Interview: Matt Desch of Iridium

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Still think of satellite company Iridium as just one of the failures of the dotcom era? Think again: now it is making $300m revenue a year and $100m EBITDA. New CEO Matt Desch faces a challenge as the satellite fleet reaches old age, but he's confident of raising $2.7bn in the next few years to launch a new one, he tells Alan Burkitt-Gray

Matt Desch

Matt Desch: 250,000 subscribers, and for every new subscriber there is no additional cost

Usage map

Where they're active: Iridium phone usage for the week of beginning July 22 2007

Timeline: how they rebooted Iridium

Motorola missile engineers Ken Peterson, Raymond Leopold and Bary Bertiger conceive the idea of using 77 satellites in low earth orbit to cover 100% of the earth's surface for a digital phone and data network. The element iridium has the atomic number 77 — and the name stuck even when the design was improved to use 66 satellites.
According to a Wired Magazine article from 1998, Bertiger's wife Karen Bertiger needed a phone in a remote part of the Bahamas in 1987 to be able to close a real-estate deal. Her question led the Motorola trio to devise the Iridium solution.

An IPO on Nasdaq, private placements and debt together bring Iridium's funding to $5.5 billion.

Commercial service starts, using 66 active satellites, each 775 kilometres above the earth and taking 100 minutes to orbit. Handsets communicate on the 1.6 gigahertz band, automatically swapping links from one satellite before it goes below the horizon to another that is visible. Unlike other systems, Iridium can route calls from satellite to satellite in space.

After nine months of commercial service Iridium, with too few customers, defaults on two loans worth more than $1.5 billion and files for bankruptcy. Motorola, which owns 18% of the company, prepares to crash-land the satellites and burn them up on re-entry into the Earth's atmosphere.
Similar problems hit other satellite phone companies — including one originally promising 40-50 million customers.

After the Pentagon helps rescue the project with a big contract, a new Iridium company takes over for a reported $25 million.

New Iridium begins offering commercial service for voice, data and internet.

Spare satellites launched into orbit.

Text and fax services introduced.

Reaches 100,000 subscribers and positive EBITDA.

200,000 subscribers; second quarter 2007 revenue of $66 million and EBITDA of $20 million.

First quarter 2008 shows $74 million revenue, $24 million EBITDA; 250,000 subscribers.
Final cases involving Motorola from the bankruptcy of the original Iridium are settled.

Iridium is starting to make plans for a share flotation, following a period of rising revenues and earnings, so that it can afford to build and launch a new series of satellites.
Now that is a sentence that few people expected to read, or write, a few years ago, when satellite phone operator Iridium was the classic case study of foolish investments in over-optimistic telecoms operations.
But it's true, in all those elements: Iridium, the successor company to the one that went bust nine years ago after just nine months of commercial service, now has 250,000 customers. Based on first-quarter figures, revenue is running at an annualised level of about $300 million and EBITDA is about $100 million.
"The thing about satellite companies is that they eventually become cash machines," says Matt Desch, who has been CEO of Iridium since September 2006. "For every new subscriber there is no additional cost — the revenue just goes to the bottom line. We have crossed over profitability and we're now generating significant new levels of cash."
Desch is a mobile phone man who had no connection with Iridium until 2006. He has spent most of his career with vendors, including Nortel — where he specialised in the mobile business — and Telcordia.

New satellite network

His biggest tasks for the next few years are to continue to grow Iridium's business but also, more importantly, to find the funding to build a new satellite network, without making the mistake that Iridium Mark One did back in the 1990s.
That's because, even without a dodgy business plan, satellites fade and die. They run out of the fuel that's needed to keep them in position, and if they're in low orbit, as Iridium's are — to keep handset power down and avoid the time delay suffered by satellites in high orbit — then they will fall back into the atmosphere and burn up.
Iridium was planned with 66 operating satellites, but with a lot of spares, ready in orbit to be moved into position to substitute for the failures.
"We've used up five spares in the last seven years and there are nine more left," says Desch. They're good for five years or so: "The ninth spare will be used up around 2013 or 2014."
After that, there will be holes in Iridium's coverage if nothing is done about it: customers won't be able to get a signal or calls will be dropped. So the company is planning a series of new satellites to replace the existing fleet.
"We want to be launching the replacement satellites by 2013," says Desch. "We expect that we will be replacing those satellites over a three-year period from 2013 to 2016. Each satellite will be backwards compatible with the previous satellite. We will launch six at a time."
So that's 11 launches at least — plus more for the second-generation spares — in three years or so.
Iridium has already set a budget for the operation at $2.7 billion. Now the company is finding out, firstly, what it can get for the price, and secondly, how it can raise the money.
It has named three companies as competitors for the job of building and launching the satellites: Lockheed Martin, Loral and Thales, in alphabetical order. One will be chosen, and Desch is aiming for a fixed-price contract by the end of the second quarter of 2009.
Satellite and launcher technology have moved on since the late 1990s, and what Desch and his team can buy for their $2.7 billion budget is a lot more than the first Iridium team could get for way more back then.
"We're working with our suppliers to see what is the maximum amount of technology we can afford for that price," says Desch. And not all of it will be for Iridium's own purposes.
Its satellites can carry more than the Iridium system. Equipment can be installed for a whole range of other organisations that would find it useful to have electronic systems in orbit over every bit of the earth's surface.

Earth observation

"The one that's most public is earth observation," says Desch: "scientific sensors that would measure global climate change in real time — there's a tremendous need for the data."
He expects to raise "from $600 million to $1 billion" in revenues from such "secondary payload sales".
On top of that Desch estimates that the company will be able to generate $1 billion from internally generated cashflows.
And the rest? That will have to come from other sources. "Were raising a little equity in anticipation of an IPO in 2009," he says.
At the moment "I don't need the money that much", but he wants to be prepared. He's already commissioned Evercore Partners, an investment banking boutique, to advise on the fund-raising. "I can't talk much more about that because it's a very competitive process."
But by the time of the main IPO "we'll be generating substantial earnings", says Desch: $300-$400 million a year, he estimates.
Is this a realistic projection? Iridium today has a very different subscriber base from that envisaged by the Motorola team which worked on the idea in the early 1990s.
Then Iridium was going to deliver voice telephony around the world, to all those places not connected to the fixed network or the still embryonic cellular networks.
Even though Motorola should get more credit than any other company for coming up with the idea of the cellular phone in the first place, it failed completely to recognise how successful mobile phones would be.
In the year Iridium launched its commercial service, there were 100 million GSM phones in operation and international roaming was well established. GSM was a success on a scale that Motorola had not expected, and the opportunity for satellites in mass-market voice services was past.
But there are different opportunities now, says Desch. "Only 18% of the planet is covered after 23 years by wireless technology. It isn't going to expand much beyond that."
There is no GSM coverage at sea and little in the remote regions of the world — such as the middle of the Sahara or Siberia. Inmarsat, which has been in business for three decades, has the biggest market share, though according to Desch its share is now 47%, to Iridium's 22%, in second place.
Satellites orbiting above the equator — such as Inmarsat's — have a big advantage but a few disadvantages. It's useful that the satellites are in fixed position, so a user can point the antenna at the best satellite.
It's not so handy that the speed of light means radio waves take a third of a second to get to the satellite and return; phone conversations can be stilted and web browsing slows down.

Polar coverage

And fixed satellites cannot reach the areas round the north and south poles — where equatorial satellites are unreachably below the horizon. That's not a problem with Iridium's 66 craft, which zip around a few hundred kilometres over every patch of earth, including the Arctic and Antarctic.
"Only 12% of traffic goes over the poles," admits Desch, but the polar effect is more significant than that. "If you're going to install one system on an aircraft you want one that will work everywhere."
So a FedEx plane from, say, Moscow to Memphis will be able to stay in touch throughout the route via Iridium. "The thing you worry about most is coverage, coverage, coverage. We have the best coverage."
It's not broadband — and Desch recognises the irony that someone who has worked in broadband for most of his career, including in 3G mobile, should now be running a system where 128 kilobits is called "high speed".
It's enough for three voice lines and for IP data, he says. "It can work on a fishing vessel or a cruise ship, for crew access or ship's business."
A customer that continues to be important to Iridium since the early days is the US military. The Pentagon helped provide the market assurance that ensured Iridium was rescued after bankruptcy back in 2000, and figures published by Iridium show a around 20,000 Department of Defense users: the glow of usage around Afghanistan on the world map no doubt shows where some of those are.
But the biggest growth for Iridium is machine-to-machine data. "Two years ago we introduced a modem the size of a pack of playing cards that married up with a GPS receiver, and sometimes with a wireless GPRS receiver to provide real-time two-way connectivity anywhere on the globe."
You'll find it in ships and trucks and containers, reporting on speed and position. "Transport is one of the biggest early users — knowing where the truck is, the status of the truck. Is the driver going over 65 mph? Is there an emergency? What's the status of the refrigeration in the back? Have they been hijacked?" he says. "That business is growing 200% a year for us and is continuing to grow at that level. We see eventually millions of customers."

Security sensors

Sometimes you won't see it in use: the construction industry uses sensors to track large, expensive machines. There are security sensors that "can now be put in places where you can track if something's crossing the border where it shouldn't".
Some systems are used for monitoring things that don't move — pipelines, wind turbines, for instance — but where it's cheaper to use an Iridium device to send a burst of data now and again than to install a fixed telecoms connection.
Iridium, with only 150 employees, does not develop these applications internally. An ecosystem of companies works in different sectors, "service partners who are specialists in the spaces they serve".
Sometimes Iridium gets to hear of odd applications because of technical requests those partners make. One asked if there was a way for a terminal to log onto the nearest Iridium satellite and transmit a burst of data in under five seconds. Why? Because that was the time that the whale carrying the monitoring equipment came to the surface, says Desch.
There are other Iridium terminals on buoys checking deep ocean currents and temperatures, surfacing from time to time like the whales to report back. Submarines use tethered buoys to communicate with base — less susceptible to interception than conventional radio. Tuna fishers use Iridium to combine sonar pictures to find where the shoals are swimming.
There are many other applications, including "some I can't tell you about that are pretty cool", he smiles.
"The real secret to our success in the last seven years has is the change in business model," says Desch. "Before bankruptcy Motorola envisioned Iridium as a mass-market consumer service for business people. This system is not really good at that."
But it was designed to be upgradable. It is "a software system in orbit" and "it's been changed dramatically by our technology partner, Boeing", says Desch. Boeing built and launched the original satellites.

Global positioning

One upgrade being considered is a positioning function, to use Iridium satellites along with the GPS system to improve accuracy. "That can be programmed on the current constellation," he says.
Iridium "is the most sophisticated commercial satellite service in the world", he says. "We have more satellites than any operator except the US and Russian governments. They're some of the most sophisticated satellites that have ever been built but it's going to get even more interesting as we build the next generation system."
If he doesn't get the funding, Iridium will fail for a second time. "Iridium was and is a technical marvel," says Desch. "It wasn't conceived correctly from a business perspective. Once we got the business model right, it's now become a business marvel as well."
The investment bankers, and other potential sources of money, will be seeing a lot of Desch over the next few years. GTB

 Matt Desch

Chairman and CEO of Iridium since September 2006

BS in computer science from the Ohio State University and an MBA from the University of Chicago

Spent 13 years until 2000 at Nortel Networks, finally as president for wireless networks business and responsible for its carrier customers in Europe, Middle East, Asia and Latin America

CEO of Telcordia from July 2002 to October 2005, having also served on the board of Telcordia's parent SAIC and then taking Telcordia into private equity ownership