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A learning experience

Jul 9, 2001 12:00 PM, by Lynnette Luna

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Virgin, one of the world's most savvy branding companies, hoped to offer nationwide mobile wireless service in the U.S. by the end of this year. But the process has been slower than expected as the company works to educate the industry about the mobile virtual network operator (MVNO) strategy.

Virgin Group has built a wireless business by forming partnerships with existing operators to sell mobile services under the Virgin brand name. Sir Richard Branson, chairman and founder of Virgin Group, has taken this MVNO concept to the U.K., Australia and Asia. His goal is to make Virgin the world's first global MVNO, which means a deal in the U.S. is critical.

After months of speculation about which U.S. carrier Virgin might team with, Sprint PCS finally gave way, admitting that it is in discussions with Virgin. Sprint PCS cautioned that although the two companies agreed on preliminary matters, no definitive agreement has been reached and there are no assurances that any transaction could be consummated.

The U.S. MVNO market is a tough one to crack, even for a company with a brand name like Virgin. Richard Siber, partner and head of the global wireless practice with Accenture, said U.S. carriers are skeptical of the business model.

“U.S. carriers are not compelled because they've seen the terrible reseller model and have been comparing MVNOs with resellers,” Siber said.

Indeed, companies such as former operator Omnipoint, which subsequently was purchased by VoiceStream Wireless, watched its subscriber numbers fall one quarter because it couldn't keep track of how many reseller customers were active. Traditional resellers also threaten to dilute carriers' brands because they target the same customers, Siber said.

VoiceStream Chairman and CEO John Stanton recently told analysts MVNO strategies that work in Europe might not necessarily work in the U.S.

“To compete as a common carrier in the U.S. is difficult,” he said. “Resellers [would find] it difficult because prices are declining, and we and our competitors already are meeting specialty interests. Nextel met the need for dispatch capabilities and eliminated a class of resellers.”

John Tantum, president of Virgin Mobile USA, agreed that many wireless executives see similarities between the old reseller market and the new MVNO market. “They are put off by it,” he said. “As we've gotten into much more detailed discussions with wireless operators, some have realized the fundamental differences.”

While operators may think they are meeting “specialty” interests, they aren't, say analysts and Virgin's Tantum. MVNOs are designed to target specific niche markets.

“MVNOs are more than resellers because they have a brand that is appealing to a segment carriers don't normally target,” Siber said.

Virgin plans to attack a market segment most carriers have not targeted to date: the youth market. The company intends to offer a hip pay-as-you-go service similar to what the company offers in the U.K. Each of Virgin's phones in the U.K. comes with a host of WAP services called Virgin Xtras, which allow customers to receive discounts on CDs, DVDs, videos and computer games.

Virgin also is seeking an equity relationship whereby an operator agrees to a 50/50 joint venture. Not all its arrangements are equally split. Singapore Telecom, for instance, put up $450 million to its joint venture with Virgin, while Virgin contributes just $50 million and its brand name. Some U.S. carriers have expressed concern about this arrangement, although analysts say a joint venture is the only way carriers and MVNOs can align objectives to ensure a long-term relationship.

“There are people who are reluctant,” Tantum said. “There are concerns about control, but we think those can be overcome. 50/50 joint ventures have worked well in other parts of the world.”