By Tom Pfeiffer
LONDON (Reuters) - Mobile start-up FreedomPop says it is generating revenue from almost half of its British users by providing optional paying services in addition to free voice and data plans.
Tumbling data prices mean the cost of launching so-called "over-the-top" telecom services to challenge established companies such as BT Group (L:BT), Telefonica (MC:TEF) and AT&T (N:T) has never been lower.
But many of the new arrivals have yet to prove they can turn a profit and the industry is watching their performance closely.
Los Angeles-based FreedomPop, led by a former head of strategy at BT, has developed technology that analyses users' behaviour and sends them targeted offers for paying services such as extra data, online security and multiple phone numbers.
CEO Stephen Stokols said FreedomPop has a higher proportion of paying subscribers than messaging service WhatsApp or music site Spotify.
"Our conversion rate in the UK is 48 percent – people converting from free to paid services. Spotify is around 12 percent which is considered pretty good," he said.
FreedomPop launched in the U.S. in 2012, came to Britain last September and plans to add Spain next month after raising $109 million (74.40 million pound) in funding from investors including Partech Ventures and Intel (NASDAQ:INTC) Capital. Other investors include Mangrove Capital, DCM and Skype founder Niklas Zennstrom's Atomico.
Stokols said he aimed for a deal with a second U.S. wireless network soon and expects FreedomPop to make its first net profit by the end of 2016. He did not give precise numbers for UK subscriber take-up, saying it was "at six figures".
U.S. carrier Sprint (N:S) looked at buying FreedomPop last year but the talks ended without a deal. Stokols said Sprint was interested in FreedomPop's technology, which could help it bring down the price of its own subscriber plans and compete better.
FreedomPop partners with Sprint, selling Sprint-compatible phones and allowing Sprint's wholesale data business to benefit from FreedomPop's growth. Stokols sees more tie-ups with telecom companies to offer FreedomPop to their low-price subscription base.
He said they stood to gain by making revenue from its data traffic while having none of the customer acquisition or service costs.
"That’s on us. So Sprint is making a ton of money off us... And we take the risk if the model doesn't work," said Stokols. "I presented recently in Silicon Valley to 18 global telcos. The theme was not denial, but ‘how are we going to work together?’"
Start-ups are only part of the threat to the telecoms industry from technology companies.
Giants including Google (O:GOOGL), Facebook (O:FB) and Microsoft (O:MSFT) are developing their own networks to link their servers and these software-based IP networks can be far less costly to maintain than the complex legacy systems of the telecoms companies.
"There is one clear message - the party is over for the telcos and will not come back. You can shoot yourself in the foot today or be shot in the head," said Dan Bieler, principal analyst at research and advisory firm Forrester.