Problem Set

Engineering Systems Learning Center (ESLC)

Massachusetts Institute of Technology

Version 1.1, October 14, 2003

You should spend about 3 hours on this problem set. This averages to about 20 minutes per question. Your answers can be short sentences or even bullets in some cases. It is more important to think about these questions deeply, rather than writing a lengthy report

After reading the sections on technical specifications of Iridium and Globalstar and the section on the economics of the LEO communication satellite constellations, what reasons you think caused the Iridium system to be more expensive than the Globalstar system? What are the key differences in architecture and design between those two systems?

There was a fundamental pricing dilemma that became apparent, while studying the financial data for Iridium. The typical per minute charges for Iridium were $2-7 per minute between November 1998 and June 1999. With few initial subscribers there was obvious pressure to increase charges further or at least to keep them at a high level to maintain revenues. This rendered the service less competitive and prevented rapid expansion of the subscriber base. On the other hand, by lowering prices dramatically one might attract new customers, but still not be able to recover operating expenses. What would your pricing strategy have been while introducing Iridium in 1998-2000? How does your proposed strategy relate to the CPF metric? (Hint: Think about the “demand curve” or price elasticity of this market)

Summarize the key points from class where you and your classmates formed ad hoc “stakeholder” teams. What was your team? Report the main potential reasons for failure that your team discussed. Who among the other stakeholder teams will you have to negotiate with and why? What is your preferred post-bankruptcy scenario for Iridium?

Because of the line-of-sight requirement and weak signal, the Iridium service generally does not work well in urban areas with tall buildings, inside steel structured buildings and in automobiles. In your opinion, to what extent did these usage limitations limit the commercial success of the system?

How could it be that a satellite telephone price of $3,000 and per-minute charges of $2-7 dollars seemed reasonable in 1990, but turned out to be non-competitive in 1998?

In September and October 1998 the Iridium gateway operators told Motorola that they would not be ready for operational activation on November 1, 1998. The main reasons were the lack of trained personnel, some remaining software problems in the constellation and the fact that the 100,000 satellite phones promised by Motorola and Kyocera had not yet been delivered. Nevertheless, Iridium LLC insisted on rolling out the service on November 1, 1998 despite some lingering technical issues. Do you agree with the assertion of a number of class action lawsuits that the premature introduction of Iridium caused negative initial customer reactions and was to blame for the business failure?

Describe the nature of the relationship between Motorola and Iridium LLC. What might have motivated Motorola to arrange this particular structure? What where the advantages and disadvantages for Motorola, for Iridium and for lenders/shareholders of Iridium, respectively?

On August 18, 1999, The Wall Street Journal published an article stating in part: “[l]ast week, Iridium LLC filed for bankruptcy-court protection. The Washington, DC company’s satellite system was supposed to revolutionize telecommunications by allowing phone calls anytime, anywhere. But nine months after its high-profile launch, it has only about 20,000 customers.” – Summarize in a short paragraph what your take away is from doing unit 1 of this case study. What were the fundamental reasons for technical success and economic failure in your personal opinion?

If you were the designer of Iridium or Globalstar in the late 1980s or early 1990s, what could you have done to avoid or alleviate some of the risks and difficulties that these systems experienced? This is not an easy question. Give a few examples of actions you could have taken. What can we learn for architecting similar systems in the future?