Case study on

SATELLITE PHONE SYSTEM

Class: L.Y. EXTC B

Subject: Radar and Satellite Communications ( IA-1)
K.J. SOMAIYA COLLEGE OF ENGINEERING

Faculty Incharge:
Dr. Kiran Ajetrao.

Keagan Ferrao 1613076

Saud khan 1613080
INTRODUCTION
During the Operation Iraqi Freedom in 2003, satellite phone services enabled round-the-clock television
coverage of the battlefield. Lacking conventional wireless or cable telecommunication infrastructures,
embedded journalists used videophones equipped with small satellite antenna to deliver live reports from
the frontline. Through satellite transmissions, viewers watched live broadcasts of troops in combat and
missiles striking Baghdad. News coverage of the war illustrated satellite phone services’ potential to
transform how the news is communicated across national boundaries and from conflict torn regions.
Despite their potential to transform communication, satellite phone companies have struggled to achieve
profitability. Many well-known companies such as Motorola, Sprint, and, Kyocera, have provided financial
and/or technical support to help develop satellite phone networks. Due to their resource rich
environment, satellite phone companies developed mature technologies that allowed customers to
transmit voice and data messages from anywhere on the globe. Despite their resources, leading satellite
services such as Iridium have filed for bankruptcy protection or restructured their debt. In this case, we
use Iridium [11, http://www.iridium.com/corp/iri_corp-understand.asp], the first satellite phone service,
to illustrate why satellite phone services have failed to meet investor expectations and win market share.
Iridium experienced serious setbacks due to factors such as weak market positioning, high cost structure,
and lack of critical mass. This case illustrates how state of art technology may not lead to firms’ acquiring
market share or earning profits. This case unfolds as follows: first, we describe opportunities and
challenges presented by the mobile phone marketplace during the 1990s. Then, we provide an overview
of how satellite phone systems work. Next, we identify and describe services provided by Iridium’s
competitors in the phone service industry. The case concludes with a discussion of lessons learned from
Iridium’s experience.

MOBILE PHONE SERVICE IN THE 1990s

Though cellular and PCS phones eased communication, consumers mobile phone companies as providing
unreliable services through the mid-1990s. Due to their rapid expansion, mobile phone companies lacked
the infrastructure to support customers’ needs. For example, cell phone companies frequently lacked
enough cell sites to provide the bandwidth necessary for providing customers with basic services. As a
result, mobile phone users were frequently unable to make calls or had their connections were dropped
mid-sentence. Also, mobile phone companies used different communication technologies within and
across countries. When traveling within a country, cell phone users would frequently find they were either
unable to make or had to pay roaming fees for a connection. When traveling abroad, cell phone users had
to lease or purchase new equipment to access mobile services. Due to the limitations of existing mobile
phone technologies, satellite phones were perceived as an attractive alternative wireless phone
technology. By using satellites to transmit messages, investors believed they could address the signal
quality, roaming and infrastructure problems that plagued conventional mobile phone services. When
compared to cell phones, satellite phones had access to more bandwidth that could enable stable voice
and faster data transmission. Because of their globe spanning infrastructure, satellite phones would not
require roaming fees or present compatibility problems across networks. Analysts envisioned a world in
which users could use the same handset to communicate data whether they were climbing Mount
Kilimanjaro or laying on a beach in the South Pacific. Seeking a first mover advantage, investors sank
billions of dollars into developing and implementing satellite phone systems. Established in 1991, Iridium
was the first active satellite phone network [15]. Many wellknown companies such as Lockheed, Sprint
and Sony, provided financial or technical support to the new firm. During May of 1997, Iridium launched
the first satellites of its network [12]. When complete, the Iridium system provided robust voice and data
solutions across the globe. Without roaming fees or compatibility problems, Iridium users placed calls
from any location including oceans, airways, and mountainous regions. Even though Iridium offered
superior services, consumers did not flock to purchase satellite phones. When compared to traditional
services, consumers found that Iridium’s costs (i.e., expensive proprietary equipment and high service
fees) outweighed satellite phones’ benefits (i.e., reliability and access). Also, by the late 1990s, consumers
perceived existing mobile phone companies as providing adequate access to their networks. For example,
companies such as Verizon or AT&T offered phone packages that included unlimited minutes and no
roaming fees. Because consumers’ weak response, Iridium for Chapter 11 bankruptcy [3] on August 13,
1999.

OVERVIEW OF A SATELLITE PHONE SYSTEM

Operating Basics of Satellite Phone Networks When the user initiates a call on a satellite capable handset,
the nearest satellite picks up the call and authenticates the users through the nearest gateway on the
earth. If the destination phone is part of the public switched telephone network (PSTN), the call is routed
to the nearest gateway and consecutive PSTN. If the destination phone is another satellite handset, the
call routing occurs through satellites only, which increases transmission efficiency and quality. There are
three types of satellite communication systems which differ in terms of orbit and signal strength (see
Table 1). Low earth orbit (LEO) satellites orbit below about 1,800 miles from the earth’s surface. Medium
earth orbit (MEO) satellites peak at 9,000 miles and geosynchronous earth orbit (GEO) satellite at 22,300
miles. The distance of orbit from the earth has an inverse relationship with signal strength and positive
one with a satellites lifespan. Because of their proximity to the Earth, LEO satellites provide strong signals;
however, they have a relatively short 5 to 7.5 year lifetime. Due to their distance from the Earth, a MEO
satellite transmits a weaker signal; however, they may orbit the earth for 10 to15 years. GEO satellites
have the greatest lifespan and transmit the weakest signals.

LEO and MEO satellites are used most frequently by satellite phone services. Because of signal strength,
LEO and MEO enabled systems require phones that use small omni-directional antenna. Despite this
advantage, low orbit satellite systems present firms with technical and financial challenges. Technically,
firms had to design LEO and MEO systems that could constantly switch users’ signals from one satellite to
another. This is because LEO and MEO satellites move more rapidly than the Earth’s orbit and a handheld
device Because of their shorter distance from the earth, LEO and MEO satellites orbits degrade relatively
quickly. Financially, this meant that firms had to pay for launching new satellites more frequently than if
they had built GEO satellite networks.
IRIDIUM’S NETWORK
The Iridium satellite system uses 66 LEO satellites that orbit 780 km (about 485 miles) above the earth's
surface, to transmit signals. Each satellite cost $62 million, weighs about 1500 pounds, and revolves
around the earth every 100 minutes. The satellites cast 48 beams onto the surface of the earth, covering
a circular area with a diameter of 2700 miles. Iridium transmits data between phones, satellites, and
traditional communication networks. Calls are routed from one beam to the next or one satellite to
another when the satellite moves out of the range of the user. The service link between phone and
satellites operates in Lband frequency at1-2 GHz. Iridium relies on circuit and packet switching to manage
voice and data transmissions between phones and satellites. Circuit switching sets up a dedicated
connection for the duration of each voice transmission i.e., a phone call. By using circuit switching for
phone calls, Iridium ensures that users will not experience transmission interruptions due to dropped or
degraded signals. Packet switching breaks down data into smaller units called packets and sends them
over a shared connection. By using packet switching, the Iridium system efficiently uses bandwidth to
allow more concurrent users to transmit data. Iridium uses gateways to manage communication between
its satellite network and more conventional telecommunications systems. Gateways are points that a
signal may enter or leave a network. Iridium currently maintains 12 gateways, 2 in North America, 7 in
Asia, and 1 each in Europe, Africa, and South America. Communication among satellites and gateways
uses Kaband frequency at a rate of 19.4 – 29.3 GHz.

ODYSSEY WORLDWIDE SERVICES

Odyssey Worldwide Services planned on implementing MEO satellite system as a backbone of its service.
Because a MEO system required less maintenance, analysts believed Odyssey would yield greater profits
than Iridium’s LEO satellite system. However, despite the financial backing of TRW and Teleglobe, Odyssey
lacked sufficient resources to complete the satellite system and merged with ICO [10,
http://www.ico.com/press/releases/199712/971217.htm]. ICO Global Communications [10] ICO’s
founders envisioned a system that combines the strengths of satellites and terrestrial network to deliver
services. ICO’s proposed system would have used MEO satellites to reduce maintenance costs and simplify
transmitting signals. MEO satellites operate at higher altitude which leads to a longer lifespan than LEO
satellites. Also, because they can cover larger areas, MEO satellites switch signals fewer times to span the
globe than a LEO-based satellite network. Due to financial difficulties, ICO filed for bankruptcy in August,
1999. In 2000, Craig McGaw, founder of Nextel, raised 1.2 billion dollars to lead ICO out of bankruptcy. In
a step forward, ICO launched its first satellite in 2001. However, despite the infusion of capital and
successful satellite launch, ICO has not implemented an operational satellite phone system.
Teledisc
Funded by Bill Gates, founder of Microsoft, and Craig McGaw, Teledisc announced it would build a
network of 840 LEO satellites to offer consumers telephone and Internet services. Perhaps due to its high
profile supporters, Teledisc successfully persuaded the United Nations and United States to dedicate a
portion of the electromagnetic spectrum for their service. After Iridium and ICO filed for bankruptcy in
1999, was unable to raise sufficient capital to fund the network. As a result, Teledisc failed to launch a
single satellite. In 2002, Teledi

sc laid off its last ten employees and went out of business.

Globalstar
Globalstar was formed in 1991 by Loral Space & Communications and Qualcomm. With support from the
United States and Russian space programs, Globalstar quickly built a limited LEO satellite network. In
1999, Globalstar began delivering services in more than 100 countries. By November 2000, Globalstar had
sold only 21,300 out of its stockpile of 143000 phones [13]. When examining Globastar’s failure to win
subscribers, analysts suggest that consumers didn’t like limited service, bulky phones, and high per-
minute charges. Globalstar filing for Chapter 11 US bankruptcy protection during February 2002.

LESSONS FROM IRIDIUM’S FAILURE

Despite multi-billion dollar investments and high profile support, Iridium and its rivals’ failures illustrate
how offering technologically advanced services does not lead to success in the marketplace. We can draw
several lessons about how management and markets influenced Iridium’s failure. First, many consumers
may not value quality as much as cost when purchasing communication services. In order to win market
share, Iridium focused advertising on differentiating satellite and conventional mobile phone services.
Advertisements suggested that satellite phone services quality and reach distinguished Iridium’s service
from less sophisticated mobile phone services. Even though Iridium effectively differentiated its services,
consumers were not willing to incur the high start-up and ongoing costs of satellite phone service. Original
US retail prices were $3295 for a satellite phone, $695 for a pager, and airtime fees of up to $7 per minute.
Given the high price for Iridium’s service, consumers could not justify the additional expense over using
other phone services. To address the service versus price dichotomy, Iridium could have considered using
a price discrimination strategy that varied prices with level of service and type of customer. However, due
to its billions of dollars in debt, Iridium could not offer consumers lower rates for voice and data
communication services. Second, network effects of existing technologies placed Iridium at a
disadvantage when compared to existing mobile phone services. Network effects refers to a service or
technology becoming more valuable as more people use it, which may allow firms to lower costs and
eventually acquire more customers. By the mid-1990s, mobile phone companies had acquired a
substantial customer base in many countries. In countries such as Hong Kong or the United States, mobile
phones had become part of daily life for many citizens. Because adding additional customers required
relatively little additional investment, mobile phone companies had resources to invest in developing
more reliable technologies and expanding their infrastructure. During the 1990s, mobile phone service
expanded the size of their calling areas through strategic alliances. By the time Iridium initiated services,
mobile cell phone companies had achieved a critical mass of customers necessary to dominate the
marketplace. Third, Iridium underestimated “the threat of substitute services” By the time Iridium
initiated services, cell phone companies had addressed many of consumers’ complaints linked to signal
quality and roaming fees as well as lowered the costs of services. Consumers felt that mobile phone
services’ low airtime fees and start-up costs compensated for satellite phone services worldwide coverage
and higher reliability. In essence, consumers substituted technically inferior services for Iridium’s satellite
phone service. Fourth, Iridium’s management failed to target many potential market niches. Iridium’s
advertising strategy focused on large, corporate customers such as oil or aviation companies, however, it
did not focus attention on other niche markets such as small businesses or residents of remote regions. A
more effective marketing strategy might have targeted small businesses such as importers that require
ubiquitous or high quality access to maintain relationships with their global network of suppliers and
clients. Iridium also failed to market services to residents of lightly populated, inaccessible areas that lack
terrestrial phone service. If Iridium had engaged in a size or geographically based marketing strategy, it
might have won customers as well as generated good “word of mouth” advertising. Fifth, Iridium failed
to acquire the critical mass needed to surpass entry barriers presented by existing services. The expected
break-even point for Iridium was estimated to be 600,000 customers around the world. By the time it filed
for bankruptcy, Iridium had acquired 55,000 customers. Due to its pricing, changes in the mobile phone
market, and focused marketing strategy, Iridium never gathered the critical mass to support basic
operating costs or to lower prices as a means to attract customers.

CONCLUSION

Despite a history of bankruptcy and failures, satellite telephone companies continue to operate. To
survive, companies have been reorganized or bought out by investors. For example, although Iridium’s
satellite system $5 billion to develop, Dan Colussy acquired Iridium assets for about $25 million at a
liquidation sale. Freed of massive debt, satellite phone companies have been able to lower costs. Rather
than $7 dollars a minute, Iridium has slashed charges $1.50 per minute of airtime. Despite lower costs,
satellite phones may not appeal to broader consumer markets. Satellite telephones cost from $1995 to
$9295. When compared to modern cell phones, satellite telephones are bulky and posses fewer auxiliary
functions. In lieu of broader consumer markets, satellite phone companies continue to market their
services to the industries such as oil exploration and have directed their attention to government agencies
such as the U.S. Department of Defense. Iridium recently renewed a contract with the Pentagon to serve
20,000 U.S. Defense Department workers. The usefulness and ubiquitous access of satellite phone
services was demonstrated to TV viewers all over the world in the Iraqi war. Despite new contract and
increased public awareness of its services, Iridium has a long way to go to meet investors’ expectations.
Will the future of Iridium Satellite be bright as analysts predicted?
REFERENCES

Altinkemer, K., Yue, W. T. and Yu, L. “Adoption of Low Earth Orbit Satellite Systems: A Diffusion Model
under Competition,” Information Technology and Management, Volume 4, 2003, pp. 33-54.

BBC News, “Flaming end for satellites,” http://news.bbc.co.uk/1/hi/business/681646.stm, March 18,

2000.