OPIM 5894 ADVANCED PROJECT MANAGEMENT IRIDIUM LLC CASE Team 1

What caused Iridium to fail? Prof. Suresh Nair, University of Connecticut 2  Over Estimating Demand and Difficulty Attracting Subscribers  Expected Demand did not materialize (2.25M subscribers were expected by $2.3B Revenue)  The correct target market was not identified  Competition from traditional cell phones much higher than anticipated  Cellular Providers expanded roaming agreements  High Handset Cost

What caused Iridium to fail? Prof. Suresh Nair, University of Connecticut 3  Unable to fulfill orders  Manufacturer issues slowed production  Distribution problems prevented early orders to be unfulfilled  Prospective customers were confused about ordering process and did not know who to buy from  Early ordering process disorganized

What caused Iridium to fail? Prof. Suresh Nair, University of Connecticut 4  Financing Structure  83% Debt to Equity Ratio  Much of the debt was short term financing  Fulfilling debt obligations hinged on Iridium’s ability to sign up subscribers very quickly  High initial number of subscribers needed to break even (approximately 1,000,000 needed)  Iridium was essentially operating on temporary debt extensions, which eventually caught up to them

Why did Motorola finance Iridium with project debt rather than corporate debt? 5 Prof. Suresh Nair, University of Connecticut  Using project debt allowed Motorola to protect itself from the high risks related to the project  Motorola would have been able to enjoy the rewards, but were protected from failure  Putting the project on its own balance sheet could potentially adversely affect stock price  In 2008, “A judge has finally ruled that Motorola has nothing to pay over the bankruptcy of its Iridium satellite venture in 1999”

Lessons Learned? 6 Prof. Suresh Nair, University of Connecticut  Spend more effort identifying target market  Currently, government, military, “machine to machine” and marine customers make up the bulk of customers (475,000 commercial, 48,000 government)  Assume a longer adoption rate, especially for such an unproven market  Maturity dates on loans were very aggressive, and thus did not allow Iridium to gain necessary subscribers to pay debt service  In high risk projects such as this, project financing can protect the project sponsors from failure due to “non-recourse”