Sunday, February 17, 2008

Why he left Xero Mobile and started Blowfish Works

This is an English translation of an article I wrote for the Swedish business news site (November 16, 2007). In this slightly revised version of the article, I added a couple of quotes from the interview, which was done in English.

After having been kicked out of Xero Mobile, Carl Freer started 
Blowfish Works.                                                

Stefan Eriksson’s crash on the Pacific Coast Highway could hardly have come at a worse time for Carl Freer, who had move to the U.S. in the summer of 2005 and was in the middle of launching a new company, Xero Mobile. It promised free cellular telephony to college students if they agreed to watch ads on their phones. However, conflicts in Xero’s leadership Freer start another company, Blowfish Works.

“I founded Xero Mobile and I was the largest owner. The idea grew out of the SmartAdds-concept, which I invented while at Gizmondo. I wanted to create value for Tiger Telematic’s shareholders. Stefan Eriksson and the others owned shares in Tiger and could therefore qualify as owners, but had nothing to do with the day-to-day business. Peter Lilly worked for the company and helped in writing the business plan. The technical development was done by the Swedish company Netlight Consulting and Steve Carroll,” Carl Freer says.

“Registered owners could qualify for shares in Xero without giving up the shares in Tiger, so there is a chance that you could be doubly rewarded, but today I have no control of Xero,” he says.

“I left Xero in the summer of 2006. I was never employed, but helped them with fund raising and commercialization of the product. In return I got a license agreement for a technology I had developed. It was never part of SmartAdds, or owned by Xero, because I had done that work in a separate entity. It was a ‘click-through’ process, covered by a business process patent, and worked like a ten-second stopwatch, which starts after an ad is shown. When you click on it, a delivery report with the IMEI-number is sent to the server, so that we can let the advertiser know that the customer has watched his ad,” he says.

Users of Xero Mobile’s service are subsidized not unlike when cellular operator gives out free or near-free cell phones to customers who sign up for two-year contracts. Xero’s service is paid for by ads delivered and monitored with the same SmartAdd-technology that was developed for Gizmondo. Access to the cellular network is leased from a cellular operator, why the model is called mobile virtual network operator (MVNO). At that time it was a new and hot idea, but today’s it’s on the way out.

“The entrance fee is $300 million. You don’t own the network and have to buy enough of a foothold to be able to sell your service, but it is a service that you bought from somebody else,” says Jeffrey Peacock, a long-time technical consultant, system architect and application developer. He led the development of mobile applications for Blowfish Works until August 2007.

The cost of the phones is the largest cost when you’re starting an MVNO-service. The users need new phones that besides voice can handle data and video for the service to work, and “it requires a very large investment to provide millions of students with expensive phones at no cost,” according to Carl Freer.

“You also must reach critical mass, and that is expensive. You need at least a million people, maybe even 5 million to be able to talk about critical mass in America. Besides, you have the carrier cost, and you have to pay upfront. Being an MVNO is costly, because you have to buy bulk. It’s such a cash draining exercise. If you get it right, the rewards are there, which is why Disney and everybody else tried to crack this market, but it is hard to compete against carriers that are also your suppliers. You’re at their mercy,” he says.

Vodafone initially founded the MVNO model as a way to outsource the job of collecting of a more focused customer basis. Europe’s successful MVNO’s were focused on business-to-business accounts. It was almost a Klondike feeling, but it wasn’t easy, and very few MVNO’s are successful.”

That’s where the talk of $300 million came from. When Xero Mobile was started rumors circulated saying that they had pulled in that much capital, but it was only a cost estimate.
“The MVNO model is dead. Disney pulled out despite all their resources, and so did ESPN, and Boost. People in America already have family plans, so getting free airtime is really not worth much. But my colleagues at Xero were adamant about the MVNO model. They have tweaked the business plan somewhat for the colleges, hired a very clever CEO, and Simon Davis and David Warnock are big investors in Gizmondo. They are wealthy guys who made their money in real estate. And Joe Marten is also there, of course. They hired Allen Brown as new CEO, and kicked me out. I tried to help out putting a deal together, but there were thinking to short-term, trying to figure out how much they could boost the share price without too much effort," says Carl Freer.

"The SmartAdds technology is based on a MVNO business model, where you became a MVNO. I didn’t see any value in that, and tried to steer them away from that. I told them that they need to be carrier agnostic, and that they need to addresses the needs of local advertisers. But they shunned my advice, as they wanted to do a quick sale, and brought in a management team that looked like 24 carat. They wanted to raise enough money to be able to pull out what they were owed by Gizmondo, but you can’t build a company on that mentality. Hopefully they will change their modus operandi now," he says.

"The deal with the new management team said that I couldn’t be involved even though I didn’t want to be bought out. I had started the company, but I realized that I had to step aside because of all the bad press, so I signed the agreement, which let me keep my royalty to the click-through technology, and a worldwide distribution agreement. It also stated that they would buy me out, but they never paid me, so I still have my shares, and they still call me now and then for advice," Carl Freer says.

His ownership in Xero Mobile could complicate the British company ROK’s attempt to buy out Xero Mobile, which we have reported about in Realtid.

Once he had left Xero Mobile, Carl Freer started Blowfish Works, which has similarities with Xero, but doesn’t require the customers to get new cell phones and is independent of the cellular providers. Blowfish Works runs on most mobile phones that can show video, and instead of rewarding users watching ads with free minutes, registered Blowfish customers get a cash card that fills up with a dollar everytime they have watched an ad.

”The underlying technology is sound, both when it comes to the software on the phone and on the server,” says Jeffrey Peacock, who wrote the software for the phones.

Blowfish Works is currently working with companies in the entertainment business to produce ads that people want to look at besides the fact that they get paid to do it. A key idea with the new business model is that it focuses on local advertisers. A pizzeria manager could log on to the web site, pull together an ad from templates, and then deliver it to users according to a profile that he or she has set up in advance by clicking on checkboxes. It can be teenagers within the same zip code as the pizzeria, and it is also possible to assign a maximum cost for how much the delivery of this ad should cost (every deliver costs $2.50).

The users register their interest in advance, and supplies information that helps the advertiser to pick the right target group. Such an ad could consist of a brief video together with a coupon, and they are downloaded when the user is not using the phone.

Jeffrey Peacock says that one problem with such a service in the U.S. is that the cellular operators control the functionality of the phones, and sometimes want to keep the control over what phone features the users can take advantage of. They want to us these features to send news briefs, movie clips and ESPN sports clips to the subscribers. It can be hard for a third-party company to get access to the phone’s video features, and that is the threshold Blowfish wanted to overcome.
”My challenge was to find a way to run video on cell phones independent of cellular operator. It wasn’t easy, because we didn’t have enough bandwidth for streaming video over the cellular network, but we figured out a way to do it,” he says.

Blowfish Works solution was to install a small program on the handset that signals to the server when it can receive video clips.

Carl Freer says that he owns the majority of the shares in Media Power, Inc., which in turn owns Blowfish Works. There are also two angel investors, but doesn’t want to reveal their names, as he has not asked them for permission.

During our meeting at the Hotel Mercer in New York, he gave a demonstration of the service, seen from the advertiser’s point of view. It showed that 1,289,413 users and 320 advertisers had signed up for the opt-in service. About 20 percent of the users signed up via the website, while a million had responded to offers from six database companies. The official start of Blowfish Works is set to January 1, 2008. (Note, February 17, 2008: The official launch has been delayed until March 15, due to the “porting process and carrier certification” Carl Freer explains in an email).

”Blowfish Works is not just a matter of ads,” he says. ”You can send anything, ring tones, music videos. Ring tones are a $6 billion market, where half of the revenue goes to the cellular operators.”

You can also send political ads to well defined target groups.
”We are talking to one of the presidential campaigns about using the Blowfish-model to send political ads and video clips to people who have showed their interest, ” he says.

The fact that they are using an opt-in model means that the ads will get a better reception than if it had been spam. Besides, the ads will never interrupt a phone call.

”We are hoping that people who run fan sites on MySpace will discover Blowfish. There are people with MySpace sites that have large numbers of visitors, but are unable to capitalize on that. We could license our technology to MySpace in exchange for 20 percent of the revenues. It could be a great tool for local rock bands that want to get their music out to friends and acquaintances, and maybe even earn a commission from an ad that is played before the song,” he says.

”I’ve been trying to find people with databases and that want to make money from them. Pop, rock and rap-stars could use this model to stay in touch with their fans. We could also issue cash cards with the artist’s name on them that will be preloaded with money when the fans click on the ads. It’s going to spread like a virus,” Carl Freer says.

Hans Sandberg

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