Will This Low-Cost Carrier Disrupt the Wireless Business?

By Markets Fool.com

You can leave AT&T , Verizon , T-Mobile , or Sprint , and trade your monthly bill for one that's measurably smaller. Better yet, if you're willing to keep your data use to a minimum, you can eliminate your bill entirely.

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That sounds too good to be true, but it's exactly how FreedomPop works. The alternative carrier gives away service -- to a point. Any customer can get 200 voice minutes, 500 text messages, and 500 MB of data for $0 a month. Unlimited voice and text with the same amount of data costs $6.67 a month -- though to get that price, you have to pay for the year upfront -- and more data costs $0.025 per MB.

It's a very straightforward plan, yet few people are taking advantage of it. The company hopes to change that, and has abandoned plans to put itself up for sale. Instead, it has raised $30 million to grow the company,TechCrunchreported.

How does FreedomPop work?
The low-cost/no-cost carrier operates on the Sprint network. Thecompany sells its customers a variety of devices -- mostly older-model smartphones -- that work on its network. It also allows people to bring their own devices, as long as they are compatible. The phones -- which include the Apple iPhone 5 and Samsung's Galaxy SIII -- are refurbished models sold at a heavy discount. The company also sells wireless hotspots and home Internet access.

Once a customer has a phone and a plan, using FreedomPop is no different than any other carrier. That's partly why its small user base -- about 1 million customers, its CEO told TechCrunch --is surprising.

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Source: FreedomPop's Twitter feed.

Why isn't it more popular?
It's possible that many potential customers simply don't know that FreedomPop exists. The company does not have a physical retail presence, and it spends very little on marketing. "We acquirecustomers in the U.S.for 1/100th of what the carriers pay," CEO Stephen Stokols told the technology news site, explaining that its customer acquisition costs are "under $5 where most carriers' are $380/user."

In addition to its relative anonymity, FreedomPop likely suffers from its selection of devices. It offers a great price on service, but its upfront cost on older, less-hip phones is similar to what a user will pay on a two-year contract for the latest and greatest handsets. That may be a poor financial decision by the customer, but having an iPhone 6 seems to mean more to a lot of people than paying very little, or nothing, for their plans.

It's also possible that FreedomPop suffers because its offer sounds too good to be true, scaring potential customers away. As a society, we have been taught to be wary of anyone offering something for nothing, and FreedomPop literally does that.

Can FreedomPop be a challenger?
Armed with $30 million and a commitment from its CEO to grow the business, now might be the right time for FreedomPop to attempt to disrupt the major carriers. To do that, the company needs more attention -- and it needs better phones.

The attention part may be left to slowly building word of mouth and an increased retail presence. The company plans to launch in "at least one big-box retailer in the fourth quarter and may add another retail partner if it can finalize a deal in the next few weeks," Fierce Wireless reported.

It's also possible the hardware issue could be solved, or at least improved, soon. Stokols told TechCrunchthat the company is working on a deal that would include raising more money from a strategic partner that would help in that area.

FreedomPop does not need to have the latest-and-greatest phones. It could also benefit from the fact that lower-priced Android and Microsoft WIndows phones keep improving. The company might do well to launch a signature phone on either (or both) operating systems with a partner like Blu Products,which makes low-price, high-feature phones for both Android and Windows Phone.

FreedomPop has a disruptive offer, but a mix of fear of the unknown, skepticism, and a lack of high-end phones has kept it from being more than a minor player. Another $30 million won't change that; but the existence of the company, and its slowly growing user base, could serve as a check on the traditional carriers.

It's essentially a message to the big four wireless carriers -- treat people well, or they will look for an alternative. And in this case, the one they find might be better than what they are leaving -- and it will almost certainly be cheaper.

The article Will This Low-Cost Carrier Disrupt the Wireless Business? originally appeared on Fool.com.

Daniel Kline owns shares of Apple and Microsoft.He has a FreedomPop mobile Internet device but rarely remembers to use it. The Motley Fool recommends Apple, Twitter, and Verizon Communications. The Motley Fool owns shares of Apple and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.