Burned by their own hubris: Every party to the Kogan Mobile fiasco brought their fate on themselves

Windows 7 has been available for purchase in Australia since October last year. But has Microsoft's previous operating system, Windows Vista, passed away? Not quite.

full opinion/analysis by Renai LeMay
23 August 2013
Image: Kogan

The ispONE-fuelled demise of Kogan Mobile this week just nine months after the service launched has been one of the most spectacular implosions of a telco seen in Australia since the Murdoch- and Packer-backed One.Tel fell from the sky in 2001. But what may not be apparent is that there are no victims in this complete debacle: Like the fated heroes of the Greek tragedies, every party burnt by the process brought their own injury on themselves.

There’s a moment detailed in the biography of Apple supremo Steve Jobs which comes to mind when I think of the way in which maverick consumer electronics entrepreneur Ruslan Kogan (who counts Jobs amongst his heroes) must have been looking at Australia’s mobile telecommunications industry 12 months ago.

The year was 2001, and Jobs had been back at Apple for several years after his long absence from the company he had co-founded two decades before. Jobs had quickly cut and slashed his way into bringing Apple back into profitability, and the company even had some air under its wings, courtesy of the popularity of its first iMac. In short, Apple was out of the danger zone.

However, the IT industry as a whole at the time was in something of a slump and there wasn’t an obvious path ahead. The dot com bubble, which had created so many inflated corporate valuations in the last years of the 1990’s, had finally burst, and, as the book’s author Walter Isaacson wrote, a “pall had descended on the digital realm”. For 25 years, the personal computer had been at the centre of the digital revolution; but now many in the industry were wondering what was next. The PC had become “boring”, Wall St Journal technology writer Walt Mossberg wrote at the time.

Of course, Jobs had his own ideas about what was next for the PC industry, and they weren’t boring. “It was at that moment that Jobs launched a new grand strategy,” Isaacson tells us, “that would transform Apple — and with it the entire technology industry.” That ‘digital hub’ strategy, with the PC as the centerpiece of media creation and consumption, led to the development of iTunes, the iPod, the iPhone and the iPad. Out of the ashes of the old Apple, a new one was born, and it soared high indeed.

In mid-2012, it must have seemed to Ruslan Kogan, as it did to Jobs in 2001, that the industry he was looking at was ripe for transformation. At the time, the collapse of Australia’s third major mobile carrier, Vodafone, was accelerating (actually, it still is), and the other two major carriers, Telstra and Optus, were tightening their grip on the mobile sector. Such resellers as there were were either quite junky, focused on businesses, had overly complex offerings, or required customers to be tied up with other unrelated product lines, as in the case of ISPs like iiNet. There were few companies offering simple mobile options to customers.

And at the same time, an unprecedented opportunity had just become available. Telstra had finally consented to open its superior mobile network — the best in Australia — to wholesale access, and was developing a remarkable new platform with wholesale onseller ispONE and Swedish technology giant Ericsson which would allow prepaid mobile services to be sold on it.

For Kogan, it must have seemed like a once in a lifetime chance to leverage his already strong consumer electronics brand into a growth position in Australia’s mobile market, with the potential to emerge as a challenger brand in the same way as he had in consumer electronics and furniture. Swap Harvey Norman and JB Hi-Fi for Telstra, and execute.

When Kogan launched his mobile services in mid-December, just weeks after the new Telstra Wholesale 3G prepaid platform was complete, the entrepreneur did so with the signature strutting style which has made him a regular on Australia’s top current affairs programs.

“It’s a disgrace that current providers have been able to get away with astronomical charges, network issues, poor customer service, frustrating excuses and deliberately misleading pricing structures designed to trip customers up,” Kogan told online site Everything For The Man, which broke the news of Kogan’s entrance into Australia’s mobile sector.

“No one likes to pay more than they expected and no one likes to get ripped-off, so we’re putting a stop to it,” he said, his words writ large with a sense of righteous justice. “From today, Australians can choose to say goodbye to excess usage charges and will be guaranteed to get what they pay for. No more running out of credit mid-month, no more complicated fine print tricking you into paying more – just $29 per month for unlimited standard calls and text and 6GB of data, or even cheaper if you sign up for a full year!”

From there it must have been like following a standard formula for Kogan. Launch a product 90 percent as good as companies much larger than your own, but for a steeply discounted price. Do it with killer marketing and public relations, positioning your company as a David in a market dominated by Goliaths. Hit Today Tonight, A Current Affair, morning shows, radio broadcasts, online media, all simulataneously. Blast the major companies repeatedly with your rhetoric so that customers see you as the underdog. Bundle your new mobile platform with your existing mobile smartphones which customers are buying from your website.

And for a while it worked. It worked remarkably well.

Just two days after Kogan Mobile launched, its bargain basement unlimited plans, coupled with its awesome marketing centred around Kogan himself, had already resulted in the sale of more than 10,000 SIM cards. Like a poker player on a pair of pocket rockets, Kogan immediately doubled down. “Chances are it’ll be double that by the time this article is read,” Kogan told Business Review Weekly.

And even better, the goliaths of Australia’s mobile market had already started reacting unfavourably to the new fly buzzing around their shoulders, generating a new wave of rolling publicity for Kogan as journalists starved for content in the quiet weeks before Christmas ate up the latest spin from one of Australia’s most energetic entrepreneurs.

BRW compared Kogan’s overnight success favourably to the more limited uptake experienced by larger retailers Coles and Woolworths, which had also entered the prepaid mobile market. And the Financial Review landed what Kogan must have seen as the perfect jewel of press coverage; a veritable insult from dominant mobile player Telstra, which tried to distance itself entirely from the upstart competitor its own network was fuelling the success of. “Telstra Wholesale is not in partnership or any other direct relationship with Kogan,” a frosty Telstra spokesperson told the AFR, allowing Kogan to be in the enviable position of having publicly insulted Telstra while still using its services to fuel his own success.

For several months Kogan’s newfound mobile momentum rolled on. The company picked up tens of thousands of new mobile customers (today it has about 120,000), and it was rapidly looking like it would take pride of place as one of Australia’s largest mobile resellers. Up until this point, you could indeed compare Ruslan Kogan with Steve Jobs. After the successful launch of the first iMac, former Apple chief executive John Sculley said of Jobs: “He has implemented the same simple strategy that made Apple so successful 15 years ago: Make hit products and promote them with terrific marketing.” And Kogan had certainly done that; even if the actual products had been Telstra’s to start with.

However, it only took several months for the wheels to start falling off the bus. Ruslan Kogan is one of Australia’s smartest entrepreneurs; but like Jobs in his early days, he’s still young and capable of making mistakes, and Kogan Mobile would turn out to be the first major one in his career.

As early as March, it was apparent that somewhere in the value chain between Kogan, ispONE and Telstra, someone wasn’t happy with how the money was being made.

The issue, as was later explained in detail during ispONE’s legal attempt this month to stop Telstra from killing its relationship with the wholesale onseller due to a failure to pay its bills, was essentially that everyone involved in the Kogan Mobile scenario — from Telstra, to ispONE, to Kogan itself and even the tens of thousands of customers who had bought prepaid SIM cards from Kogan — had completely overestimated how much value they were going to get from the relationship.

Telstra’s problem, as columnist Peter Moon laid out in the Financial Review this week, was that Kogan’s cheap and unlimited data offer had quickly attracted a huge number of heavy data users onto its network; customers who were consuming vast amounts of costly network traffic. However, Telstra was not receiving remuneration from ispONE commensurate with that usage, it was unclear whether ispONE could actually pay its bills, and meanwhile the uptake of Kogan’s service was cannibalising Telstra’s own retail opportunities. Moon writes this week:

“Apparently Kogan’s assault on the market was all too aggressive and disruptive for the liking of the market leader’s retail arm, and there were some choice words directed at the wholesale division about it all. So there haven’t been many within Telstra arguing for a Kogan rescue package this week.”

The structural flaw in Telstra as a company is extremely well-known in Australia’s telecommunications industry: The nation’s former incumbent, like Batman’s Two Face, has a dual personality that sees it simultaneously serving retail customers, while also attempting to provide services to other telcos so that they can compete with its retail arm. This dichotomy has long plagued Australia’s fixed-line telecommunications market, and it was obvious to seasoned observers of the industry that the same problem would come to trouble Telstra in its wholesale efforts in the mobile scene.

Put simply: There is little incentive for Telstra to play fair with companies like Kogan, which are openly challenging their market share. Why has Kogan been unable to reach “commercial terms” with Telstra this week, unlike fellow mobile reseller ALDI? My opinion is that it has at least partly to do with the fact that Kogan’s overnight success raised eyebrows at Telstra; coupled with the fact that Kogan’s bargain basement business model and contract with ispONE meant it was unlikely Telstra would get its just reward as the foundation of that success.

ALDI has a slightly different model that doesn’t see it compete so strongly with Telstra. Fundamentally, ALDI wants to use mobile services to lock in its existing retail customers; not to generate massive mobile profits. Telstra is OK with that. But it’s a different situation entirely with Kogan, who has openly stated his intention to challenge Australia’s mobile giants — and has shown at least an inkling of the capacity to be able to do so.

But Telstra should have known this would happen. If I led Telstra’s mobile division, I would just never bother getting involved in the wholesale market. With the remarkable mobile growth Telstra has been experiencing over the past several years, there is really no need for Telstra to fool around with resellers like ispONE, Kogan, ALDI or anyone else. Ultimately such relationships don’t add much to Telstra’s top or bottom lines and have the potential to undercut its own retail channel. Telstra’s greed — and possibly an attempt to demonstrate that it’s not in danger of becoming a mobile monopolist — led it into the mobile wholesale market, but its problems with a company like Kogan were all too predictable.

ispONE’s problem was similar to Telstra’s: The company had overestimated what it would get from a downstream customer’s success. ispONE made what would turn out to be a disastrously bad bet on Kogan when the pair inked their resale contract. ispONE bet that not that many Kogan customers would consume high amounts of data; a bet that turned out catastrophically inaccurate. As iTNews reported from the court case between Telstra and ispONE, quoting ispONE counsel: “The problem is that Telstra is charging ispONE substantially more than what ispONE is charging its customers.” Well, d’uh.

ispONE’s troubles can also be sourced from its own hubris. The company, as Business Review Weekly has reported, had its genesis in an argument at a bar, where one of its two founders met and had an “altercation” after one illicitly added drinks to the other’s tab. ispONE has flown high at times, but it seems obvious that the company has also survived by taking bets on dubious prospects at times; not least of which was the decision by the company’s founders to buy the business itself using credit card debt, more than a decade ago. As ispONE admitted to BRW, over its history it was close to the line of going bust several times. This isn’t unusual at all for companies competing in Australia’s low-margin, highly competitive telco sector.

In 2012, flush with success and with their names rocketing up the BRW Young Rich List (alongside Kogan), it must have seemed to ispONE’s founders, Zac Swindells and Chris Mochings, that limitless opportunities awaited them in their new wholesale partnership with Telstra. Unfortunately, that pride was to come before a fall; in this year’s BRW Young Rich List to be released next month, it is unclear whether their names will appear at all. Is it any surprise that those who had flown so close to the sun several times finally got burnt?

Kogan’s mistake, sourced in his own arrogance and existing retail success, was a fundamental misunderstanding of the dynamics of Australia’s telecommunications industry; perhaps forgivable, when you consider that Kogan Mobile was the entrepreneur’s first real venture into it. Kogan had been able to sign a deal that was too good to be true with ispONE for mobile reseller access to Telstra’s network, but Kogan failed to understand that its ultimate supplier was not ispONE, but Telstra; and that getting up Telstra’s nose in a market that’s not strictly regulated by the Australian Competition and Consumer Commission is never a good idea; particularly when your whole ability to operate depends on Telstra’s good will.

The only real control in Australia’s telecommunications industry comes from building your own infrastructure. Whether it’s mobile towers or ADSL DSLAMs in exchanges, you have to have your own gear on the ground to seriously compete with the major players, especially if you’re going to do so on price. Fixed-line broadband players like iiNet and TPG have learnt that lesson the hard way over the past decade; but it was a lesson Kogan had not learnt when he set up Kogan Mobile.

Kogan also underestimated the likely behaviour of his own mobile customers. The truth is that Australia’s mobile sector is cut-throat, and customers will take as much as they can get for as little as they have to pay. Kogan’s cheap, unlimited plans quickly drew many of the industry’s worst offenders to Kogan’s door, quickly getting it in hot water with its upstream providers.

And Kogan’s customers themselves? Many, perhaps most, must have known from the start that Kogan’s retail offer was far too good to last. Unlimited mobile to mobile and national calls, coupled with 6GB of data per month, all for just $29 per month, or $299 a year? When Kogan launched that plan, there was no other mobile reseller offering anywhere in the vicinity of those prices for that amount. It should have been easy to see that getting something for almost nothing was never a sustainable business plan; Kogan’s contractual disputes with ispONE in March, which saw high-usage customers dumped and Kogan reforming its usage policy, should have been warning enough that not all would end well here.

The irony about the situation — the gross, unmistakably irony — is that it’s happened all before in Australia’s telecommunications sector; several times over.

The list of names of Australian retail telcos over the years which, like the fabled Greek figure Icarus, have fallen flaming out of the sky as their wings burnt up in the harsh heat of the sun, is long and will continue to grow. And it’s not hard to draw parallels between some of the more visible examples and Kogan Mobile’s plight this week.

One may recall, after all, that Australia’s most famous telco failure, the One.Tel venture backed by the Packer and Murdoch families, also heavily depended on access to another telco’s mobile infrastructure. At one stage, Wikipedia’s extensive entry on the subject tells us, One.Tel was receiving $120 from its upstream provider Optus every time it handed out a new SIM card to a customer — even if that customer never used that SIM card. Eventually Optus realised it just wasn’t making any money from the One.Tel relationship and canned the contract; just as Telstra threatened to do with ispONE when the company didn’t pay its bills, and has done with Kogan when the pair couldn’t agree on terms. When the end came, Telstra, like Optus, was ruthless about how it publicly dumped its reseller.

Just like Kogan, One.Tel saw massive uptake of its services very quickly, and just like Kogan, the strength of One.Tel’s offering was that it was focused on providing a simple product line that would be easily accessible to customers.

And yet, in both cases, the leaders of the telcos concerned didn’t have enough experience with Australia’s telecommunication sector to realise the underlying dynamics of what was happening with their businesses. Each business was highly dependent on other companies’ infrastructure and technology (witness the way in which Kogan has admitted it was dependent on ispONE’s billing and administration systems), but in each case there wasn’t sufficient revenue being passed up the chain to justify the relationship.

Like One.Tel, Kogan is great at producing killer marketing and PR. Ruslan Kogan himself has an awesome, almost instinctive understanding of what Australian consumers want and how much they will pay for it; that is his genius. But in each case, fantastic marketing and a great product offering were not enough to keep their businesses out of hot water.

What I find most telling about the whole situation is how quickly the house of cards which Telstra, ispONE and Kogan had constructed fell down this week, when a gust of air blew on it. It should be apparent that Kogan should have had contingency plans in place if ispONE fell over and its billing systems were no longer available to it. It should be apparent that Kogan should have had a line open to other wholesalers — Optus and Vodafone — so that Kogan’s mobile service to its 120,000 customers could continue if Telstra pulled the plug. The fact that such backup options have failed to materialise completely shows just how shaky the Kogan Mobile business model was, right from the start.

There’s a famous photo of Ruslan Kogan in which the entrepreneur is wearing a black t-shirt with a quote from Ayn Rand’s famous novel The Fountainhead. The quote, from the book’s protagonist, states: “The question isn’t who is going to let me; it’s who is going to stop me.” Ultimately, the answer to the question of who was responsible for the Kogan Mobile fiasco which landed this month is clear: Everyone involved. It was the inherent flaws in each party’s character that brought the whole system down: They were each responsible for blocking their own success. And if that isn’t the definition of hubris, I don’t know what is.