Biz Doc: It Has Come To This

Hard Lessons: Mobile Phones Are The Russian Winter of Brand Extensions

October 2014

In WWII, the Russian winter wasn’t kind to the Germans (see poor soul on the left).  The term “Russian Winter”  lives on as a warning and a metaphor describing ill-advised odysseys into hostile territory.  Attempts to launch an MVNO (Mobile Virtual Network Operator) have become an expensive Russian Winter for many brands.

The latest victim appears to be Amazon and, if today’s (October 24th) earnings call is any indication, it’s a mess.  Recall, the Kindle Fire Phone launched on July 25th.  On Monday September 8th, the price was cut from $99 to 0.99 cents (on a two-year contract)… and the next day Apple held the iPhone 6 launch event.

It took confidence and vision for Amazon to launch the Fire Phone, a product that would confront the Apple flagship, in the middle of the 60-day countdown to the vaunted iPhone 6.

Today (a mere 90 days after launch) Amazon made some financial admissions about the Fire Phone… including that it was taking a write down to the tune of $170 million and had $83 million worth of inventory in stock.  In a prelude to the earnings call, yesterday (October 23rd) desperation became a package deal as AT&T began offering an Amazon Fire HDX-7 tablet for $50 when you buy a Fire Phone.  This is not the final epitaph for the Fire Phone, but it’s certainly not a rosy horizon.  Meanwhile, the Apple iPhone 6 backlog wait-time has reached nearly 4 weeks for new orders according to estimates taken today from Apple’s online store.

Amazon is certainly not dumb and not alone here.  The annals of mobile phone history are full of brand extensions that have a horrible track record.  Actually, “horrible” might be charitable.  Now, niche brands conceived specifically for for mobile voice, messaging or data have a less horrible, but still sordid, history.

Metaphorically speaking in the context of Russian Winters for brand extensions, if Amazon is the metaphorical Germans, then ESPN was Napoleon.  In 2006 ESPN tried and also failed to launch their own mobile phone.  I could go back and recount that debacle, but Business Week’s Tom Lowry summed it up quite well it in an article he wrote back on October 29, 2006:

“…Just seven months after launching its own cell phone and service on Super Bowl Sunday, ESPN abruptly announced it was scrapping its heavily hyped Mobile ESPN.  Becoming your own cell-phone provider–leasing wireless spectrum from one of the big carriers and delivering programming directly to customers–is not for the faint of heart… ESPN, the $5 billion-a-year jewel of Walt Disney Co., takes pride in knowing what sports fans like and how they want their games, highlights, and analyses served up. Yet despite investing nearly $150 million in Mobile ESPN, say industry sources, the company signed up just 30,000 subscribers, way below a possible breakeven mark of 500,000…”

Yes, there are some exceptions.  Some say that Virgin Mobile is a brand extension and I will agree with you but also ask you to double check the ownership structure of that venture and its history.  They were also sold in Sprint stores and if you flunked credit, the representative cheerfully pointed to the display and said, “Have you considered Virgin Mobile?” That’s a strong, symbiotic relationship.

Ironically, Apple helped blaze a path for brands to offer a compelling (and far less expensive) mobile experience: THE APP.  None other than ESPN learned from its MVNO train wreck and was an early leader when it came to launching a veritable suite of eponymous apps.

OK, But Why Does This Keep Happening?

The mobile carriers are typically all-too amenable to MVNOs because they provide a source of revenue without the fuss of handset subsidies, retailer commissions, imputed marketing expenses and the like.  The margin on a wholesale deal is, thus, pretty tasty (In a past life I worked for a carrier and knew about the wholesale MVNO contracts).

If the MVNO fails, and the W-L record of MVNOs is 3-57 (my rough approximation), it is also a source of very low cost subscriber acquisition to the carrier who lovingly embraces the MVNO subscribers who are already on its network.  Failed MVNO subscribers usually get a letter that starts with WELCOME TO SPRINT!

The brand extension odyssey typically starts with an offsite planning meeting where arrogant executives lie to each other and come up with remarkably dumb ideas:

Following the planning meeting (and subsequent weekend at the Betty Ford clinic), the CEO tells the CMO to engage a wireless carrier.  It usually goes something like this:

CMO of Brand: “Hello Mr. Carrier, we want to launch our own mobile phone. Our beloved brand is all-powerful and… [insert roughly 13 minutes of brand stats and associated diatribe here].  In conclusion, research shows 98.26% of our customers currently use a mobile phone and our analysis indicates the overlap between mobile phone use and our brand is statistically significant.  Thus, a mobile phone carrying our beloved brand will be a category killer.”

Wireless Carrier:  We are enthralled and humbled.  Yes we’ll sell you wholesale minutes, messaging and data.  We would be fools not to associate with genius such as you.  Please sign here.

CMO of Brand: Uhh… on page 847 of the carrier agreement in section there’s a clause that states if we don’t pay our wholesale bill, or we elect to discontinue the service, then our subscribers will immediately become your subscribers.

Wireless Carrier: (Waves hand and suddenly sounds like Alec Guinness) “These are not the droids you’re looking for.

CMO of Brand: What?  Huh?  Where were we?

Wireless Carrier: You were about to borrow my pen and sign on page 912.

CMO of Brand:  Right – OK, there I signed it.  Let’s issue a press release.

Wireless Carrier: Of course, here is our boilerplate.  Just put your name in the blank and change the date.

CMO of Brand:  Awesome!

And so it goes.  I believe that one can reasonably predict the potential success of MVNOs by using this two axis chart:

I could go on but the point is clear and boards should find the historical lessons instructive.  Amazon is just the latest company to encounter the Russian Winter when it comes to mobile phone brand extensions.


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