1.

Assuming the market was rational at the time (i.e. market prices reflect fundamental values), how much was Iridium worth on a per share basis at the end of 1998 according to the projections in Exhibit 5? What are the important determinants of value? How confident are you in your answer? (Please assume the market risk premium equals 7.5%.)

2.

What caused Iridium to fail: was it a bad strategy, bad execution, or bad luck?

Iridium failed because of its bad strategy and bad execution. Bad strategy: It took a big bang approach to green field technology instead of an organic and phased approach. No pilot program was launched to test feasibility or gather consumer feedback. Marketing and sales made mistakes and the phones were too large and too expensive ($ 3,000 along with $3.00 $7.50) per call. There were mixed predictions regarding the mobile satellite market because Leslie Taylor Associates predicted a user base of 7 mill. subscribers and revenues of $8 20 bill. by 2003 whereas Forrester Research predicted that the global satellite market would be as much as $36 bill. by 2005. There were logistical problems trying to distribute phones and there was no service inside buildings. Moreover, the satellite life was short. Iridium had signed 256 operating agreements with local providers in over 100 countries by July 1999. The company still had to negotiate agreements with another 140 countries and territories. The project strategy was too ambitious. Bad execution: Iridium failed to analyze infrastructure needs and costs. Iridium started advertising campaign even before phones were available for sale. It also needed to negotiate and finalize agreements with local service providers in 240 countries. Iridium spent too much and there wasnt enough cost management and controls (debt to capital ratio of 60% was extremely high). Also, they could not answer one million sales inquiries due to internal confusion and experienced logistical problems trying to distribute phones. In March 1999, it was unable to fill 15,000 orders for satellite phones because the manufacturer could not ramp up production fast enough. Iridium announced that it had only 7,188 satellite subscribers, 10,294 total service subscribers and cumulative cash revenues of $195,000 as of March 31 [Expected numbers were: 27,000 subscribers, 52,000 total service subscribers and $4 mill. of cash revenues]