5 Rules to Disrupt a $200B US Mobile Market
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