How To Blow Through $300 Million: The Sad Story of Motricity

Let me set the scene.  A leader in the mobile technology space is cutting staff (a nice way of saying laying off 250 people), moving their headquarters from their mega 70,000 square foot offices in Durham, NC to Bellevue, WA, its biggest investor slams them in the news and management responds with angry and bleary-eyed comments to a local news outlet.  Is this a crash waiting to happen in 1999?  No, this is where the well funded mobile company Motricity finds itself today.  How did they find themselves on the verge of collapse?  The answer in one word: Hype.

The mobile industry in 2004 was on the brink of a revolution.  The US Carriers were just about to open up their platforms to third party companies giving them the ability to bill customer's cell phones using premium messaging (PSMS) right about the time when ringtones and wallpapers were becoming all the rage in the teen market.  Once the Carriers flipped the switch the race was on and Motricity was one of the early companies out of the starting gate.  Concentrating on selling their mobile platform into large customers they set their sites on media leaders such as MTV and BET and by December of 2005 their plan had paid off.  They closed a deal with BET allowing them to sell ringtones and other mobile content directly to its viewers over the Motricity mobile storefront and the Motricity platform.  But the economics of this deal was never disclosed.  It could be assumed that Motricity most likely gave BET access to their platform for free and would share some of the revenue that was earned from the sale of mobile content through BET or from messaging fees (text messaging, WAP Push) for messages that BET sent out that passed across the Motricity gateway.  In theory, this business model seemed feasible.

But, for all of 2004 and the majority of 2005 Motricity was busy raising venture capital and appointing people to various positions within the company and to the board of directors while other companies in the space had started selling mobile content directly to consumers.  All the while during this time, many smaller companies had jumped into the mobile game and had begun earning tremendous amounts of money from ringtone sales.

By early 2006 the ringtone fad was quickly fading and many of the companies that had been earning steady large amounts of revenue from ringtone sales were quickly learning that customer acquisition costs were rising at alarming rates and return on investment was crashing fairly rapidly.  To add insult to injury the US Carriers were starting to clean up their books and starting to reconcile refunds and non-billable customers against payouts that were made to these 3rd party companies for mobile content sales.  The result was industry chaos.  US Carriers were recouping their early payout losses by withholding millions of dollars from aggregators like m-Qube, Mblox and Gold Pocket Wireless and 3rd party companies were paying the price.   By mid 2006 most ringtone based companies were on their way out.  By the end of 2007 only the ones that had transformed themselves into mobile technology providers would be left.

Motricity was also reeling from this industry shakeup.  Because Motricity was providing companies with a white labeled mobile storefront that facilitated mobile content sales they still needed to plug into an aggregator to receive access to all of the different Carriers across the US.  So, in July of 2006 they went out and acquired themselves an aggregator, Gold Pocket Wireless.  This acquisition not only opened up a new business model for Motricity but it also gave them what they needed; a direct connection to the US Carriers.   It also provided them with some new brand name cache since Gold Pocket Wireless had deals with NBC's "The Apprentice" and "The Biggest Loser," CBS' "CSI NY" and "Big Brother". 

Although this seemed like the perfect acquisition the truth was in the details. Motricity would now become an aggregator allowing them to cut deals with 3rd party companies to provide access to the carrier gateway and opening new revenue streams for them in the still lucrative PSMS market and the growing standard rate market.  But, what they didn’t realize was Gold Pocket Wireless was completely inept at delivering on their deals.  They were having tremendous problems getting 3rd party company mobile programs approved by the carriers and subsequently launching these programs.  As a result, GPW started loosing clients and after the Motricity acquisition they even lost some of the brand name deals that they brought to the table in the first place.

This acquisition split the focus of Motricity from their core business, platform and storefront sales, to a new focus on providing aggregator services.  This meant valuable sales resources needed to be placed on the difficult task of finding companies to send their premium and standard rate traffic through the Motricity gateway.  This shift in thinking would eventually hamper Motricity for the next two years.

The end of 2006 would bring promising news for Motricity.  They had signed a deal with the king of teen content, MTV.  Motricity would provide the platform, mobile content storefront and aggregation services to MTV but again the question was, in exchange for what?  How was Motricity to gain from this new exciting relationship?  Was there a revenue share in place on content sold over the storefront?  Was MTV going to pay messaging fees?  We would never find out the answer but what was becoming abundantly clear was the fact that Motricity was stuck with an offering that was starting to look outdated.  The days of the mobile storefront offering ringtones for download were long gone.  The mobile phone handsets that would emerge in early 2007 not only had the capacity to store and play back hundreds of songs but these songs could organically be turned into ringtones.  In addition ringtones were now exclusively mp3 master tones and large royalties had to be paid to the music labels for their distribution.  Instead of recognizing these facts and expanding their offering to include applications that centered on creative uses of mobile like streaming text messages from viewers during music videos and interactive voting across MTV’s properties Motricity simply focused on the storefront.

Things remained static for most of 2007 for Motricity.  They focused on their MTV deal and finding clients for their aggregation services but then they received a blessing from high powered investor Carl Icahn.  In March of 2007, Icahn invested $50 million in the mobile company.  Rumors began to swirl about a possible IPO for Motricity, surely Carl Icahn had some idea about where Motricity was heading if he was throwing $50 million at it.   Then in October 2007, Carl Icahn invested another $50 million in Motricity.  This second investment capped a $185 million dollar round for the company bringing the total amount it had raised to $300 million dollars.   At the time of the second investment a behind the scenes push for an IPO was quickly waning and publicly the company had disclosed that an acquisition of the mobile services division of Infospace, Inc. would take place for $135 million.

By the time of the second Carl Icahn investment, Motricity had sprawling offices in Durham, NC totaling 70,000 square feet, they had grown explosively fast and by all accounts had appeared to be the leader in the mobile content space.  But as many of the Internet bubble companies of the late 90’s had found out, appearances aren’t everything.

On October 15, 2007 Motricity, who had raised over $300 million dollars to this point, had acquired the mobile services business unit of Infospace for $135 million. The Infospace mobile services business unit, which consisted of technology to run mobile portals, storefronts and messaging services for Carriers gave Motricity a closer connection to the Carriers and a reach into Europe through the Infospace portals.  Again, it seemed like the perfect acquisition.

Less than six months later any thoughts of a smooth integration between the two companies were shattered.  In late February 2008 Motricity announced layoffs of 250 people, over 1/3 of their workforce, and announced that they were leaving their 70,000 square foot offices in Durham, NC for Bellevue, Washington.  But that wasn‘t all, a week later Icahn, a $100 million investor in Motricity, weighed in on the matter; as told by MocoNews.net:

“Icahn told Private Equity Hub’s Dan Primack about his second-thoughts. He said: “I did ask Icahn why he did a pure venture capital deal last year for Motricity, which is now laying off 250 workers and moving its headquarters out of North Carolina. He answered that his son came to him with the deal one night, and he basically said “Why not?” He now admits it probably wasn’t a good decision, but still expressed faith in the company’s technology.”

Brett, who is Icahn’s son, is a member of Motricity’s board.

If Icahn expresses faith in the company’s technology, he must be referring to the technology the company purchased through the acquisition of InfoSpace since going forward most of the company’s cellphone infrastructure platform will be based on the mCore platform built by InfoSpace.

So now the spin war starts.  Motricity will continue to release interviews, press releases and statements claiming that everything is fine and that they are getting back to their core focus and that millions in revenue is right around the corner.  But the truth is the end is neigh.  Motricity has lost the confidence of Carl Icahn, they have begun cutting staff, they are abandoning their headquarters and management is desperately trying to paint this picture in a different light.  By any outsider account of this situation it looks as if Motricity has been the acquired company. 

Unfortunately, we’ve all seen the end of this movie before.  Its Goliath versus Goliath, a company growing so rapidly with so much venture capital that it looses focus and eventually implodes upon itself.  With its failed attempt at an IPO and the current state of the credit and financial market here in the US it doesn’t seem likely that 2008 will be the year of the Motricity IPO.  And any other exit strategy doesn’t seem feasible either.  Who is going to pay over one billion dollars to acquire Motricity?  Who would they merge with?  I can’t think of one company that would consider either of these deals. From my vantage point, it looks like it is just a matter of time before the cash dries up and we bid farewell to this fallen giant.

Comments

[Right On]

Wow! As an ex-employee - you REALLY hit the nail on the head!

[mobileman]

Spot on. Motricity got it wrong on suo Manu different occasions. Its just a matter of time until they are gone.