What can we learn from Amp’d Mobile?

As most of us are aware, Amp’d Mobile is officially out of business. This is the result of their bankruptcy filing in early June, as they were over $100 million in debt. In the early stages of the hearings, it looked like Amp’d would reemerge with restructured debt settlements. However, as time wore on, Amp’d only fell further in debt to their largest creditor, Verizon Wireless. After weeks of failing to find a debtor in possession, Verizon renewed efforts to shut down the network, and on July 23, it did. As of this writing, if you had Amp’d service and haven’t ported your number, it’s back in the enormous pool of unassigned phone digits (don’t say we didn’t warn you). We’re all familiar with the outcome, but there are two pressing questions that remain: how did this really happen, and what does the result mean for cell phone users?

How did this happen?
By all accounts, Amp’d looked like an exciting business. They were attempting to transcend the traditional cell phone company model and become a true mobile content provider. Admirable is the company that tries to stand out from the mainstream. However, having an idea and executing that idea are far different endeavors.

There is plenty that goes into the execution of an idea, but the two foremost aspects are people and cash. You need the right people making the right decisions, all while keeping the ever-present issue of money in mind. You can form the most brilliant plan the mobile industry has ever seen, but unless you have the moolah to back it up, it will remain but a thought in your head.

Likewise, you could have the backing of the world’s top Venture Capitalists and raise hundreds of millions of dollars. But without some great minds working on the project, it could turn into a colossal bust. There has to be a balance: smart people working within their means, both intellectually and financially.

Management issues
However, this doesn’t seem to be the case with Amp’d. Yes, they were founded by Peter Adderton, who honed his pedigree by building Boost Mobile. But one man does not a company make, even if he is “internationally recognized as one of the foremost authorities on youth marketing.” There is a certain level of responsibility that the other members of the board have to take, and according to Adderton, that didn’t necessarily happen:

“The biggest struggle I had [with the board] was agreement on where the company should go. We had way too many board members and then we had observers at top, and the any partner could dial in, to a point where it became very difficult for the management to manage.”

At first glance, it would seem beneficial for a young company to have so many minds trying to improve it. However, there is a point where that becomes counterproductive. Human beings are by nature competitive beings. They want things their way, and when others pose an obstacle things tend to get heated. So yeah, you can have 25 of the top players in the cell phone industry, but if they can’t agree it’s not as attractive as it sounds.

Another question at this point, which dips into the financial: how much were these board members and observers on the top making? Presumably, the observers were the investors, and many of them also probably sat on the board. But just how much money were they taking from Amp’d? It’s not like Amp’d was a blue chip company that could afford to dole out hundreds of millions in salaries. They had limited startup funds, and as with any mobile phone venture, had to take losses for quite a good deal of time while they spread the word and got subscribers.

Financial issues
Before we dive into financial reasons for Amp’d’s downfall, consider how expensive it was to run this business. First you need the spectrum from a major carrier. Amp’d went with Verizon, and probably payed a boatload for use of their 3G network, which was integral to Amp’d’s plan to provide high quality mobile content.

Next, you need to pay the people who will run this business. This runs from the board members to mid-level managers to customer service reps (which Amp’d seemingly skimped on, but that subject will be addressed in due time). On top of that, you have the cost to lease buildings in which to house customer service centers.

Then there’s the overhead for all of the phones the company has to buy wholesale and have available to customers immediately. Phones, as we know, aren’t cheap. Amp’d probably didn’t have an overwhelming inventory to start off, knowing that it takes a while to grow a subscriber base. Regardless, the overall cost of phones and other equipment overhead was not cheap.

Finally, you have the actual content that needs to be purchased by Amp’d to provide to its customers. Once again, not cheap. Know how you pay $2.50 to download a ringtone? Yeah, now think about how much the owner of that song charges a company to let its users download it. Licensing fees can be astronomical, but if they wanted to stand out from other services, they had to offer premium content. Premium content costs premium dough.

Now, $400 million is an enormous number. It took 90-hour weeks by plenty of people for 18 months to raise that money. And they worked hard for every penny of it. But once you have it, it doesn’t last long. Just look at all the described costs. How long do you think you could run a company with that many expenses for just $400 million? Not long. That gave Amp’d very little time to secure a subscriber base. Once again, not the easiest thing to do, either.

The niche market
Of course, Amp’d wasn’t out to steal customers from other wireless carriers, per se. Their business model revolved around attracting the 15 to 30 age group or thereabouts. That’s fine, because at the time of their inception most major carriers didn’t put much into the youth marketing. Instead, they were focusing on family plans, which netted them much more money.

So the model had a chance to work. However, the family plan angle caused a problem. From 15-18, kids typically live at home. Even through age 22, they’re usually — but certainly not always — on a family plan while in college. It’s easier for all parties, and much cheaper, too. Since family plans are contract-based, there was little sense in prying away teens already on such plans. That was complication No. 1 with this market.

Complication No. 2 is that this market usually doesn’t have all that much money. Yes, what money they do have they is apt to be spent on entertainment, but we’re not quite sure if that adds up to profitability for Amp’d. A very small percentage of parents would pay for both the phone and the content for their child. A larger, but still not huge, percentage would pay for the phone, but not the content.

So Amp’d had a problem here. Having subscribers is one thing; getting them to pay for loads of content is another. Even with the after-college market, there was still a problem with getting them to buy content. If they’re already paying the monthly bill, plus rent, plus other utilities, plus alcohol (an essential, of course), there’s not much money left over for TV shows and games. There’s some, but not much.

In theory, this was and is a great niche. The kids want this kind of service. Unfortunately, their ability to pay for it is very limited.

When billing turned bad
As we mentioned previously, payroll had to be an issue at Amp’d. With limited funds and plenty of expenses, we’re sure (and this comes from our retail experience) that payroll was watched very closely. This also means that projects not related to the main vision of providing mobile content were also probably skimped on.

For instance, how much time and money do you think that Amp’d spent on the billing system? Probably not much. After all, according to Adderton, “You don’t raise $400 million in 18 months by spending time inside the office.” And this isn’t just speculation: the billing system was seriously flawed from the beginning. However, with a small subscriber base, it wasn’t much of a problem.

Then, though, came the customer surge. From Adderton:

What we initially built the system it worked fine, but when Bill [Stone] and Sue [Swenson] came in and saw that we needed to change it to scale. It takes months to change a billing vendor and we had a team working on that, while at the same time we were loading on the customers at a great rate. In 17 weeks, we got 100K subscribers, and little problems in billing and collections suddenly became bigger problems. It wasn’t just customers with bad credit, but it was customers with high credit who just weren’t being billed at all.

Imagine the difficulty and confusion of trying to add hundreds or even thousands of accounts to a computer daily while the system was being overhauled. There are bound to be holes all over the place. But it’s not like Amp’d could close their doors temporarily while they fixed the system. They needed the business that was coming in, so they tried to take care of everything on the fly. That is not a good formula for success.

So now on top of the normal gamut of customers who simply won’t or can’t pay, Amp’d has an issue with some people simply not being billed. Obviously this was an oversight by the new system, but it was flawed right from the beginning. Now the company was charged with not only finding the information for these subscribers, but informing them that they owe X months’ back bills. Yeah, that tends not to go over well with customers, no matter how rich.

If we believe the high end estimate of Amp’d subscribers (200,000), that’s 40 percent that weren’t paying. And, judging by Adderton’s comments, this meant both $100 subscribers and $15/month pay-as-you-go subscribers. Let’s say that the average subscriber pays Amp’d $45 per month. You have 200,000 of them, meaning you’re grossing $9 million per month. But, with the non-payers, you’re out $3.6 million per month. And since 80,000 is the number of non-payers, not a percentage of the whole, that would look a ton worse if their subscriber base was only, say 170,000.

Horrible customer service
We say it right in our provider review of Amp’d: “Plan for some hold time if you’re calling.” The first time we called Amp’d about an issue, we were on hold for about 30 minutes — and that seems like we got lucky. It was doubly annoying, because it was a fairly straightforward question; we were only calling them to ensure we weren’t reporting anything inaccurate.

What’s most telling about Amp’d’s customer service: our user reviews. Allow us to quote some of them.

• “I would have given A’mpd Mobie 4 stars if it weren’t for their customer service and the way they conduct their pay-as-you-go service.”
• “Hate the customer service!!! My first email to them prompted me to call customer service and that began long and frustrating journey with their customer service department. I have been told “NO!”, hung up on and endured excessively long waits on hold. Not just for billing issues but also for tech support issues as well.”
• “I LOVED my phone until like the rest.. had to call customer services just to wait 6 hours 4 customer services and a so call manger to tell me they don’t know”
• “Telephone service is decent. Customer service sucks. Everytime i need to contact Ampd its a problem. They either have only one technitian on staff or I cant even get through to pay my bill. If you want a company that you can get in contact with anytime then DONT get AMPD.”
• “Wow… Ampd mobile has the worst customer service I have ever experienced. I have had a broken phone for over two months which 6 different customer service reps have told me they would take care of. I am canceling my service as I type…”

And on and on and on. Chances are a good portion of the 80,000 non-payers were disgruntled subscribers who had either cancelled service but were not acknowledged — hence they denied charges — or didn’t pay because they didn’t want to pay for something they weren’t getting. So you can see how all of these factors lead to a less than profitable business.

Most importantly, what does it mean?
Before the Amp’d bankruptcy, we weren’t sure that there would be too many more MVNOs popping up. There is only so much bandwidth that providers can sell wholesale — to services that compete at least to some degree with them. Now with Amp’d going broke, we’re fairly certain that you won’t see any significant ones popping up soon.

The overreaching question, though, is whether or not we’ll see carriers cut off other MVNOs when their lease agreements comes to a close. The big carriers — you know, the ones that own the networks — are competing harder and harder every day for your business. So when comes the point when they feel that MVNOs using their network are becoming true competitors?

You can even look right at Amp’d for an example. They were founded upon the idea of providing premium mobile content. Well, isn’t that what Verizon is pushing right now? Chances are, Verizon pushed extra hard for the disbandment of Amp’d because they were becoming a true competitor. The last thing Verizon wants is to lose customers to a service using their bandwidth and their network.

The larger picture, though, is that as the big carriers add more and more features and content to their service, there is a far lesser need for niche MVNOs. The new features and content will cover most if not all of these niches, so the carriers will eventually decide that it’s not worth it for them to compete with themselves just to sell their excess bandwidth. Also eventually, they’ll need that bandwidth themselves.

In fact, this could be true of all US MVNOs, except of course for those under Sprint. Since Sprint doesn’t offer a prepaid plan themselves, they use MVNOs for that purpose, with Boost Mobile at the forefront. Since Boost is a subsidy of Sprint, they essentially are Sprint prepaid. That means that the other MVNOs under Sprint could vanish once Sprint starts to offer more content and picks up more subscribers.

So it’s easy to understand how Amp’d could go bankrupt in such a short period of time. Their service was a real step forward for the industry, thus it took remarkable skill and enormous cash flow to even get it off the ground. However, when you’re trying to fulfill such an expensive vision, you tend to cut corners here and there. Sometimes it comes back to bite you in the ass, sometimes you cover it up in time.

Unfortunately, Amp’d couldn’t stop the bleeding in time. They had competent management who could identify the problems, but there were too many obstacles to overcome.

In the end, it was too much too quick. If Amp’d had been given more time on their debt, they might have been able to turn the operation around. However, as we said, Verizon isn’t stupid; they knew that Amp’d posed a threat to their own subscriber base. Don’t think that Verizon declaring default on Amp’d’s debt was just some random occurrence.

Still, another nine months could have been the difference for Amp’d. They could have secured more creditors, overhauled the billing system, gotten their subscriber base back on track, and began repaying their debts. But when you owe someone $33 million and they’re calling in the debt, you’ve gotta answer to them.

Sometimes, they’re not too friendly when you do.