[Satellite News 07-18-11] Iridium has enjoyed a surge of transformative success over the last two years that has propelled the MSS entity to the top of most analysts’ watch lists. While most of the operator’s long-term buzz circles around its ambitious Iridium Next constellation backed by $1.8 billion in ECA Coface credit, Iridium also has drastically improved its position in the machine-to-machine and handset markets and has generated long-term momentum through a string of better-than-expected quarterly financial results.

   At the helm of Iridium’s efforts is CEO Matt Desch, a 2010 Via Satellite Executive of the Year nominee who was recently appointed to serve on the U.S. National Security Telecommunications Advisory Committee (NSTAC). On top of managing Iridium’s MSS growth and business model, Desch now advises and provides recommendations to U.S. President Barack Obama and other government leaders on the security of the nation’s telecommunications systems.

   Satellite News presents the extended version of Desch’s View From the Top interview featured in Via Satellite magazine, where he discussed the latest developments for Iridium Next, why the company has increased its handset revenue outlook, MSS opportunities for hosted payloads and what lies ahead for mobile satellite’s most dedicated markets.

 

Desch: The space components primed by Thales is part of a firm, fixed-price contract that is already well down the path of our five-year plan. We’re about 20 percent of the way complete toward the first service launch and it’s going very well. I’ve that notice that before a lot of other satellite providers win contracts like this, they will have already lined up their team and confirmed the sub-contracts before they win the initial business so that when the deal is signed, the team building is pretty much done. Thales goes through this process a little differently because of their commercial heritage. They line up their team and win the business and then they go back and start negotiating the final deals with their sub-contractors as they go. This way, they have a couple of choices and options in getting that done. At this point, Thales pretty much has the full team assembled. There are a few more announcements in the satellite engineering area that they’re working on, but that’s all on track. We’re early on in the design phase and we already received some pictures and specs from Thales. We’re moving onto a preliminary design review at the end of this year or early next year together, but in the meantime, you will hear additional team announcements – like Lockheed Martin doing the flight software, ViaSat for the Ka-band receivers and MT Satellite Products delivering the titanium diaphragm propellant tanks for the constellation.

 

Desch: We recently signed a contract with iDirect contract for ground infrastructure. There are two things that were covered in that deal. The first is the development of infrastructure for Iridium Next and the second is the upgrading of our current ground infrastructure, given the fact that, in some cases, our ground network is getting to be 12 or 13 years old. iDirect is helping us implement a natural technology upgrade that is ready for Iridium Next. The goal there is that our ground infrastructure for Next would be all in place by early 2014, which supports the current network and gives it about a year of readiness before the service launches. We’ve also announced core technology ground infrastructure deals with Hughes, Ericsson and RT Logic. Ericcson is providing the upgraded switch and Hughes is providing the advanced network controller to the Earth terminals themselves. iDirect plays a part in those contracts as well. The space and ground segment together is all part of our two-pronged, $3 billion plan. If you add up all the companies associated with this project, we have about 30 major companies working as sub-contractors that are part of Iridium Next. This is a multi-national, multi-company undertaking.

 

Desch: Obviously, you don’t just buy a system and wait four-years for your prime contractor to deliver it. We have a very experienced and knowledgeable team working under [Iridium Executive Vice President of Iridium Next] Scott Smith, who has built a lot of satellite systems with Lockheed Martin and put in his time in the digital imaging world at DigitalGlobe. We have a team of about 20, who I consider the best of the best in space expertise with Block 1 experiece, managing Thales and other efforts. I have a separate team under [Iridium Executive Vice President of Global Operations and Product Development] John Roddy, who manages our ground operations and gateways for the Iridium Next project. They are spending a lot of team in France, working very closely with the space team on the ground evolution. They also are going around the country visiting suppliers and working with master project plans. Overall, there are monthly operations meetings. I get a full-blown, four-hour review about once a month that goes into a wide-range of every aspect of the program. We also have weekly meetings on more specific subjects. Because of all the experience you have on the team, you’re constantly in discussions about all kinds of things that are going on across the board. This is a set-up that I would say is going very well for us right now. Even though there will always be some items in yellow and some decisions to be made that have consequences, we’re on track, on budget and on plan.

 

Desch: These projections sound consistent with what I’ve heard in the public safety industry during some recent discussions I’ve been a part of. I can tell you that there is still a lot of interest in broadband for fire and police. Firefighters, for example, wish that they could have the schematics of a building sent to them on their way to a disaster. Police want to be able to interact and see pictures of a scene in real-time. These are all the same applications that consumers expect to have on their iPads or whatever devices they may have. These capabilities help first responders do a better job. I think MSS and FSS will play a broad role in delivering these services. I think there will be a desire for higher speeds and support and, from Iridium’s perspective, we’ll be ready to support them with the current products we have and Iridium Next will give us even more capability to provide.

 

Desch: We haven’t talked about the Hosted Payload Allience publicly because we didn’t want to take too much credit for it. But, we did play a leadership role in putting that together. The reason why is because Iridium has a unique, time-limited opportunity in hosted payloads. Most other larger satellite companies launch a few spacecraft with hosted payloads a few times per year on a regular basis. For them, getting hosted payloads on satellites is an opportunistic, year-by-year kind of activity. We have a huge opportunity, but it’s only for the next couple of years or so. We were operating on our own basis, but felt pretty strongly that this was a long-term opportunity for the whole industry. So, yes, we were a driver of the alliance and it was, for the most part, our idea. I don’t know who talked to whom first. I wasn’t there. Don Thoma was one of the first callers to pull people together. He was a natural leader for it.

 

Desch: We’re carrying momentum throughout the year. We updated our full-year guidance after our first quarter because we had some forward visibility from our many partners. We’ve seen how they are using our products and how many they plan to buy. The driver behind the growth has almost solely been our new 9602 transceiver. In the past, we found ourselves being too conservative with 9602 projections, but we’ve seen it develop to the point where its size and price performance have been extremely well received across a wide range of markets. We know our partners have a lot of choices for a machine-to-machine solution. We work so that our customers can say that Iridium is the best option on multiple fronts. Our customers can say our products are the best on coverage, with 100 percent global coverage where others are limited. They can also say we’re the most real-time. For some of our competitors, it could potentially take as long as hours between a message being sent and received. We can do that in literally seconds. We also have the best message sizes so you can get more data through in a burst.

   The only problem that we tend to run into is that our devices were a little bit too expensive. Our goal was to fix that by the time we came out with the 9602. Now, we’re cost-competitive and have the best technical solution and we’re seeing that those customers who weren’t working with us before have been moving towards us and that those who had been working with us can now address more of their markets. These customers can also share their volumes with other suppliers and move that business in our direction because they could see that we performed better at a lower cost.

 

Desch: We’re not expecting to see too much consumer development this year, but we’re counting on it in the long-term. The development will come as Iridium moves toward consumer-size devices that could take advantage of the small size of our 9602. I think we’ll have at least six different consumer-like devices come out in the near future that could generate significant volumes themselves. Cost is extremely important to that development. For now, we have more than 100 different partners now who are building the 9602 into their solution. We’re seeing a lot of activity in the trucking, mining, transportation, fishing and tracking industries. There are so many different ways the 9602 can be used for and are deploying a lot more units because of it.

 

Desch: We’ve been lowering the cost of production for the last ten years. While we don’t discuss the specific margins of our handsets, I can say that we make a quite a bit of money on our handsets. There’s a misunderstanding out there that we have higher costs than our competitors because we’re priced higher. That is not true. In fact, we probably have the lowest costs of anybody. The reason we price higher is because we can. The phone works in more places and has more value to customers because of its size and its features.

   We significantly lowered the cost of production when we made the 9555 handset and we’ve continued to make cost reductions every year since. We even have a number of cost-reduction plans scheduled for implementation over the next year or two. The primary element that will lower your overall costs is the cost of components and we doe have a lot of work over the last two to three years to “siliconize” more and more components in our handsets. The work that went on in the 9602 actually paid big benefits into our 9555 handset because we’re able to take that technology and put it into our handset. The same thing happened with our machine-to-machine device. We invested almost $20 million into silconizing the many discrete components of the 9602.

   We’ve continued to find ways to get lower cost components and better integrate some of the technology and all of that goes what we consider the BOM (build of materials). I come from the manufacturing world, so in my manufacturing speak, our BOM has continued to decline both from smart procurement of devices as well as, even more considerably, integration of technology into chips, which can be deployed less expensively on the phone.

   Another cost-cutting factor is that we produce larger volumes of phones. If we’re making 50,000 to 100,000 phones a year, we’re going to get parts at lower prices than competitors making 1,000 to 30,000 phones. We also have worked to lower our conversion costs, which is what your manufacturing company makes in terms of the effort it takes to produce and the amount of automation it has on the process, etc. Other smaller elements like shipping and making the boxes less expensive all come into play. But, with ten years in the business, we’ve gotten the process of making phones less expensive through our contract manufacturing down to a science.