Cell-phone startups struggle in tight market
Posted on Sunday, June 25, 2006
Setting the stage for another round of losses in the volatile telecom sector, a wave of cellphone startups that were counting on TV, music and other premium services to attract users is floundering.
Among the companies struggling to sign up customers: Mobile ESPN, a venture backed by Walt Disney Co., and Amp’d Mobile, a youth-oriented wireless startup backed in part by Viacom Inc. and Vivendi SA.
The companies are among about 30 wireless operators and hundreds of related wirelesstechnology companies that have been launched over the past four years. They hope to carve out a profitable niche in the mobilephone business with networks leased from the nation's major phone carriers and new services pushed by heavy marketing.
Not since the late 1990 s has the telecom sector seen such a wave of investment. In the past 16 months, startup cellular carriers have raised at least $ 1 billion, according to San Francisco investment bank Rutberg & Co., compared with just $ 100 million in the three years from 2002 to 2004.
But many of the new carriers are struggling as they fight over a relatively thin slice of the market. While the number of U. S. cell-phone users has doubled over the past six years to 215 million, only around 1 percent of them regularly use cell phones to watch videos, for example. Cell phones also are facing competition from iPods, BlackBerries and other multimedia devices.
ESPN, the cable sports channel, is among the most public to stumble. It launched its cellphone unit with great fanfare at this year’s Super Bowl, but now has gone back to the drawing board after a botched entry into the market, according to a person familiar with the situation. That misstep will likely result in losses for Disney that may run into the tens of millions of dollars, that source said.
Amp’d Mobile, which has attracted $ 250 million in funding, signed up fewer than 10, 000 subscribers in its first five months, say people familiar with the situation. Its investors include music-video network MTV, a unit of Viacom, Universal Music Group, a unit of Vivendi, the venturecapital arms of Qualcomm Inc. and Intel Corp. and some of the best-known venture-capital firms in Silicon Valley.
Viacom declined to comment on the specifics of its investment. Universal couldn't be reached for comment.
A worrying sign for the telecom startups has been the disastrous initial public offering last month by Vonage Holdings Corp., whose stock has dropped by half since its $ 531 million deal. Like many of the wireless startups, Vonage, whose subscribers can make cheap phone calls over the Internet, doesn't own its own phone network and relies heavily on marketing.
Venture capitalists and others remain hopeful that the new-media offerings, which have proved popular and profitable in parts of Asia, will catch on in the U. S. Amp’d is staking its position in data services, such as music and video, and that’s “forward-looking,” says Jonathan Ebinger, a partner at BlueRun Ventures, a venture-capital firm funded by Nokia Corp. that has invested in wireless companies but not in Amp’d. Through clever marketing, Ebinger says, Amp’d could achieve some success.
In theory, starting a cellphone company is relatively easy. Startups don’t need to build their own costly networks to carry calls and other services, one reason the proliferation of carriers hasn’t done much to help equipment makers such Siemens AG and Nokia, which agreed earlier this month to combine their telecom-gear units.
Instead, the startups can lease access to the networks of major carriers, such as Verizon Wireless, a joint venture of Verizon Communications Inc. and Vodafone Group PLC; Cingular Wireless, a venture of AT&T Inc. and BellSouth Corp.; or Sprint Nextel Corp. They can then market voice and other services under their own brand names.
Like Vonage, however, the new branded carriers are going up against those same deeppocketed phone companies — in a market that’s already saturated. And they face the added disadvantage that many consumers are locked into one- or two-year service contracts with the major cell-phone carriers.
Even if the wireless startups succeed in persuading consumers to pay a premium for their entertainment services, the larger carriers are likely to respond by introducing similar services to market, says John Simon, managing director of General Catalyst Partners, a venture-capital firm that has invested in wireless companies. “The challenge is that they can be imitated by the major carriers,” he said.
The startups say they expect to gain more traction with consumers within a year or so as their aggressive advertising produces results. Amp’d Mobile is advertising heavily on cable channels MTV and Comedy Central; ESPN Mobile bought two spots in this year’s Super Bowl and has followed up with online and TV campaigns.
But the new entrants still face the burden of persuading consumers they offer services that are unique and appealing enough to merit switching from a major carrier, says David Bottoms, vice president of strategic partnerships for Sprint.
Peter Adderton, founder and chief executive of Amp’d, says his company is bringing compelling entertainment to the table. Amp’d has its own TV studios and has hired KC Armstrong, a former employee on The Howard Stern Show, to host a reality-TV program.
Amp’d TV news programs include Naked News, in which scantily clad women anchors deliver their reports in thongstyle bikini underwear.
Amp’d’s investors are optimistic that the strategy will yield customers over time and that their investment will pay off. “We don’t want to invest in a communications-service reseller,” says Allen Beasley, a partner at Redpoint Ventures. “Amp’d is a mobile-media company.”
Still, the company has had its share of growing pains. Its first phone, a black slide handset made by Kyocera Corp. of Japan, has a short battery life, which means customers have to choose between making phone calls and watching videos. Customers complain that some of the key functions don’t work properly.
The company says it has addressed those issues and that to buy time to solve problems it is intentionally moving slowly on adding subscribers. “Everything that’s pushing the envelope is going to run into issues,” Adderton said. Amp’d has had substantial subscriber growth in the past three weeks, he said.
Mobile ESPN has tried to stand out from the crowd by creating a phone tailored to sports fans. Disney, which owns ESPN with Hearst Corp., says that it expects to invest more than $ 130 million in Mobile ESPN and Disney Mobile, a wireless venture that allows parents to control children’s phone usage.
But Mobile ESPN’s model doesn’t appear to be winning over consumers. The startup, which was launched in February, had signed up fewer than 10, 000 customers through May, according to people familiar with the situation. Robert Iger, Disney's chief executive, said on the company's first-quarter earnings conference call that initial sales from Mobile ESPN were “lower than hoped.”
The company is reconsidering its entire strategy and has had an internal staff shake-up, people familiar with the matter say. To improve lackluster sales, Mobile ESPN has altered its pricing. In February, the company rolled out a $ 35-a-month service plan with just 100 minutes and a data package that included real-time scores, wireless Internet and video clips of sports events. Now its calling plans start at $ 40 a month for 400 minutes, comparable to one that Sprint offers. But the data package with the new Mobile ESPN service no longer includes wireless Internet and videos.
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