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Virgin's Fresh Approach to Wireless

At first glance, what Dan Schulman, CEO of wireless-service provider Virgin Mobile USA, is doing seems as daffy as climbing a mountain in a snowstorm. In July, his company jumped into the U.S. market for wireless services, a sector that's already suffering from too much competition and falling prices. Virgin's strategy? Offering prepaid wireless service (users pay for minutes -- and taxes -- in advance), something that other service providers have already abandoned because of lack of profits.

However, the novelty to Schulman's approach may lie in its simplicity. Virgin is targeting 13- to 25-year-old wireless users with a prepaid service billed at 25 cents a minute for the first 10 minutes of daily use and 10 cents a minute thereafter. "We are extremely simple and easy to understand," says Schulman. By contrast, the nation's largest wireless service provider, Verizon Wireless, charges a different per-minute fee for its prepaid FREEUP service, depending on whether the call is made during a weekday, after 9 p.m., or on the weekend.

Actually, simplicity and flat rates appear to be catching on for both pre-paid and regular wireless services, as users tire of complicated phone plans and fine print. On Sept. 5, AT&T Wireless (AWE), the country's third-largest service provider, began offering a $99.99 unlimited-calling national plan. And on Oct. 1, Cingular Wireless, the second-largest wireless provider, introduced a feature called "rollover" for some of its national plans. It allows users to move unused minutes from month to month for up to a year. "Simplicity is something Cingular has been focused on for a long time," says Chris Penrose, an executive director at the company. "Customers want to be treated fairly."

Eventually, all wireless-service rates probably will go this route, and either be billed much like landline long-distance or with a flat fee, industry experts say. But it'll take a few years for the technology to reach a point where that makes sense, says Adam Guy, an independent wireless analyst in Washington, D.C. Most wireless networks have very limited capacity -- so, if everyone were to make calls during peak times, such as the lunch hour, call quality would suffer, he says. That's one reason companies discourage peak usage with high rates.

Schulman, the former president and CEO of travel site, spoke with BusinessWeek Online reporter Olga Kharif on Oct. 2 about what differentiates Virgin, the brainchild of Virgin Group boss Sir Richard Branson. In Britain, Virgin Mobile, which started three years ago, has 2 million subscribers and is the fastest-growing wireless service in Europe. Following are edited excerpts of their conversation:

Q: Most service providers are retreating from offering prepaid wireless service. They just can't make any profits. Why are you plunging in?

A: I think that the trend of the other carriers moving away from prepaid bodes well for us. We're exclusively focused on the youth market -- we define that as anyone between 13 and 25. And that market has very particular needs that aren't always met by postpaid plans. In fact, prepaid is the ideal solution for that customer set.

Q: How different are these customers' needs?

A: First of all, many of them are in flux in their lives. They're either in college, they are just leaving their home, or they may be getting their first cell phone. They may not have credit yet or may be credit-challenged in some way. As a result, a prepaid cell-phone plan that doesn't require a credit check or doesn't require a contract to sign is very appealing.

The other thing that we found is that our customers' usage is inconsistent. One month, they may not use the phone at all, and another month they may use it quite a bit, depending on whether they're on vacation or in school. All cell-phone postpaid plans [which require contracts and charge monthly fees] force you to make a decision about what your usage patterns are going to be a year in advance.

Q: You don't have any off-peak and peak rates. How do you manage not to get the network clogged during peak times?

A: We actually were the first carrier to completely do away with what we felt was an artificial engineering distinction between peak and off-peak minutes. The reason we're able to do that is our partner [providing the networks] is Sprint PCS (PCS). And Sprint not only has plenty of available spectrum -- here and now -- but it just introduced a new technology which doubles its voice capacity.

Q: How close are you to breaking even? You need to gain 350,000 users to do so.

A: We don't disclose our numbers. But we're very pleased with the way our launch has been accepted by the consumers. Our customers are using this service very frequently. And in our customer focus groups, we've had 100% of our users say they would recommend the product and the service to their friends.

Q: How is your service different from other youth offerings?

A: We've tried to design our plan to make it the most economically attractive to the users. If you look at the other carriers, all of them still make a distinction between peak and off-peak minutes. Most of their peak and off-peak minutes are priced at 30 cents and 15 cents, vs. our 25 cents per minute for the first 10 minutes of a day, 10 cents per minute thereafter.

More important, we're different because of the applications and content that we provide. Our VirginXtras features include wake-up calls as well as the ability to listen to music clips, vote on them, and hear how other people voted. And if you like a music clip, you can pass it along to a friend.

Already, music labels are interested in reaching out to this target market. We have an exclusive arrangement with [cable music channel] MTV. Together, we're developing different applications and products, like an MTV-edition phone that may have a user interface structured around music and entertainment.

Q: How is your service different from what Virgin Mobile offers in Britain?

A: We've adapted a similar price structure but different price points to be competitive in this marketplace. Just like Virgin Mobile in the U.K., we've also introduced Xtras, though we've tried to be very careful about how we price those.

A lot of companies are pricing such features by the megabyte, and I defy you to find anybody who actually knows how many bites they are downloading. So we've basically said, "Look, if you want to listen to a music clip, then it's exactly the same price as for a one-minute phone call." You know exactly what you're paying for.

Q: What do you think U.S. operators can learn from your experience?

A: I think it's important to be focused on where your bread and butter are. The second you try to be all things for all people, you have a problem. We are trying to serve our segment extremely well -- and that's an advantage.

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