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OPIM 5894 Advanced Project management Iridium LLC case

OPIM 5894 Advanced Project management Iridium LLC case. Team 1. http://users.business.uconn.edu/snair/opim5894.html. What caused Iridium to fail?. Over Estimating Demand and Difficulty Attracting Subscribers

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OPIM 5894 Advanced Project management Iridium LLC case

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  1. OPIM 5894 Advanced Project managementIridium LLC case Team 1 http://users.business.uconn.edu/snair/opim5894.html

  2. What caused Iridium to fail? • Over Estimating Demand and Difficulty Attracting Subscribers • Expected Demand did not materialize (2.25M subscribers were expected by 1998 - $2.3B Revenue) • The correct target market was not identified • Competition from traditional cell phones much higher than anticipated • Cellular Providers expanded roaming agreements • High Handset Cost Prof. Suresh Nair, University of Connecticut

  3. What caused Iridium to fail? • Unable to fulfill orders • Manufacturer issues slowed production • Distribution problems prevented early orders to be unfulfilled • Prospective customers were confused about ordering process and did not know who to buy from • Early ordering process disorganized Prof. Suresh Nair, University of Connecticut

  4. What caused Iridium to fail? • Financing Structure • 83% Debt to Equity Ratio • Much of the debt was short term financing • Fulfilling debt obligations hinged on Iridium’s ability to sign up subscribers very quickly • High initial number of subscribers needed to break even (approximately 1,000,000 needed) • Iridium was essentially operating on temporary debt extensions, which eventually caught up to them Prof. Suresh Nair, University of Connecticut

  5. Why did Motorola finance Iridium with project debt rather than corporate debt? • Using project debt allowed Motorola to protect itself from the high risks related to the project • Motorola would have been able to enjoy the rewards, but were protected from failure • Putting the project on its own balance sheet could potentially adversely affect stock price • In 2008, “A judge has finally ruled that Motorola has nothing to pay over the bankruptcy of its Iridium satellite venture in 1999” • http://www.zdnet.co.uk/news/networking/2008/05/23/nine-year-iridium-bankruptcy-saga-over-for-motorola-39422962/ Prof. Suresh Nair, University of Connecticut

  6. Lessons Learned? • Spend more effort identifying target market • Currently, government, military, “machine to machine” and marine customers make up the bulk of customers (475,000 commercial, 48,000 government) • Assume a longer adoption rate, especially for such an unproven market • Maturity dates on loans were very aggressive, and thus did not allow Iridium to gain necessary subscribers to pay debt service • In high risk projects such as this, project financing can protect the project sponsors from failure due to “non-recourse” Prof. Suresh Nair, University of Connecticut

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