Freemium, Conversion Rates and More: AVG CEO J.R. Smith (Part 3)

Sramana: What did you do after you left Telecom Solutions Group?

J.R. Smith: I left to found a MVNO, which is a mobile virtual network operator. Virgin Mobile is perhaps the most famous MVNO. MVNOs lease capacity with network operators, and they are in charge of sales, marketing and distribution. They have their own brand and they are not strapped with the cost of building an infrastructure. They buy the handsets, they do the billing and everything else.

MVNOs are typically focused on a niche market. I went in and did a partnership with Vodafone focused on the student market in the U.K. It was a highly undervalued market. I had a partnership with a company that had distribution and advertising channels and university campuses all over the U.K. We were a student-only proposition, and we required potential customers to show us their student ID to join. We did all the handset distribution, contracts and billing. Vodafone in the U.K. is a business brand, so they were perfectly happy for us to go into the student niche market.

We created a unique plan that has had a huge impact on the mobile industry. Our plan allowed students to buy units. They could buy 500 units. One unit was equivalent to one minute of talk time or two texts, and a picture message was three units. You could use your units however you wanted. This was in 2004, and the way mobile operators worked at that time was by defining a number of text messages and voice minutes. As soon as you broke outside of those parameters, your rate would triple.

They made tons of money by having people break their bundles. We got rid of the bundles. We did not control how the units were spent, so our users never broke out of bundles and incurred tons of extra costs. We gave our users tools to measure use. We would send them a text message when they hit a certain number of units. We helped them manage their spending rate. In the U.K., the average revenue per user is £19 per month. Ours was £27 pounds per month. Average customer churn in the U.K. was 30%, while ours was 15%. It was a great business.

Unfortunately, as is often the case with MVNOs, the operators ultimately control you. Vodafone would not renew our contract. We invested time and money, but in the end we had to wrap it up. I learned a lot in that business about consumers, direct sales and marketing. In the U.K. it is insanely competitive. The unit plan that I talked about was mimicked by T-Mobile about a year before we shut down. They copied it verbatim and spread it across Europe. They did not calculate how much money they made by having their customers break bundles. T-Mobile lost hundreds of millions of dollars by introducing this plan. We were able to control it and we made money. T-Mobile did not know how to control it.

This segment is part 3 in the series : Freemium, Conversion Rates and More: AVG CEO J.R. Smith
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