Charting the collapse of Kogan Mobile and ispONE

Ruslan Kogan’s telco experiment has turned to dust but the demise of Kogan Mobile was always on the cards even before the fracas between Telstra and ispONE came to light. So what went wrong?

Ruslan Kogan’s ambitions in the telco space have turned to dust but the demise of Kogan Mobile was always on the cards even before the fracas between Telstra and ispONE came to light. 

The fractious interplay between Telstra, telco wholesaler ispONE and Kogan Mobile has inevitably produced an outcome that tells you a lot about the state of affairs in the mobile virtual network operator (MVNO) market.

Kogan might have made his name in the retail game by being a disruptor, but after showing Gerry Harvey a thing or two about disruption, this time it’s Kogan who has been on the receiving end with a salutary lesson on just how hard it is to beat the likes of Telstra at their own game.

As for ispONE, its tenure as the Telstra middleman of choice has come to an ignominious end courtesy of a gamble that just didn’t pay off.

Kicking Kogan where it hurts

The promptness displayed by Telstra in showing Kogan the door is instructive. The telco’s antipathy was apparent nine months ago when Kogan Mobile was launched, Telstra didn’t want anything to do with it.

It was always looking for an excuse to jettison Kogan and didn’t waste a second in cutting Kogan Mobile and its 115,000 customers loose. The fact that Optus and Vodafone didn’t come to Kogan Mobile’s rescue is another indication of how the tier-one telcos just didn’t want to pursue a relationship with Kogan. What will hurt Kogan even more is that while his dream evaporates the other MVNO on ispONE’s books, ALDI Mobile, has worked out a deal with Telstra to keep its service ticking along.

It’s no wonder Kogan is crying foul but at some point his strategy of offering high-data plans at bargain basement prices was always going to cause rancour.  

As far as Kogan’s peers in the MVNO space, and analysts for that matter, are concerned there’s little sympathy on display for Kogan or ispONE.

Yatango Mobile is a recent entry to the local market and the telco’s boss Andy Taylor told Business Spectator that Kogan’s price point – 30 days Unlimited calls, SMS-MMS and 6GB of data for $29 - was a recipe for disaster not just for Kogan Mobile but also ispONE.

“We knew commercially that this was not viable and it was ispONE taking on all the risk,” Taylor said.

It certainly was and in the end it proved to be ispONE’s undoing.

ispONE’s ill-fated gamble

While ispONE was selling the Telstra service to Kogan at a fixed per-subscriber basis, it was paying Telstra for volume per minute (voice and data). The bet here, and it seems incredulous in hindsight, was that as long as usage patterns of Kogan Mobile customers remained stable and under the stipulated fair use policy, ispONE could keep giving Kogan a sweet deal and still make enough to keep Telstra off its back.

Unfortunately, that premise unravelled rather quickly because at $29 a month Kogan Mobile customers certainly weren’t holding back on usage and the 6GB data allowance just wasn't enough. That tension manifested itself in April this year when ispONE started kicking high-use Kogan Mobile customers out. The warning signs where already there for ispONE and after haemorrhaging cash for nine months it’s finally game over for the wholesaler.  

Now, ispONE wasn’t an outfit run by amateurs. They managed to strike a deal with Telstra, had an existing relationship with Optus and had built a sophisticated billing support system, iBoss,  to minimise back office headaches for its customers. So, how did it manage to get itself in so much trouble?

One reason that could potentially explain the misstep, according to Taylor is that ispONE may have miscalculated the level of data utilisation at the plan level.

Taylor says that there is a big misconception that Kogan Mobile and Aldi Mobile were running on Telstra’s 3G network, that’s actually not the case.

“They were running on the older 2G network that just wasn’t getting the level of investment that the new network was receiving. If you look very carefully at the way things were worded, Telstra mandated that they were only using a part of the network,” Taylor told Business Spectator.

“That’s why they could give away 6GB packs because nobody could use it fast enough. The unlimited model could only work if you have low utilisation at a plan level.”

Business Spectator has since been informed that Kogan was actually on Telstra's 3G network but it's access was limited. But Taylor is partially correct in saying that there was a disconnect between expected data usage and what really happened.

As things turned out, Kogan customers started smashing their data limits leaving ispONE in an unenviable position of juggling a losing equation where it was paying Telstra more than what it was receiving from Kogan.

If you are an aggregator you have to get your modelling right and in this case ispONE found itself in a no-win position.

Telecommunications consultant and analyst Tony Simmons told Business Spectator that ispONE just didn’t have any room left to manoeuvre.

“Unfortunately, it found itself in a position where it was going to end up breaching one of its contracts, either the one with the supplier (Telstra) or the one (with Kogan) which makes it money,” Simmons said.

“It found itself in a completely invidious position, just no win.”

Where now for MVNOs

The implosion of ispONE and the demise of Kogan Mobile don’t necessarily spell doom for the MVNO sector. However, they do reinforce a couple of key considerations.

For one, MVNO's need to differentiate on more than just price. Although price is still a key motivator for customers the wholesale terms on offer from the carriers just do not allow significant price reduction.

What’s needed is a value proposition, a service proposition, that provides customers with something extra. It can be coverage, it can be bundling other services and products, or it can be content. Low cost carriers are going to find it increasingly harder to get support from carriers and while Telstra, Optus, and Vodafone to some extent, duke it out the MVNO sector can still provide customers with value.  

But the pitch can’t just be about bargain basement prices and unsustainable data plans.  

Simmons says that Optus’ experience through its subsidiary Virgin Mobile proves that the MVNO proposition is still viable.

“There are plenty of people who are still making money in the space through good wholesale agreements, Macquarie Telecom wholesales Telstra, Optus and Vodafone and they do it well.”

However, the key caveat is making sure that the numbers are checked and if you are passing on contracts to downstream sub-aggregators or customer you have to dot the i's and cross the t's. Otherwise the likes of Telstra and Optus won’t hesitate to pull the trigger, especially if they feel that they are at risk of losing customers at a retail level. 

An earlier version of this story stated that Kogan Mobile and Aldi Mobile are not utilising the Telstra 3G network. Both Kogan and Aldi's services are on the 3G network but are using a small part of the network.

This story was updated at 11:16 AEST.

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