The Rise and Fall and Rise of Iridium

Iridium’s constellation of 66 comsats was a technological triumph but a business disaster-until an executive and a computer geek found salvation in the Pentagon.

IT WAS 11:30 ON A FRIDAY NIGHT IN 2003 when Mark Adams got a call at his home in suburban Virginia. The Alaska Rescue Coordination Center was on the line, looking for a pilot missing in the vast northern forests of the state. The flier had been carrying a telephone serviced by Iridium, a global satellite network for whom Adams is the chief technical officer. In 2000 Iridium had come within a whisker of disappearing itself, but it lived to transmit again, thanks to the magic of Chapter 11 bankruptcy.

The Alaskan pilot wasn’t so lucky. Iridium has staff on duty 24-7 to support the technical operations of the system, and though Adams spent several hours that night coordinating an effort to identify the approximate location of the flier’s last transmission, by the time rangers found the man, he was dead. Since that Friday night call (which Adams got because a friend associated with the Alaska Rescue Coordination Center just happened to remember that he worked at Iridium), Adams, 40, has aided in a dozen successful rescues, most memorably one of a pilot with engine trouble off South America’s Cape Horn. Thanks to Iridium, the pilot arranged an emergency landing on a snow-covered speck of an island in the far south Atlantic. The derring-do is a small part of the chief technologist’s work. But for Adams, an MIT research engineer with a Bill Gates anti-haircut who when asked to give a visitor driving directions goes to a white board, it symbolizes the lurch his life took four years ago toward adventure and the outer envelope of information science.

The unlikely path Adams’ life has taken resulted from a few folks taking a second look at the greatest dog ever launched into space and having the chutzpah to offer its receivers half a cent on the dollar. And from knowing enough people in the Pentagon who were bent on keeping Iridium as a unique battlefield resource, the worth of which has been proved daily for U.S. troops stationed in Iraq and Afghanistan.

Surely you remember Iridium, Motorola Corporation’s $5 billion low-Earth-orbit debacle. Planned in the mid-1980s, the system was archaic by the time it was deployed in 1998, offering global communications from a brick-size, $3,000 phone at charges from $6 to $30 a minute. “The Iridium business plan was locked in place 12 years before the system became operational,” says Dan Colussy, the veteran aviation executive who masterminded Iridium’s buyout and now reflects happily on it next to his pool in a particularly lush section of Palm Beach Gardens, Florida. “The idea was that a businessman would carry this thing around the world in his briefcase and dial home from Paris or London. Of course by the time it got up, nobody needed it in Paris or London.” Colussy stepped out of retirement and into Iridium’s destiny in 2000; he was a small investor in old Iridium, and thought it “a terrible waste to let this unique technological marvel just die.”

Motorola, itself one of the big players in the cell phone revolution that made Iridium obsolete, should have known better. So should many of its partners, like Telecom Italia and France Telecom, each of which poured hundreds of millions into building 18 Iridium gateways, or ground-relay stations, around the globe. The project plowed on nonetheless and opened for business, eating up another $1 billion in operating costs during its first year.

By August 1999, Iridium was bankrupt. And by the fall of 2000—when Colussy was shuttling between the U.S. secretary of defense’s office, Lloyd’s of London, a member of the Saudi royal family, and Iridium’s principal gateway, in Tempe, Arizona, to paste his deal together—Motorola was threatening daily to let the whole satellite network crash back to Earth. “All the software to bring it down had been uploaded,” Colussy recalls. “I know because we later hired the guy who was in charge of it. He just had one button to push, and he was waiting for the call.”

The call never came. Iridium flies still, six groups of eleven 1,412-pound satellites orbiting Earth every 100 minutes, guided from the basement of a featureless two-story office building in Leesburg, Virginia, which houses a bank of Sun computers as long as a football field. Two or three techies lounge in a room next door, making sure a wall full of monitors bleep the way they are supposed to.

Is maintaining the grand celestial miscalculation worth it? At an investment of $5 billion, of course not. But at $25 million, plus an undisclosed amount Colussy and his partners agreed to invest after the purchase, it may very well be.

Iridium and Globalstar, a satellite phone competitor that also went bankrupt, though with a somewhat smaller loss, were a triumph of engineering over common sense. “People have realized by now that the way to go into the satellite business is to start localized so your initial investment is low,” says Max Engel, who follows space communications for the consulting firm Frost & Sullivan. “XM Radio, for instance, which I have in my car, uses just two satellites. Iridium’s system was based on building [for] the whole globe, then wondering whether you were going to have any customers.”

Iridium’s architecture locked it into massive upfront costs. The project was the world’s biggest deployment of low-Earth-orbit satellites (known in the trade as LEOs), which hover a mere 483 miles above our heads, compared to 22,000 miles for geostationary satellites (GEOs). A LEO network’s proximity to Earth all but eliminates the half-second signal lag users of geostationary communications experience, an advantage Iridium counted on as a great selling point for its telephone service. But the lower altitude of LEOs shrinks the service footprint of each satellite. From 22,000 miles up, one geostationary satellite can fan out communications to a third of the world; each Iridium LEO satellite, on the other hand, reaches just 1/66 of the globe, so any one or two are usually useless without the others in the constellation.

Motorola’s engineers, hunkered blissfully away from the rest of the world for 12 years, did come up with some advances. Iridium’s satellites are the only ones in the cosmos that communicate with one another as well as bounce signals back to Earth. That capability makes the system the only one in the world that can connect absolutely anywhere to absolutely anywhere else, should a North Pole explorer have an immediate need to reach a South Pole colleague. And Iridium is easy to use while in motion—at sea, in an airplane, or in a desert Humvee, for instance; finding the nearest of the 66 orbiting satellites requires only a small telephone antenna. Transmissions to distant geostationary satellites, on the other hand, require users to lug around much bigger antenna contraptions.

With dozens of satellites to launch, Iridium’s constructors had to figure out how to build and launch them cheaply—and quickly. “They learned to make a complete satellite in two to three weeks, where a geostationary craft takes 24 to 36 months,” says Mark Chartrand, a satellite industry consultant based in Baltimore. “They were so small and light they could send several of them up on one rocket. Technically, this is a good system.” Indeed, at the peak of satellite construction, Iridium was turning out a satellite a week.

The launches began in May 1997, and within a year, 66 satellites had been launched, plus a few spares. There were also some failures: The old Iridium launched 16 satellites that never achieved the proper orbit or were inoperable after reaching orbit. As for launch vehicles, Iridium was true to its global roots, sending up Boeing Delta-2s from U.S. bases, Protons from Russia and Kazakhstan, and Long Marches from China. Protons were capable of lofting five Iridium satellites at a time, while the Long Marches could handle only two.

When Colussy was negotiating for Iridium, he learned that there were seven spare satellites in storage, which he arranged to have launched after the takeover. Including operational satellites, spares, and failures, Iridium has launched 95 satellites.

As successful as the Motorola designers were in coming up with small, manageable satellites, they made a dire mistake: they chose a pitifully small (by 2004 standards) band for transmitting data. The $5 billion system can send no more than 2.4 kilobits per second. Globalstar, also built in the 1990s, offers 9.6 kilobits. A standard dial-up computer modem, the one you likely dumped for cable because it was maddeningly slow, does 56 kilobits per second. “Motorola designed this system in the mid-1980s for voice, and now almost all our customers want to link their palm top or laptop to it,” admits Mark Adams. “A big part of my job has been to roll out data services working with what we’ve got. To say, ‘Here’s this multibillion-dollar infrastructure. What else can we do with it?’ ”

Adams’ answer: Short-burst data from sources far beyond the reach of either dial-up or cable. Oil companies, for instance, can place Iridium-linked sensors along their Canadian or Siberian pipelines, sending one-line messages to headquarters in case of a leak or other emergency. Trucking and shipping companies can keep track of their fleets. “There are lots of vertical markets that can use transmission speeds below 10 kilobits,” remarks D.K. Sachdev, a retired executive from the satellite consortium Intelsat. “Look at BlackBerry [a hand-held wireless device that enables users to receive and answer e-mail], which has been a great success among executives.”

Before Adams could tweak his multibillion-dollar infrastructure, though, Colussy had to save it from being dumped in the Pacific. He came up with a business transaction nearly as global as Iridium itself. “The old Iridium board was a United Nations of investors who owned the gateways around the world,” Colussy recounts. “Naturally I started with them” in seeking backers for the new Iridium.

Colussy, who tells his tale over fresh tuna and watermelon served at an umbrella’ed patio table by a uniformed servant, brought a background as corporate American as they come. An engineer trained at the U.S. Coast Guard Academy in the 1950s, he added a Harvard MBA, then rose to the position of president of Pan American Airways in the 1970s. He converted the last company he ran, UNC Corporation, from a struggling builder of nuclear powerplants for submarines to a thriving aviation services provider, then sold it in 1997 to General Electric for $725 million. By 2000, he was comfortably retired. Still, he couldn’t resist the opportunity to turn Iridium around, so he started making calls to see who was willing to throw good money after bad.

In the end, he got four investors. The first was Syncom, a Washington, D.C.-based firm specializing in telecommunications investments that was eyeing Iridium for its potential in Africa and other developing regions. The second, Saudi Prince Khalid, he never met, but Colussy recalls that he “had some pretty tough negotiations with [Khalid’s] investment bankers.” The third investor was Brazilian telecom company Inepar. Colussy then added Quadrant, headed by an Australian venture capitalist.

Colussy was also working the Pentagon, with a lot of help from Mark Adams, who at the time was an engineer with the consulting firm Mitre Corporation. Although Motorola had originally rebuffed the Department of Defense (one more miscalculation), the armed forces eventually became part of the original Iridium consortium. They even built a secure system gateway in Hawaii for military use. Adams and Colussy got Department of Defense officials to commit to giving them $36 million a year in military business if their buyout came off.

With this success, Colussy went to Chase and a battery of other banks that owned Iridium’s assets in lieu of the money they had lent. In the spring of 2000, the creditors had almost gotten $600 million from Craig McCaw, America’s first great cell phone entrepreneur. Then the bubble burst, stock markets dipped, McCaw retreated, and Colussy’s motley crew, with its $25 million, was the only group left willing to back Iridium. “It wasn’t a friendly environment,” Colussy says in his unflappably modulated CEO voice. “But once they picked themselves up off the floor, they decided $25 million was better than nothing.”

Last-minute talks with Motorola, which was keeping Iridium aloft while the money men decided its fate, centered on the Earthbound topic of insurance. Motorola, already stung by lawsuits from original Iridium investors, wanted assurance it wouldn’t face any future liabilities from satellite debris plunging to Earth. “The chances of one of these hitting anyone’s house are pretty small,” says Colussy. Still, Motorola demanded full indemnity.

After meetings in London, Colussy produced a $3 billion policy from Lloyd’s. Not enough, Motorola said. Colussy, with help from his lawyers, then recalled an obscure federal law allowing the Department of Defense to indemnify civilian contractors engaged in hazardous work. He had used it in his Pan Am days so the airline could fly to Saigon during the Vietnam War. One problem: Authorization had to come from the secretary of defense. During the late fall of 2000, with Motorola past its deadline for trashing Iridium, Colussy managed to get meetings with top Pentagon officials, including then-Secretary William Cohen. By December 12 Motorola had its indemnity, and Colussy and his investors had Iridium.

Next came the task of converting the vast, gold-plated corporate Iridium into something as close to a garage start-up as Colussy and Adams could get it. Under Chapter 11 bankruptcy, the company was relieved of interest payments on about $5 billion in debt, which immediately lopped 40 percent off Iridium’s costs. Step two was to cut out Motorola, which had been charging the consortium $45 million a month in operating fees. Colussy switched to Boeing, which did the job for $3.5 million per month. Colussy closed corporate offices in favor of the Leesburg facility, rehired only 200 of the 600 employees that had been let go, returned to operational status only one of the 18 gateways (the Pentagon’s gateway in Hawaii had been excluded from closure), and ended up with eight percent of the old system’s costs. The original Iridium had needed one million customers to break even; the new version required only 60,000.

Colussy is the first to admit that Iridium will never achieve anything like its originally intended glory. “If you have a cellular or hard-wired phone system where you are, that’s always going to be the way to go,” he says. “Iridium will never be as cheap.”

Conceived in the age of voice and woefully underequipped in today’s age of data, low-Earth-orbit satellites are now commonly acknowledged to have been a wrong turn off humanity’s highway to the colonization of space. “The guys at Iridium are doing a good job with what they have,” says D.K. Sachdev. “But how many electronic systems that were designed in the 1980s are you still using?”

The rescue of Iridium does have implications for organizations wanting to manage technology reasonably. The satellite industry started in the 1960s not as an industry at all, but as an array of government consortia—Intelsat, Inmarsat, Eutelsat, among others—viewed as a second front in the space race and cold war, with all the costs-be-damned culture that entailed. By the 1980s, most LEO projects were captained by big military contractors such as Motorola and Lockheed.

Colussy’s Iridium restructuring started a completely different trend. Since December 2000, little-known private investors have taken over one satellite company after another, betting their own cash on squeezing and niche-positioning them back to health. Last year, Inmarsat, a one-time state consortium focused on maritime communications, was bought by two British venture capital firms. (Inmarsat, a geostationary system that can carry data at broadband speeds, has been running the Iraqi Central Bank’s information systems.) Globalstar emerged from its own bankruptcy this spring, purchased for $43 million by New Orleans-based investment company Thermo Capital. Intelsat, the industry godfather, was privatized in 2001 to its original consortium of governments and former state companies, with a promise to make its shares available on the stock market this year.

Technical director Mark Adams thinks small on a daily basis, particularly when laboring over a new-generation phone that will be less than half the original Iridium’s size, and, at under $1,500, less than half the price. Adams’ watchword is conservation. He and his team have extended the projected life of Iridium’s satellites from 2005 to 2014 through various resourceful measures. The least reliable system on an Iridium satellite, for instance, is a gyroscope that keeps the craft facing the sun, from which it draws energy to power its batteries. Adams and co-workers have figured out how to use thrusters to orient the satellites, saving wear and tear on the fragile gyroscopes. Now Adams and his team are working on extending battery life by letting the satellites take turns hibernating at certain points in their orbits. “These systems, like many products of American engineering, were fundamentally overdesigned,” says Adams. “They were meant to fly five to seven years, but have enough battery for 20. That gives us a lot of ways to stretch that lifespan.”

As for Colussy, now 73, he ran new Iridium for about a year, then passed the reins to chief executive Gino Picasso, who has searched far and wide for a few more customers. Iridium use is picking up among ranchers in the Australian outback, Colussy is pleased to report. And the company is challenging Inmarsat among commercial fishing fleets. New Iridium has run pilot projects in the villages of Senegal, giving native sons who are working in Paris or Washington, D.C., their first chance to phone home.

While his successor nurtures these seeds of growth, Colussy is thinking about the next phase for the satellite industry as a whole. What he sees, now that he has helped break it down into manageable bits, is an imperative to make it bigger and stronger again through mergers. “What needs doing in the satellite business now is consolidation,” Colussy says, the gleam in his eye suggesting he’s mulling prospects more exciting than the afternoon golf game he’s scheduled.

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