MVN-OH-NO?

Ampd Mobile Inc. is perhaps best known as the hipster virtual operator that makes 3G content and enhanced applications, such as social networking and Webmobile integration, its primary focus, hoping to capture the tech-savvy teen and twentysomething market. So when it filed its petition for Chapter 11 bankruptcy in June after 17 months of fast growth, many took it as another example of an MVNO overextending itself (ESPN closed down its sports-themed MVNO last fall), relying too much on image and not enough on margins.

The margin is never going to get any better, says Dean Fresonke, CEO of ClearSky Mobile Media, noting a 30 percent or less margin is the norm. So there is virtually no way to spend the money to create a brand, identify a customer base and then sell to it. The successful MVNO has to sell to an existing customer base.

In Ampds case, the situation is compounded: Almost half of Ampd customers arent paying their bills. Ampd claims about 200,000 subscribers and an ARPU of around $100. But it seems that its young audience cant afford that high monthly cost. According to court documents, 80,000 subscribers, most of whom are on 18-month contracts, arent paying.

Ampd made the decision to handle billing itself (based on systems from bcgi) and to offer postpaid calling plans. Sources inside the company say that a collections maelstrom arising from its postpaid billing model has forced the MVNOs hand. In the quest to add customers, stringent credit checks werent performed, leading to a plethora of costly bad-debt subscribers. Meanwhile, subscribers have come forward to complain about billing inaccuracies and delays.

With the money not flowing in, creditors began demanding payment. While Ampd has recouped some of the $360 million in investments from MTV Networks, Universal Music Group and others, it still owes about $33 million to underlying network provider Verizon Wireless, $16 million to handset partner Motorola Inc., and various sums to Universal, BestBuy Co. Inc. and MTV, among others.

The MVNOs bankruptcy petition essentially blamed a lack of OSS/billing scalability for its troubles. High growth and the billing nightmare have now made a back-end infrastructure overhaul necessary to maintain operations. But to afford it, the company needs to restructure its more than $100 million in debt.

Is it time to add Ampd to the dead pool? The company itself stresses that it is not going out of business and says it will continue normal business operations throughout the reorganization process, while Ampd Mobiles senior management team remains largely intact. But lawyers for Ampd note the company is considering all options, which could include being bought, spinning off into a software company or taking on new investors. Ampd is unlikely to leave the market entirely, despite its payment problems; but is likely to reposition itself as a content and services partner for MNOs that are interested in its niche youth market, says Alexandra Rehak, research director at Analysys.

The numbers beg the question of whether or not this is a death knell for an industry thats seen the high-profile demise of Mobile ESPN, while youth-oriented Virgin Mobile USA remains not only unprofitable, but is actually more than $500 million in debt after five years in business (as it revealed in its IPO filings).

The virtual reseller approach hinges on the ability to create a strong enough marketing brand to attract profitably and retain a highly segmented set of users that has been overlooked by the big network operators. With no network infrastructure to support and a wide variety of mobile virtual network enablers out there to support the billing end of things, the idea is to be able to offer more personalized, tailored services than the mass market wireless companies. One trick is to know the audience; the Ampd approach of selling expensive, postpaid service to the notoriously disloyal and often responsibility-challenged youth market has left many scratching their heads.

The business also has proven to require much deeper pockets than originally thought, thanks to the need to balance customer acquisition costs, churn, contract terms, bad debt, handset subsidies and the desire to ramp up quickly. And too narrow of a market niche can result in an inability to close the business case; there have to be enough available subscribers to make ROI.

Even so, Gartner Inc. says that MVNOs, which number around 40 in the United States, serve 5 percent to 10 percent of U.S. subscribers today, and will serve up to 25 percent of them in five years. Take Virgin Mobile USA. Despite its debt, it is regarded as one of the most successful MVNOs. It has millions of subscribers to its prepaid service. Virgin also is launching a series of enhanced applications to differentiate itself, and it expects its third-quarter IPO to raise about $100 million for the company. The venture is helped, of course, by parent companies Sprint and Virgin Group, which continue to float Virgin Mobile USAs debt with nary a grumble.

Mass-market MVNOs with low-priced prepaid offerings have taken a notable share of the U.S. market, and have driven the growth of prepaid services, says Analysys Rehak. For example, TracFone Wireless and Virgin Mobile USA have captured sizeable market shares and provided effective competition for MNOs; the two operators accounted for a combined 5.3 percent share of U.S. cellular subscribers and almost 36 percent of all prepaid subscribers at the end of 2006.

Meanwhile, other service launches continue. Telcordia Technologies, one of the highest-profile back-office enablers for MVNOs, continues to add providers in the United States as customers, most recently KDDI America Inc., a subsidiary of Japans KDDI Corp., and tween-targeted kajeet.

Overall, it appears that MVNOs arent disappearing anytime soon. Rather, its a question of evaluating the business metrics to find a successful recipe. It is unclear whether MVNOs that target low-spending, high-churning prepaid customers have a sustainable business model in the long term, says Rehak. These marginal mobile service users are underserved, and are likely to continue to represent a large, relatively untapped market.

But she says the prospects for high-end niche MVNOs are much less certain. There are few examples of such companies finding success elsewhere in the world, Rehak says. Most of the players that find a large enough subscriber base to survive will either be absorbed by MNOs, if their propositions appear compelling enough, or repositioned as mobile content developers and distributors, like Mobile ESPN.