Smart50 winner ispONE collapses amid sector shake-up

Experts are expecting a consolidation in the telecommunications sector that will see a rise in mobile charges, as ispONE, a key source of competition in the mobile market, is placed into receivership.

The former Smart50 winner, which resold prepaid access to Telstra’s 3G mobile network, was yesterday placed into voluntary receivership with corporate receivers Ferrier Hodgson.

Ferrier Hodgson immediately cancelled the wholesale agreement with Telstra, and says it is now focused on selling off the assets of ispONE that can be sold.

The cessation of the wholesale agreement with Telstra could have affected the 250,000 customers who bought mobile plans from Kogan Mobile and Aldi Mobile, who on-sold ispONE’s coverage.

However, an agreement was reached between Telstra and Aldi Mobile, which means the 130,000 customers that use Aldi Mobile will continue to receive service from Telstra.

Kogan Mobile’s 120,000 customers will be cut off from mobile services within the next 30 days.

SmartCompany contacted Kogan founder and CEO Ruslan Kogan for comment, but was referred to a written statement.

“Kogan Mobile has been muscled out of the mobile industry against our will by a force much bigger and much stronger than us,” it said.

“The migration to Kogan Mobile was one of the biggest in Australian telecommunication history. As we lowered the prices for services, we were happy and so were our customers – but not everybody in the industry was pleased with what we were doing.

“As you may have seen recently, many companies have fallen out of the prepaid unlimited market. We’re afraid that due to certain industry dynamics, this is a sign of things to come. We’re concerned that it won’t be long before your choice as a consumer is eroded almost completely. We worry that the big telcos in Australia will continue their consolidation of power. Inevitably, this will mean higher prices.”

The warning was echoed by telecommunications expert Paul Budde, of Budde Communications.

“The reality of being a reseller is that you can be wiped out of the market,” he told SmartCompany.

“We’re seeing an enormous demand for broadband, including on mobiles, and so there’s huge competition between the three major players – Vodafone, Optus and Telstra. And average revenue per user is not increasing, while the major telcos have to make major investments in their networks.

“So they’re squeezed, and anybody who competes with them on price isn’t good for their strategy. They want to increase their prices, and they want to get rid of any competitors. And I’m not saying they’re doing anything illegal. But it’s killing the resellers.”

Last week, ispONE took Telstra to court to try to prevent it cancelling its wholesale contract. Telstra claimed that ispONE owed it $12 million in fees. The case was thrown out, allowing Telstra to cancel the contract. At the time ispONE was placed into receivership, Telstra had yet to do so. It was the receivers who cancelled the contract yesterday.

It’s not the only court case ispONE has been involved in recently. In May, the telco lost a case against Kogan. The online retailer said the telco was refusing to recharge high-usage customers when they reached a certain threshold of mobile usage, which it was not allowed to do. Kogan won the case, forcing ispONE to reinstate its customers.

Writing in The Australian Financial Review, technology lawyer Peter Moon wrote that ispONE’s failure was its inability to accurately gauge the usage of the customers who used its on-sold coverage.

“Certainly, ispONE’s failure can be traced back to one catastrophic business decision: to buy a volume-charged service from Telstra and resell it as a fixed price service to Kogan Mobile.

“[It] was betting on certain patterns and profiles of service use by Kogan customers. As long as they didn’t use too much service, the fixed monthly amount per customer that Kogan was paying would cover ispONE’s obligations to Telstra and leave a tidy profit. That figuring turned out to be disastrously wrong. When Kogan went to market offering ultra-cheap unlimited plans, high-volume users flocked to it. Suddenly, ispONE’s Telstra bill far exceeded its collections from Kogan.”

However, Budde characterised this as less a miscalculation and more a risk ispONE had to take to survive.

“With these ISPs, they have to balance on the edge,” he says. “They have to take risks to conjure up a competitive advantage. It’s a risky business, and always is in situations like this, particularly when competitors are being squeezed. These resellers are knowingly taking risks, because they have no choice.

“On the other hand, consumers go into these situations with their eyes wide open. The mobile market is nothing new. And consumers know that by going to something other than the majors to get a low price, they take the risk that these companies are not sustainable.”

In recent weeks, a number of second-tier mobile-plan providers have abruptly ceased offering their cut-price mobile data offerings. These include Lebara Mobile, Dodo, and Red Bull Mobile.

ispONE, founded by Zac Swindells and Chris Monching, was featured in the 2010 Smart50 list. Both founders have appeared on the BRW Young Rich list.