MVNO: The Industry Is Not Broken

(c) Forbes

Don't let Mobile ESPN's flop stand for the whole virtual network industry, says Peter Adderton, founder and chief executive of Los Angeles-based Amp'd Mobile. While ESPN's parent, the Walt Disney Co., said this week it will cost $30 million just to shutter its sports-driven wireless service, Adderton says Amp'd is alive and well.

As a mobile virtual network operator, or MVNO, Amp'd resells access to the Verizon Wireless network, a joint venture of Verizon Communications and Vodafone. It is aimed squarely at the lad-mag set and offers all sorts of high-concept, low-rent come-ons: The company sells music downloads for 99 cents, instead of the industry-standard $2, for instance. Users can also download videos from Playboy, Girls Gone Wild and Maxim, as well as CollegeHumor.com, a Web site whose stars include streakers and drunk skateboarders.

The company started slowly nine months ago, but Adderton says it is accelerating now: He says Amp'd has more than 50,000 subscribers in the U.S. and is adding more than 20,000 per month. Its subscribers spend about $100 per month on Amp'd service, he says, including $30 per month for data services--about five times the national average.

Adderton has deep pockets, with more than $250 million in funding from investors ranging from Intel's venture capital wing to Qualcomm, Viacom's MTV, Universal Music Group and other groups.

He may need them. While Adderton and Amp'd insist they're doing fine, both the company and its business model have raised questions from skeptics who think MVNOs burn through cash much quicker than they bring it in. ESPN, for instance--even with all of its marketing might--couldn't convince more than a few thousand subscribers to sign up for its failed wireless service.

Adderton, who previously ran Sprint Nextel's urban-youth-focused Boost Mobile walkie-talkie service, spoke with Forbes.com Wednesday about Disney's flop, his plans and the importance of selling a sexy phone.

Forbes.com: The latest Amp'd subscriber numbers are a month old. Are you still hitting your goals?

Adderton: We're on target to do our projected hundred or so thousand for the end of the year. We're on plan, which is really good. It will be interesting to see how the holiday season goes. Traditionally, at Boost, it was a very big part of our business. A lot of people are coming off contracts at the holiday season, because most of them got their phones over that period. We're pretty optimistic about how our holiday season is going to go.

How much money does Amp'd burn through in a month?

We don't give out the exact numbers, but every MVNO is purely based around subscriber gross additions. The more subscribers you get, the more cash you go through. So, as long as we stay on plan, we're good. The big problem is if you go too fast and you start growing, but one would argue that that's not a bad problem. If you have plenty of subscribers coming in, you have the ability to go out there and fund that business. Right now, we're on plan and feeling very comfortable with where we are, and we'll look at raising money when we think that that's necessary.

Did Disney pull the plug on Mobile ESPN too fast? When will you take a good look at how Amp'd is doing?

I've always said that you need to give companies at least a 12-month period, not before you write them off, but before you [press] the reset button. For us, March-April is the time. After the Christmas period, [you] get January sorted out, look at the data coming through from those customers. It's one thing to connect to a lot of customers; you have to make sure those customers are going to pay you.

Does the ESPN flop give the MVNO industry a black eye?

With Mobile ESPN, it was, "We have a big brand. What do we do with it?" And they outsourced everything to everybody else. This is the fourth MVNO I've ran. We've got a pretty good handle on what it takes to run a successful MVNO. The industry is not broken. In fact, MVNOs are only getting stronger. The concept of virtually using somebody else's network to deliver voice has been around for a long time. This concept of an MVNO isn't the part that's broken. We talk about different industries: You'll have a lot of cars that are extremely successful, that will sell like hotcakes. And then you have cars that don't sell at all. It doesn't mean that the factory's broken--it means that the product isn't right, that the design isn't right. Don't kill the factory just because they put out a dud. If we succeed or fail, it will be purely on not the fact that we were an MVNO, but the fact that nobody wanted our product or that everyone wanted our product.

Carriers have to constantly upgrade their networks to the latest generation of network technology. How does that affect you?

It makes it better. The one thing that I've seen is that technology constantly keeps evolving. America's a large country. By the time you roll out a network to cover 200 million people, there's probably four more technologies that are half the cost that give you twice the bandwidth. When do you stop? Operating on somebody else's network, when they've spent the infrastructure and cost to lay the fiber cables, to set up the cell towers, to build the back end, and then we get a certain price per megabyte and the same price for voice, and then we get the same service level? Why wouldn't you want to be an MVNO? It's like an arms race. Everyone is trying to lay out the fastest, cheapest network--I think it's an advantage for us. Google and Yahoo! don't build networks. They ride on other peoples' networks. And I think that's where, if you look at what Amp'd is doing, we're doing exactly the same thing. The best way served to companies like ours is to be able to wholesale other peoples' networks.

Some industry observers, such as Forrester Research's Charles Golvin, suggest that a big part of Mobile ESPN's failure was that they didn't focus on a phone's primary purpose: to make phone calls.

That's 100% correct. This is a "send and end" business today. Right now, today, it's a voice product. Amp'd has a four-pronged strategy attack. The first life cycle of Amp'd is to be a good phone company. The barrier to entry is reasonable pricing on a cool-looking handset. It doesn't matter whether you can watch anything you want to watch. If you don't have the fundamentals right, then you're not going to build a business. Our strategy two years out is a lot different than our strategy today.

And then there's the data and content you're distributing, such as an original TV show called Lil' Bush that started on Amp'd and will be expanding to real television. Is anyone using it?

We're streaming over 200,000 videos a month right now. We're probably doing close to 50,000 or 100,000 tracks of music. We're doing tons of games, ringtones, wallpaper, text messaging. When we [started] the business, we expected to have a data ARPU [average monthly revenue per user] after two years of $18. And we're at $30 after really three or four months of going. It may not be the reason that they originally purchased Amp'd, but once they get it, they're coming back time and time again. Usage is going up; it's not going down.

Donick Cary, who was one of the writers for The Simpsons and for Letterman came to us and said, "Today on television, there's not much for a comedy writer to do. Everything's for reality and drama." He wanted a medium [where] he could express some of his ideas, so he came to us. He pitched this concept to us on Lil' Bush, and I said, "I love it. Let's do it." We produced them, and it's been a great success for us. It blew our servers out when we launched it; everyone wanted to watch it at once. We learned two things: One, we need to get a better server system, but secondly, we've had people who've bought the phone just so they could get Lil' Bush on Friday morning because they love it so much. Thirty percent of our content is original. That's where the media company aspect of what Amp'd is trying to build comes into it.

A lot of other MVNOs don't sell the name-brand phones consumers seem to like. Yet you're going to sell Amp'd versions of Motorola's RAZR and Q phones. How important is it to have popular phones in your arsenal?

It's the number-one focus. At the end of the day, it's the device that's important. I think other carriers are seeing the fact that they didn't carry the RAZR as a reason why they had low subscriber growth. There's no doubt about it--it's the handset. We've been working on our handset roadmap from the start. We wanted to partner with Motorola. We felt they were the one with the best brand suited to Amp'd. I think the other MVNOs who don't have the RAZR are going to struggle this Christmas.