There was no more telling statement during last week’s legal trial between mobile virtual network operator (MVNO) ispONE and its supplier Telstra, than when ispONE’s counsel said: “The problem is that Telstra is charging ispONE substantially more than what ispONE is charging its customers.”
ispONE this week succumbed to financial pressure and called in the administrators before it could have its final day in court with Telstra. It had alleged Telstra engaged in unconscionable conduct when it promised to match Optus pricing and then charged significantly more.
ispONE is not new to the MVNO game. It’s had a relationship with Telstra for years, as it has with Optus. But when Optus decided to move away from wholesaling prepaid mobile products, Telstra stepped in to fill the void.
Telstra Wholesale sales director Paul Zahra secured the deal with ispONE, and emails discussed during last week's trial between Zahra and ispONE director Zac Swindells showed the issues he faced in negotiating a competitive deal from the mothership.
In one email Zahra said "it was a battle to get the pricing per minute and per SMS you wanted," and that "data is a very sensitive subject internally", so they would need to revisit data pricing at a later stage.
Now out of pocket millions of dollars, Telstra has washed its hands of one of ispONE's clients, Kogan Mobile, but has moved to form a direct relationship with another, Aldi. It’s a clear sign of which retail brand Telstra thinks can deliver profitable customers.
In the razor-thin margin market of mobile virtual network operators, it’s hard to understand why ispONE ever signed agreements that saw it charge Kogan Mobile a per-user rate, while it was to pay Telstra for minutes and megabytes.
During the trial between ispONE and Telstra, Justice Pagone was careful to establish if the so-called Optus pricing was included anywhere in the agreement between the two parties. It was not.
ispONE bore all the risk, and Kogan Mobile seemed oblivious to the potential final outcome when it sued ispONE for damages after already winning its case against the wholesaler for booting customers off the network for overuse.
Where to from here?
Damian Kay, who runs virtual telco and ASX-listed Inabox Group, said no carrier wants to be subject to the situation Telstra found itself in.
He predicted carriers would increasingly want to deal directly with mass-market players, as Telstra has moved to do with Aldi.
“The MVNE [mobile virtual network enabler] will still play a role in the ‘enablement’ but not the commercial supply of the service. From a risk perspective to the MVNO this is not all together bad,” Kay said.
That enablement piece could help determine who survives in the MVNE business.
Connecting to Telstra’s platforms is no mean feat. When ispONE first did so, Swindells was only too happy to boast of the new systems built in conjunction with Ericsson in less than 16 weeks to make the prepaid product possible.
It emerged during last week’s court session that the prepaid platform hadn’t quite lived up to expectations, with problems experienced from late December until February this year.
Kay's Inabox Group mirrors all its agreements back to back with the carriers and the MVNOs. “In other words we sell it the way we buy it.”
For small MVNOs unwilling to manage their own billing and carrier integration, the business case just got a whole lot more difficult.
Kogan Mobile said it has been “muscled out of the mobile industry against our will by a force much bigger and much stronger than us”.
Telstra hasn't commented on why it chose to work directly with Aldi and shut Kogan out, but it’s clear who holds the ultimate power, and how quickly a carrier can freeze out a potential threat.
In the carnage, Optus customers may also be affected. Despite an eleventh hour restructure from ispONE, an Optus spokesperson said the company is currently monitoring the situation and will talk with the administrator regarding the next steps of the business "to ensure limited disruption to customers using the Optus network".
And undoubtedly, retail brands considering MVNOs will be looking much more closely at the fine print.