Mobile Meltdown

How the "can't miss" wireless startup Amp'd Mobile burned through $360 million and found itself in bankruptcy.

Virtually from the beginning, wireless startup Amp'd Mobile seemed poised for greatness. When it formed in December 2003, its senior management team, including CEO Peter Adderton, was still glowing from its smashing success with wireless provider Boost Mobile. That company targeted multicultural youth, and Adderton successfully sold it to Nextel in October 2003.

Amp'd, the sequel that couldn't miss, was pitched to draw 18- to 25- year-olds who wanted to use their phones as entertainment devices. Amp'd invested heavily in original content and contracted with Verizon Wireless to operate over its broadband network. The startup promised to bring "a more relevant, personal experience to the wireless lifestyle with unique music, video, community, entertainment, sports, and gaming offerings."

Amp'd quickly became a darling of the venture-capital set. Columbia Capital (which had funded Nextel and XM), Highland Capital Partners (MapQuest), and Redpoint Ventures (MySpace), as well as corporate investors such as Intel, MTV Networks, Qualcomm, and Universal Music Group, provided Amp'd with $360 million in equity investments, plus another $31 million in debt financing.

A little over a year after its launch, Amp'd publicly declared that its model was working. It had attracted well over 100,000 subscribers and, in a January 2007 press release, CEO Adderton crowed, "Amp'd has always said mobile entertainment has the potential to change the way the world amuses itself. Our strong performance to date, unique entertainment offerings, and expansion into international markets proves we're on our way." The release cited average revenue per user exceeding $30 a month for content and data, compared to an industry average of $6.80. And content alone amounted to nearly 60% of that $30, compared to 25% for other carriers. Amp'd content--including Ultimate Fighting Championship (UFC) events, Supercross racing, and the series Lil' Bush (which proved so popular, Comedy Central turned it into a TV show)--made up 39% of its video downloads.

So when the company filed for Chapter 11 bankruptcy protection on June 1, one could be forgiven for wondering, What happened? How could a company with so much going for it burn through such a huge sum in less than two years? Executives at Amp'd declined to comment, and the company released a statement vowing to reemerge from bankruptcy after restructuring its back-end operations. However, at press time, the company announced that it would cease operations on July 24.

Adderton, who parted ways with the company shortly after the company filed for Chapter 11, did not respond to our interview request, nor did the company's major investors. But the tale told in the company's bankruptcy filings--and reinforced by interviews with a half-dozen former Amp'd executives (who spoke on condition of anonymity) and by comments from customers and employees on the Internet--lays out how appallingly poor execution and profligate spending can cripple a visionary company.

The official line: The company's problems began in early 2007. That's when Amp'd became aware of "customer collection problems at rates that were higher than industry norms," according to an affidavit filed by Amp'd president Bill Stone as part of the bankruptcy. By May, "nonpaying customers approached 80,000," out of an estimated total customer base of 175,000. As Tole Hart, a Gartner research director, puts it, "You can't give away your service to half your customers for free."

Yet there were seeds of potential trouble from the very start. Amp'd was conceived with an expensive business model. It hired executives around the country, flying them to the company's Southern California headquarters as needed from New York, Seattle, and Northern California. CEO Adderton himself choppered in by helicopter from his Orange County home, although it's unclear who paid for all of the costs associated with his commute. (Amp'd declined to comment about it.)

By design, Amp'd spent liberally on advertising and marketing. When Adderton raised his first $60 million in August 2005, he acknowledged in the press that he would "need a lot of cash once [we] get going to get customers." Amp'd sponsored an array of properties, from the MTV Video Music Awards to rapper Snoop Dogg's youth football league. It also threw or cosponsored a lot of bashes, such as pool parties at the 2005 MTV Video Music Awards in Miami and the 2006 Coachella Music Festival in Palm Springs, California. Many of the former employees we spoke with felt that Amp'd could have been more prudent in its efforts to attract its target customer. A former employee says the company sometimes paid full rate-card prices for advertising when it might have gotten significant discounts based on volume: "If you don't know what to ask for, you just hand over your wallet and take what's given to you."

The company also spent heavily on content. Amp'd had its own mobile outdoor broadcasting trucks to simulcast extreme-sports events on its handsets and its own in-house recording studio to produce its own concerts. It also licensed a lot of content from MTV Networks, UFC, Playboy Enterprises, major record labels, and video-game companies. (Of the licensors mentioned in Stone's bankruptcy affidavit, Playboy and Live Nation declined to comment, and UFC and MTV didn't respond to repeated requests.)

All these costs meant that Amp'd needed customers, and quickly. After a sluggish start--The Wall Street Journal reported in June 2006 that Amp'd had attracted fewer than 10,000 subscribers in its first five months--the company picked up the pace. By September, Amp'd issued a subscriber forecast of more than 100,000 customers by the end of the year, a goal that it met. In hindsight, given the high number of nonpaying clients cited in the bankruptcy, it's natural to wonder whether Amp'd was overzealous in its customer-acquisition efforts.

The half-dozen former executives all question the company's operating depth. Amp'd had hired Sue Swenson as its chief operating officer in October 2005, but a noncompete clause with her previous employer, T-Mobile, prevented her from joining until a year later. In the interim, the job fell to Stone, a former Verizon Wireless executive whose background was in marketing, not operations. The former employees say that few experienced operations folks were on hand to solve the myriad problems that Amp'd encountered. For example, there seemed to be no way to distinguish between customers who didn't pay and those who simply weren't being billed. When Amp'd started getting complaints about poor service, "it kept adding customer-service reps instead of finding out why they had so many calls," one of the former executives says.

Cash flow clearly suffered. On May 22, Verizon Wireless informed Amp'd that it was in default of its broadband service agreement and that if Verizon Wireless didn't receive $4.5 million in 10 days, it would pull the plug. Amp'd went back to its investors for additional funds, and as late as the morning of June 1, Stone indicated in his bankruptcy affidavit that he believed the company would get the money it needed. But the last-minute attempts fell apart, and Amp'd sought bankruptcy protection from its creditors that evening. The bankruptcy filing listed $164 million in liabilities, against assets of just $46.6 million.

Amp'd execs asked a bankruptcy court judge for permission to sell its assets at auction. Verizon Wireless, Amp'd's largest creditor--Amp'd owes the carrier approximately $33 million--could purchase the Amp'd content library, likely its most valuable asset, for its V Cast service.

It is ironic that the Amp'd flameout came just four weeks before Apple's iPhone debuted. One former Amp'd executive recalls meeting with a Radio Shack executive just before the Amp'd service launched: "He said, 'You only have 18 months until everyone catches up to you.'" Eighteen months out, Amp'd filed for Chapter 11, and it is the iPhone that now carries the torch for Adderton's vision of the future for mobile entertainment.

Add New Comment

1 Comments

  • Emarcarian2k1

    Thanks John. This is well written and probably the most useful article I've seen so far with some additional insights. Great for my research on MVNOs and the downfall caused by negligent customers, and a failure in operations to cut the cord on bad customers. Can't believe they blew through $400 million!