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5 Rules to Disrupt a $200B US Mobile Market

Stephen Stokols
9/16/2013
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It has been more than 10 years since innovators such as Skype and Vonage first leveraged VoIP to disrupt traditional carrier pricing and force new pricing models for fixed-line telephony. Since then, the majority of fixed-line voice has moved to VoIP, ultimately delivering billions of dollars in value to end consumers.

Today mobile has emerged as a massive $200 billion market (in the US alone). However, despite the rise of both OTT voice apps as well as new wave mobile virtual network operators (MVNOs), large carriers continue to control the market and sidestep disruption. This is due to three major advantages incumbent carriers enjoy:

  • Entrenched and extensive distribution networks: AT&T Inc. (NYSE: T) alone claims over 16,000 retail locations in the US including company-owned stores. That kind of ubiquitous presence is costly to establish and difficult to compete against.

  • Economies of scale: Carriers can procure large volumes of devices at deep volume discounts as well as get exclusive access to top devices (such as the iPhone).

  • Wholesale pricing control: Though all carriers operate wholesale divisions, in most cases retail holds the power. With the exception of Sprint, carrier wholesale pricing is typically influenced by retail and set at uncompetitive levels.

So is disruption to this massive market futile? Despite the barriers the answer is "no." Below are five rules that in the aggregate possess the potential to deliver mass disruption on a scale not seen in over a decade.

    1) The customer acquisition approach must be unique and scalable
    Any new entrant relying on outselling Verizon Wireless in Best Buy or outbidding AT&T on Google (Nasdaq: GOOG) is not going to disrupt anything. However OTT text and voice applications such as Pinger and TextPlus have scaled to hundreds of millions of users leveraging online and viral tactics at CPAs an order of magnitude less than large carriers.

    2) The proposition/product must have organic traction out of the gate
    A company that must rely on solely paid customer acquisition from day one lacks ability to build the strong customer base and loyalty required to disrupt.

    3) The core proposition must create a real "innovators' dilemma," i.e. incumbents cannot replicate it without losing massive revenue
    Many media outlets label pricing tactics from new MVNOs or even T-Mobile's Jump as "disruptive," but the reality is it is the opposite. Both AT&T and Verizon quickly replicated Jump at no risk to existing revenues (the contrary). However, If Verizon were to give away the first 500MB of data free (like FreedomPop), it would forgo billions in lost revenue. An innovator relies on a new business model, not new pricing.

    4) A technology must be exploited that larger players are not yet ready to embrace
    Skype jumped on VoIP before big carriers felt the quality was sufficient for their paying user base. OTT voice apps leverage VoIP over cellular while mobile operators are less comfortable until VoLTE is in place. In classic disruptive theory, leveraging a new technology that incumbents feel is not ready for prime time is critical. This principle applies in the mobile market more so than many others.

    5) The disruptor must have no industry ties
    If a company has revenues, partnerships or synergies that are compromised in disrupting a certain market, then it can't truly disrupt it. Apple for example relies on carrier subsidies to help drive hardware growth so it has too much to lose by destroying mobile carrier margins. Conversely, in music distribution, Apple had nothing to lose if iTunes destroyed old-school retail distribution and consequently it did just that.

In short, any company that can adhere to all five rules for disruption possesses the power to truly shake up today's mobile market. Unfortunately, to date, neither MVNOs offering pricing optimizations, nor OTT apps offering free text and cheap voice, have been able to truly threaten market dynamics. MVNOs lack aggressive or differentiated enough value as well as customer acquisition differentiation. Conversely, OTT voice apps possess a strong capability in viral acquisition but lack the end-to-end value across data, voice, and text to really affect customer spend.

We think FreedomPop is proving how the rules of disruption can work. Less than a year ago, we grabbed the mobile market's attention with the launch of its free 4G proposition, offering consumers 500MB of free 4G data each month for life. Since its launch, the company has proved the disruptive "freemium" model viable. It has ramped subscribers on limited marketing spend and given away more than 500 million free megabytes of data while maintaining positive gross margins. However, it has limited its product offering to just mobile data devices, a mere $5 billion market.

But I can tell that our first year has been just an appetizer to the main course. This company was conceived to compete across the entire $200 billion mobile market, not just the hotspot portion. In the upcoming weeks, we will attempt to extend this disruptive model to full voice, text, and data. We will be launching the world's first ever 100 percent free mobile phone service. We will leverage VoIP over cellular to offer deliver significant cost reductions that cannot be achieved on existing mobile voice networks.

We believe FreedomPop is the inevitable outcome of the Internet and telecom markets converging. In the converged world, companies clinging to excessive profits from commoditized services like voice and text lose out, and companies that can seamlessly deliver consumers increased flexibility, convenience and value emerge as winners.

-- Stephen Stokols, CEO, FreedomPop

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Garnet Campbell
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Garnet Campbell,
User Rank: Light Beer
9/18/2013 | 1:48:44 AM
Cost of 4G unlimited package 21USD per month with the dongle thrown in
Disruptive!

Competition is great!

Disruptors need to destroy the model in North America; the way forward would be to build a free net.

Applications exist today to disrupt the telephone companies but they are not well advertised. Even paid applications such as Skype out offer a better quality service than the Telco's  at a fraction of the cost.

 

A call from anywhere in the World to anywhere North America is 0.02 USD per minute in peak time.

Disruptors need to turn what is commonly a billed service now into one that gets its revenue elsewhere without affecting the service.

There are many ways to provide service for free; some cities have deployed their own fiber to the homes; now they can roll connectivity into property taxes! WIFI : create a network where people open their WIFI to others (AAA authenticated) and create a shared nationwide WiFi network for practaclly zero cost.

500Mbs is next to nothing, a low usage account consumes easily 2Gbs per month so 500M free would not even turn a small users head for a second look.

Disruptive 500Mbs! A few files exceeds this amount!
MordyK
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MordyK,
User Rank: Light Sabre
9/17/2013 | 1:49:58 PM
Business model
FreedomPOP appears to be a similar model to FREE in france, only FREE roams on a 3rd party carrier for macro usage while FREE has its own licensed spectrum for indoors over Femto's, while FreedomPOP uses indoor WiFi and MVNO's for the macro on a carrier. 

That said surmounting the carrier's mindshare positioning ought to be an interesting challenge. Best of luck!
derac7020
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derac7020,
User Rank: Lightning
9/17/2013 | 10:25:16 AM
Enough with the infomercials.
C'mon, Lightreading, post news not propaganda.   Or just have a page for these transparent product pushes.   
@jopocop
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@jopocop,
User Rank: Moderator
9/16/2013 | 8:26:47 PM
Disruption
Apart of the issue is the holding of available spectrum regarding whether there can be disruption.  Who winds up with the next FCC alloted spectrum?   Apart of the issue is net neutrality, whether that is allowed or disallowed, by the courts or Congress.  M&A has an impact, when consolidation happens creating a larger enterprise in control of the market. We are witnessing the disruption of cable, where the operators find themselves needing to provide TV everywhere or face subscriber losses. Bundling is certainly a factor, where some telcos can provide the whole package from TV to wired and wireless services.  Google bank had the wherewithal to enter the space only in recent years given the vast cash cow from advertising. FB wants to enter the space to a degree from its cash cow advertising too. Amazon can enter the space from its cash cow retail operations.  Everything is high stakes and the entry fee is enormous and thus newcomers have a very difficult if not impossible time to pass throgh the portal to the promise land of a provider of communications and content.  
brookseven
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brookseven,
User Rank: Light Sabre
9/16/2013 | 8:20:31 PM
Yes, I am sure
 

Taking all the money for the carriers out of mobile will inspire a massive growth in the installation of new cell sites and backhaul...and that is the flaw with the model.

Just like the CLECs of the past.  So, how do you think you are going to get a carrier to invest in the network if all they ever get is break even back?

seven
kaop
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kaop,
User Rank: Light Beer
9/16/2013 | 7:28:31 PM
Free mobile phone service
With the right marketing and partnership, the free mobile phone service chould generate some buzz.  Cellphone service could become the next big commodity like gas.  Imagine shopping at the supermarkets could earn minutes toward cellphone services.
kaop
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kaop,
User Rank: Light Beer
9/16/2013 | 7:15:37 PM
Freemium mobile broadband
FreedomPop is like NetZero's freemium model where you give away a core product for free and then generate revenue by selling premium products to a small percentage of paying users.  I think 500mb/mo isn't enough to disrupt the market.  I think 2GB may be the magic number to get people to sign up and use freely.
RitchBlasi
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RitchBlasi,
User Rank: Light Sabre
9/16/2013 | 5:46:09 PM
Free Mobile
Sounds good but someone told me a long time ago that nothing is ever free. There is always something hiding behind the curtain.
Tony2231
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Tony2231,
User Rank: Light Beer
9/16/2013 | 3:54:50 PM
Agree
Let's hope we get some disruption soon
DanJones
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DanJones,
User Rank: Blogger
9/16/2013 | 3:05:20 PM
How fast to scale
Interesting read,

 

Any thoughts on how fast you need to grow a subscriber base if disruption is your goal?
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