InPhonic

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InPhonic

Type	Public (NASDAQ: INPC)
Founded	1999
Founder	David A. Steinberg
Headquarters	Washington, DC, USA
Key people	David A. Steinberg, John Sculley, Jack Kemp, Ira Brind, Lawrence E. Harris, Blake Bath
Area served	USA
Industry	Wireless
Products	Cell phones and wireless plans
Revenue	$320.5 million USD (2006)
Net income	$38.2 million USD (2006)
Employees	> 1,000
Subsidiaries	Wirefly.com
Website	www.inphonic.com

InPhonic's corporate logo.

Wirefly's logo.

InPhonic Inc (NASDAQ: INPC) is the leading seller of wireless services and devices online, both through its electronic commerce site Wirefly and through private labeled websites it creates and manages for online retailers. InPhonic was founded and is headed by David Steinberg. Its board of directors includes former Vice-Presidential candidate Jack Kemp and technology/marketing guru John Sculley (of Pepsi Co and Apple Computer fame). Inc. Magazine listed InPhonic as the #1 company of 2004 [1].

The company was modeled after sites like Expedia, gathering information from companies into a single site to help customers find deals by comparing services and prices. A partnership with InPhonic appeals to wireless carriers because acquiring a customer through InPhonic can less expensive than other marketing approaches (television and radio ads, for example) designed to generate sales at a traditional brick-and-mortar store. InPhonic, in turn, receives a commission from carriers for each new account generated, once the customer meets a number of criteria. In general, this market is expanding; third-party activations now represent nearly 50% of all newly acquired subscribers, industry-wide.

The company's central online storefront, Wirefly.com, has received a number of Internet awards, including Forbes magazine's "Best of the Web" for 2004 and Keynote System's "Best In Overall Customer Experience" in 2005.

In addition to operating Wirefly.com, InPhonic powers the technology platform and fulfillment system of 6,000 other private label cell phone sales Web sites, according to company spokesman Tripp Donnelly. In early 2006, the firm claimed that it was the largest third-party online cell phone retailer in the US, accounting for one-third of the market, and that it sold 850,000 cell phones in 2005 alone. In June 2006 the company said that it had completed more than 2.5 million cellphone activations in the past three years.

The company is headquartered in Washington, D.C. and maintains technology and operations centers in Largo, Maryland and Reston, Virginia.

1 Financials
2 Acquisitions
3 Partnerships and affiliates
4 Business Model, Customer Service, and Pricing Issues
5 Consumer Class Actions against Inphonic
6 DC National Marathon
7 External links

[edit] Financials

InPhonic CEO David Steinberg and CFO Larry Winkler with the U.S. Marines Toys for Tots Program at InPhonic Headquarters.

In September 2001, the company closed a $19 million Series D round of capital financing headed by Core Capital Partners. The investment also included new investors McAndrews & Forbes, First Analysis, Spring Capital and Wynnefield Capital. All previous investors -- including Sculley Brothers Investments, CMS Financial Services, and Mid Atlantic Venture Funds -- participated as well. In 2003, Technology Crossover Ventures invested an additional $56 million in the company.

The company went public in November 2004. The company raised $108.9 million through its initial public offering. The IPO was InPhonic's second attempt to tap the public markets; the company filed to go public in 2002 but canceled the offering because of stock market conditions at the time.

Revenues for the company increased from $154.8 million in 2004 to $320.5 million in 2005, while losses grew from $10.2 million in 2004 to $38.2 million in 2005. Core wireless activation revenue was up from $147.5 million in 2004 to $312.5 in 2005, an increase of 112%.

InPhonic had $68.8 million in cash, cash equivalents and short term investments as of the end of the first quarter of 2006.

In November 2006, Goldman Sachs one of InPhonic’s largest shareholders, made the company a proposal to provide it with $100 million in debt financing, part of which InPhonic used for a large stock buy-back [2].

Revenue for the last quarter of 2006 was $120.3 million, up from $85.2 million for the fourth quarter 2005. Analysts estimated revenues of $120.73 million. For the first quarter of 2007, InPhonic expects adjusted results to breakeven to $0.02 per share. Revenues for the period are projected between $108 and $110 million.

[edit] Acquisitions

InPhonic expanded its business interests in 2001, absorbing several tech companies which specialize in software and content management on mobile platforms. In January, it acquired Reason, Inc. for its expertise with device and management tools; in early October, the company bought a Durham, NC-based company that develops software and services designed to extend large-scale corporate applications to wireless devices; and in November, it added Skyware Group, a New York developer of custom wireless applications, for an undisclosed amount of cash and stock. At the time, industry analysts pointed to all three additions as indicative of InPhonic's plans to grow into a multi-dimensional wireless company.

In 2002, InPhonic continued to build its wireless distribution channels, when it bought Simplexity, Inc. for $20 million in stock and cash. The following year, the company maintained its aggressive acquisition strategy when it bought mobile marketing firm Avesair, signaling a move into mobile ad messaging and delivery.

In January 2005, InPhonic bought rival A1 Wireless for $10 million, and a few months later it purchased VMC Satellite, a player in the satellite TV industry, for $11 million.

[edit] Partnerships and affiliates

InPhonic's has established relationships with a range of e-commerce partners to provide wireless activation services. Its partners include high-profile brands such as Radio Shack, BestBuy, Overstock.com, Buy.com and AOL; industry players like Cognigen Networks and Intelisys,; and major U.S. carriers Verizon Wireless, Cingular, Sprint, T-Mobile, Alltel and others. InPhonic also runs fulfillment for original equipment manufacturers like the Motorola and LG brands.

A deal signed with Disney in April 2006 was the first deal for the company's mobile virtual network enabler (MVNE) division since the company shed its own mobile virtual network operator (MVNO), Liberty Wireless, in 2005.

InPhonic works with smaller sites through the LinkShare Affiliate Program [3], paying commissions to these websites when their readers go to InPhonic's site.

In April 2006, InPhonic finalized a partnership with Amazon.com to become Amazon's first third-party provider of wireless products [4]. InPhonic's online retail tools have since been integrated into Amazon's web pages, giving customers greater selection when shopping for both phones and plans on the Amazon.com site.

InPhonic's online storefront Wirefly.com announced its sponsorship of the Wirefly X Prize Cup in September 2006. The event showcases space-related technology and innovation in the private sector, and features rocketry exhibitions and a series of monetary prizes.

In 2007, Wirefly became the sponsor of another public event, the National Marathon, held in Washington, DC. Now known as the Wirefly National Marathon, the race benefits local youth organizations like the Boys & Girls Clubs of Greater Washington, and the Special Olympics: District of Columbia.

[edit] Business Model, Customer Service, and Pricing Issues

InPhonic became popular thanks to its aggressive pricing strategy, including heavily subsidizing free cell phones with discounts or rebates worth several hundred dollars. The terms of some of the rebates ("Customer Loyalty Rebates"), however, required the customer to return the rebate form between 180 and 210 days after the initial activation. This unusual rebate model stems from the fact that the carriers will not pay a commission on a customer who does not maintain service for six months. Because InPhonic sells its cell phones below cost, some consumers try to take advantage of this by purchasing the phone with no intention of keeping the service. [5]. The six-month restriction ensures that discounts go to customers in good standing, who lead directly to a carrier commission for InPhonic. These commissions make up for the loss incurred when the phone purchase is made.

The strict rebate requirements caused some consumer groups to call for the regulation of rebate incentives by electronics manufacturers and retailers.[6]

Between 2003 and 2005, 1,500 people filed complaints about InPhonic with the Better Business Bureau, charging that the company had falsely denied their rebate claims worth up to several hundred dollars in some cases. After neglecting to follow up with the BBB regarding many of these complaints, InPhonic's membership was revoked in November 2005. After receiving more than two thousand complaints in three years, in June 2006, the D.C. attorney general sued the company, accusing InPhonic of imposing "unusually restrictive conditions" on its rebates, making it "difficult or impossible" for consumers to obtain them. [7] Five months later, in November 2006, InPhonic announced a settlement with the AG's office in which the company agreed to modify its advertising practices regarding rebates and provide refunds to certain customers. [8]InPhonic claims to have taken many steps towards simplifying the process and further educating customers since then.

In July 2006, InPhonic added a new rebate processor and opened a rebate hotline for customers wishing to inquire about rebates. InPhonic agents assisting customers with specific rebate submissions can be reached at (866) 607-9877.

In the intervening months, InPhonic reached a historic agreement with its carrier partners to move to a residuals based model. The residuals-based model, where the carriers pay InPhonic commission over the lifetime of the customer's service contract, rather than a one-time up front payment, allows for much more stability in the company's revenue stream and balances the risk the company assumes at time of activation. In a Q3 earning statement, InPhonic CEO David Steinberg announced that the new revenue model has allowed the company to reduce the number of cell phone deals that rely on rebates to 25%, down from 60% of deals requiring rebates in early 2006. [9].

[edit] Consumer Class Actions against Inphonic

At least four class actions and ten individual actions have been brought against Inphonic in six federal district courts, alleging that Inphonic “failed to adequately disclose the terms of its rebates associated with the purchase of wireless telephones and/or wireless service plans, failed to honor valid rebate claims filed by customers, and unreasonably delayed the processing of rebate claims.” [10] These plaintiffs have alleged that various state law claims, including “fraud, negligent misrepresentation, unjust enrichment, conversion, and breach of contract, as well as violations of state consumer protection statutes.” [11] They have also alleged that Inphonic “violated the Federal Racketeer Influenced and Corrupt Organizations Act," also known as the RICO Act.” [12] The RICO Act is generally used by the FBI to prosecute the mob, not consumer complaints. On October 25, 2006, these actions against Inphonic were consolidated in the Federal District Court for the District of the District of Columbia.