A freemium MVNO — can it work?

This article was authored by Jouko Ahvenainen, and was originally posted on telecomasia.net.

We have seen dozens of MVNOs come and disappear. There are a few that have survived with a strong brand (e.g. Virgin) or niche services like international calls (e.g. Lebara). Now, we see a newcomer from California that has also collected significant venture capital funding, and it offers free calls, data and no ads. It is FreedomPop.

FreedomPop is a Los Angeles based MVNO founded in 2011. It closed its first $7.5 million funding round and started to offer its first services in 2012. In 2013 it started to offer free voice and data in Sprint’s network. Early this year it started to offer nation-wide WiFi service in the US for $5 a month. In June it raised a $30 million funding round. All together FreedomPop has raised almost $50 million.

How does it make sense to try a new MVNO and why would someone invest in it? The free package includes 500 MB data, 200 voice minutes and 500 text messages. If that is not enough then the user can buy more data, minutes and messages. The unlimited plan is $20 a month. This sounds like quite a normal offering.

Beyond minutes and bytes, FreedomPop offers also value-added services. Veterans of the telco business don’t get easily excited about value-added services. But FreedomPop offers some unique services. For example, it is possible to get insurance for the phone, Wi-Fi service, attach a foreign number for calls outside the US, or anonymous browsing for improved privacy.

About half of the subscribers only use the free service, and another half buys some added services. According to their comments, ARPU from paying customers is approximately $15 a month, which translates to $7.50 ARPU for the whole subscriber base. It is low compared to many other carriers or MVNOs.

So, can this make sense? One answer is that they count on the freemium concept that has worked with many internet and mobile services; users can start with the free service and then buy additional services according to needs. This means low customer acquisition costs. FreedomPop has revealed it has 600,000 subscribers and more than 80 employees. It aims to have one million subscribers this year. This means its  organization is light compared to carriers and other MVNOs.  One of the seed investors is Skype founder Niklas Zennström’s VC Atomico. It probably means that FreedomPop has the knowledge and competence to utilize the best internet business model innovations.

This summer FreedomPop plans to expand to the UK, where it will use Three’s network. It also plans to expand at least to four other countries in Europe and offer roaming solutions in some European countries.

We still have the question, of whether it is something new that can survive or if it is one more usual MNVO story. Some people see that it’s similar to those successful freemium internet services applied for the first time to the MVNO model, and some people compare it to low-cost airlines where you must pay for all extra services. But we know the telco market is not easy to survive in.  One answer is that they only focus on getting enough traction to sell the company to a carrier. There is already speculations over a potential acquisition. And it is typically the VC strategy.

We must wait and see if the company and concept is successful. If it works, then it may have an influence on mobile business models globally. We haven’t seen too many truly new business models for mobile subscriptions, only many complex pricing packages. As I have written earlier, I believe there is a plenty of room for new mobile business innovations, but I have expected more cooperation and bundling with content, media and payment companies.

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