. “Between 30 and 40 percent of sales come from oceanic traffic, the Department of Defense accounts for between 20 to 25 percent and aviation is probably 10 percent,” says Desch, who notes that Iridium can command a premium for its services. “If you’re on top of a mountain, flying over the Pacific Ocean or sailing through the Northern Passage and you really need to connect, you’ll pay a lot of money to do it.”
Given the high barriers to entry into Iridium’s market—the time and cost of building and launching a global satellite system—the company is uniquely positioned to continue to command that premium. What’s more, the need for the kind of global communications capabilities it provides continues to swell as communication and tracking technology evolves. “There are already so many devices that enable messaging, mapping and other information, and more are being developed,” says Desch, who notes that as a wholesaler, Iridium provides access to the network to its partners, who resell it to the end user. “Pictures, texts, email and application data critical to people’s businesses and lives are all transmitted between all of these different devices.”
Lesson Three: Invest in the future, or become part of the past.
Iridium, which posted $336 million in revenues over the last 12 months and is growing between 20 to 25 percent, also needed to gear up for the future by replacing its current satellites, which are expected to near the end of their lifespan in 2014. The company began development of a next-generation satellite constellation, Iridium NEXT, in 2010. Set to launch in 2015, the new system is the fruition of years of financial wrangling by Desch, who took Iridium public in 2009 to help pave the way for NEXT. “When I came in, we had a fast-growing, unique company whose future wasn’t very assured,” notes Desch. “It was either going to make a lot of money for its investors for the next few years [until the current satellites system’s demise] or it was going to continue on forever.”
Iridium’s IPO proceeds were earmarked for NEXT, but Desch needed significantly more to hit the projected price tag of $2.7 billion. Despite the tough credit market, he was able to win a $1.8 billion credit facility backed by the French government, clearing the way for the company to launch NEXT in 2015.
“We’ve accomplished the big challenge, which involved financials,” says Desch. “The fact that we were able to do that, despite a global meltdown of financial markets, demonstrates the power of the platform. Now, the next few years will be about achieving the full potential of the company. We’re pretty excited about that.”