Amp’d short circuits – will any MVNO ever succeed long-term in the US market?

So now we have the second big public service turn-down scheduled for later this week, Amp’d, who mentioned to its customers it might be going off-air Tuesday, 12:01 a.m (Update: they bought another week’s reprieve, and now plan to turn down service on 7/31, hoping to use the week to find a better exit, which looks like a sale of whatever subs remain to another small MVNO called Prexar Mobile).  The company is also now auctioning a number of physical assets as well, but I already have a drawer full of non-functional handsets ;). It looked like it was working hard to get a temporary bridge agreement with Verizon to keep the service alive, but this latest announcement leads to the conclusion that things did not pan out. Unlike the SunRocket business problem, I do think there is room for MVNOs as a business segment. The question is whether or not the US market and its carriers will support development of a wholesale market in the US.

If you look at the MVNO business globally, it is really quite robust. I pulled this writeup listing some of the major European MVNOs, and you can see how that market has grown.

For those not familiar with the term, MVNO stands for Mobile Virtual Network Operator. It is a fancy term for a cellular retail business who buys its bandwidth from wholesale providers (it doesn’t own any spectrum, cell towers, etc.). This sector really grew out of dynamics in the European and Japanese markets. Some of the catalysts that drove cellular companies there to create a wholesale offering were:

  • The fact that that networks in their markets were, for the most part, all using common frequencies and technologies, making for a more efficient market.
  • The economics of being a wholesale provider proved to be attractive, eliminating the impact of ongoing issues of retail customer churn and high customer acquisition costs to the wholesaler.
  • The cellphone infrastructure had a high fixed cost base, and getting more customers (retail and wholesale) to cover that nut made economic sense.
  • A number of carriers had big debt burdens they saddled themselves with through irrational bidding on 3G spectrum a few years ago (they collectively spent something like 260 Billion Euros, which I think is now about 10 Trillion USD ;), and really needed the added economic boost of new lines of business.

So if the MVNO market makes sense, what is up with Amp’d? There were a number of things that made Amp’d a long shot from the beginning.

First, unlike Europe and Asia, the US market is served by different carriers working on different spectrum and different technologies. Much has been written about the US being a third world of cellular technology, all of which point to this carrier technology fragmentation both between each other and the rest of the world as one of the root causes. That means selection of a wholesale provider is much more complex – they are not fungible substitutes. A selection of a carrier has big implications on handset options, etc..

Second, we are in an era, post Judge Green, of consolidation of carriers in the US market. Fewer providers mean a less efficient market, and bad wholesale pricing, if it’s available at all.

Third, the big four carriers have really mixed opinions on whether they will ever support an MVNO industry. Even a carrier like Sprint, who is the provider for Helio, runs hot and cold on the idea of being an MVNO going forward.

We were approached to be an inventor in Amp’d a few years ago. I took a pass, based on a number of considerations:

They were effectively entering the hardware business by focusing on their own custom handsets as a core part of their value proposition. The handset business is brutal – just look at Motorola’s last quarter as evidence. Consumers expect the best. Their cellphone is a personal expression of themselves. That means keeping up with the Joneses and releasing new handsets on a regular basis (every 4-6 months). Amp’s was going to be a long-cycle producer of new devices, which wasn’t a winning play.

They were focusing on a market segment/demographic that hadn’t demonstrated a prior willingness to pay the material handset charges and monthly plan costs that Amp’d had modelled.

The management team, while smart, was selling itself as the Boost team redux. It was long marketing, but not nearly as long technically. There is a great article in Business Week talking about the CEO as product designer, which is well worth a read and expresses my own philosophy in spaces like the consumer electronics industry. Was this core team up to the task of building a better mousetrap?

Their partnership with Verizon, who was to be their wholesale provider, was flat-out a wrong bet. It is not that Verizon didn’t have a good network. It is just that they now were wed to a CDMA network, which would make handset development much more complex (no ability leverage of all the great development from Chinese OEMs like HTC and others).

We passed (did I also mention mega pre-money valuation), and had no regrets.

I guess one question still remains: Will the US ever have a real MVNO market? In my mind, there will be no MVNO market in the 2G/2.5G space. I think only when new fabrics arise (though things like Sprint’s WiMax plans, the upcoming 700 mhz spectrum auction, etc.), and we get some better technology consistency from incumbents as they roll out their 3G offering, will we ever have a shot at an efficient market.

Can anyone succeed here? I do think Helio has a chance, and I hope they prove the case for an MVNO in this market. They have several things in their favor, when compared to Amp’d:

  1. They locked in a 6 year agreement with their wholesale provider
  2. They can leverage all the technology development (software and hardware) of SK Telecom in creating compelling consumer solutions
  3. They are adding feature sets that appeal to the prosumer (really good email integration, etc.) to allow themselves a more upmarket sale
  4. They have a technology visionary at the helm (Sky Dayton).

I don’t see another major MVNO player (other than Virgin in the pre-paid market) making a go of it, and as such, I am not very bullish on the US MVNO space as a whole. Here’s hoping something else happens to serve as a catalyst to get us out of our third-world status sometime soon!

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