
The 5.2 billion dollar mistake. - speek
http://steveblank.com/2010/11/01/no-business-plan-survives-first-contact-with-a-customer-%E2%80%93-the-5-2-billion-dollar-mistake/
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tobtoh
Interesting article - but I can't help but feel it's written with a big dose
of 20:20 hindsight. Obviously Iridium didn't succeed and if you were doing it
again and knew what you know now, you would do things very differently (as the
article explains). However, back in 1990 when Iridium started, I think a lot
of their decision were not necessary ignorant.

In 1990, Iridium probably did have a good solution to a problem in _1990_. The
article mentions that the waterfall model was a bad development model to
follow - yes agree - but whilst 'agile' development concepts existed back to
the 60s, it really only started becoming more mainstream in mid 1990s (the
term 'agile programming' wasn't even used until 2001). So the waterfall model
was probably a reasonable model to take back then.

"No Business Plan Survives First Contact With A Customer". Again in the age of
release early, release often, this seems to make sense. But when your product
is global satellite coverage, how do you break down your product into
something that could be released early/often? I guess you could possibly
launch one satellite and see if people would subscribe ... but like the Net, a
one-node network would be of very limited value and reach.

I agree that the frozen business plan was the critical reason in their
failure. Even a regular survey of potential customers would have shown that
the price difference was too great for rapidly diminishing benefits.

But I don't agree that their initial solution was necessarily bad or that the
waterfall model was inherently bad based on 1990s knowledge.

~~~
edanm
I don't think he's criticizing them for not following agile methods,
considering they didn't exist then. He _is_ criticizing them for not changing
their plans based on the developments going on around them.

But mostly, he's just using Iridium as an example of what not to do,
regardless of whether they could have known better or not.

~~~
tobtoh
I think he is exactly criticising them for not following agile methods - it's
the basis of his criticism for following the waterfall method. His criticizm
for not changing their plans is pt 3 (which I agree with)

And on your last point, using Iridium as an 'example' is like criticizing
Middle Age 'surgeons' for not using antiseptic to ensure the success of their
operations. You'd be right, but it's hardly a valuable observation nor provide
much insight into how to avoid an equivalent situation today (where you are
lacking knowledge/tools/technology).

~~~
radu_floricica
You'd be surprised what information was available vs what was actually being
done. Lots of stuff we think are modern discoveries have been known for 2000
years.. yet not widely practiced for various reasons.

I guess it boils down to what is lately being called "evidence-based
medicine". Trial and error would have taken them really far, if they'd
practice it properly. Which is something even now we're not doing to the
fullest extent.

------
jdietrich
Iridium never identified a customer need, they just ploughed ahead and built
the biggest, shiniest system and hoped that it would pay off. Global coverage
just isn't that useful to all but a tiny number of users.

The obvious customers were seafarers, but they had been using Inmarsat for
years. Their network achieved near-global coverage using four geosynchronous
satellites. You needed a big antenna and a powerful transmitter, but that was
no problem on an ocean-going vessel. The same went for fixed installations in
remote areas on land. Inmarsat was at the time a UN-backed nonprofit
established to improve safety of life at sea and was under no particular
commercial pressures.

GSM took off in a huge way in the early nineties, so by the time Iridium
launched most of the developed world was blanketed in GSM coverage. Multi-band
handsets and roaming agreements meant that most travelling business customers
already had a handset that worked just about everywhere at relatively low
cost.

There was still a gap in the market for portable communications in less
developed and more sparsely populated areas, particularly Africa and the
Middle East. The later network Thuraya solved that problem cheaply and
elegantly by putting a geostationary satellite over Ethiopia and covering most
of the market for handheld satellite phones after just one launch. They now
cover 70% of the world's land mass with just two satellites and are far more
profitable than the revived Iridium.

Iridium could have pivoted. They had a lot of sunk R&D costs, but the initial
66 satellites were built and launched in an enormous binge between 1997 and
1998. They had a gap of at least six years between conceiving the idea and
building the first piece of hardware. I believe that they failed to do so
because they were preoccupied with the idea of providing truly global handheld
telephony, rather than the more mundane task of making a product that people
want. Iridium brilliantly solved the technical problem of providing telephone
coverage to parts of the world with very few people, but failed to realise the
basic flaw in that business model.

Iridium turned out to be a wonderful gift to humanity, but it was a bloody
awful business decision.

~~~
oiuyhgthyjuki
In the 80s when only yuppies had cell phones and coverage was limited to a few
square miles of financial districts could you have predicted 100% GSM coverage
in Africa?

~~~
borism
There still isn't 100% GSM coverage in Asia - the most densely populated
continent, let alone Africa and S. America. There are many many places that
will never see GSM coverage. So I wouldn't write satellite communications off
just yet.

Could you have predicted it in the 80s? Maybe, if you didn't have all this
money to build exactly what they built.

~~~
oiuyhgthyjuki
Compared to the cost of installing conventional telecoms Iridium's $6Bn looked
very cheap.

Their big mistake was assuming that mobile phone usage would be a limited
special market alongside landlines. They didn't consider that much of the 3rd
world would simply skip over the cost of installing landline infrastructure
and cell phones would be the cheap alternative so leading to a much larger
demand and cheaper phones and calls.

------
cletus
I like this article because I see examples of this mistake all the time.

There is a startup (forget the name) who is seeking to bring smartphone like
features to the much larger feature phone segment of the market (~80% of the
market). It's a big idea and the potential market is huge... on paper.

The problem? Technology is ever changing. Today what are $500-1000 devices
(and thus the top 20% of the market) will in 2 years cost half that and be 50%
of the market. So they're betting on a business that by the nature of pretty
much anything to do with silicon, is a dying business. Basically all phones
will be smartphones in the next 5 years.

In the digital camera market, Olympus and some others designed the FourThirds
sensor format for digital DSLRs some years ago. They did this at the time when
Canon and Nikon were making larger sensors and putting them in $1200-2000
bodies. Their idea? Reduce the cost of the sensor and have something that is
compelling both in terms of price but in body and (in particular) lens size.

The problems? APS-C sized sensors became basically a commodity item. So
FourThirds has only a size advantage and not really a cost advantage. Canon
and Nikon (in particular) have much larger markets and the economies of scale
that really matter when it comes to lenses.

So the lesson of the article is don't bet your business in what is a
transitory problem.

~~~
delackner
While I don't disagree with the basic idea you're presenting, about people
building nice sounding solutions that end up DOA, your Four-Thirds example is
a bit distracting, since it isn't true.

Olympus and Panasonic have made a lot of money selling four-thirds format
cameras, for advantages quite unrelated to sensor cost. These two companies
carved an entirely new market segment (very small high-quality-sensor
exchangeable lens cameras). Previously there was no exchangeable lens digital
camera that was both small and optically (sensor and lenses) high quality.
What's more, in the traditional segments Olympus was a bit player with sales
very disapponting compared to the Canon juggernaut. So this story is much more
about an old player deciding to play an entirely different game rather than
just keep getting the stuffing beat out of them by just going along competing
directly.

They've done well enough that other players (Sony, Samsung) are jumping in and
trying to pitch their own mirrorless formats to try to win a piece of this new
market segment. There is speculation Nikon and Canon will try as well.

~~~
potatolicious
You're confusing the Four-Thirds format with the Micro-Four-Thirds (to be
fair, they have the same sensor area).

The Four Thirds format - i.e. traditional SLRs with smaller sensors was a
failure until they pivoted into Micro Four Thirds (EVIL cameras, "electronic
viewfinder interchangeable lens"). The cost advantages of four thirds sensors
never materialized, and the smaller sensor size is only a marginal advantage
when it comes to integrating into smaller devices.

This is evidenced by the fact that a mere year after the launch of the first
Micro Four Thirds cameras, Sony has already hit the market with the same
concept, but they're doing it with a larger APS-C sensor (and also no bigger
than the E-PX and GF-X series of Micro Four Thirds cameras).

Olympus and Panasonic rightly deserve the credit for inventing the entire
concept of EVIL and bringing it to market, but IMHO it has little to do with
the Four Thirds format. That whole thing was a bad idea to begin with. APS-C
sensors are widely available and commoditized, so there are no cost
advantages, and there is not necessarily a significant technical advantage
either.

~~~
delackner
I was going to try to just continue this via email, but I don't see your
contact details. I don't have the industry background to know whether APS-C
sensors are indeed "commoditized" but that sounds a bit spurious. Canon, Fuji,
and Nikon make the best digital camera sensors in the world today, and I have
not seen a single camera produced by a major player that uses one of the other
player's sensors. They'd be insane to sell that advantage as a commodity part.
In that environment, it makes a lot of sense for Panasonic and Olympus to push
the development of their own supply of sensors.

As for whether there is nothing worthwhile in their smaller sensors, well,
time will tell. Today, there is no MFT-competitor (Sony, Samsung) lens with
Aperture below F2.8. That's pretty half-hearted competition.

------
gaius
_it went into a 8-year Waterfall engineering development process. Waterfall
development is a sequential way to develop a product (requirements, design,
implementation, verification – ship.) Waterfall makes lots of sense in a
market with the customer problem is known and all customer needs and product
features can be specified up front. It is death in a rapidly changing
business_

Paraphrasing a well known smuggler, launching satellites into orbit ain't like
dustin' crops, boy.

How exactly would Agile Methods have helped here?

~~~
JunkDNA
I think the point Steve is making is that as the company went along, they
should have noticed their prior assumptions about the cellular market were not
panning out. They cold have started seeking out alternative revenue streams
besides traditional dialup voice service. I'm not sure what those options
would be, maybe messaging or some other data? Two-way Internet via satellite?
I'm not a telecom person, so I'm ill-suited to come up with workable options.

~~~
gaius
But what could they have done differently? They could perhaps iterate the
design of each satellite on the assembly line. But things like buying rockets,
getting them delivered to the launch site, getting a launch window, etc, it's
hard to see how you can do that in sprints. This is about moving physical
stuff around.

~~~
boundlessdreamz
The point is "they should have done something differently" not "what they
could have done". Halfway through their development process, the problem they
started out to solve no longer existed.

Launching satellites etc are expensive and time consuming. Agreed. But even
when Iridium launched it's satellites were not fully operational. They would
have probably had enough warning to iterate on a different product

~~~
gaius
We don't know that they had a choice. If you've signed a contract, with
penalties, for 15 launches, you might know you're doomed but have to press on
anyway. The Eurofighter is another example of this - when the UK govt tried to
cancel its Tranche 3 order, it found the penalties would have been more than
the cost of the aircraft...

~~~
ars
They could have declared bankruptcy.

------
mattmaroon
I'm not really sure what the lesson is here. He says "Customer Development,
Business Model Design and Agile Development could have changed the outcome"
but how? I mean, they could have shut down halfway through and saved a couple
billion, but it doesn't seem like any amount of adaptability could have made a
global satellite project cost-feasible in the face of cell phone ubiquity.

The only lesson I can think of here is don't finance a project that's going to
cost a lot and take a decade to implement, because there's a good chance that
technology will make it obsolete by the time you launch.

~~~
tonystubblebine
And wouldn't that have been a huge improvement over the actual outcome?
Shutting down early and saving 3 Billion dollars is 125X what they ended up
selling for in bankruptcy.

~~~
jonpaul
I agree with you in principle. That would have been a better outcome. But as
they say, hindsight is always 20:20. When you're in the thick of things, the
last thing you want to do is quit. Sometimes you only want to quit when you
have to, so that at the end of the day, you know you gave it your all.

------
zipdog
I generally hear about Iridium as a second-generation success. The fact that
the company that currently owns it is looking at putting up a new network (at
a cost of perhaps $3 billion) shows that the idea wasn't a foolish one.

But like some great ideas it takes a trailblazer to burn themselves up in the
trailblazing process.

Another example in this context is the Panama canal. Or various railways
companies. Or possibly the Segway (still waiting for the second generation
owner on that one).

~~~
aaronbrethorst
> Or possibly the Segway (still waiting for the second generation owner on
> that one)

You mean third generation? The guy who acquired Segway died at the end of
September in a Segway accident:
[http://wheels.blogs.nytimes.com/2010/09/27/segway-owner-
dies...](http://wheels.blogs.nytimes.com/2010/09/27/segway-owner-dies-in-
segway-crash/)

------
nowarninglabel
Regardless, I'm sure happy that mistake happened. When the main satellite goes
down on the ship I work on, the Iridium phone is the always-working standby
you can count on.

------
tophat02
The current Iridium looks like it has focused its marketing to the segments
that actually make sense: maritime, explorers, and military.

But the infrastructure is up there and, sure, a bunch of people lost a lot of
money, but it's THERE now. I could think of some products they could introduce
that might be promising.

Here's an idea: a small piece of plugin hardware for iPhones, Droids, etc.
This would be something you take with you (for example, on road trips or
vacations to far-flung places). You would buy the unit for $149 and then
prepay, say $30 for 10 minutes of service. The idea is that it's "there when
you need it, wherever you are." It could even go in your first aid kit... it's
there for emergencies.

------
theDoug
Worth noting and remembering: "No business plan survives first contact with a
customer."

------
nirajr
Key problem?

Commit 5 billion dollar to a 'frozen' business plan, that will take years to
execute, while the world changes under your feet. You know there's no room for
iteration, so you don't pay heed to whats going on until you've burned all the
cash.

Bliss in ignorance that was by design because of the nature of the business
plan.

------
InclinedPlane
There are a couple of lessons for startups here.

Things to avoid doing: spending crap-tons of investment money long before your
product is on the market; gold-plating the business plan; relying on the
classic "expect everything to go as planned waterfall / big-bang integration"
model.

Iridium could have been much more successful (read: profitable to the initial
investors) if they had used different techniques at each step such as
iterative development with strong market / customer feedback. If they had
begun by gauging market reaction through using pre-order commitments (paid and
unpaid) instead of relying heavily on deep pocket investors they would have
been able to scale their initial offering to the market a bit better. If they
had planned to launch a "minimal viable product" initially that could be
scaled up over time as the business grew they would have avoided the massive
up-front costs that sank them (the biggest cost was launches, they could have
pre-built the entire fleet of satellites and kept most on the ground for a
pittance in comparison).

Instead they put an entire fleet of satellites into orbit at tremendous cost
and launched a service which on day 1 gave essentially 24/7 phone coverage
over the entire Earth. An impressive achievement to be sure, but at too great
a cost.

Some companies can grow like this, ramp up to enormous proportions quickly and
find enough traction to keep running and keep growing. But for every success
there are many more failures, companies that devoured their seed corn too
fast.

------
chadp
Lessons Learned Business plans are the leading cause of startup death.

Interesting.

------
TorKlingberg
I wonder what Iridium could have done better, if they used more agile methods
and followed the market. Sure, they could have discovered it wouldn't work
half way though, given the remaining money back to investors and closed down.
But what company does that?

I cannot really see a good "minimum viable product" to test the market for
Iridium either. Nobody would buy a phone that only works for an hour each day,
when the first satellite in orbit is overhead.

------
klaut
This reminds me (on a smaller scale) of Realtime Worlds spending 5 years
developing the APB game and then having a cold shower this year when the game
was not so successful as they thought, following a close down.
(<http://en.wikipedia.org/wiki/Realtime_Worlds>)

------
dabent
I actually sent my resume in to work on this when I was a young coder.

It's interesting to see them as part of the present-day satphone network:
[http://en.wikipedia.org/wiki/Satellite_phone#Satellite_phone...](http://en.wikipedia.org/wiki/Satellite_phone#Satellite_phone_Network)

------
sreitshamer
> The idea of iteration or pivots was unthinkable. This business plan was a
> static document. It was great for fundraising, looked great in business
> schools

He (unintentionally?) implies that business schools are similarly clueless,
which is funny since he teaches at Stanford's.

------
Tycho
Good effort though.

The budget was $5.2 billion. I wonder what the cost of an equivalent
government program would have been.

~~~
ojbyrne
Actually there is a reasonably similar government-led project that originally
cost $12 billion. Kind of a success though:

[http://www.space.com/businesstechnology/technology/satcom_gp...](http://www.space.com/businesstechnology/technology/satcom_gps_overview_031105.html)

------
RiderOfGiraffes
Submitted within moments of each other, this item is that same:
<http://news.ycombinator.com/item?id=1856331>

------
vidar
It would be interesting if they managed to cut the ties to Motorola completely
after the spinoff? One can imagine the BigCo mindset prevailing even after
leaving the mothership.

~~~
jonknee
With $6b invested, they were a BigCo no matter what they did regarding
Motorola.

~~~
vidar
Heh, fair point. Just goes to show that once you label someone a startup in
your head, you can be blinded to such obvious facts!

------
gabrielmazzotti
Great article, very educational. The only way to do that a startup can do that
kind of errors is beeing the daughter of a multinational like motorola

------
iwr
I wonder if anyone has in the works an idea of using optical instead of
microwave for satellite to Earth communication.

~~~
gvb
Optical would have all the problems the current RF (Iridium) solution has plus
more...

* Clouds are a killer.

* Laser is highly focused - downlink would be tricky to support more than a couple of ground stations. Uplink would be extremely difficult because the uplink would have to track a (relatively) fast moving LEO satellite. Neither would lend themselves to a handheld ground station ("phone").

* Non-laser solutions likely don't have the bandwidth or the power to be effective.

~~~
iwr
UV light would penetrate clouds better.

Indeed, aiming the collimated beam would be a problem, but not an
insurmountable one. Given the bandwidth benefits and the relatively small size
of the transmitter (compared to microwave), many small (cheap) satellites
could serve the same purpose as an Iridium constellation.

It wouldn't work indoors, but neither do satellite microwave links. The reason
cell tower signals reach indoors is signal strength. It's prohibitively
expensive to place equivalent transmitters into orbit.

~~~
mfukar
UV wave generation requires significantly more energy consumption than
microwaves. Plus, UV radiation is highly absorbed in the atmosphere, leading
to low signal to noise ratio.

------
bond
So they have now 300,000 customers and what about $$$$?

