Will iPhone 5 Help FreedomPop's Phone Service Disrupt the Mobile Industry?

FreedomPop has an entirely different approach to the smartphone market that may win some customers away from the big four of AT&T, Verizon, T-Mobile, and Sprint.

Apr 30, 2014 at 10:16AM

T-Mobile (NASDAQ:TMUS) has cast itself as the maverick company in the mobile phone industry mostly by calling out its competitors on long-standing industry practices that take advantage of consumers. In doing that CEO John Legere has forced competitors to take notice ... and in some cases lower prices and change how people buy top-of-the-line smartphones.

For an industry that once operated in lockstep Legere and T-Mobile are refreshing. But the changes T-Mobile hopes to bring to the industry are minor compared to radical shakeup being offered by FreedomPop. Led by founder and CEO Stephen Stokols, the company is attempting to not just change the mobile market but to transform it entirely by offering a monthly base price of free for phone, text, and a limited amount of data.

T-Mobile may have caused AT&T (NYSE:T), Verizon (NYSE:VZ), and Sprint (NYSE:S) to lower prices, simplify plans, and make their business a little more transparent, but none offer customers the option of free service.   

How it works

FreedomPop provides service over Sprint's network and customers can either buy a refurbished phone from the upstart carrier or bring their own device (most Sprint-supported Android devices are supported as are older iPhones, but not some of the newest phones). The company uses Sprint's network but routes all voice calls over a 3G or 4G data connection.

"We're not touching the voice network at all," FreedomPop VP Tony Miller told TechCrunch. "If we were to go with Sprint's voice network the cost of the deal would be orders of magnitude higher, and the free plan would cost between $15 and $20." 

The free plan is only the company's base offering and customers are encouraged (aggressively) to sign up for add-ons that cost money, but are still cheap compared to comparable offerings from the traditional companies. All the base plans (including the free one) come with 500MB of data -- a relatively small amount -- but there are no automatic overage charges -- customers are given the option of simply not using any more data that month, upgrading to a bigger plan, or paying $0.0.25 per additional MB of data. The company also appears to offer an extra 500 MB of data just for signing up but that is presented as a premium during the sign-up process so it may not always be offered.

Currently the FreedomPop website offers three refurbished phones including the Samsung Galaxy SII, for $159, the HTC EVO 4G for $99, and for the first time ever an Apple (NASDAQ:AAPL) device -- the iPhone 5 for $349. None of these are top-of-the-line phones (the Samsung handset is three models out of date). But supporting the iPhone 5 is a major step forward for the company as it opens up the service to Apple devotees with a relatively current model.

It remains to be seen whether customers will trade a lower monthly bill for an older device that they have to pay for up-front. It's also a huge question if Apple fans will want to be on a service that locks them into a phone that's a generation old with no ability to upgrade when the iPhone 6 gets released.

Has it worked so far?

Since FreedomPop is a venture-backed private company, it does not have to report its subscriber counts. But what Stokols has said suggests that while the company may not completely disrupt the big four mobile phone players, it might make them take notice. 

Stokols told re/code that FreedomPop's business is growing quickly, generating around $5 million in revenue for the last quarter of 2013. He called 2014's start "significantly higher already," saying that FreedomPop aims to be bringing in "IPO-type of numbers" of roughly $10 million per month by sometime next year, though he said that didn't mean the company was committing to going public. The company claims to have hundreds of thousands of customers -- a relative drop in the bucket compared to T-Mobile, which is essentially tied with Sprint for third place with 46.7 million customers at the end of 2013.

It's fair to call FreedomPop a success but that success has only affected a tiny percentage of consumers. While the big four are certainly paying attention, the market impact is minimal.

Can FreedomPop become a player?

FreedomPop can be bigger but its business model -- which is reliant on refurbished phones -- likely puts a cap on growth. The company, Stokols told USA Today, plans to sell 300,000 refurbished iPhones in 2014 ($104 million in sales, though profit margins are likely very slim) and one of its challenges is buying those phones in order to refurbish them for resale. The company has managed to keep up with demand so far, but there is a finite number of relatively recent used phones available at a reasonable price.

The second thing holding back FreedomPop's growth is that the company is making an offer that seems too good to be true ... and in some cases it sort of is. To thrive FreedomPop needs customers who are value-conscious but also tech-savvy enough to know about a semi-obscure mobile phone service provider ... but not so tech-savvy that they need a current top-of-the-line phone. That's a pretty specific audience -- it exists, but it's limited.

FreedomPop also still has to make money and the company does that by steering customers toward add-ons. The carrier does not disguise these added costs, but it also doesn't make them easy to spot (though transparency has greatly improved since earlier iterations of the FreedomPop website). In general the something-for-nothing proposition makes customers wonder what the catch is, and the persistent sales efforts and potential up-charges do little to make the company feel entirely legitimate.

That's not to say FreedomPop is not offering a deal-changing service that's completely above board -- by all accounts it appears to be. But until the company finds a way to support high-end phones it will be a fringe player in the mobile phone space. 

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Daniel Kline has no position in any stocks mentioned. He is a Sprint customer who has a FreedomPop mobile Internet device though he has not used in over year. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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