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Updated Monday, December 17, 2012 at 09:10 AM

Former rivals Nickels, Mallahan join in low-cost phone venture

By Brier Dudley
Seattle Times technology columnist

Here’s a tech story with an uplifting message, just in time for the holidays.

It starts with Joe Mallahan, the T-Mobile executive who ran for Seattle mayor in 2009.

Mallahan was largely unknown outside of wireless circles until he ran for office and defeated incumbent Greg Nickels in a bare-knuckles primary.

Then Mallahan lost to Mike McGinn in the general-election runoff, went back to T-Mobile and faded from public view.

Nickels went on to lecture at Harvard and serve as a delegate to the United Nations General Assembly.

They lost touch until this past September, when Nickels received an email out of the blue from his former rival.

They hashed things out over Chinese food in West Seattle, and Mallahan ended up hiring Nickels to help run StepUp Mobile, a new wireless phone company that’s launching nationwide service early next year.

You don’t expect that kind of reconciliation in this age of nasty, personal politics.

Forgiveness is also rare when you’re talking about phone companies, which are generally ruthless about managing payments and credit risks.

But StepUp is an unusual company.

Instead of using the latest gadgets to sell pricey service, StepUp is going for the other end of the spectrum.

StepUp plans to offer prepaid, unlimited talk and text plans to low-income customers whose credit isn’t good enough for traditional plans. It will sell phones through thousands of mom-and-pop retailers in urban areas — places like ethnic groceries and electronics stores.

Mallahan said the company will “serve low-income customers extraordinarily well and get them away from all their anxieties and all the nickel-and-diming they experience from the other brands.”

Of the 280 million wireless customers in the United States, about 84 million are in this subprime category and looking for unlimited plans, he said.

StepUp will sell products under the brand name Daylight. The brand is intended to convey relief from worries about extra charges or losing service.

“By that,” Mallahan said, “I mean if you can’t pay me this month, pay me for a week. If you’ve been with me for a while I’ll give you a grace period — I’ll give you four or five days to pay me — which is revolutionary in the prepaid space.”

This is more than political correctness.

StepUp expects to have more than 1 million customers and annual sales of at least $500 million within two years. It sees a $45 billion market opportunity serving low-income buyers looking for unlimited wireless plans. It’s not disclosing prices yet, but plans may be in the $30 range.

This is familiar territory for Mallahan. He made a name for himself at T-Mobile figuring out ways to reach lower-income customers with concepts like flexible payment plans and installment plans for devices. That helped T-Mobile build the “value” reputation in competing against larger carriers.

“I always sort of pressed T-Mobile leadership to go further and further, taking risk and investing in lower-income customers, but they’ve got this whole portfolio; there’s only so far we could go,” he said.

More recently Mallahan was heading T-Mobile’s wholesale business, working with companies that sell phones and service under their own brand names, but run on T-Mobile’s network. This gave him insight into what carriers were charging these companies, known as mobile-virtual network operators, or MVNOs.

In August 2011 Mallahan left T-Mobile to start working on StepUp, which is an MVNO that will run on Sprint’s 3G and 4G network. The company now is raising $5 million for its launch and believes it could eventually be acquired by a large carrier, similar to the way MVNOs like Virgin Mobile were folded into Sprint.

StepUp has seven employees based in Fremont and hopes to grow to 400 in Washington state within a few years, including a customer-support center. That would be a local presence comparable with Clearwire, the Bellevue wireless company that may be swallowed up by Sprint.

Nickels is the company’s vice president of community relations and regulatory affairs. His stature — including a stint as president of the U.S. Conference of Mayors — adds name recognition and may help StepUp secure approval from the FCC and regional regulators.

Nickels said he’s going to figure out how his 35 years of experience in government “can add value in the private sector to this startup.”

He noted that cellphones aren’t just a luxury item and are required for people “to be competitive or be able to access opportunities out there.”

“I know 10 years ago it was a status symbol, 15 years ago it was more snobbery, but now it’s a tool you have to have,” Nickels said. “The ability to make that available to folks at a good cost with quality service and respectful customer service, it’s kind of a cool thing.”

Neither plans to run for office again, though Nickels added that “you never say never.”

They realized late in their campaign battle that they shared the “social justice ethic” they say underlies StepUp.

“It’s a real liberating thing for me personally to be able to focus directly on low-income [customers] and innovate on ways to solve the problems they face,” Mallahan said.

Mallahan has plenty of examples of how the lowest tier could be better served:

“I see time and time again brands that ostensibly are targeted at low-income customers not focus on what their needs are and nickel-and-dime ’em,” Mallahan said. Carriers may offer a $50 unlimited plan, he said, but charge a $3 to $5 fee to make payments at their stores.

Inconvenience is another sticking point. For instance, some prepaid wireless companies won’t let customers pay by phone, using debit cards. Instead people must find a retail store and pay cash.

Imagine, Mallahan said, that “you’re supposed to be picking up your daughter at school and you’re 15 minutes late and you have no connectivity. Nobody is thinking about how to solve those problems for those customers. That’s frustrating to me. It’s what I kind of sold Greg on: This really is a distinct need that none of the other brands are focused on.”

It’s refreshing to hear a CEO talk about people struggling to pay their bills not as a risk, but as an opportunity to create new products.

Mallahan said his key insight is understanding that people aren’t necessarily trying to get away with something.

“The vast majority of them aren’t trying to rip you off. They’ve just got into a situation where they can’t pay,” he said. “If you’re not understanding that and helping them succeed, they’re kind of forced to bail and go activate [service] on somebody else.”

What a concept — compassion. Let’s hope it catches on.

Brier Dudley’s column appears Mondays. Reach him at 206-515-5687 or bdudley@seattletimes.com


KEN LAMBERT / THE SEATTLE TIMES
Former political rivals Greg Nickels, left, and Joe Mallahan, pictured Wednesday, are now partnering in a new venture called StepUp Mobile, a wireless carrier targeted at low-income people.




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