When Iridium LLC, the US $ 5-billion plus global satellite company, announced what is billed as the costliest business flameouts last week, it took down with it a hefty investment of over Rs 220 crore by Indian financial institutions (FIs).
India was among the 19 strategic investors in the Iridium project, the investment as impresarioed by Ravi Parthasarthy, vice chairman and managing director of Infrastructure Leasing and Financial Services (IL&FS). He hard-sold, lobbied and cajoled Indian institutions to put their money into the project and also did a good job of convincing doubters who knew better. For instance, B K Syngal, former chairman of Videsh Sanchar Nigam (VSNL), India's monopoly long distance phone company, had once called Iridium "a pie in the sky". He later parted with over $ 5 million to host the Iridium gateway.
Parthasarthy's argument was that, though untested, Iridium was India's first chance of being "at the cutting edge of technology development" and to participate in revolutionary change, instead of trying to catch up with it.
The argument was seductive, as is obvious from the size of investment he managed to channel into the project. Today Industrial Development Bank of India (IDBI), which as the largest FI led the consortium, has lost nearly Rs 40 crore, ICICI has lost Rs 30 crore, and IL&FS itself will write off nearly Rs 40 crore in equity and debt. Unconfirmed reports suggest that it had also made a hefty unsecured loan to the beleaguered Iridium India.
Surprisingly, Housing Development Finance Corporation (HDFC) who, in Deepak Parekh has a common chairman with IL&FS, has a relatively small exposure of just over Rs 5 crore according to its latest balance sheet. Other investors included Life Insurance Corporation, General Insurance Corporation, Exim Bank, State Bank of India, Unit Trust of India and IL&FS Venture Fund.
Unfortunately, Iridium did not remain a pie-in-the-sky. The concept was born in 1985 when the wife of a Motorola executive, unable to use her cellular phone while on vacation in the Caribbean, convinced her husband of the need for a worldwide mobile wireless system. The project was proposed three years later by Motorola engineers and was formally announced in 1990. The 66-satellite system which promised to connect subscribers anywhere in the world made history for its sheer size, scale and ambition. When all the satellites were launched in February 1998 and the system was fully operational, Iridium had negotiated 320 partner agreements with telephone companies worldwide to serve 105 million subscribers throughout the world.
Exactly ten years after the project was formally announced, Iridium made history again as one of the biggest and most expensive project disasters the world has seen. In retrospect, the anecdote about the executive's wife on a holiday seems like a foolish beginning for a $ 7-billion inferno.
Ultimately, Iridium failed to deliver both on technology and on its ability to gauge the market. Its concept, though revolutionary, did not keep pace with other equally sensational changes in cellular telecom technology. The company was probably so focused on its global link-up that it failed to keep ahead of the phenomenal advances in global cellular roaming.
Worse still, even the global link-up claim was not entirely true. Iridium linked up the world, subject to so many ifs and buts -- the most important of these was that its brick-sized phone could pick up signals only in the open air. Inside buildings, it had to have a pager link up to catch the signals and the call could be connected only in the open.
But where Iridium went spectacularly wrong was in figuring out its market. Its business planners and researchers had figured out that "if Iridium's service was more expensive than existing call routes, callers would be less likely to use Iridium phones". In fact, the service was nearly 25 per cent more expensive.
They also researched the social behaviour of "people on the move" and interviewed 25,000 people in 54 cities in 34 countries who fit the profile of likely Iridium users.
The mistake probably began right there. Instead of trying to figure out the market, Iridium pre-fixed the market as comprising "wealthy, business travellers always on the move". They did not bother with the fact that these travellers are unlikely to be enamoured by a brick-sized phone which works only in open air. The market should have been with oil companies, defense establishments, offshore rigs and complicated infrastructure projects which had operations in remote locations not connected by terrestrial networks and unable to receive cellular signals.
By the time, Iridium realised its folly, the project was already battling for survival. It needed 500,000 subscribers to make money. When it closed shop on Friday, it had a pathetic 55,000 customers or less. All these had paid upward of $ 3000 per phone as well as subscription costs. In India, the number of subscribers was around 100 and even this was considered decent as compared to several other countries.
For India, the Iridium debacle puts a question mark on investing in similarly ambitious projects in future. For instance, Subhash Chandra's Agrani satellite project would be the first to be affected. The project already has an okay of sorts from the financial institutions. Globalstar is another global satellite project which is looking for funding but targeting a different market. The question is - can Indian financial institutions afford such adventurism? In a knowledge-driven world where technology changes faster than it takes for ambitious projects such as Iridium to reach financial closure, a resource-scarce country such as ours is better off waiting.
As far as global satellite telephony goes, India already was a part of the London based Inmarsat project and will remain so. In hindsight, it would seem that only hype and hard sell by IL&FS led Indian money down the drain. In future, it would be far better for banks and financial institutions to wait and watch.