Exclusive: Inside The Take-Down Of Kogan Mobile

120,000 people can't be wrong: Kogan Mobile was a successful experiment in how to shake-up the local mobile market, but the possibility of long-term success would never be realised thanks to the folding of wholesaler ispONE. Now, for the first time: the real story behind the ispONE debacle from sources on the inside.

To understand the bitter end, first we must understand the complex beginning.

In order to do business in Australia, Kogan Mobile and Aldi Mobile signed contracts with a wholesaler who would on-sell Telstra's 3G service. The wholesaler went by the name of ispONE, and it facilitated the sale of mobile service to Kogan and Aldi, who in turn went on to redefine 'cheap and cheerful'. It wasn't long before trouble started, however. Kogan was forced to take ispONE to court after the wholesaler began restricting the ability of customers to recharge if they surpassed the company's fair-play policy, and ultimately Telstra and ispONE had a falling out in court over unpaid bills.

ispONE finally folded, forcing customers off Kogan Mobile and leaving Aldi Mobile to renegotiate its contracts.

That's the story we know. Here's the one you haven't heard.

Sources with knowledge behind the scenes have come forward to Gizmodo over the last week to reveal that the prices offered by Telstra weren't just uncompetitive, they were unsustainable to doing business. These sources have asked to remain anonymous for fear of losing their positions within their various companies.

The plan that saw Kogan able to offer unlimited service and 6GB of data to customers for $29 per month was allegedly offered back to Kogan by Telstra Wholesale at a cost of between $75 and $95 per month. That would mean the pricing Kogan would have had to offer to customers to make the business remotely profitable would have been well in excess of $100 per month, which customers just wouldn't accept, and neither would Kogan Mobile.

Kogan Mobile reportedly only made a pittance from its business before the implosion of ispONE, with the real money coming in terms of both brand recognition in the local market and what's known as the "halo effect": the idea that people will continue to buy more stuff from you once they have made one purchase. Kogan would sell a phone as well as a SIM card, and maybe a case. The next time that same customer might come back and purchase a television, for example, and so on and so forth. The halo effect.

You can imagine Kogan's outrage at the unsustainably high wholesale price, given the fact that Telstra offers unlimited calls and texts via its pre-paid 3G network to its own carrier, Boost Mobile, for less than half that. $40 per month will get you an unlimited prepaid offer through Boost at a retail level.

Those reports echo what happened back in 2010 between Internode and TPG, who both tried taking Telstra to the ACCC over high wholesale access charges for ADSL services. Telstra shook up its wholesale pricing in such a way that companies buying the service to on-sell -- namely TPG and Internode -- would pay more than an ordinary Telstra retail customer would to get the service, making it almost commercially unsustainable for these ISPs to continue offering service outside of their own, very limited DSLAM zones.

That's what sources are alleging has happened to ispONE and in turn, Kogan Mobile.

So where does Aldi Mobile fit into the scenario? ispONE sold to both Kogan Mobile and Aldi Mobile for cheap MVNO services. Kogan Mobile has been forced to see its 120,000 customers out the door, while Aldi Mobile stays in business thanks to an "interim agreement" with Telstra, sans middle-man.

Sources have told Gizmodo that Aldi Mobile is able to continuing service thanks to an eleventh-hour deal struck with Medion Australia under what we understand to be the same or similar terms to what was offered to Kogan Mobile: an unlimited plan with similar inclusions would cost between $75 and $95 per month as a wholesaler. Surely that means that Aldi Mobile will now be running at a loss, right? It all comes down to the cost of a relationship.

Medion has a multi-million dollar agreement for the supply of products to Aldi stores around the world, and reportedly wants to preserve the relationship with the profitable Australian arm. As a result, Medion -- the same company that Telstra made the interim agreement with for the continued supply of 3G to Aldi Mobile -- is happy to wear the cost of the extra services for the sake of the ongoing Aldi relationship.

Whether Aldi Mobile decides to shake-off its unlimited option in the future to make the service as profitable as can be in light of the uncompetitive arrangement is at the discretion of Medion.

The real loser in this situation -- apart from customers who want cheap mobile services from decent providers -- is ispONE. The wholesaler has spent the last year in and out of court and now owes tens of millions to Telstra, Aldi Mobile and Kogan Mobile. Nobody has exited this deal covered in glory, and at the end of the day, nobody wins.

When asked about the contract negotiations, Aldi and Kogan refused to comment, while Telstra had this to say:

"We will not be disclosing commercial information regarding our arrangements with ispONE or Medion. We were able to enter into a direct supply arrangement with Medion so that ALDImobile can continue to offer services to its customers. To date, we have not been able to reach an agreement with Kogan. An agreement requires two parties to agree and we have no intention of negotiating through the media."

Telstra continues to maintain that it had nothing to do with the failure of ispONE, and has gone on record defending itself on its blog. The telco has added, however, that the interim services it is providing to Kogan Mobile in the form of 7-Day Plans are being offered at the cost of the telco:

The decision by Ferrier Hodgson, as ispONE’s administrator, to terminate Telstra’s Wholesale’s pre-paid mobile contract meant we had no choice but to progress with disconnecting Kogan’s services, although we are currently providing an interim service at our own cost to Kogan end users so they have time to choose their next steps.

Scope image via Shutterstock

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Comments

    "Sources" = Kogan. How one-sided can you get.

      Sure, but it sounds like Telstra. I had some exposure to the Crazy Johns saga (and a lot of that came out in court anyway) and to Telstra's dealings with various Telstra Licensed Shop owners. Telstra's modus operandi over and over again is that when someone else is making money selling Telstra's service, Telstra wants to take all their customers for itself and has no hesitation about jacking up wholesale prices and cancelling licenses to do so. I would never go into business as a Telstra re-seller or Telstra licensee, the pattern has repeated far too many times.

    Simple fact is you pay for peace of mind. If you don't want to pay Telstra's prices, then there is always risks, and this is what happens.

      telstra dont offer peace of mind. telstra offer monopolistic practices and price gouging.

        Cry baby. Toughen up.
        This is how business has been done for the last thirty years. Hunger for increased profit and growth far outstrip any moral compass or social conscience.
        Sad but true

    It still doesn't answer the big question, What rate was ispONE purchasing from telstra at? For all we know the true value of the bill from Telstra to ispONE is similar to this $75-$95 per month and they went broke because they on sold it at such cheap rates.

    When you consider its rumoured that Telstra was charging a number of cents (apparently between 2-5) per megabyte it doesn't take long to see that 6gb of usage may well cost in this price range.

    Kogan has the added disadvantage of attracting the highest percentage of heavy users so its unlikely there were a large enough percentage of under using customers to offset the heavy users. Aldi may find that their customer base is less demanding made up of more general supermarket shoppers than tech savy users and are able to continue to operate without losing as much money as Kogan would have.

      Perhaps ispONE was selling a different product to what it was buying?

      If it was selling Kogan/Aldi plans with a maximum data allowance but buying data on a per-GB basis from Telstra, then that might explain why it was concerned about Kogan's heavy users.

      I also wouldn't be surprised if they got caught out being locked into one price to Kogan and having Telstra renegotiate the supply end.

    Everyone needs to email the ACCC and complain about this strong-armed tactic of Telstra (and all the major telcos it seems) to essentially price fix mobile access. Dodo, Red Bull and now Kogan Mobile have all been bullied out of competition and in the end it's the consumers who lose. We're now paying more to get less and no-one seems to be worried about it? I understand that all the major telcos have new infrastructure and 4G networks, but then how do they justify pricing even the 3G networks at higher margins than what consumers have been able to get it at?

      I don't need to. I'm on Boost Mobile and I'm not losing out.

        yet

          That has a lot to do with who owns Boost, and that is Telstra.

            Why do people keep saying that Telstra own Boost? They don't. Boost is an independently owned MVNO using Telstra's network.

              Telstra own Boost. Im currently in dispute with Telstra over a phone service and while the TIO ruled in my favour it doesnt change the fact that Telstra refuse to deal with me. Low and behold when I applied for Boost I got this email not long after:

              "Unfortunately, we can't authenticate the information you've provided through our online shop.

              This means we can't proceed, so we've cancelled your order. We'll refund any delivery charges and/or purchase amount you've already paid us to the credit card you used to place the order.

              If you'd like to place a new order, please visit your local Telstra store

              If you have any questions, please call our online support team on 1300 131 113. We're here to help 24 hours, 7 days.

              Best regards,

              Gerd Schenkel
              Executive Director, Telstra Digital Sales and Service"

              Boost are more than just an MVNO. Theyre owned and operated by Telstra.

              Boost for the most part is Telstra. Regardless of who owns them, their customer service and billing is Telstra.

              I can't count how many times I've called/chat to them where i was greeted by a Telstra rep.

              The only difference in customer service is you cant walk into a Telstra shop and expect to be served on both brands.

      I ain't worried, i get a pretty good deal with Optus.

      Where do you get that logic from?
      Telstra own the assets, and get to charge whatever they like for other people to use those assets.
      The fact that they charge their own brand (Boost) less is irrelevant.
      The rules that apply to fixed line (USO) do not apply to mobile, so if you want Telstra, you have to pay what Telstra want to charge.

        Exactly.
        Don't like it? Go to Vodafone or Optus who also have their own networks.
        Everybody else just uses one of these 3 networks anyway.

        You would be incorrect to think that. This country has anti competitive legislation and what Telstra has done, time and time again to Crazy Johns, TPG, ispONE, Kogan and maybe Aldi, is against the law. It's just nobody has the guts or the money to fight them. You can't run a cartel, which is why they have to offer a part of their services to third parties. Telstra own Boost mobile and offering packages way below what you offer your partners is anti competitive and illegal. If you fools are happy to pay the highest prices in the world for a mobile services, then good luck to you. Time for the ACCC to grow a set and take care of the people for a change.

          Evidence?

          Telstra owe nothing to Kogan or ALDI as they never had a deal with them!

            You are either a paid Telstra troll, or delusional. Go the the ACCC website, theres plenty on anti competitive legislation. Telstra run a mafia style operation with many "spies" (might be you) looking to bring opposition to their illegal practices down. If you/we accept this type of cartel with its brutal practices, then we all lose. We still pay the highest prices for mobile and data services in the world because of the power of the likes of telstra. You might be mad enough to think its fine and dandy, but it isn't. Get your head out your telstras ass pal.

      I'm with you brother. We need some solidarity to beat that scum of a company Telstra. People saying I'm alright Jack, don't realize it might happen to them before long. We need to make a stand now.

    But seriously, Why does it cost so much to use data??I would of though that as technologies get better prices and allowances would come down. I understand the dwindling offerings of the unlimited calls and messages but we are using data more then ever and the quotas of these plans should reflect that.

      Data uses far more network capacity than a phone call, If telco services were billed purely on the cost to provide them you would get unlimited call plans for mere dollars while data would cost you very similar to what it does now. A typical phone call is 22.8kbps while your mobile internet might be 40mbps. Talking on the phone non stop for an entire month would only use 7.4gb of data for the whole 730 hours. With data you can take up far more network capacity than with calls so it makes sense its more expensive. In fact you could argue that with telcos overcharging for voice calls they are subsidising the data cost quite significantly.

      Last edited 23/08/13 2:36 pm

      I think the cost is based on a number of things, but mainly it's what the market will wear and the use of bandwidth vs capacity on the whole network.

      Telstra has heavily invested in 4G though so they obviously want to push people into using that now, even though I assume the 3G tech is a lot cheaper to manage at the moment.

    On this one your going to need to name names, because the assumption right now is someone within Kogan.

    With AldiMobile now having a deal directly with Telstra, I'm wondering whether they now have access to the full 'NextG' network? instead of just the capped 7.2 Mbps 3G wholesale network that ispONE was on-selling.

    It is a pretty big hit for consumers, especially those who want no-contract plans because they buy phones outright. The offerings from the major telcos for BYO devices are an incredible rip-off.

    Is there any word on if Optus is also starting to shake up their pricing to 3rd party providers? I noticed the other day that the plan I'm on with TPG no longer exists ($14.99 after discount, $600 credit + 1.5gb data). Instead, you can get a more expensive plan ($17.99) with less value ($500) and less data (1gb). It seems like they wouldn't change something like that unless they had to, right?

      Optus just shook down dodo. Dodo doesn't do prepaid as from the end of this month, and a top up of data has suddenly gone up 100 percent. I smell price fixing here of the big three telcos. They have to be stopped now.

    It's pretty straight forward- Telstra deliberately set out to destroy these companies by forcing them to pay an unsustainable fee for its services. Business models are built around expectation of paying certain costs.
    It's obvious that this is not the usual cost of business for this service since the teslstra subsidy Boost exists.

    This sort of thing is done in real estate all the time- upping rents to ridiculous levels to chase out tenants. It's uncompetitive, and exactly the sort of thing we've come to expect from Telstra.

      Think about it critically for a minute. Telstra offers 1GB on their $60 plan, yet Kogan offered 6GB on their $30 plan. 6 times as much data for half the price. Sounds too good to be true. When something sounds too good to be true, it usually is.

        The truth is, Telstra is ripping everyone off

      ..... @ozoneocean

      ... dude do u seriously not pay attention ?? .. boost is telstra brand ! and it is normal pricing the fact that ispone owe telstra MILLIONS on dollar means the were offering kogan and aldi prices that were less then what it owed telstra .... sorry mate no conspiracy theory here

    I don't really understand this.
    Telstra prices a product, and those who want to on sell it for less are complaining that they can't.
    Whether you like Telstra or not, they are allowed to price their products however they want. They don't have a monopoly on the market, it's different than the copper wire in the ground which Telstra owns most of.
    You don't like Telstra's prices, go somewhere else... I don't see what the problem is.

    This whole thing looks to me like Telstra got fed up with all the unpaid bills and legal action and simply priced "troublesome" groups away from their services. Pretty smart way to tell them to F-off.
    Businesses do it all the time. Quote a ridiculously high price because you really don't want the contract/job. If the customer still wants to make it work, then the extra cash makes dealing with them more bearable.

    In what world does it make sense that you can buy a product from a company, sell it for less, and still want to make a profit.
    It's also not a surprise that Telstra gives better pricing to it's own brands. That's pretty normal practice (Fuel discounts anyone?).

    You want cheap mobile phone access go to the Vodafone network, you want great coverage and reliable speeds, then you pay for it.
    Sure Telstra could be cheaper, and sure the 2 year plans don't suit everyone, but that's why we have choice.

      Wake up, we don't have a choice. Optus just shook down dodo, and dodo had to quit it's prepaid. Their data cost just went up 100 percent. The big three are obviously in cahoots with each other.

      You are completely wrong. ispONE had a contract with Telstra for services at a price that equaled the one Optus was offering third party suppliers at the time. Optus then upped their service costs to their suppliers, so Telstra upped theirs, but way beyond the level Optus had. That was ispONE's argument. Those were not the terms they agreed to. They were held to ransom. The cost to litigate against Telstra would've been prohibitive so they caved in, Telstra got what they wanted. Telstra and Optus just change the rules as they go to trip up popular third parties when they get to big for their boots. This was orchestrated and is an attempt to push up service costs to bump up their bottom line. If you think big business has the right to kill off little players in the industry, you are mad. This needs to stop, or your next phone bill will equal your electricity bill.

        Evidence needed! I need to see how any company could so blatantly break a contract and not be sued into oblivion if it is as obvious as you make out. Until then it sounds like you're bias/conspiracy theory against Telstra.

      Its not much of a choice when Telstra own ALL the network around where you live. How can other be competitive when there is no coverage other than Telstra?

    It's all about data and I don't care, I just want voice and SMS. Telstra has a monopoly with the 3G it owns and to automatically assume (impose on customers) we need all that data is stupid. Telstra was one PMG/Telecom and a Tax payer supported operation that had CSOs (Community Service Obligations). I need the mobile coverage for the areas I go where normal GSM and CDMA phone service is a no go. Let the phone addicts in cities subsidise the remote area coverage - as they are not scared to spend money and the profits Telstra now makes for non government people is obscene!

    If Kogan really had their customer interest in mind, why have they stopped allowing their customers to port out to another carrier and are refusing to release the numbers.

    I have always heard Kogan had the worst customer service. Questionable electronics. The Kogan TV i have seen was the worst TV o have ever seen. It was so dull with over saturated colours.

    Not sure why you guys like this company. The only positive thing i have heard was you article about them looking after their staff. Well you would hope they look after their staff because they don't care about their customers.

      What are you on about? Kogan don't make any electronics, they source them from asia, where almost all electronics are made. You seem to hear quite a bit, but have no first hand experience, so let me give you mine.

      I'm not a fan of Kogan. Their stuff is pretty middle of the road but not bad (everything I have bought is still working). Customer service (excluding mobile) is complacent and disinterested once they have your money. They use Toll, a very dodgy delivery company, with who I've had some issues about opened/damaged boxes arriving at my door. But its cheap. Their mobile customer service was out of India (big surprise) and the staff had no clue about how their own systems worked. (Sounds like telstra).

      When I heard about their mobile offerings I thought, yeah, Like I'd trust them to provide mobile services. After being dicked around by Optus for years with shitty coverage and getting worse, I jumped into Kogan and was surprised. I was a happy customer paying for a simple service at a simple price. Just as things were fine and dandy, Telstra stick their ugly head up to bite off the competition, AGAIN. I would trust Kogan over Telstra any day.

    What is the ownership of Boost? I've heard a couple of these rumours circulating that have mentioned Boost as a Telstra subsidiary. Their page on wikipedia http://en.wikipedia.org/wiki/Boost_Mobile says they were dropped by Optus and started using Telstra as a provider this year, but I can't see anything that implies ownership.

      Well someone's in someone's pocket then.

      http://www.whatech.com/members-news/mobile/12096-telstra-and-boost-mobile-enter-retail-alliance

    There is only one logical possibility for the leak here, and it isn't Kogan or Aldi. Think about it.

    Loving all the Telstra hate. Don't like them as a provider? Don't support them by going to companies that take whole sale through them, and if that doesn't work then I guess you better suck it the hell up and either make a time machine to travel into the past to make a new provider... or suck it the hell up because it is their sandcastle and they will do what they want with it!

      YEAH! Don't demand that your hard-earned money goes to something that is worth paying for, just pay for whatever crap you're given, little person you!

    I find it extremely hard to believe that Medion (ALDI) has agreed to the terms mentioned in the article. This would mean that they would be making a $6.5 million loss each month. (provided they have 100,000 customers who are paying $35/month when the plan is really costing $100/month). No doubt if this is true, it will be a very short-lived interim agreement and ALDI will either have to jack up prices or drastically reduce their offering - disappointing their customers either way. I still think ALDI were offered a much more competitive deal and Telstra Wholesale are just playing favourites. (i.e. telling Kogan to f*** off)

    Why do people keep calling Boost "Telstra's carrier/brand/subsidiary"? As far as I can tell, Boost is not owned by Telstra - it's an independant company, using Telstra's 3G network for it's MVNO.

    Perhaps Telstra offered Kogan above-market rates to resell direct. What then of Optus and Voda's offers to Kogan? Sounds like the problem mightn't be the network providers.

    The above article, be it based on correct insider information from a Kogan stooge (as has been claimed) or otherwise, is pretty much a perfect summary of exactly what Telstra has been found guilty of doing on numerous occasions since full telecommunications deregulation began in 1995. And when I say guilty I mean guilty of violating the anti-competition provisions of the laws governing telecommunications services especially those under the Trade Practices Act.

    Being involved in the deregulation of the industry for 20 years now, I have witnessed this practice time and time again on different services from the likes of ISDN and other digital data services in the '90s to broadband Internet access and mobile voice and data. I should add that Telstra is not the only guilty party here as other network providers have also been less than friendly to a sustainable competitive environment. However, Telstra, being the incumbent carrier and largest player in most markets, has made the biggest impact on preventing a level playing field to flourish thereby stifling sustainable long-term benefits for the end-user (i.e. lower costs and better service).

    The best test to determine anti-competitive behaviour of an entity operating in both wholesale and retail marketplaces is to compare the cost at which the wholesale arm supplies a service to its own retail arm (in this case, Boost Mobile) versus the cost charged to its other wholesale customers (e.g. ispONE/Medion). If indeed, the above figures are correct or even close, then Telstra is clearly acting in a highly anti-competitive manner and should be the subject of immediate scrutiny from the ACCC. It's been quite some time since I've delighted in seeing the ACCC pull out its $1 million/day fine cease-and-desist "big stick". It's quite effective I must say!

    I absolutely agree with Telstra's claim that its commercial negotiations are and should be confidential. However, if (as it claims) it is not doing anything untoward and has nothing to hide, then perhaps the easiest and most honourable way to resolve this is for it to open its books and let the rest of us judge for ourselves.

    And then perhaps the most important parties in all this, the end-users (that's you and I), can make our own choices based not only on price and service but also through a sense of fair play.

      Absolutely agree. Sounds like your knowledge of Telstra is similar to what I was just saying in a reply above. The ACCC should be straight onto this because if what is reported is accurate (IF, of course) it's an open-and-shut breach of the Competition and Consumer Act. Pretty sure Kogan is no stranger to the ACCC's investigators anyway, should know someone to call!

    They probably could have cut down on some of the overheads if they stopped paying you guys to advertise for them. Seriously by "exclusive" did you mean "copied and pasted from the email they sent me earlier." It's almost disgusting the amount of stories on here and lifehacker at the moment. Can't wait for Kogan to start selling games & womens clothes so the folks at allure media can start running "stories" on kotaku and fabsugar, then you'll really start raking in the cash

    Lol it is prepaid. If you want a price to stay then you need to be in contract and commit to spend for a length of time. If you think that you have any guarantees that the price will stay the same when you haven't signed a contract then you are a fool.

    archfiend, or is it stevoghedevo? Its hard to tell, there are so many paid Telstra trolls here these days. Why do you think ispONE took Telstra to court for the injunction in the first place? Because they broke the deal. Its in the transcript of the original court injunction. They had a wholesale pricing deal that matched that of Optus. Then Optus bumped up it wholesale prices, Telstra did the same without discussion with ispONE. Why are you defending these types of cartel style business tactics? I'd really like to know. Reading your (and stevo's) posts, anyone could be forgiven for thinking you are the head of publicity of telstra. So what is it? Telstra employee of just stupid?

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