Investors in the failed Iridium satellite phone project of Iridium are seeking around $4 billion in damages from Motorola, whose group was the lead promoter of the Iridium project
Iridium’s delayed launch
By Anna Marie Kukec
Daily Herald Business Writer
Some called it fraud.
But it more likely was just “tech-testosterone,” said Herschel Shosteck, president and chairman of The Shosteck Group, a wireless technology consulting firm in Silver Springs, Md.
He referred to creditors’ initial shock-and-awe regarding Iridium LLC, a revolutionary satellite communications company, and its system that was developed by Motorola Inc. and launched in 1998. The $5 billion network attracted few subscribers and nose-dived into bankruptcy the following year.
“It was pure fantasy, not fraud. It was delusional, not fraud. It was insanity, not fraud,” said Shosteck, an adviser who tried to dissuade some investors at the time. “Fraud implies purpose or knowledge in transmitting false information or intent to gain money from something. These people just didn’t understand anything.”
Since then, Motorola has spent millions settling several lawsuits arising after Iridium’s bankruptcy. And a trial is scheduled for Oct. 23 on a lawsuit against Motorola by the Official Committee of the Unsecured Creditors of Iridium in Bankruptcy Court in New York. The case, filed in July 2001, seeks around $4 billion in damages for claims alleging breach of contract, warranty and fiduciary duty, among others.
How it started
In 1987, Motorola developed the Iridium concept as a way to provide mobile phone service anywhere in the world through a network of more than 60 orbiting satellites. After more than a decade of work, Iridium began offering service in 1998.
A few months later, Iridium ran into trouble. Subscribers weren’t jumping for it, due to cost and quality of service issues, and great strides in Motorola’s own cellular technology were nudging it aside.
In 1999, Iridium defaulted on loans totaling about $1.5 billion and filed for bankruptcy protection.
“Iridium was absolutely brilliant, but it was economically not viable,” Shosteck said. “If you’re in trouble in the middle of the Antarctic, you’re not going to call your mother-in-law in New York. You’re going to call for help. … The business just wasn’t going to generate enough revenue from the developing world and the capital investment was just too great.”
Also, Iridium was competing with other satellite networks, including Globalstar. With the quick advances in the cellular phone network, the market became saturated, said David Weissman, senior telecom analyst with Zacks Investment Research.
“You must also consider the intellectual property and the technology learning curve that it brought to Motorola back then, and how adaptive the company was in progressing back to more mainstream markets where it is now,” said Weissman. “Iridium also was a partial response to defense and government requirements for closer reliance on the latest commercial off-the-shelf technology. The massive network may have not panned out, but Motorola developed a better understanding of its customer requirements.”
A new company
In 2000, a new group of investors led by Dan Colussy formed Iridium Satellite LLC and acquired all the assets for around $25 million. They pumped in another $100 million to get operations going again.
“I was a user of the system and realized what a tremendous network it was,” Colussy said during an interview while on business in Portugal. “It was just too valuable and too much of an advanced piece of technology at the time to let it just go away.”
The Iridium system has the unique ability to reach all of the world’s remote areas, including the airspace, the oceans and the many under-developed parts of the globe that have no communications systems, Colussy said.
Since none of the satellites were destroyed after the bankruptcy filing, the system remained intact and ready. Colussy, who became the new company’s CEO, pursued subscribers from different industries, such as aviation, maritime and government agencies.
Iridium secured a contract with the U.S. Department of Defense and has played major roles in the Hurricane Katrina region as well as the war in Iraq.
Today, Iridium remains privately held. It posted $188 million in revenue in 2005 and has around 100 employees, mostly at its Bethesda, Md., headquarters and facilities in Tempe, Ariz.
It has about 162,000 subscribers and anticipates $200 million in revenues this year. By 2013, Iridium plans to replace its 66 satellites with newer technologies, Colussy said.
Meanwhile …
While the new Iridium rose from the ashes, Motorola has been dealing with residual suits from the old company.
The lenders’ claim for a $300 million guarantee had been filed in federal court in New York. That case led to a judgment against Motorola in early 2002, which was appealed. The judgment, which totaled $371 million including interest, was paid by Motorola in April 2002.
In March 2003, Motorola paid $12 million to settle remaining lawsuits filed by Chase Manhattan Bank, resolving five legal disputes with the lenders. Motorola had a $260 million counterclaim against Chase, but dropped it with this settlement. The settlement also covered a case filed in a New York state court alleging that Motorola and the old Iridium had “fraudulently induced” Chase and 17 other lenders of old Iridium to enter into the Senior Secured Credit Agreement. That case sought the entire unpaid balance of the $800 million loan, plus interest and expenses.
Motorola still faces another lawsuit filed in U.S. Bankruptcy Court in July 2001 by the Official Committee of Unsecured Creditors seeking damages in excess of $4 billion.
“While the still pending cases are in various stages and the outcomes are not predictable, an unfavorable outcome of one or more of these cases could have a material adverse effect on the company’s consolidated financial position, liquidity or results of operations,” Motorola said in a government filing.
Motorola executives declined comment for this story, but did release a statement saying “Motorola believed that Iridium would be technically and commercially successful as was demonstrated by Motorola’s commitment to the Iridium project. Iridium was a technical success and the system is still up and running today.”
Iridium ranks as one of Motorola’s more embarrassing failures, said Carmi Levy, senior research analyst for Info-Tech Research Group.
“This is an example of hype spinning out of control, of proper elements of due diligence not being performed, and of failure to properly assess competing technologies which could potentially — and ultimately did — kill demand for the initial launch of Iridium,” he said.
Levy compared the Iridium frenzy with the Internet boom of the late 1990s, where companies assumed the momentum of the market would more than make up for failures to address the fundamentals of business.
“Both Motorola and Iridium have evolved into different companies since all of that happened,” said Levy. “I believe the market recognizes the Motorola of today is a much more evolved firm than the Motorola that decided to back the launch of Iridium.”
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