Startup backed by Skype co-founder aims to undercut Mexican telcos

October 12, 2016 5:04 AM EDT

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By Christine Murray

MEXICO CITY (Reuters) - A U.S. wireless startup backed by a co-founder of web phone service Skype has teamed up with Mexican pay-TV provider Dish Mexico to lure subscribers with free call and data plans in the country's growing and increasingly competitive mobile market.

FreedomPop, a five-year-old firm backed by Niklas Zennstrom, will take advantage of a sweeping telecoms reform that gave mobile virtual network operators (MVNOs) access to the network of billionaire Carlos Slim's America Movil at regulated prices.

MVNOs, like Virgin Mobile, which has just a 0.6 percent market share in Mexico, rent capacity from companies with existing mobile networks. L.A.-based FreedomPop, though, is seeking to sharply undercut them and the carriers, by giving about half its users a package of calls, texts and data for free.

"The business model part is really what differentiates us," co-founder Stephen Stokols said in a telephone interview, adding that the free plan would have a limit on data and was likely to be of interest to half or a little less of its overall customer base.

The company's other subscribers will pay for services such as extra data, microfinance loans, online security and the purchase of extra phone numbers.

MVNOs have historically struggled to gain ground in Mexico, with just 0.8 percent of Mexico's mobile subscriptions, according to the latest data from regulator the Federal Telecommunications Institute (IFT).

That compares to the United States, where the largest MVNO, TracFone, owned by billionaire Slim, has a hefty 25 million clients.

Despite Mexico's reform, Slim's telecoms giant still holds almost 70 percent of the market there.

Competition is also getting tougher. Mexico's operators have been in a price war since the reform brought U.S. carrier AT&T Inc into the market.

Carlos de Legarreta, an analyst at GBM, said that, unlike in other countries, MVNOs in Mexico have not focused on market niches and targeted advertising.

"I think its more an issue of competition, of commercial strategy," he said.

Stokols said that there was a "good dynamic" because of the reform and FreedomPop's partnership with Dish Mexico, Mexico's second-largest pay TV provider, majority owned by the Vargas family's MVS Comunicaciones. EchoStar Corp also has a minority stake in the venture.

MVS spokesman Felipe Chao said that the precise workings of the alliance were still in the planning stage.

FreedomPop, which also operates in Spain and Britain, earlier this year got $50 million in funding from LetterOne, the investment vehicle owned by Russian telecoms billionaire Mikhail Fridman, to help pay for international growth.

The startup is also backed by Zennstrom's venture capital firm Atomico.

The Mexico deal is a blueprint for further services in other countries which will be announced next year, Stokols said.

FreedomPop increases its margin by offloading traffic onto Wi-Fi hotspots when it can. In 2015, Alphabet Inc's Google launched an experimental wireless service called Project Fi which switched between Wi-Fi and cellular networks to cut data use.

There are still doubts about the technology that allows seamless switching, but Stokols said they will soon disappear given rapid advances in the area.

"It's crystal clear where were two years that question's going to seem ridiculous," Stokols said.

(Reporting by Christine Murray; Editing by Christian Plumb and Andrew Hay)

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