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

by Olga Kharif

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.