Amp'd Mobile Runs Out of Juice

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Then, last week, Verizon prematurely send Amp'd a note saying that its wholesale agreement with the upstart was terminated effective immediately, the filing says.

Here's why Verizon (VZ) may want to pick up Amp'd on the cheap: Amp'd has been exceptionally successful in getting its subscribers to use data services, which are expected to become the wireless industry's growth engine in the coming years. In the first quarter of 2007, Amp'd users downloaded twice as many videos, songs, and games as in the fourth quarter of 2006. In addition, Amp'd's unique content and a multimedia application it has leased to carriers in Canada and Japan could help enrich Verizon's offerings, says Dipanshu Sharma, founder of V-Enable, a mobile search company that works with numerous carriers (see BusinessWeek.com, 11/1/06, "Amp'd to Tap Japan's Mobile Market,"). A well-oiled wireless machine, Verizon may have the knowhow to fix Amp'd's operational problems.

Verizon Wireless did not return requests for comment. But Steven Yoder, a director at law firm the Bayard Firm representing Amp'd in the proceedings, says the company is in talks with existing and new investors. "We are certainly considering all alternatives," he says. With interest in telecom investments rising, particularly after the recent private equity deal to acquire Alltel (AT), chances are there will be takers.

Depending on a Fickle Market

Amp'd also could drop its wireless service business and turn into a software company, says Alex Besen, founder of wireless data consultancy the Besen Group. After all, the youth services market is fickle and extremely competitive. "Youth is the least loyal [customer] in the whole wireless world," says Besen. And that business can be unprofitable for a long time, as it can take a wireless service provider more than a year to recoup its initial customer acquisition costs. Virgin is still losing money after five years in business. Software profits are easier to make, and they are fatter.

Amp'd's troubles will also put the spotlight on Helio, a joint venture between SK Telecom and Internet service provider EarthLink (ELNK) that's also trying to capitalize on multimedia wireless services for the young. Analysts believe that the outfit, which has about 100,000 subscribers, will use up its parents' $440 million investment by the end of the year. In recent comments, SK Telecom said it may be willing to provide more funding. "It would be a disservice to group all [virtual operators] together," says Rick Heineman, a spokesperson for Helio. "Helio is a completely different business model [from Amp'd]." Indeed, instead of differentiating its service through content, Helio has striven to offer exclusive handsets and cool applications, such as gifting, where one user can buy and send a ringtone to another Helio user.

Differentiation through applications and services has served others well. Tracfone, the U.S.'s largest virtual wireless operator, offers the same flat per-minute rates for long-distance and international calling—an offering that appeals to many immigrants. Perhaps the most shining example is Movida Cellular, which focuses on the Hispanic community. "They are doing everything right," says Besen. "They know their market segment." Clearly, he says, Amp'd does not. "Maybe they will change their business model and come back," Besen says. With half of its users not paying, that may be a struggle.

An Amp'd statement tries to spin it all in a positive light: "As a result of our rapid growth, our back-end infrastructure was unable to keep up with customer demand." But industry insiders blame Amp'd's high marketing costs and operational failures for driving it over the edge. Industry insiders say users didn't get bills on time and experienced problems with the service—which is why, some claim, Amp'd customer losses recently jumped to as much as 8% of its subscribers per month, about three or four times the rate of many rivals. Amp'd wouldn't confirm or deny rising customer churn.

On June 5, Amp'd will go before a judge for a procedural relief hearing, and "we are hopeful we can work with our lenders to restructure in a very short period of time," says Yoder.

Kharif is a reporter for BusinessWeek.com in Portland, Ore.