The mobile virtual network operator bandwagon, cruising along smoothly a few months ago, appears to be suffering from a case of backlash.
Recent MVNO news and rumors haven’t been particularly pretty. The Wall Street Journal recently ran a scathing assessment of MVNOs’ performance thus far.
The Web was buzzing with a report that claims Helio L.L.C. had only scraped together 100 subscribers (the company, for its part, says its numbers are “in the thousands”). Merrill Lynch analyst Jessica Rief Cohen concluded that Walt Disney Co. should pull the plug on Mobile ESPN L.L.C. after less than six months on the market, while EarthLink Inc. reported that its share of Helio’s operational costs totaled $13.3 million last quarter, and the company expects those costs to skyrocket to be between $75 million and $85 million by the end of the year.
In addition, while Verizon Wireless reported that it added 1.8 million net new customers to its network last quarter, the carrier said that every single one of those were direct customers-meaning that overall, its resellers, including Amp’d Mobile Inc., didn’t contribute any net new customers to Verizon Wireless’ network.
But several analysts say that writing off these just-launched companies doesn’t give them a fair shake.
MVNOs have been tweaking price plans, adding options like prepaid or lower price points, and in some cases, dropping handset costs. None of the so-called next-generation MVNOs have said anything specific about their customer numbers, but most have ramped up their distribution networks in recent weeks.
“You have to give all these ventures a little bit more credit in being flexible,” said Yankee Group analyst Marina Amoroso. “I would be extremely concerned if they weren’t changing their prices, because it would mean they aren’t learning anything from what the market is telling them.”
Most of the new MVNOs have been in business for mere months. Amp’d Mobile soft-launched last December; Mobile ESPN kicked off nationwide service at the Super Bowl in February. Helio rolled out its offering in May and already is taking heat before even hitting the three-month mark. Disney Mobile is barely two months out from launch.
“I just think it’s too early to just write them off,” said Andrew Cole, analyst for CSMG/Adventis. “Businesses aren’t just created overnight.”
It’s an open question as to how much of this the companies brought upon themselves with high, pre-launch expectations. Helio, for example, had said it expected to have 3 million customers by 2009, and be cash-flow positive-which Amoroso called “very aggressive” goals.
Merrill Lynch initially expected Mobile ESPN to sign up around 240,000 customers by the end of the year, and has since lowered its projection drastically to just 30,000 customers. Analyst Jessica Rief Cohen noted in a recent research report that despite corrections to Mobile ESPN’s initial pricing errors, “we are still skeptical that it will succeed in attracting subscribers. … It should be evident to the company after the early struggles of its ESPN services that this is a relatively unattractive business.” It is, she said, “time to throw in the towel.”
Cohen went on to add that Disney Mobile was “somewhat more interesting” than the Mobile ESPN offering, but that the service also launched with high price points and “repeated Mobile ESPN’s mistake of launching with only one handset that is unlikely to be appealing to its target demo.”
Disney Mobile has said that it will begin selling a second handset this week, and expects to add a third handset to the lineup this fall.
According to Tower Group analyst Bob Egan, some MVNOs and their financial backers probably underestimated how tough it was going to be to compete against the big carriers and their marketing juggernauts.
“I think that people have forgotten that traditional operators have spent tens of millions of dollars building recognizable brands,” Egan noted. “That’s taken 15 years to accomplish. … Who in the MVNO market has got that dynamic a marketing group, that big, thick-enough wallet, to really rise to that challenge?”
Meanwhile, the few actual numbers that hint at how MVNOs are doing don’t exactly look stellar at this point.
“Our reseller net adds were slightly, very slightly, negative for the quarter,” said Verizon Wireless spokeswoman Nancy Stark, who was quick to add, “That does not mean that every reseller didn’t have net adds. Our resellers certainly had gross adds, they had net adds, it’s just that in total, the resellers as a group were slightly negative.”
Resellers and MVNOs, including Amp’d Mobile, make up about 4 percent of Verizon Wireless’ customer base.
Amp’d Mobile said that it posted positive customer additions last quarter, and that the MVNO’s increased distribution footprint was having a positive effect on sales momentum.
“We are satisfied with how our business is ramping with positive customer additions,” said Bill Stone, chief operating officer for Amp’d Mobile.
One thing seems certain: the new MVNOs don’t appear to be on track to repeat the success of Virgin Mobile USA L.L.C., which launched in July 2003 with $100 million in funding and counted 500,000 customers within nine months. But, analysts pointed out, the new postpaid MVNOs are likely to grow very differently than traditional prepaid MVNOs, particularly since most of the recently launched MVNOs are targeting customers who are likely tied up in a service contract with another carrier.
“I think that the market is looking for a quick hit, a wham-bam-thank-you-ma’am type of performance, and you’re not going to get that with postpaid MVNOs,” said Amoroso. “There is this market expectation that they’re going to be enormous and very successful. I think that they are going to be successful in their own right”-but, she added, that might involve redefining success.
Amoroso said that she’s withholding judgment on specific MVNOs’ success until at least the end of the year. The fourth quarter typically has higher churn and provides the largest number of gross adds to the carriers, and MVNOs are be expected to partake of the bounty since they are largely targeting churners anyway.
Cole said that after all the initial hype surrounding MVNOs, “now, you’re in the state of disillusionment. You’ll start to see some of these players do well, and that’ll make people feel better. … Having said that, there’s no question that not every MVNO will survive.”
