Commercialization imperatives for start-ups

Sometime in 1985, Bary Bertiger was in the Bahamas on a holiday trip with his wife. His wife complained that she could not reach her business clients via her cell phone from there. In those days the terrestrial cellular phone services were not available everywhere.

The Motorola engineer thought if his wife is facing such connectivity problem then high-flying senior business executives across the world might also be facing the same type of problem. With travel among business executives increasing rapidly, Barry identified a genuine problem and a great opportunity. He and two other Motorola engineers envisioned Iridium as a provider of global telephony via a network of Low-Earth-Orbiting (LEO) satellites that would allow subscribers make phone calls from any global location.

With support from the then Motorola Chairman Robert Galvin, his son and Motorola (as prime contractor), they went ahead with the project. The project saw a capital investment of about USD 5 billion, raised from a combination of debt, an IPO and equity investments.

Iridium focused on international business executives who frequently travelled to remote areas where cellular phone service was not available. It interviewed 23000 people from 42 countries after screening over 200000 people, and surveyed over 3,000 corporations to select its target customer segment.

Companies and experts from around the world joined hands to develop, test and launch the Iridium network of 66 LEO satellites (400–450 miles in altitude from the earth).

Around mid-1998, at a time when it became one of the favourites in Wall Street and enjoyed analysts’ confidence about its bright potential because of its strong and experienced management team, CEO Edward Staiano predicted Iridium’s subscriber base to reach 500,000 by 1999.

On 1st November 1998, after about $140 million advertising campaign and an opening ceremony where then US Vice President Al Gore made the first phone call using Iridium, it launched its satellite phone service.

By April 1999, Iridium could only win 10,000 subscribers which grew to 20000 by August 1999, much less than the 52,000 necessary to meet loan covenants. It defaulted on $1.5 billion in loans. Nine months after the launch, on Friday, 13th August 1999, Iridium Satellite LLC filed for bankruptcy, marking it as one of the 20 largest bankruptcies in US history. With only 50,000 subscribers in March 2000, Iridium terminated its services.

According to a study by Booz Allen and others, after all the time, effort, and money spent in screening and developing new products, 50% to 67% of them fail in the commercialization process. Iridium is an interesting case study for start-ups to learn from on several counts.

Commercialization takes several aspects into account, including production, distribution, marketing, sales and customer support. I think the failure in addressing the Desirability-Viability-Feasibility triad became one of the critical factors for Iridium’s commercialization process not falling on track.

Let us check from the perspective of fundamental questions of Desirability-Viability-Feasibility triad, which is key to sustained success.

DESIRABILITY:

Do the users really want this?

Demand for seamless communication was there among business executives. ?

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Will this solution meet a genuine need?

Iridium’s launch campaign gave the message that it would allow voice, data, fax, and paging messages to be transmitted to anyone from anywhere at any time.

Its technology depended on line-of-sight between phone antenna and orbiting satellite. Subscribers could not use the phone when they were inside moving cars or buildings and in many urban areas. The users had to align the phone to get proper connection even in open fields. To work in dense urban areas, Iridium phones required a special over-sized antenna to boost signal strength.

It lacked adequate data capabilities that increasingly became a key requirement of business users.

Iridium’s solution could not actually meet the genuine need of its target users.

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Will it fit into lifestyle of your customers/users?

Iridium could not really fit into lifestyle of its target customers.

Iridium handset, though smaller than cell phone competitor Comsat’s Planet 1, was almost the size of a brick. The handset was seven inches long, including antenna, and weighed about one pound, making it difficult to fit into a briefcase.

It required special solar-powered accessories for recharging the battery, which was difficult to get in remote areas.

Whenever the senior business executives had to make a call or receive a call they had to go out of the building, may be leaving in-between a meeting, or get out of a car if they were travelling.???

Will it appeal to them?

Excerpt from Iridium Press Release, November 1, 1998 says:

“Business people who travel the globe and want to stay in touch with home and office, industries that operate in remote areas, disaster and relief organizations that require instant communications in troubled areas — all will find Iridium to be the answer to their communications needs.”

Iridium could not live up to the expectation of its target customers leave alone appealing to them.

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Will they actually want to buy it?

Due to manufacturing bottlenecks, especially at Kyocera (one of its two main suppliers) Iridium could not even arrange handsets for its few subscribers that actually wanted one.

Iridium launched the service before enough phones were available to sell to its prospective customers.

Will they finally buy it?

A report by Wall Street Journal, after Iridium’s launch campaign said:

“Over a matter of weeks, more than one million sales inquiries poured into Iridium’s sales offices. They were forwarded to Iridium’s partners — and many of them promptly disappeared, say several Iridium insiders. With no marketing channels and precious few sales people in place, most global partners were unable to follow up on the inquiries. A mountain of hot sales tips soon went cold.”

Moreover, feedback on benefits or lack of benefits from the few customers they could win might have been a deterrent for new buyers to actually buy the service. The traction was not there.

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Let’s now try to get answers to these FEASIBILITY questions:

Can the product be manufactured the way customers/users want to have it?

One of the major drawbacks, as I feel, was the dependence on line-of-sight between phone antenna and orbiting satellite. The customers could not get the service in the manner they wanted it.

Moreover, tracking the satellites, which flew overhead at speeds of more than 15,000 miles per hour, from the ground and connecting calls from satellite to satellite were complex and expensive.

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Is the technology within the startup or can the technology be accessed easily?

Apart from Motorola, Iridium had contracts with Lockheed Corporation for designing and constructing the satellite bus; Raytheon Corporation for designing the antenna for communication between the satellites and Iridium handsets; and COMDEV for the antennas for inter-satellite and gateway links. There were other major suppliers as well like Telesat, Siemens, Telespazio, Bechtel, Khrunichev Enterprise, China Great Wall Industry Corporation, and McDonnell Douglas. ?

Iridium could access leading-edge technology from outside but that required a lot of coordination and costs in terms of both money and time.

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Is the technology fool-proof and also cost-effective?

Initial concept to actual development took 11 long years. Motorola built the Iridium network on time, on budget ($3.5 billion) and to specifications. But, the final project cost exceeded by $ 1.5 billion because of late addition of some features and technologies.

Moreover, the software that Motorola deployed in the system had about 20 million lines of software code which required debugging. However, Iridium started selling the service before all testing and debugging could be completed. This later resulted in service problems because of poor testing. This led to a perception that the system was prematurely turned on.

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The questions on VIABILITY are:

What would be the lifecycle cost?

Expected life of Iridium satellites ranged from 5-7 years once a satellite was in orbit. Its service and handset lasted in the market actually for roughly one and half years only.

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What value the customer would perceive at different price points?

With $3000 for purchasing a handset and service charge of $3 to $5 (depending upon the location) for per minute call as well as the inconvenience of making or taking a call beyond sight of satellite the cost side weighed too much for the customer to perceive value in Iridium service.

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What would be the demand and profitability at different price points?

Apart from the points cited above, an Iridium satellite simultaneously could handle only 1,100 calls. Therefore, achieving requisite economies of scale for offering its customers lower prices could not have been possible for Iridium.

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Will the solution align with the startup’s business goals?

Iridium relied heavily on outside consultants for assistance in developing a marketing strategy. Its partners, especially those outside US, delayed setting up marketing teams and distribution channels.

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What will be the return on the investment?

Neither the Iridium service nor the service providers were actually ready for the launch.

Among several other reasons, Iridium’s highly leveraged capital structure; lack of control over partners’ marketing initiatives; high handset and service pricing; design and service limitations made return on the investment uncertain.

Here’s what the Iridium management said in its 1998 Annual report.

“Iridium believes that its slower than expected subscriber ramp-up and revenue generation have been primarily the result of problems with the initial distribution of subscriber equipment, a shortage of fully-trained service providers and sales personnel and a lack of effective marketing coordination among Iridium, its gateways and its service providers. During the initial roll-out of Iridium World Services, (i) Kyocera experienced significant difficulties in achieving Iridium’s quality control standards and was unable to ship significant quantities of phones until early March of 1999, (ii) there were substantial difficulties in distributing phones and pagers to various markets around the world, (iii) although Motorola’s satellite phones and pagers have been available since the commencement of commercial operations, the production of cellular cassettes for its dual mode satellite/cellular phones and some other accessories was delayed, and (iv) Iridium and its gateway operators had difficulty identifying and training service providers and their sales staffs.”

We would find many takeaways from studying the Iridium case.

Start-ups, must check their projects especially on the Desirability-Feasibility-Viability points at every stage and should not loose the sight of the sweet spot for sustained success.

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As an Entrepreneurship Educator and a Start-up Mentor, I am on my mission to contributing to growth of entrepreneurial ecosystem.

I believe that there are many under-privileged talents across the globe that, if given access to basic knowledge of start-up operations, can create major impact by crafting solutions that would help in achieving the UN SDGs. I believe start-ups have a great role in helping the world taking care of its sustainability and environment by coming up with life centred design of solutions.

To help and add value in lives of such start-up enthusiasts I write on different aspects of entrepreneurship in my newsletter ACUITY.

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Debasish Bhattacharyya

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