With $100 Mil In Pocket, Wireless Startup Expands

REINHARDT KRAUSE, Investor's Business Daily_Dec 24, 2008 09:51 EST

Paul Posner says the wireless flat-rate pricing trend has just begun.

Next month, his 2-year-old wireless phone company, Pocket Communications, plans to launch a flat-rate, unlimited cell-phone service in five midsize Northeast cities.

Pocket's rate plans start as low as $25 per month for unlimited local calls and text messaging. Customers pay in advance.

The company already has 300,000 customers in south Texas, from San Antonio to Laredo, and in the Rio Grande Valley. Last month, it said it had raised $100 million from venture capital firms for its Pocket Communications-Northeast.

Such big investments have become rare amid the global financial crisis. Battery Ventures, which led the funding round, had previously invested in MetroPCS Communications PCS, the biggest U.S. flat-rate service provider. (See related story.)

Posner doesn't plan to compete with MetroPCS and Leap Wireless LEAP, another flat-rate company, in markets where they operate.

He says there's plenty of room for a new flat-rate player. The big four wireless firms -- AT&T T , Verizon Wireless VZ, Sprint Nextel S and T-Mobile USA -- aren't ready to drop their $100 or so prices to compete for the same low-income customers as MetroPCS, Leap and Pocket, Posner says.

"The big guys aren't going to cannibalize their high-spending customer base to go after this market," Posner said. "The market share of all the flat-rate providers is still very small. Together they have around 10 million subscribers. That's less than 5% of the wireless market. Are AT&T, Verizon and the others going to drop their pants to try to prevent that share from growing? I wouldn't do it."

Boston-based Battery Ventures likes the flat-rate business model. In 2005, it twice invested in MetroPCS, which went public two years later. Matt Niehaus, a partner at Battery Ventures, says flat-rate companies are well-positioned to grab more market share.

"It's very difficult for the big four to replicate the low-cost structure of the flat-rate model," Niehaus said. "We think the unlimited market has legs. It's a model that generates cash flow very quickly and ramps up market penetration during the first year quickly."

Posner has been around the telecom business for almost 20 years. He owned small retail stores that sold pagers and cell phones in the 1990s. He's dabbled in acquiring radio spectrum to slowly build a wireless services business.

After the telecom bust in 2000, troubled firms sold off licenses for WiMax wireless broadband services at fire-sale prices. Posner bought WiMax spectrum and sold the airwaves to Nextwave Wireless.

In 2006, Posner used money from the Nextwave sale to purchase airwaves in south Texas in a Federal Communications Commission auction. He says Pocket managed to get a network up and running six months later. Pocket opened its own small retail stores.

"We turned profitable in nine months. You're just selling air," he said. "Ours is a no-frills approach."

Pocket's subscribers don't sign contracts.

"We don't print invoices, there's no paperwork," Posner said. "We send a text message and voice mail when a bill is due. If they don't pay us, we turn them off. When they pay us, we turn them back on."

Posner estimates that Pocket has a 10% share in its Texas markets.

Pocket's network uses CDMA, the same technology used by Verizon and Sprint. (AT&T and T-Mobile use the main competing standard, GSM.)

To make it easier for users to switch to Pocket, Posner set up a separate software business called Houdini. It sells software that lets consumers reprogram or unlock their existing CDMA phones to run on Pocket's CDMA network.

Houdini has licensed its software to MetroPCS, Posner says.

Neither MetroPCS nor Leap are in the northeast markets Pocket will enter next month: Hartford and New Haven, Conn.; Springfield and Pittsfield, Mass.; and Poughkeepsie, N.Y.

"The economics of those areas aren't that different from south Texas," he said. "It's a nice cluster."

With $100 Mil In Pocket, Wireless Startup Expands

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