Analyst Angle Special Edition: Amp’d, MVNOs and future of the market

Editor’s Note: Welcome to a special edition of our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry. In the coming weeks look for columns from Compete’s Miro Kazakoff, Current Analysis’ Avi Greengart and iGR’s Iain Gillott.
Amp’d Mobile announced late on June 1, 2007, that they were filing for bankruptcy in a move designed-as many bankruptcy filings are-to protect them from their creditors. At the top of the list sits Verizon Wireless, which threatened to turn off service to Amp’d subscribers. Next on the list is Motorola. One of the most interesting revelations of the day was that 80,000 of their 200,000 subscribers seemed to not be paying their bills. The news of the last few days has raised the question of whether MVNOs are viable here in the U.S. The answer is: “Yes, but it’s difficult to do.”
The primary challenge that MVNOs face is that they can’t compete with wireless carriers (e.g., Verizon Wireless, AT&T Mobility, etc.) on the criteria the majority of subscribers use to select a wireless service provider. The majority of subscribers who selected their wireless service provider (i.e., they are not on their parents’ plan or that of an employer) did so based on quality of coverage and cost of services. Handset selection barely made the top ten on our list. Those who own and control the network meet these criteria best. It’s hard for MVNOs to compete for the majority of U.S. subscribers.
Most MVNOs will argue that they are not targeting the majority of U.S. subscribers. Many claim they can break even or even be profitable with fewer than one million subscribers. At the end of 2006, the U.S. market was edging towards 230 million mobile subscribers. One million subscribers represents less than one half of a percent of the U.S. mobile subscriber base. From a total market perspective, achieving market share of less than 1% seems reasonable for any new entrant.
Many of these MVNOs are targeting niches of the U.S. market that they feel are underserved by the mass-market carriers. Jitterbug wants elderly subscribers who need big buttons on phones and emergency services. Kajeet wants younger children with sophisticated needs whose parents are not ready to add them to their family plan. Amp’d wants teens and young adults who seek a more sophisticated and “cool” multimedia experience on their phones. Disney targets families. There are many more including Helio, which seeks a customer base not too different from that which Amp’d seeks. Mobile ESPN pinned its hopes on ESPN’s loyal viewers wanting the ESPN experience on all three screens.
Virgin Mobile USA Inc. has done well with this strategy. They began serving prepaid customers before the wireless carriers decided that they too wanted them in order to sustain their growth. What Virgin had working in their favor, however-which many of these new MVNOs don’t-is that the carriers need to sustain BOTH their subscriber growth and their ARPU while minimizing churn. This is hard to achieve since growth is coming from the prepaid market. Virgin at the end of last year reported about 4.5 million subscribers with monthly ARPU of $21.48. Seventeen percent of Virgin’s ARPU is generated by data services. With $1.1 billion in annual revenue at the end of 2006, they filed and S-1 this spring for an IPO. This qualifies as a MVNO success story.
The math for other underserved mobile subscriber segments-especially for those looking for high end entertainment users-is less appealing. When we asked mobile subscribers to choose their top criteria for selecting a wireless service provider, less than 1% cited entertainment options. When we rephrased the question and asked consumers to give us their top-five criteria, about 3% cited entertainment options. More than double this number of 18 to 24 year olds selected entertainment options in their top five. Three percent equates to six million mobile subscribers which is a reasonable target audience.
The target audience for entertainment-focused service providers may be over five million, but the math is more complicated. A percentage of these-maybe half-are locked into a one- to two-year contract so are ineligible to switch without penalties. While MVNOs (like Amp’d, Helio, etc.) offer attractive content, the wireless carriers do as well. With their scale, wireless carriers can sign distribution deals (and offer handset variety) that are very attractive to media companies. That is not to say that gaining share in this market isn’t doable-it’s just hard.
Family plans offered by wireless carriers stand as a formidable challenge to all MVNOs. Jupiter Research recently completed extensive research of kids, tweens and teens as well as young adults. Nearly half of 18 to 24 year olds we surveyed are still on their parents’ plan. After quality of coverage and cost of basic voice plan, availability of family plans and free in-network calling were most important to subscribers when choosing a provider.
Some of the MVNOs targeting younger children (like Kajeet) may fare better as they are looking to sign up new subscribers rather than to lure them from existing plans. Parents are footing the bill for these younger children, but are not necessarily ready to have their youngest children on the family plan. They seek the control and options offered by new entrants such as Disney Mobile and Kajeet.
There are still opportunities for MVNOs in the U.S. Controlling cost will always be a core component because MVNOs are not likely to turn into mass-market providers with significant scale unless the wireless carriers here really screw things up and don’t evolve with their customer base. Moreover, the carriers-at least to date-have not shown interest in pursuing niche segments or they haven’t had the ability to do so. Whether they should or not is a question that goes beyond the scope of this piece.
Hopefully the bankruptcy protection will help Amp’d Mobile to emerge as a stronger and healthier player. Like many of the MVNOs in the U.S., they’ve done a lot to push the envelope around user interface and how subscribers use their handsets. Large, established companies are not always the most innovative despite deep pockets. Much of our innovation comes from VC-backed startups. Amp’d Mobile’s strategy of using an MVNO as a proof of concept for a media portal may in hindsight prove to be an expensive one, but they likely viewed it as their only option at the time. Many others have been at the same place.
It will be interesting to see where these MVNOs and their assets end up. A wireless carrier acquiring their subscribers and brand to target a niche of their own audience doesn’t stretch the imagination too much-the financials aside. At least they wouldn’t need to integrate two networks.
Questions or comments about this column? Please e-mail Julie at jask@jupiterresearch.com or RCR Wireless News at rcrwebhelp@crain.com.