A Case Study of the Satellite Phone Industry

Satellite phone services use advanced technology to deliver phone service around the world. Although technologically advanced, satellite phone companies have not captured a substantial share of competitive mobile phone markets nor returned large profits to investors. In this case study, we examine why Iridium, a major satellite phone service provider, fell short of analyst’s expectations and failed to achieve profitability. We illustrate how high cost structures, lack of critical mass, “threat of substitute services” and weak market positioning have limited satellite phone companies’ ability to compete with conventional mobile phone companies. This case demonstrates that state of art technology may not lead to market success, even with supportive investors, global cooperation and alliances with other firms. Keyword: satellite phone, LEO, Iridium, five forces, critical mass, network effect, wireless, price war, positive feedback, mobile phone. 1 Please address correspondence to Dr. Jason Thatcher, 101 Sirrine Hall, Clemson University, Clemson, SC, 29634. Telephone: 864-656-3751, Fax: 864-656-2015 A CASE STUDY OF THE SATELLITE PHONE INDUSTRY Journal of Information Technology Management Volume XVI, Number 2, 2005 49 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