The Chapter 11 bankruptcy filing of Amp’d Mobile Inc. may not necessarily signal the death knell for the business model, but is certain to make investors and partners wary and put additional pressure on other fledgling mobile virtual network operators to review their own operations. Observers shrugged off the shut-down of Mobile ESPN late last year due to handset and distribution issues plus a change in strategy by The Walt Disney Co., but the struggles at Amp’d came despite its seemingly successful subscriber growth, high average revenue per user and distribution strategy.
The company filed for bankruptcy protection late June 1 after a liquidity crisis brought on in large part by the fact that the rapidly growing company’s subscriber base of nearly 200,000 customers included 80,000 non-paying subscribers by May 2007-or a shortfall of about $8 million per month, based on the company’s reported ARPU of around $100. Verizon Wireless, which hosted Amp’d Mobile’s voice and data services, demanded a $4.5 million payment for network services (it’s owed a total of $33 million), then declared Amp’d in violation of the wholesale agreement that had been signed exactly two years prior and threatened to cut off network access for Amp’d customers. A few hours later, Amp’d filed for reorganization under Chapter 11 bankruptcy protection.
Isolated or a trend?
Most observers agreed that the failure of Amp’d is not necessarily a reflection on the entire MVNO industry-though it might be reflective of high-end MVNO offerings.
Amp’d gave the impression that it was gaining high-value customers in its target segment, but appears to have tolerated risky customers in exchange for fast growth.
“It looks like they did that by lowering credit and found themselves with a lot of non-paying customers, and ultimately they had a major collections problem and a serious cash crunch,” said CSMG Adventis Vice President Jeff Toig.
The collections and bad debt problems “could happen in any industry. It could happen to anybody. It’s indicative of a company that was trying very hard to grow at all costs,” said DP Venkatesh, CEO of mPortal. Venkatesh also discounted the problem as being one of scaling the billing system, and theorized that Amp’d could have been losing money in two places: unwilling to cut off customers who weren’t paying their bills and lower their all-important subscriber rolls, and perhaps also being unwilling to risk their retail relationships by charging back merchants who brought them non-paying customers.
Competition leading to difficult choices
Venkatesh added that competitive pressures are leading MVNOs to offer unusually generous sales commissions as they try to get the attention of dealers and big-box retailers. The collections problems at Amp’d also pointed to the advantages of growing slowly with quality customers-as well as the pluses of the prepaid MVNO model, Venkatesh added, since a company gets its money upfront.
Research director Guy Zibi of Pyramid Research said that while MVNOs overall as a model might survive, Amp’d Mobile’s problems might be a reflection of what could happen to the generation of new, high-profile, high-spending MVNOs. Virgin Mobile USA L.L.C.’s model has proven successful, as have the strategies of Tracfone Wireless Inc. and Boost Mobile L.L.C. All three companies focus on prepaid. But the “MVNO 2.0” might just not work, he said, because they’re simply too expensive.
“The cost base is just too substantial,” Zibi said. “The customer spending, even though it was on average higher than the market, is not high enough to make up for what they are spending on the cost side.”
Currently, Zibi said, the high-spending MVNO model “is not working”-although, he acknowledged, it might eventually if investors are, say, willing to put in as much as $150 million to $200 million per year for four to five years.
“You really have to have shareholders that are extremely patient and have that money to use, and obviously that is a dicey proposition,” he said.
Skewed cost structure
John Strand of Strand Consulting said that compared with other MVNOs, Amp’d and its cost structure could be described as the “‘Supersize Me’ MVNO of the world. I’ve never seen so many people attracting so few customers in such a big country with such a high cost.”
Compared to the staff-slim, cost-conscious MVNOs that have been successful around the world, Strand said, the cost structure of Amp’d is “insane.”
He allowed that most of the MVNOs are no-frills operators-a strategy that Amp’d deliberately strayed from-but pointed out that they were keeping their costs in line.
“The problem is, Amp’d is behaving just like a traditional operator,” Strand said. “With a cost structure like that, they have no chance at all.”
Toig said the success of MVNOs may very well come down to “basic wireless 101.”
“How you build an MVNO is very important to long-term success-how you manage the cost structure, credit policies, collection, life cycle management,” he said. “These things are core competencies of wireless carriers, and MVNOs are wireless carriers. They tend to be wireless carriers light, but they’re wireless carriers.”
Increased scrutiny
Venkatesh said that large companies that support MVNOs may start going over their accounts receivables with a fine-tooth comb, but that the creditors of Amp’d are unlikely to substantially change their stance toward MVNOs because they weren’t courting them in the first place-particularly Verizon Wireless, for which Amp’d was the only high-profile MVNO the carrier supported. Amp’d, according to a court filing by Verizon Wireless, was purchasing between $12 million to $15 million in network services each month prior to the bankruptcy. A carrier representative declined to comment on the demise of Amp’d, but the company argued in court filings that it shouldn’t be stuck with still more unpaid bills for service and said that the MVNO’s “fundamental problem” of non-paying customers “was unlikely to be remedied any time soon, if at all, and will continue to impair [its] ability to generate revenue going forward.”
And how will Amp’d emerge from bankruptcy-if it does?
Perhaps as a sub-brand in much the way it is offering service through partner Telus Corp. in Canada, Zibi offered. Or, maybe as the mobile media company that its executives have always proclaimed it to be-minus the burdensome MVNO business, and thus able to concentrate on its success in original content.
“I don’t think this is their preferred path,” Toig said. “But I think if you listened to [CEO] Peter [Adderton] or [President] Bill [Stone] at any number of industry events, they viewed themselves as a mobile entertainment business. They certainly have positioned themselves once they emerge-if they emerge at all-as a mobile content and entertainment business.”
