Kogan Mobile woes a sign of MVNO consolidation

Kogan Mobile's recent troubles herald the beginning of a wave of consolidation in the mobile virtual network operator (MVNO) market, according to Amaysim's CEO.

The problems for Kogan Mobile began with the termination of the agreement between Telstra and ispONE, which resold Telstra's services to Kogan Mobile.

This affected more than 100 retailers that sell ispONE services and around 280,000 customers of fixed line, mobile phone and Internet services.

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ispONE attempted to take Telstra to court, but several days later the company went into voluntary administration.

While Telstra has brokered a direct deal with Medion, which provides Aldi mobile services, to keep customers on the network, a similar deal has not been struck with Kogan Mobile and its 120,000 customers.

“What [we’re seeing] is the first wave of consolidation in the crowded market and what’s really happening is that players with unsustainable business models or margins are exiting the market,” Rolf Hansen, CEO at MVNO Amaysim, told Computerworld Australia.

“We’ve seen this trend across Europe and it also happened in the US when they had the first big wave of MVNOs.”

Hansen has had previous experience in low-cost MVNOs such as simyo in Europe. Although he said he couldn't comment on the events of the last few days, he is adamant that mobile services can’t just be about price point and an attempt to be the cheapest in the market.

“The industry is trying to get to get to grips with and find an answer to the exponential increase in data usage, which comes with a related increase in cost for providers – the carriers. There’s no magic solution,” he says.

Telstra and Kogan battle it out

Telstra said it has not reached a Medion-style agreement with Kogan.

A blog post by the telco sought to clear the “misinformation and confusion” about its role in the Kogan Mobile woes.

“The decision by Ferrier Hodgson, as ispONE’s administrator, to terminate Telstra’s [wholesale] pre-paid mobile contract meant we had no choice but to progress with disconnecting Kogan’s services, although we are currently providing an interim service at our own cost to Kogan end users so they have time to choose their next steps,” the blog post stated.

Kogan responded that it was “news” to the company that Telstra was willing to negotiate a direct deal with them.

“If Telstra is truly prepared to enter into a direct arrangement with Kogan on ‘commercial terms’, we invite Telstra to be open and transparent with the Australian public by disclosing the rates and terms on which it is prepared to supply Kogan. We have no skeletons in our closet,” the company stated in a blog post.

Michael Malone, CEO at iiNet, has also weighed into the debate, saying Kogan’s business model wasn’t sustainable and that just offering cheap services won’t work.

Guy Cranswick, advisor at IBRS, said the situation with Kogan and Telstra shouldn’t be read as a telco giant throwing its weight around. Instead, he blames Kogan’s business model coming undone.

“It did not plan or see that scale could not be reached to cover over the flaw in its business,” he says. “However, the MVNO business is under tight margins and it operates as a price differentiator. In the market structure that means MVNOs will be under pressure which they cannot alter to their advantage as the oligopoly market inhibits.”

Kogan Mobile was launched in December last year on Telstra’s wholesale 3G network, offering a pre-paid plan of $29 per month for unlimited calls, unlimited SMS and MMS, unlimited voicemail and 6GB of data per month. Kogan Mobile was offering a 90-day commitment for $79 and a 365 day commitment for $299.

The plan didn’t require a fixed contract and was among the most competitive in Australia. But Hansen believes destructive price competition can be damaging to both the industry and consumers.

“Whilst it sometimes looks very easy to copy what we do – and many people have been tempted to do that in Europe – in the end it’s quite complex to build a business with scale and at the same time to sustain your margins and offer a good service to your customers,” he says.

There are now more than 40 companies offering access to the networks of Telstra, Optus and Vodafone and Hansen says other smaller players in the MVNO market could find themselves running out of funding and exiting the market. Until they reach a cash flow positive stage, he says it’s a danger zone.

“This is the first wave – how many more will come? I guess it depends also on how many entrants will dare to enter the market,” Hansen says.

“It has been a crowded market. I believe it’s not a market that provides a lot of space for many more new entrants, so it’s going to be interesting to see what will happen in the future.”