Find an inefficient market and fix it: It's a time-honored formula for success in a business world where things don't run quite as smoothly as we'd like. Five years ago, David Steinberg, with the help of former Apple CEO John Sculley, set up Inphonic ( INPC), a Washington D.C.-based startup that spotted an inefficient market. Inphonic would do to opaque and unnecessarily costly wireless plans what Expedia did to air travel: help consumers navigate to the best and cheapest deals. "We're saving consumers money three ways," says Steinberg. "We save them an average of $125 on the phone itself. We save them 20% to 40% by mapping their usage patterns to rate plans available in the market. And we save them by setting up accounts in under five minutes." It takes customers nearly an hour to do that in wireless retail stores. Steinberg wasn't the first to come up with that idea. There were several other startups helping people sift through mercurial wireless plans -- Point.com, TelStreet, Simplexity, among others. But Inphonic had a board that included heavyweights such as Sculley, former senator Jack Kemp, Jay Hoag of Technology Crossover Ventures and others with deep ties to the wireless industry. Those industry ties were crucial. And Inphonic won them by showing they could save the carriers money, too. The carriers spend an average of $380 for each new customer who signs up at a retail store, but only $295 on customers signed through a Web site. "We're disaggregating the cost of running thousands of retail stores," says Steinberg. "Carriers look at us as a low-cost distribution strategy." By cultivating its connections and drawing on Sculley's marketing experience, Inphonic broke from the pack. Not only does its own Web site, Wirefly.com, help consumers compare plans on the basis of roaming, long-distance and anytime minutes, it maintains similar wireless-search functions for 6,000 sites operated by carriers such as Verizon ( VZ) and Sprint ( FON), phonemakers such as Motorola ( MOT) and Samsung and portals such as Yahoo! ( YHOO) and Microsoft's ( MSFT) MSN.
Inphonic expects to help activate at least a million new and switched-over cell-phone accounts this year, pushing its revenue up 72% to an estimated $350 million. But if the second quarter is any indication, Inphonic will be bringing in new revenue while expanding margins. In the quarter ended June 30, Inphonic's revenue grew 66%, higher than the 41% increase in the cell-phone accounts activated through its technology. Still higher was the 69% increase in gross profits. The company's gross margins rose to 43.4% in the second quarter from 40.7% in the first. Improving gross margins, and Inphonic's efforts to cut sales and marketing costs as a percentage of sales, will help alleviate one of the chief concerns among investors about the company -- that it has yet to post a profit. Inphonic went public last November at $19 and saw its stock pop quickly to $28.10, but it has lost half that peak value since. Steinberg says the company will post a net profit "very, very soon." At a Thomas Weisel investment conference last month, he hinted that profitability may come in the quarter ended Sept. 30. Despite its revenue growth and anticipated profitability, Inphonic trades at 1.7 times sales and 12 times its forecast 2006 earnings. That low valuation reflects other concerns, namely that Inphonic faces constant competition from new start-ups as well as established names such as Amazon.com ( AMZN). But its home-grown Wirefly site is making a name for itself, bringing in a bigger share of revenue -- 38% in the second quarter compared with 33% in the first quarter. As Inphonic pushes to brand the site through ads on venues such as MSN's homepage, it hopes to capture a larger share of the market. Inphonic also is unlikely to maintain a revenue growth rate of 72%, but it's likely to keep grabbing a larger share of a growing market. Roth Capital Partners forecasts that U.S. wireless subscriptions will increase to 240 million in 2008 from 182 million last year. As fewer first-time subscribers sign up in a saturating market, the number of account activations from price-sensitive consumers switching to new plans will more than make up for that slowdown.
Roth estimates that Inphonic's share of activations will rise to 3% in 2008 from 1.8% last year. Not only will more consumers start to activate plans through the Internet (nearly three-fourths already research plans on the Web), people switching carriers are more likely to make online activations because they offer some of the best deals. Roth has no underwriting relationship with Inphonic. With $83 million in cash and short-term investments, Inphonic is poised to keep making modest but strategic acquisitions to strengthen its position in the market. In January, it bought competitor A1-Wireless for $10 million, and a few months later it purchased VMC Satellite, a search engine that could help it move into the satellite-TV industry, for $11 million. According to Roth, both companies will add $30 million to Inphonic's revenue this year. And A1 will add $3 million and VMC will add $1 million to the bottom line. While those deals are helping to nudge Inphonic into the black, the company will need to keep pushing down costs of its core business to keep that profit growing. One helpful trend is that the carriers tend to share a bigger piece of the pie the more customers you bring them. That could help Inphonic's margins for a few years. At some point, though, making the market more efficient means rubbing up against the service providers. When that happens, Inphonic may find its close ties with wireless carriers a little strained.