Research

Iridium's house of cards: An analysis

An outgrowth of Motorola in the late 1980s, Iridium was set up to be the world's first global wireless phone company. With 19 organizational partners spread across 160 countries, dozens of novel technological inventions, and over $5 billion in investment, expectations were high when Iridium was launched amid great acclaim. Less than a year later the company filed for Chapter 11. A W. P. Carey School of Business professor and his teammates have made a study of Iridium's collapse, focusing on its stages of decline and especially the transitions between those stages.

2005-05-06

What is the key to entrepreneurial success? How does a company move from a beginning or startup phase, to the critical financing and growth stages to finally become a mature and successful business? According to Kevin Dooley, Professor of Supply Chain Management at the W. P. Carey School of Business, companies proceed through definable change points along the way from birth to growth and maturation stages — or, if the company fails, finally to decline.

The risk, he says, often comes in the transition from one point to another. Recognizing these stages of venture development helps us understand what leads to the success or failure of an entrepreneurial venture.

In a research paper to be presented at the Academy of Management Conference this summer, titled "Iridium's House of Cards: The Nature of Entrepreneurial Stages and Stage Transitions," Dooley and co-authors Gregory A. Daneke and Seemantini Pathak, examine the case of one particularly interesting venture, Iridium. An outgrowth of Motorola in the late 1980s, Iridium was set up to be the world's first global wireless phone company.

The company "involved 19 organizational partners spread across 160 countries, dozens of novel technological inventions, and over $5 billion in investment." Dooley and colleagues analyze the distinct stages of growth of the venture in an effort to understand how the "international joint venture that developed and launched the first low-earth-orbit satellite-based telecommunications system" managed to falter.

Iridium's story

Iridium's 66 satellites were successfully launched in 1998 to great acclaim; however, the projected customer demand never materialized. Only about 20,000 subscribers were on the books when Motorola originally promised close to 5 million users by the end of the 1990s. The researchers note, "In July 1999, Iridium failed to pay the interest on a $90 million bond and in August 1999 it was forced to file for Chapter 11.

At the time of the filling, Motorola's estimated financial exposure was $2.2 billion. Iridium terminated the service to the customers in March 2000. After several near mergers, sales, etc., the entire system was sold for a fraction of its value (approximately $25 million) to its former CEO, Edward Staiano in November of 2000."

Interestingly, the authors conclude that "a partial explanation for Iridium's failure lies in the timing of its stage transitions." The trio charts the development of the Iridium venture as follows: Invention (to) Business Planning (to) Business Development (to) Business Execution (to) Business Decline/Death.

Technology development tasks dominate the invention stage, and, according to the research, major technology development issues should have been completed towards the middle of the 1990s — certainly by the time the product was released. Iridium's product design never matured adequately, however. Significant performance and reliability issues plagued the system up until the point of bankruptcy.

The authors argue that a specific market focus is a necessary outcome of the business planning stage. Again, in Iridium's case, markets were chosen and discarded throughout the company's life cycle, resulting in an immature and unstable foundation from which to develop and execute the business.

The company's target market shifted amongst many targets, including business people, professional travelers, industrial platforms such as oilrigs, and military applications.

Finally, the business development phase should yield sufficient resources, in the form of both organizational partners and capital financing, to successfully execute the business. The transition from the development to execution stages occurs when the product is released. In the case of Iridium, funding was never sufficient.

The company's financing plan predicated an extremely complex governance structure, where it proved almost impossible to manage the competing desires of stakeholders. The lack of early revenue coupled with sky-high fixed costs cast the new venture into financial peril almost immediately, with bankruptcy finally occurring when existing investors wished to invest no more.

Complexity vs. flexibility

The body of research examining success and failure of new ventures is wide, and a similarly large number of studies examine the evolutionary cycle of companies, but this study is the first to bring together these two perspectives. The paper states that the prior research "cannot answer the 'when' and 'why' of transitions between stages."

According to the authors, the flash in the sky that was Iridium generated a flurry of media attention and business research commenting on the reasons for the firm's failure. "By most accounts, Iridium is considered somewhat of a technological success, but a market and business failure, as it went bankrupt within 10 months of beginning operation," they wrote.

Extensive information existed on the company, making it an ideal candidate for research. While a weak board, competition, and shifting marketing goals do factor into Iridium's demise, the authors note that these explanations only provide a partial understanding of the failure.

Instead, the trio chose to look to the complexity of the organization along its development stages, linking its failure to the company's inability to fully complete a stage of development before moving on to the next stage. As well, Iridium's complex structure made it difficult to back up and correct a stage. The paper states, "In some circumstances, flexibility to adapt is retained because the level of time and/or resources required to make a change is feasible. Given the complexity of the Iridium design, no such flexibility was present."

Company complexity can also throw a monkey wrench into traditional statistical research methods for stage modeling. Daneke adds that the complexity of a company's technology and of their development path make it difficult to rely on "plotting points" to understand the nuances inherent in a business failure or success.

So, the authors employed "centering resonance analysis," a form of computerized text content analysis that identified "dynamic narrative patterns" on the development and decline of Iridium. The authors used articles from the Wall Street Journal spanning 10 years to identify  "influential words and themes in the narrative," and then used "statistical change point analysis to identify thematically-based epochs, suggesting stages and their transition points."

Says Dooley, "Unless you follow a company in real-time, researchers only have access to historical accounts from participants. Their information can be informed and rich, but it is also biased by time. So, there's a lot of after-the-fact [analysis] to make the narrative coherent. By looking at media reports, we would have access to more objective and on-the-spot information." Daneke says that their research team may be one of the first to use public narratives, in this case media reports coupled with text analysis, to understand a venture's evolution.

Through text analysis, notes Daneke, researchers were able to "tease out the subtle nuances to examine linear and nonlinear phenomena." He adds, "There are no normal time series for cataclysmic events. So, instead, we chose to analyze what people have said at different times in the company's progress or stages of development."

The three authors note that, "in order to examine why stage transitions occurred, the specific content of the narrative at the stage transition points was examined, and key events were identified that appeared to be linked to the dominant themes within the next stage." They determined that the stage transitions were "triggered by significant, public events: the maturation of a leadership structure, the official launch of the product, and the announcement of bankruptcy," and that "significant risks were incurred as Iridium transitioned from one stage to another."

However, the trio also needed to address one additional question in their Iridium research: Why did Iridium move from one stage to the next when the work of each stage was clearly not "complete" or mature? The paper notes: "Stated simply, technology start-ups engender a type of attention deficit syndrome."

Certainly, says Daneke, the Iridium story remains a curiosity, especially when one considers that management seemingly ignored outside competitive patterns emerging in the field. According to the paper, Iridium was never meant to "compete with cell phones systems (or the Internet for that matter), but once the industrial model of global communication was blown to pieces, several small hybrid networks rushed in to improve cell phone service and extend their share of this exploding market."

These "hybrids" entered the market, and they pieced together extensive cell phone service at a much more competitive price than the high-tech Iridium could manage.

Says Daneke, "You have to ask exactly what blinded them to the whole competitive environment." Unfortunately, he points to hubris and the belief in the myth of "first mover advantage." Daneke notes that Motorola's desire to be the first to chart new territory into civilian aerospace allowed the company to move forward, despite the immaturity of each stage.

"This notion of first mover advantage, particularly for tech companies, really caught on in the late 1980s and early 1990s, and companies sometimes got caught up in that. Motorola was out in front of others on the construction and financing of the satellites. Thus they probably came to believe that once they established the gold standard, they could monopolize the industry — build it and they will come. Yet, their field of dreams failed to materialize."

Pumped-up expectations

Dooley believes that in general there are strong links between new venture complexity and the likelihood of venture failure. "When markets and technologies are rapidly changing, even the most astute and competent competitor may make decisions that turn out to be wrong and for which there is little or no chance of recovery." In Iridium's case, Dooley posits that the media coverage associated with Iridium may have fed into the catastrophic cycle.

"Early media pumped up the expectations of both investors and consumers so greatly that when reality didn't match the hype, a decline in consumer and investor confidence was inevitable. Later, media attention to Iridium's failures was intense, leading to public pressure on investors such as Motorola to step out of the relationship. A less public venture might have been given more time to adapt."

The paper concludes by suggesting that venture leaders consider these new venture development stages as set of rules rather than simply descriptions.

"You build a new venture like a house. The product or service concept serves as a foundation, upon which target markets are defined, resources and investment are obtained, and finally the business is executed. When you go into the work of the next stage, you should make sure you have a solid foundation from which to build."

The paper suggests that the product concept and target markets should be well defined before significant investment is sought. From a broader perspective, the Iridium case suggests that "entrepreneurs be cognizant of the risk they incur when their success depends on a technological and organizational house of cards."

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