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  • Mark Middleton

Deep Dive Into A Wi-Fi First MVNO Business Model

In October 2013, US mobile virtual network operator Scratch Wireless launched a mobile service with an innovative business model that leverages the principle of always preferring Wi-Fi over cellular to allow it to market free voice, data and SMS plans.

We were sufficiently intrigued at the detail behind this business model and so spoke to Jon Finegold, the Boston-based Scratch Wireless VP of Marketing, to get a deep dive into the company’s business model to understand how it works.

Scratch Wireless is, at its heart, an innovative MVNO that leverages the following to enable it to claim unlimited free calling, free data and free SMS over Wi-Fi:

  1. the growing proliferation of free Wi-Fi across the USA;

  2. its Motorola phone (with the customized version of Android certified by both Google and Sprint);

  3. its own SMS and VoIP platforms; and

  4. its nationwide access to the Sprint network.

Scratch Wireless is a no-contract, pre-pay (pay-as-you-go) MVNO on Sprint’s shiny new 4G/LTE network that is targeting the price-sensitive, yet tech-savvy, 14-24 year old instant messaging generation.

According to Finegold, this demographic “uses very little voice” with “average call times of less than four minutes.” This, coupled with the fact that the cost of voice termination in the North America is trending towards zero, Scratch Wireless has calculated that it can offer free voice calling (inside North America) while on Wi-Fi.

Instead of offering its subscribers Wi-Fi offload as a complement to the more-often-used cellular network, Scratch Wireless has flipped the model on its head and is carving out a space for itself by being the first MVNO to pitch Wi-Fi First.

This is a brave new world where Wi-Fi is the default network for free services, and you only use and pay for cellular voice and data if you have no Wi-Fi access.

It can do this by taking advantage of the fact the most of its demographic already have access to free Wi-Fi whether at home, work, on campus or out and about. Finegold says that Scratch Wireless relies on the fact that its subscribers “may [already] pay for broadband service but there is no incremental charge to use data, voice or texting while connected to Wi-Fi [provided by that service provider]”. He cites the Cable WiFi initiative as an example of this.

Scratch is yet to conclude any national Wi-Fi roaming agreements with the likes of Boingo or iPass for the benefit of its subscribers. Today, users are responsible for finding and being able to connect to enough free Wi-Fi to take advantage of the free calling and the free data claims.

The tipping point for Scratch Wireless will come when it is able to leverage a cost-effective national Wi-Fi roaming agreement in a mature Hotspot 2.0 environment.

This will give its users seamless, secure, SIM-based Wi-Fi connectivity throughout North America.

Finegold says that a national Wi-Fi roaming agreement is in the works but that the company, like its peers, is waiting for sufficient Hotspot 2.0 momentum and maturity at both the device and access point level before they can take advantage of it.

Scratch Wireless has launched with a single device, the Motorola Photon Q 4G LTE smartphone. The US$ 269 phone comes pre-installed with Scratch Wireless’s own customized version of Android 4.1 Jelly Bean that, according to the company, has been certified by both Sprint and Google. Finegold was keen to point out that the company’s “secret sauce” is installed native and is not available via an app.

The customization is a smart move, ensuring that the Wi-Fi, VoIP and SMS smarts appear native in the handset. This is important for two reasons. First, by ensuring that the support is native, Scratch has a better chance of controlling quality of service and avoids all the problems that arise with the variability of app performance on different versions of the android OS. Secondly, the user does not need to do anything to make a free VoIP call to the USA, send an IP SMS or download data over Wi-Fi. All SMS/texts sent over the Wi-Fi network and cellular network are free IP texts sent using the Scratch Wireless SMS platform.

This Scratch features in the OS ensure that all voice calls made while the smartphone is connected to Wi-Fi are in fact VoIP calls that use the Scratch VoIP platform rather than using Sprint’s cellular voice platform.

If you need to make a call when you don’t have access to Wi-Fi, be ready to pay a premium for cellular voice and data. Scratch Wireless sells two relatively expensive categories of pay-as-you-go passes for using the cellular network – 24 hour passes and 30 day passes. Prices range from $1.99 for 30 minutes of cellular calling in a 24 hour period to $14.99 for just 200 MB of 4G data that expires after 30 days. This is going to be expensive for any demographic. Clearly, this is where the company makes its margin.

Scratch’s business model is currently very US centric. The free calling over Wi-Fi is only good for calls to US numbers – the company recommends other apps for calling outside of the US. And, unlike most MVNOs, Scratch Wireless does not yet offer international cellular roaming off the back of its wholesale agreement with Sprint.

There is no question that this business model is innovative. But with its high priced cellular voice and data packs, this model really only suits those that are nearly always inside a free Wi-Fi zone or are happy to communicate mainly via SMS and pay a premium for cellular voice & data services when they need it. Sounds like they have their target demographic bang on. Watch this space.

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