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Iridium: How to turn $6bn into $25m in 9 months

 In Business decisions, Insights, Realizer Blog

The iridium satellite phone launch is a case study of how to turn $6bn into $25m in 9 months, using poor decision making.

Back in 1998, Motorola launched the iridium phone. A mobile phone unlike any other – via a network of 66 satellites orbiting the earth, subscribers could make calls from anywhere on the planet. The middle of the Pacific, the top of Everest, the north pole, you name it.

There were a few minor issues though…it cost US$3295 for a phone, and airtime fees were up to $7 a minute. Oh, and it didn’t work that well in cities.

To quote from an excellent book, the Invisible Gorilla, the phone was just perfect for desert dwelling hermits with $4000 to burn.

9 months in, iridium had reached 55,000 subscribers, well short of its 600,000 break even. So in a firesale, it sold its $6bn worth of assets including the 66 satellites for just $25m, declared itself bankrupt and its previous owners marched off into the annals of business disasters.

case study of the launch concluded a variety of reasons for the epic fail.

Customers didn’t perceive the better call quality and limitless range as worth paying more for – while Iridium was being developed, terrestrial mobile companies had got their act together and were meeting customer’s expectations on call quality and range. And the marketing focused on large corporates only – and ignored profitable niches such as remote communities, importers (with worldwide networks).

However, from a decision-making perspective it is possible to discern a number of decision making biases which contributed to the issues.

First off, the sunk cost effect. Once you’ve committed to send 66 satellites into orbit, you’re pretty committed and it’s hard to change strategy. So when customer uptake was slower than expected they literally got to the brink of having to destroy all the satellites by burning them up in the atmosphere, to avoid the $10m a month running costs. This massive outlay also meant they felt unable to reduce the handset and airtime costs that were multiples higher than their almost-as-good terrestrial competition.

Second off, a failure to look for disconfirming data, most evident in a failure to understand customers. This is a classic and well known decision making issue which affects all of us, and it’s often known as the confirmation bias. Our focus on searching only for data that confirms what we know. Setting the price based on what it cost to get into business ignores the customer’s views of what value is.

Third, underestimating the competition. Research shows that one of the most common errors in decision making is failing to even think about how competitors might react, or what they are developing which might impinge on your plans. See Lovallo and Sibony’s excellent article, the case for behavioural strategy for more on this.

I agree with Daniel Kahneman’s analysis that business case studies suffer from a massive case of hindsight bias when they focus on the winners, who in reality won because of a dose of talent, but also a dose of luck too. This can be backed up by tracking the subsequent performance of companies which win awards or get listed in top 10s and top 100s…they tend to regress to the mean purely due to chance. But we have a very human bias to look for coherent stories with easy-to-understand causes.

So my final word on iridium is that I would guess they were a bit unlucky, and their decision making processes probably weren’t atypical. But there is a real lesson for all of us here: look before you leap. Take calculated risks, and set yourself tripwires or staging posts so you can avoid the sunk cost effect. Look at problems from multiple perspectives.

And don’t try and market phones to desert dwelling hermits.