Scoring a first

It`s been quite fascinating watching the progress of Iridium over the past few months. Being the first in any market always carries with it some degree of risk and Iridium is no exception.

The fundamental problem Iridium faces is low revenues that come from low subscriber numbers.

The three major satellite systems that are chasing essentially the same market are Iridium, Globalstar and ICO with Iridium going live late last year. The advantage of being first to market is that you can potentially tie up the market and remain the dominant market player for some time. The downside is that your competitors learn from your mistakes. Unless the first network operator can consolidate its first to market advantage, all it does is highlight the dos and don`ts of coming to market for its competitors that follow.

What makes the global mobile telephony market more interesting is that there is a host of satellite systems planned for commercial operation over the next three to four years. Even more interesting is that these satellite systems have been funded through a host of different finance vehicles. The impact upon Iridium shares of the announcement of the problems that Iridium faces was a 40% plummet in its share value. This kind of value loss causes many analysts and investors to critically evaluate the global mobile telephony market and the proposed network operators.

In this article I have taken a closer look at the problems that continue to plague Iridium in order to highlight the lessons we can learn about being first to market in a consumer-oriented telecom service field.

Iridium has followed the traditional cellular operator business model of distributing through service providers. The upside of this approach is that you leave the subscriber management, marketing and sales campaigns to your service providers. However, this model has a major flaw in that as the network operator you are removed from your customer. Owning the customer is proving to be more important in today`s consumer-oriented telecom service markets.

Iridium has admitted it has very little demographic data about its customers. Neither will the service providers readily share this information with the company.

The fundamental problem Iridium faces is low revenues that come from low subscriber numbers. The company had forecast 40 000 subscribers by end of March 1999 but only had 10 294 subscribers, down by 74%. This is in complete contrast to the runaway success that cellular network operators saw in the launch of their services.

The marketing problems that Iridium and analysts quote are:

• Handset shipments:
Software problems delayed handset shipments. No handsets equal no subscribers and no revenues - it`s a simple relationship.
• Distribution and marketing channels:
Many observers commented that the distribution and marketing channels in various countries were simply unprepared.
• Pricing:
Many analysts believe the current pricing structure places Iridium out of the range of many potential subscribers. At $5 a minute, it is an expensive telephone call.

Launching a new service such as global mobile telephony creates anticipation among potential users. The demand is there but when the potential subscriber cannot sign-up, this can lead to frustration and ultimately re-enforcement of the desire for competition. Customers who would have signed up with Iridium may elect to rather wait a few more months to see what the competitor is offering.

The delay in handset shipments also erodes the first to market advantage. Instead of being six or more months ahead of its competitors, Iridium`s hard won first to market advantage is undermined by problems unrelated to the network. The first to market is a significant advantage but needs to be exploited by rapidly signing up subscribers. Where this is not exploited then the cost of first to market probably outweighs the advantage.

The unprepared distribution and marketing is simply quite unacceptable as a reason for poor subscriber numbers. Many observers comment that the distribution channels in countries are in disarray. Distribution channel management is essential when the network operator chooses a business model where it is removed from its subscribers. Key issues such as training service providers, providing support and handsets are essential. The inability to activate subscribers translates to lost revenue.

Price is always a difficult parameter to assess in any market especially in a new market such as global mobile telephony. The response by Nippon Iridium may give insight into the pricing issue. Nippon Iridium has announced plans to reduce its call rate by 6% from 15 May. Furthermore, Nippon Iridium plans to better communicate the call zones, making it easier for its subscribers and potential subscribers to calculate call costs.

What has Iridium done in response to its problems?

• Replacement of important personnel within the organisation as seen by the replacement of the CFO and CEO.
• Refocusing of distribution and marketing strategies.
• Rethink of pricing strategies. Although Iridium has not confirmed a rethink of its pricing strategies, it certainly will need to ask some fundamental questions about what the market will support. It comes back to the age-old basic price elasticity question of how many likely subscribers at different pricing points.

The challenge Iridium faces is that the longer these short-term problems exist, the weaker its first to market advantage becomes and it can soon become a disadvantage. It`s difficult to make a call whether Iridium`s low subscriber numbers is because of poor distribution and marketing, insufficient handsets, its pricing structures or a combination of these factors. The problem is that the company does not have the luxury of time to sort out its problems. Globalstar and ICO are fast approaching their commercial launch dates and Iridium may find that the competitive pressures brought about by competition ends up being the market force that drives Iridium to resolve its problems.

The financiers have set Iridium the target of achieving a subscriber count of 52 000, revenues of $4 million and accrued revenues of $30 million by 31 May - just a few days away!

Finally, Iridium, being the pioneer in a consumer-oriented telecom service market, has highlighted how to and how not to go to market in the global mobile telephony services sector.