A Virgin Market for Branded Wireless?

Will U.S. consumers follow the European example and buy cell-phone service from resellers? Sir Richard Branson is betting the answer is yes

You've got to give Sir Richard Branson credit. The owner and chairman of Virgin Group, a British conglomerate with $5.2 billion in 2000 revenues, has a stellar track record selling everything from music to airline tickets. Most recently, Branson has taken the wireless world by storm. From a standing start, his cell-phone venture, Virgin Mobile, has grown to more than 1 million subscribers in less than two years. With plans to expand into Australia and Singapore, Virgin Mobile has become one of the fastest growing wireless brands in the world.

Now Branson is calling America and negotiating with the third-largest U.S. wireless carrier, Sprint PCS (PCS ), for a pending U.S. venture dubbed VirginMobileUSA. Breaking into the $53 billion U.S. wireless market won't be easy. The Virgin brand packs far less punch in the New World than in Europe. And many telecom trends on the other side of the Atlantic haven't caught on here.

Yet, the launch of VirginMobileUSA marks an important shift in the U.S. wireless market. Branson's venture would be the first so-called mobile virtual network operator (MVNO) in this country. Translation? Virgin would sell both cell phones and wireless services as part of its huge portfolio of products. In Britain, a service dubbed VirginXtras showers mobile subscribers with discounts on plane and train tickets, CDs at Virgin Megastores, and concert seats. Rather than spend billions to build wireless networks and license spectrum, MVNOs -- already common in Europe -- lease networks from operators or enter into equity partnerships with carriers looking to rent space and link up with savvy marketers.


  In time, it could usher in an era of Gucci Mobile, Kmart Wireless, and Nike On-the-Run, say analysts. MVNO partners play to their core strengths: A Nike or a Kmart takes care of marketing to customers, while telcos provide dialtone and network services. "What MVNOs are trying to say to the operators is, 'Look, you're very good at running this system. We are very good at establishing customer relationships,'" explains Jerry Kaufman of wireless consultancy Alexander Resources. Operators like Virgin can be persuasive: "We focus on consumers first," explains Steven Day, Virgin Mobile's corporate-affairs director. "We know what we are doing." As wireless Internet use increases, Virgin figures its brand's appeal will grow as well.

According to tech consultancy Strategy Analytics, MVNOs will bring in more than $65 billion in revenue by 2005, making up 10% of global mobile revenue. And carriers could reap ample benefits in extra subscribers and additional revenues, Day says. Analysts concur. By 2010, 35% of U.S. wireless subscribers will belong to MVNOs, estimates Andrew Cole of tech consultancy Adventis. At least one U.S. retailer and one foreign telecom already work with Adventis on U.S.-based MVNOs. Says Cole: "We see this as an inevitable evolution." With extra network capacity and wide-ranging coverage, Sprint and Verizon (VZ ) represent the most attractive partners for MVNOs, say analysts.

Why would carriers take the bait? Customer-acquisition costs for U.S. wireless concerns have soared to as much as $400 apiece, with operators second only to auto makers in their ad spending, says Cole. With virtual operators taking on that burden, carriers could reduce their marketing expenses and tap into the knowhow of polished brand builders. That could prove crucial in marketing to teens -- a market segment where wireless carriers have struggled. While more than 40% of the U.S. adult population carries cell phones, only 30% of youths between 15 to 17 years old own them, according to consultancy Jupiter Media Metrix.


  Plus, carriers get a chance to share MVNOs' revenues from other product lines. For instance, a wireless operator could make money when a Virgin Mobile customer buys a CD from a Virgin Megastore, explains Kaufman. For wireless resellers, such as MCI (MCIT ) or GoAmerica (GOAM ), an AT&T Wireless (AWE ) reseller, these new hybrids could present opportunities as well. Unlike MVNOs, resellers only sell communications services. Companies like AOL (AOL ), MTV, or Nike -- which analysts believe are some of the most likely to enter the MVNO market -- don't have experience marketing wireless services. And they might gain from teaming up with resellers, suggests GoAmerica President Joseph Korb.

Some analysts, however, see the MVNO concept inspiring fear in U.S. carriers. "The concept [of MVNOs] is like some alien coming from Mars and visiting AT&T Wireless," jokes Kaufman. Operators are concerned that MVNOs will drive down prices for wireless services, says Alex Trofimoff, an analyst with investment-research firm Sanford C. Bernstein. Why? Because MVNOs are looking to make small, quick profits on the commodity they resell, rather than being burdened with the long-term costs and uncertainties of building and updating expensive infrastructures. While a deal with an MVNO might benefit the contracted carrier, it could increase price pressures in the wider market, explains Trofimoff.

In addition, even potential MVNO players such as Sprint or Verizon are afraid their customer base could be cannibalized by their own partners. If that happened, it could hurt margins that are already slim by siphoning off lucrative retail customers and replacing them with wholesale minutes.


  Carriers' concerns could translate into no deals -- or bad deals -- for the MVNOs. Skeptics point out that telecoms have been loath to sell network access at anything close to advantageous terms.

Finally, U.S. carriers don't face the same pressures to defray expensive licenses and network costs, which can run into billions of dollars in Europe. Today, U.S. cell-phone penetration stands at roughly 40% of the population. That's far below levels in Europe and some Asian countries, but carriers say they can still harvest the stragglers on their own, thank you very much. And unlike their Continental counterparts, U.S. wireless companies aren't burdened with legal requirements to share their networks. "It's this attitude that carriers have, 'I have this walled garden, and no one is allowed to play in it,'" says Kaufman.

That attitude could change in a hurry if Europe's experience is any guide. After only two years in existence, MVNOs command 5% of Britain's market, says Cole. Other wireless companies, such as Sweden's Telia, have forged ahead with MVNO deals. Virgin's partner there, Deutsche Telekom subsidiary One 2 One, is happy with the arrangement so far. In the first year after its deal with Virgin, One 2 One more than doubled its customer base and significantly boosted revenues. Now the company serves more than 8 million subscribers.

Virgin's success in the New World is far from assured. "No one knows them over here," says Barney Dewey, senior partner at communications consultancy Andrew Seybold Group. "If I was Sprint, I would be asking some really tough questions." Nonetheless, says Cole, "once the Virgin announcement is done, the dam is broken." So if Sir Richard gets a foothold, American wireless could enter a new era.

By Olga Kharif in New York

With reporting from Susan Zegel

Edited by Alex Salkever

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