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Amp'd Mobile Runs Out of Juice

The "virtual" cell-phone company seeks bankruptcy protection after nearly half of its customers fail to pay their bills

The gold rush of specialized cell-phone companies targeting niche audiences took another hit on June 1 as Amp'd Mobile, an edgy upstart geared to free-spending youths, filed for Chapter 11 bankruptcy protection.

Apparently, those free-spending youths don't care much for paying their cell-phone bills. A court motion filed on June 4 explains that Amp'd "experienced an unprecedented growth of subscribers" between November, 2006, and February after running ads on MTV (VIA) about the wireless phone company's lineup of mobile music and video content.

Collecting payments from these subscribers proved to be a challenge, however. "Approximately 90% of the debtor's customers were on 18-month service contracts," according to the filing. "The debtor began to find a host of credit and collections problems (that) contributed ultimately to a liquidity crisis." By May, the number of nonpaying customers reached 80,000. That's nearly half of Amp'd's current customer base of 175,000 subscribers.

The filing in U.S. Bankruptcy Court in Delaware, which says the company owes more than $100 million to creditors, marks another setback for the fledgling market of "virtual" cell companies that lease network capacity from the nation's big wireless operators to reach purportedly underserved market segments. The biggest flameout came last year as Disney (DIS) pulled the plug on Mobile ESPN, a flashy sports service that was recently relaunched as part of Verizon Wireless' multimedia lineup.

"Trough of Disillusionment"

The bankruptcy filing will have ramifications for other virtual wireless operators, now numbering about 40 in the U.S. alone, up from about 33 a year ago. "It just means that some of the hype [around virtual operators] is gone," says Tole Hart, an analyst with consultancy Gartner (IT). "We are in the trough of disillusionment."

And investments into like companies are bound to slacken. The filing could affect the planned initial public offering of Virgin Mobile USA, an elder statesman of the virtual operator segment, with 4.9 million users, that also targets the youth segment. Even before the Amp'd bankruptcy, investors, who've sent some wireless stocks on a double-digit rally in the past few months, have worried about Virgin's red ink. Still, Virgin's losses have narrowed over the years, with revenues rising 11%, to $1.1 billion, in 2006. With Amp'd's filing, "I don't think it's going to be something that derails a deal," says Tom Taulli, an IPO expert. "[The companies are] not an apples-to-apples comparison." But now it may be more likely that Virgin's IPO could get pushed back to fall, he says.

That doesn't mean that so-called mobile virtual network operators (MVNOs) like Amp'd are going away. Gartner predicts that while these companies provide services to 5% to 10% of U.S. subscribers today, they will serve up to 25% of them in five years.

Verizon Plays Hardball

And for Amp'd, whose backers include Qualcomm (QCOM), this may simply be a fork in the road. The company says its creditors claim more than $100 million in debts. One road could lead Amp'd directly into the arms of its largest creditor, Verizon Wireless, whose network Amp'd uses to serve its customers. Verizon, owed $33 million in unpaid bills, effectively forced the Chapter 11, Amp'd says. "Further compounding the liquidity crisis at the debtor was the fact that Verizon" had given Amp'd 10 days to make a $4.5 million payment, according to court documents. Then, last week, Verizon prematurely send Amp'd a note saying that its wholesale agreement with the upstart was terminated effective immediately, the filing says.

Here's why Verizon (VZ) may want to pick up Amp'd on the cheap: Amp'd has been exceptionally successful in getting its subscribers to use data services, which are expected to become the wireless industry's growth engine in the coming years. In the first quarter of 2007, Amp'd users downloaded twice as many videos, songs, and games as in the fourth quarter of 2006. In addition, Amp'd's unique content and a multimedia application it has leased to carriers in Canada and Japan could help enrich Verizon's offerings, says Dipanshu Sharma, founder of V-Enable, a mobile search company that works with numerous carriers (see, 11/1/06, "Amp'd to Tap Japan's Mobile Market,"). A well-oiled wireless machine, Verizon may have the knowhow to fix Amp'd's operational problems.

Verizon Wireless did not return requests for comment. But Steven Yoder, a director at law firm the Bayard Firm representing Amp'd in the proceedings, says the company is in talks with existing and new investors. "We are certainly considering all alternatives," he says. With interest in telecom investments rising, particularly after the recent private equity deal to acquire Alltel (AT), chances are there will be takers.

Depending on a Fickle Market

Amp'd also could drop its wireless service business and turn into a software company, says Alex Besen, founder of wireless data consultancy the Besen Group. After all, the youth services market is fickle and extremely competitive. "Youth is the least loyal [customer] in the whole wireless world," says Besen. And that business can be unprofitable for a long time, as it can take a wireless service provider more than a year to recoup its initial customer acquisition costs. Virgin is still losing money after five years in business. Software profits are easier to make, and they are fatter.

Amp'd's troubles will also put the spotlight on Helio, a joint venture between SK Telecom and Internet service provider EarthLink (ELNK) that's also trying to capitalize on multimedia wireless services for the young. Analysts believe that the outfit, which has about 100,000 subscribers, will use up its parents' $440 million investment by the end of the year. In recent comments, SK Telecom said it may be willing to provide more funding. "It would be a disservice to group all [virtual operators] together," says Rick Heineman, a spokesperson for Helio. "Helio is a completely different business model [from Amp'd]." Indeed, instead of differentiating its service through content, Helio has striven to offer exclusive handsets and cool applications, such as gifting, where one user can buy and send a ringtone to another Helio user.

Differentiation through applications and services has served others well. Tracfone, the U.S.'s largest virtual wireless operator, offers the same flat per-minute rates for long-distance and international calling—an offering that appeals to many immigrants. Perhaps the most shining example is Movida Cellular, which focuses on the Hispanic community. "They are doing everything right," says Besen. "They know their market segment." Clearly, he says, Amp'd does not. "Maybe they will change their business model and come back," Besen says. With half of its users not paying, that may be a struggle.

An Amp'd statement tries to spin it all in a positive light: "As a result of our rapid growth, our back-end infrastructure was unable to keep up with customer demand." But industry insiders blame Amp'd's high marketing costs and operational failures for driving it over the edge. Industry insiders say users didn't get bills on time and experienced problems with the service—which is why, some claim, Amp'd customer losses recently jumped to as much as 8% of its subscribers per month, about three or four times the rate of many rivals. Amp'd wouldn't confirm or deny rising customer churn.

On June 5, Amp'd will go before a judge for a procedural relief hearing, and "we are hopeful we can work with our lenders to restructure in a very short period of time," says Yoder.

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