Seven Questions for Iridium CEO Matthew Desch — Yes, That Iridium
More often than not, the Iridium satellite phone system is remembered as one of the great telecom flameouts of the 1990s. It almost became a literal one: At one point following a 1999 bankruptcy, the 70 or more satellites that make up the system were scheduled to de-orbit and burn up in the atmosphere, in what would have been a fiery denouement of Iridium’s epic bankruptcy case.
That didn’t happen. In 2001, at what was very nearly the last minute, a group of private investors nabbed the assets of the old Motorola-backed concern for fractions of a penny on the dollar, and kept the satellite phone service running. The timing was right. The 9/11 terrorist attacks, which led to wars in Afghanistan and Iraq, ensured that the U.S. Department of Defense would remain the system’s biggest customer, and it still is today. And though no one will tell me with any certainty, it’s even possible that Seal Team Six used an Iridium-based communication system when they slipped into Pakistan and killed Osama bin Laden. Just sayin’.
The big mistake of the original Iridium was that it aimed to be “the phone” that globe-hopping executives would carry with them everywhere. In what could only be described as a monumentally bad judgement call on the the state of the wireless market, common cellphones started working pretty much anywhere a mainstream user might happen to be, obviating the need for a single wireless phone that worked anywhere in the world.
Take out the word “mainstream,” and the business case for Iridium was and is strong. It finished its March quarter with 447,000 subscribers around the world — a 25 percent increase over the previous year — of which more than 315,000 are voice customers. They’re people whose jobs take them to the remotest corners of the globe — oil platforms at sea, drilling rigs in the desert, mines in mountainous terrain, you get the idea — and for whom being without a working phone is simply not an option. As big as the conventional wireless phone networks are, they still cover less than 10 percent of the globe. Government voice users — about 37,000 at last count — are the heaviest users, averaging about $140 in revenue each month, while commercial voice users — 279,000 at last count — average about $47 a month.
But the fastest-growing bit of Iridium’s business is in data. If you have a piece of equipment or an asset whose status or movement you have to track, even in a remote desert, across the ocean or at the South Pole, the chances are pretty good you can put an Iridium modem on it and follow its status in short regular bursts of data. This “machine to machine” or M2M business is small but growing fast. As of the last quarter, the business had 122,000 customers — nearly double the number from the year-ago quarter — and brought in $6.4 million, accounting for about 10 percent of sales.
And here’s where you find another key difference of the new Iridium versus the old. Rather than anticipate every kind of use for the Iridium network, the company provides both the satellite data service and a modem module that third-party companies build into scores of applications as varied as tracking trucks across Brazil to buoys in the ocean watching for tsunami waves. There are some 150 third-party outfits putting the Iridium network to use today.
In 2009, the company went public. (I wrote about it for Businessweek at the time.) It raised $200 million to help finance a new $1.8 billion constellation of 81 satellites (66 plus 15 spares, some of which will remain on the ground) that are due to start launching on SpaceX rockets in 2015. And unlike its money-losing predecessor, this Iridium is profitable, having finished 2010 with $22.7 million on sales of $349 million.
Last week I caught up with Iridium CEO Matt Desch while he was on a swing through New York. We talked about what’s next for the Iridium satellite system more than a decade after most people had written it off as a failure. Today it’s anything but.
Desch: Our initial plan was to do a more traditional private-equity to IPO process, but the world cratered in that time. And so going public was still important. We needed financing to pay for our next-generation satellite system, so we went public and then probably thought we’d do some high-yield debt offerings. But frankly we took advantage of the troubles in the world economy, and against that backdrop, export credit agencies really wanted to support their governments. We had a competition going on to build our new satellite system between the U.S. and France. The winner turned out to be France. Their policy to support their industry was a little faster-moving and had more depth than what the U.S. was able to do at the time. The French banks gave us $1.8 billion in financing at less than five percent interest over five years. And then we closed other financing last summer. So now we have a fully financed plan to obtain all the cash we need to fund our operations and build our next fleet of satellites. We continued to grow at an average of 25 percent over the last five years. We even grew through the recession.
Who’s building the new satellites and when will you start launching them?
We’re about four years into a five-year program. Thales Alenia Space is the prime contractor building them, but its a $2.3 billion multinational contract. SpaceX will launch them starting in 2016. We’re Elon Musk’s largest commercial launch contract. He’s still working on the platform, but we don’t need him for four years, so that’s going to be perfect timing. Lockheed is on the team. Even though they competed to build the satellites, they’re still going to write some of the flight software. Boeing is on the team and ViaSat is on the team and there are others. All told it will be 81 satellites, of which 72 will be launched, 66 will be operating with six orbiting spares, and then nine more spares on the ground.
Your traditional satellite phone business accounts for how much of your revenue, versus data and other things?
Phones account for about 50 percent, but the data business is growing the fastest. Everyone thinks that our business is limited to just satellite phones that provide voice services, and they worry that that business is going to get more competitive. Inmarsat introduced a new phone last year, and Globalstar is going to come back. But I’ve been saying for the last few years that its more complex than that. We’re going to change the rules around the personal device environment. We’re moving away from satellite phones to enabling people to work on the move a lot better. This will include using your smartphone in ways that you can’t use your smartphone today. Using devices like iPads and other things. Our business is more about working with partners who enable unique solutions that put our service to work rather than the old ‘I have a phone, do you want to buy it?’ model.
And what about data?
It’s our fastest-growing business. A couple of big things have happened in the last few years. Our network has always had some distinct advantages — it has the lowest latency and covers the entire planet. We’ve come out with some devices that are both really cheap and really small, we have more than 200 partners, and at least 250 of them put our modems into things that they don’t even tell us about. It may be aviation or shipping or fishing.
Back to the data business: Part of it is what’s called machine-to-machine communications. What is that, and why is it a big opportunity for you?
It’s still in early days, but it has expanded dramatically. That industry started on the terrestrial side. Other companies would put a cellular modem in devices like the handheld pad the FedEx delivery guys use, or for tracking the truck or a shipping container, or a train or a bus. Those applications are great, but they only have so much room. They’re limited by the coverage of the cellular networks. If you want to track a truck as it moves across Brazil and not just when it’s close to major cities, we end up getting built into those products. Satellite still only accounts for about one percent of that business, but it’s growing really fast for us. We’re talking like 50 to 60 percent a quarter, so its really exploding. Once you track something on the ocean, or in the desert or in the sky, we’re the best option. People say, well, 99 percent of the populated areas are covered, but there’s a lot of reasons why you might want to track something when it’s not in that populated area. It’s really enabling things that weren’t possible before. We end up solving a lot of high-value problems that governments and companies are willing to pay a few extra dollars for. It used to be that these things cost hundreds of dollars for the airtime; now it’s in the tens of dollars, so the cost is no longer an issue.
So government is your biggest customer? And I presume a lot of that is the military? Was Seal Team Six using Iridium when they killed bin Laden?
(Laughs.) Sorry, I can’t say. But yes, government accounts for about 25 percent of our business, and growing rapidly. We do things like Blue Force tracking — that is tracking so the good guys can see where everyone is, all the vehicles and people. Special operations guys do tend to use our system, and I’ll tell you why. The military has their own systems and their own satellites that they can pre-position when they have enough time to get ready. But special forces tend to work anytime, anywhere and on short notice. When the Navy was called in to help in Japan after the earthquake, they didn’t have anything they could use beyond the immediate area of the ship, so they used our system. When they go into a new place, sometimes we’re the only thing that will work for them, and their own systems are too expensive to set up. So, yes, the Department of Defense is a big customer, but commercial customers are growing much faster. A lot of the companies that use our system are smaller, and you won’t hear about them because they supply niche products to specific industries. There’s one in Salt Lake City that builds a product that’s built into trucks that monitors the driver to see if he’s riding the brakes or going too fast. In Australia they use our system to track trains in real time. At chemical and oil companies we’re used in “man down” products, where if the systems detects you as motionless for several minutes, you have to hit a button to say you’re okay, because if you don’t you’re probably lying flat on the ground because you’re incapacitated or injured, and someone will come and rescue you. The list gets so long that we don’t even know about them all.
Will you build an add-on for my iPhone that will let me make a call from some remote place where Verizon or AT&T’s network doesn’t reach?
We won’t, but one of our partners might. My view is that you shouldn’t make a satellite phone to compete with the iPhone, because it will never be as cool as the iPhone or Android phones. What you really need to do is let them talk to our network so you can make calls on it and send messages and pictures. It probably won’t be any good for watching Hulu videos, but you will certainly be able to communicate and send pictures back and forth.