Early cellular carriers did it. Early paging carriers did it. Mobile data carriers are doing it now, and
according to analyst Tim O’Neil of SoundView Technology Group Inc., Iridium L.L.C. should do it as well.
That is-
subsidize handsets to promote network usage. It’s a standard ploy of start-up carriers but one Iridium has proven
reluctant to employ so far.
“They have to start looking more like a wireless carrier than a satellite
company,” he said, “and every wireless carrier in the world has subsidized handsets.”
Few dispute
Iridium did an impressive job building and launching the world’s first low-earth-orbit satellite network for global voice
communications. But all that effort will be for nothing if the company is unable to put enough subscribers on the
system to pay for it. To date Iridium’s problems in achieving this goal are well known.
At the end of 1998, Iridium
said it had some 3,000 subscribers using the network. Its bank covenants require at least 27,000 subscribers by the end
of the first quarter to be eligible for the next loan installment. SoundView recently reduced its first-quarter subscriber
forecast for the company from 25,000 to 9,000, and year-end figures from 339,000 to 115,000.
Iridium’s banks gave
the company a two-month waiver on these loan requirements, after which it will begin renegotiating with them.
The
problem, according to O’Neil, is Iridium is spending too much time and money targeting the international business
traveler market rather than its more immediately obvious markets.
The company spent some $150 million on a
global branding and advertising campaign designed to attract the global business traveler, a pull tactic that has been
ineffectual because the company has been unable to meet the demand generated by the campaign due to problems in the
distribution channel.
First, there were handset production problems on the part of both Motorola Inc. and Kyocera
Corp., leaving interested subscribers without a means to use the network. While these issues have been solved, the
company’s in-country service providers have been slow to activate. Although Iridium launched service in November,
gateway providers in Italy and India did not do so until March, China is not expected to join them until April, and
liquidity problems at the Moscow gateway provider has it searching for alternative distribution channels and even a
possible prepaid solution.
As such, Iridium is spending millions on an advertising campaign that is creating more of
a backlog than minutes of use.
“Iridium has 87 waiting assets being under-utilized today-every minute wasted
will never be regained,” O’Neil said. “The company cannot inventory airtime.”
The solution,
according to O’Neil, is to focus on other markets with more specific satellite communication needs, such as the
government, maritime, aeronautical and remote mining segments. As these likely will be high-usage customers, he
further suggested giving away the $3,000 handsets for free and instead reaping profits from airtime.
“These
markets have the need, the desire and the financial wherewithal to become lucrative early adopters,” O’Neil said.
“However, these segments require unique market and product strategies to penetrate. Iridium will not be
successful if they rely solely on the in-country service providers to identify and contact these targets … The money
spent on advertising and corporate infrastructure should be reallocated to direct sales and direct
promotions.”
Giving away the handsets, he said, is essential to this strategy’s success. Rather than trying to
pull in subscribers willing to pay the rather high up-front fee for the handset and airtime-something seen as a significant
barrier to entry for a new and unproven technology-O’Neil said Iridium should push the handsets out into the market
itself.
“It’s a lot easier to get buy-in with a new technology by giving (handsets) away,” he said.
“You need a critical mass of subscribers to justify the system and guarantee strong consumer
research.”
Iridium currently has a program under which firms will receive five free handsets for every five
purchased.
O’Neil said he still expects success from Iridium. It’s just that the start-up firm needs to better identify its
most lucrative market.
“We still believe this company has the potential for long-term success if they are able
to penetrate the market segments best suited for mobile satellite services, with the appropriate product, distribution
channel and pricing structure,” he said. “The U.S. government is still their best short-term
prospect.”
While Iridium has a $100 million contract with the U.S. government, O’Neil said the company
must take further steps to realize the customer’s full potential. About $40 million of the contract is allocated toward the
dedicated government gateway. Also, the contract calls for only about 2,000 handsets, and O’Neil said Iridium needs
many more users to be successful. The problem is handsets for government use cost $6,000 each due to extra security
features Iridium has yet to install, and is not expected to do until the third quarter.
“The largest foreseeable
contract from the U.S. government is two to three months out. This contract is for a few thousand handsets to be spread
between the (Armed Forces) all coordinated through the Defense Information Services Agency.”
Whether or
not Iridium will consider subsidizing handsets is not clear. Company officials were unavailable for comment by press
time. In the meantime, SoundView has lowered its year-end stock target price from $69 to $48.
