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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