A disruptive mobile phone company claims to have launched on July 1. It's called Zer01, and if on the level, would radically incite price competition in the US cellular market. Zer01 is an MVNO or MVNE (depending on when you spoke with them), and they say that they can offer cheap unlimited service by the 3G GSM cellular data network of a national partner, which they will resell. Voice services would be delivered as data using VoIP. Zer01 launched with unlimited voice, text, and data plans for $79.95 a month - including tethering your laptops all you want, and with no contract. The problem is: there is no evidence that this service actually exists. Nancy Gohring at ComputerWorld digs in to the story, and found a lot of reasons to be suspicious about the company. Added all together, it looks pretty shady, and reminds us of the Gizmondo scandal back in 2005.
But a few people in the comments of Gohring's article said Gohring pulled a hatchet job on a legit young company. They argue that many young companies start out looking rough around the edges. "Where was Microsoft's headquarters when they launched?" Perhaps some young companies do look this sketchy at the onset, but not the hundreds of startups that I've seen and evaluated in my career! And certainly not any company that has a serious shot at taking on the national Tier-1 cellular carriers, head-on. If you want to battle with Verizon Wireless, nationwide, for data, voice, and support services, your business needs to look a far sight more established than a startup with a mailbox in a Vegas strip mall. If you claim patented technologies, devices, a customized On Device Portal, then you should have a team of engineers on staff somewhere, and the USPTO should be aware of your patent. SK Telecom and Earthlink launched an MVNO, Helio, which failed at taking on the big carriers despite the track record of being the #1 carrier in South Korea, and a decent kick off investment of $440M, then $200M more, then $270M more. But OK, let's suspend disbelief just a bit longer: Maybe a small, scrappy company is just shrewd enough to win where others have failed. I want to believe, too. But after interviewing Zer01, I just can't buy into the dream.
I interviewed Zer01 CEO, Ben Piilani at CTIA this year (April Fool's Day). I was lured by their PR release about their plan, which sounded incredible. But after our half-hour interview, my parting words were "Good luck to you, but sign me up as skeptical." During our chat, Piilani said lots of things that struck me, as an experienced telecom analyst, as... um... wrong. Here are just three parts of the interview:
- Piilani told how, in delivering wireless data to phones, the wireless part of the connection is the easiest part to handle, and since ZER01 uses its own fiber backhaul network, but only uses the Wireless Carrier for that easy wireless jump, host carriers don't mind the impact because there is ample capacity. I thought, "Wha? That doesn't fit with all the research coming out saying that wireless capacity is being pinched. Nor does it jibe that the carriers just spent $Billions at the spectrum auctions for access to more cellular channels." But then Piilani went on, "You know that in Europe, data is basically free. You can show up in the airport and buy a SIM card, slap it in your phone, and the data is unlimited." Um... I thought, "I was in Europe last month for MWC, and at least once a year for the past 10 years. And as a wireless data analyst, I've bought about 20 of the SIM cards he's talking about. I'm pretty sure I would know if there were an unlimited data, SIM-only option."
As anyone in telecom knows, there is not. I thought to myself: "How odd that he would say such an absolute falsehood. And odder still that he does not know enough about the cellular industry to understand how obviously false he sounds."
- I wanted, most of all, to see the proof in the pudding. I wanted to make a call over the company's VoIP over 3G solution. I asked Ben if I could make such a test call, and he said sure, and hooked me up with a Product Manager at the end of our interview. I asked if we could place a call, but the PM began instead by showing me the phone's fancy looking On Device Portal (ODP) UI running on WinMo. He was explaining the great UI and all the apps that were to be included. So I said, "Click on one or two of those nice-looking icons and show me the apps." I picked the icons, and behind every one was an "under construction" response. He picked a couple, and there were some deeper pages. But the ODP was basically window dressing with nothing inside.
- So I pushed, and said, "Mr. Piilani sent me over here to make a phone call on your device. Let's call my phone." He replied, "Oh, sorry. Our PR firm told us not to make any calls on the show floor, because the wireless signal here is so unreliable with so many people using it." Odd that Mr. Piilani wasn't aware! I said, "Sure, but the carriers have all put COWS onsite, and no one is having signal problems this year. Look there's one guy talking on his phone right there, and my phone is four bars." He said, "Well, PR told me not to." I thought, "Fail."
I left with serious doubts about Zer01's ability to deliver on their promises, and some suspicion that they might not be on the level. Piilani and his team must have impressed someone, though, because they ended up wining a Best In Show award from Laptop Magazine, and getting praise from some analysts, even while at least a few others were more suspicious. Gohring's much more thorough recent investigation pretty much blows the top off of this story, though. Gohring suggests that Zer01 bears some resemblance to a pyramid scheme, where the real money comes from an ever growing network of distributors or "e-affiliates" who pay money for the right to resell the service. In fact, Zer01 is sold through a network of "e-affiliates" using a Multi-Level Marketing (MLM) setup managed by two other companies, Buzzirk and Global Verge. The Buzzirk cost of entry and compensation schemes incent distributors to join in at $150 the first month, and then $100 monthly thereafter. There are lower join levels, but they don't offer the MLM revenue benefits. For their money, distributors gain the right to a lookalike e-affiliate website that appears... ahem...bush league, and the right to sell the phones... which haven't actually appeared yet. Zer01 itself claims a network of 50,000 distributors. Assuming that is so, MLM revenues could be over $7M in just the first month -- but that's got nothing to do with actual service revenues.
For an example, check out "Robin and Jerry's" e-affiliate website, replete with photos of the phones they haven't touched yet. The pictures are of standard Windows Mobile devices, and it's interesting to note that the UI shown is either MSFT generic, or the product of (totally legit) German software company Spb Software House. Funny that they're using Spb's images to sell Zer01 instead of actual Zer01/Buzziker screens. Since the phones aren't available, the only thing the MLM websites really sell is a position as a distributor, lower down the food chain.
The MLM world is infamous for its own jargon. Buzzirk is no exception with a "3x9 matrix with vertical and horizontal compression." Most of the distributors defending the scheme at scam.com were saying they would find vindication when the "Triple Diamonds" got the phones. Triple Diamonds are those e-affiliates who have recruited at least 25 active e-affiliates under them, and they are the elites who are expected to get the phones first, and can finally validate whether there is any reality to the story or not. So far, the Triple-Diamonds are only getting delays from Buzzirk and Zer01.
So, is this whole thing legit? Will there be phones? Is it a pyramid scheme, or just MLM?
In the US, a pyramid scheme is illegal, and is defined by an utter lack of product, and a focus on the recruitment of additional distributors instead of product sales. But since Zer01 is a separate legal entity from the MLM distribution companies, they can't be accused of a pyramid scheme -- they simply sell their phones to 'entirely separate companies'... with similar office locations. Meanwhile, Buzzirk and Global Verge, despite recruiting their e-affiliates with a focus on the mobile phone offering, also are clear that they offer other products that their e-affiliates can sell, such as a "water saver," a "power saver," and "identity theft protection." Thus, it is possible that the phones will never arrive, Zer01 will say "Sorry, just couldn't pull it off," and blame it on Ma Bell. Buzzirk and Global Verge can say, "Sorry, e-affiliates, no phones. Thanks for the fees, but stick around to sell the water saver," thus, engaging in legal MLM, not a pyramid. This paragraph is certainly just speculation, but cautious investors might want to investigate further whether the mobile phone service is just an oasis to lure them into an expensive "water saver" MLM franchise.
I've seen all forms of wacky claims made by Zer01 re-sellers while researching this post. I've read how it roams from AT&T, to T-Mobile, to Rogers, to TELUS (with no mention of the fact that TELUS uses CDMA networks not supported by the phones they offer). I've read that it will work in airplanes, that "it's got the 2100MHz speed," that you can download a movie to your laptop in 3 minutes, that it includes SMS MasterCard mobile payment, and that it uses "the proprietary patented technology that Zer01 has that allows your phone to switch from GSM, Tri-Band, Quad-Band, Wi-Fi to connect to the VoIP," that it's 4G, that it's 5G and that it offers 20Gbps on a private FTC-licensed 2100MHz network. The claims range from the improbable to the technologically incoherent or both. The company leaders suggest that this is caused by confusion, and overzealous distributors. Perhaps some clear, correct, and well-presented franchiser information would abrogate the need for the creation of falsities? When so many of the e-affiliates are lying, I think the company at the center still deserves at least some of the blame. Besides, much of the gibberish is right off the Buzzirk franchised website, like "Internet speeds will range across GPRS, EGPRS, EDGE, and even 3G when available." Someone should have told these telecom experts that EGPRS and EDGE are exactly the same thing.
There will surely be Zer01/Buzzirk/Global Verge defenders popping up in the comments, some from the companies, others that just disagree, and some from the 50k "distributors" who have already been convinced to re-sell Zer01. There is a whole army of people out there who, once fooled, have pride, cognitive dissonance, and personal financial interest in defending Zer01. Comment away, call me a hack, and exercise polite free speech. But please also make your case: offer your telecom credentials if you have any, tell us where the Zer01 engineers are, what the special technology is, where the towers are erected for that proprietary 2100MHz network, who the network provider is, how standard HTC phones can push 20 Gbps of data with just a SIM card upgrade, where the claimed patents are, with whom Zer01 has Mobile Network Operator contracts, and if you have used one of the Zer01 devices personally and can vouch that they exist, and work (and aren't just AT&T SIM phones with an ODP).