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Before you roll out that business plan, ask yourself if it will survive first contact with the customer

Feb 07, 2011 Business Daily, Strategy

“At $5.2-billion Iridium was one of the largest, boldest and audacious startup bets ever made. Conceived in 1987 by Motorola and spun out in 1990 as a separate company, Iridium planned to build a mobile telephone system that would work anywhere on earth. It would cover every city, town and square inch of the earth from ships in the middle of the Arctic Ocean to the jungles of Africa to the remote mountain peaks of the Himalayas. And Iridium would do this without building a single cell tower.
How? With an out-of-this-world business plan. First, the company bought a fleet of 15 rockets from Russia, the U.S. and China.  Next, it  built 72 satellites on an assembly line and used the rockets to launch them into orbit 500 miles above the earth. There the satellites acted like 500-mile high cell phone towers capable of providing phone coverage to any spot on the planet. Seven years after it was founded their satellites and ground stations were in place.  It was a technical tour de force.”

STEVE BLANK, www.steveblank.com (1 November 2010)

The Iridium satellite phone was meant to be HUGE for Motorola. In the late 1980s, mobile-phone coverage was sparse; calls were prohibitively expensive, as were handsets; and the handsets themselves were huge and unwieldy. Iridium was the proposed answer. The firm was spun out of Motorola, and its projected numbers looked dramatic. More than $5 billion was sunk into the project.

The first phone call on Iridium was made in 1998. Within 9 months it was seeking bankruptcy protection. History records it as one of the great startup failures of all time.

What happened? Influentual startup expert Steve Blank has chronicled the debacle. The essential problem was that the business plan was designed by wonks and consultants away from the battlefield, and did not survive its “first contact with the customer.”

For one thing, it took 11 years for Iridium to move from concept to launch, and it took birth in a world very different from the world in which it was conceived. Cellphone technology had moved on and base stations were now far more widespread. Handsets had shrunk in size and could sit comfortably in a user’s pocket. And the cost of calling had benefitted from the scale effect, plunging dramatically.

By contrast, the phone Iridium actually introduced to the market was still a bulky monstrosity with a huge antenna; and it required line-of-sight connection to the satellites, and so couldn’t be used indoors. Most astonishing flaw of all: calls cost $7 per minute (while cellular calls had declined to an average of $0.50 at the time). As a much-touted mass-market mobile phone, Iridium was dead on arrival. Its business plan called for 42 million customers; it managed no more than 30,000 before giving up.

Iridium was sold for $25 million (less than half of one per cent of the money spent on it), and these days its successor company makes money by focusing on a niche market of far-flung users – soldiers, explorers and the like, which was perhaps the only target market this product could have had.

Iridium is a chilling example of what happens when assumptions about customers are made far away from customers; when you take too long to come to market in a rapidly changing industry; when you don’t ask basic common-sense questions about your venture, such as: who will use this product, and why will they want to? What is the real need we are trying to fulfil? What options does that customer have? What is compelling about us?

I hope none of you will ever make those basic blunders.

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