By snubbing Sprint for VZW, Qwest gives up on its own branded wireless services, choosing instead to partner

Until Monday the main casualties of the mobile virtual network operator (MVNO) fallout have been small boutique operators, but now Qwest Communications is giving up on its virtual operator relationship with Sprint, opting instead to sell the standard Verizon Wireless service available at any cellular kiosk. The MVNO business model isn’t just failing the niche players; it isn’t working for the big retail operators either.

At Qwest’s earnings call today, CEO Ed Mueller said Qwest’s new 5-year partnership with Verizon Wireless would be similar to its relationship with DirecTV. Qwest resells the satellite TV service as part of its home telephone and broadband bundle and bills for it, but the service remains entirely DirecTV’s, Mueller said: The branding, provisioning and customer service are all handled by the satellite provider.

The strategy has worked well for Qwest so far. According to chief financial officer John Richardson, Qwest has outpaced both Verizon Communications and AT&T in video penetration and added another 50,000 satellite TV subscribers in the first quarter. The new wireless resale agreement will work the same way. Customers can buy a phone and service plan through Qwest and have their wireless charges attached to their Qwest bill, but otherwise the customers will be Verizon Wireless customers, using VZW service plans, downloading VZW content and applications and calling VZW customer service.

That differs greatly with the MVNO arrangement Qwest currently has in place with Sprint, in which Qwest brands the service under its own name offering its own service bundles and data plans, handles all back office, billing and customer service functions, and markets the service independently. With little more than 800,000 wireless subscribers—all of whom are wireline subscribers, too—maintaining that sort of operation proved too costly for Qwest. In March, Mueller made public Qwest’s search for a new wireless partner, saying the company no longer wanted to be in the wireless business per se, rather to use wireless as a way to make its core facilities based services stickier.

“We are not going to make a ton of money on wireless,” Mueller said. “I don’t think a better MVNO agreement gets us to where we want to go. We need a new partner. We bring a lot to the party, and people will see that.”

The switch to Verizon Wireless will allow Qwest to suspend its own attempts to build a wireless brand and instead tap into Verizon’s enormous national marketing and advertising campaign. Most wireless operational costs will revert to Verizon, requiring Qwest only to integrate its billing systems with the wireless operators. But there will be monetary trade offs, said IAGR wireless analyst Roger Entner.

“The commission it gets from reselling Verizon’s service will be less than the margins it received from reselling Sprint under its own brand,” Entner said.

Qwest is the second high-profile Sprint partnership to collapse in recent weeks. In April, Sprint’s joint venture with the cable operators, Pivot, breathed its last breath, ending a two-year, $200-million partnership intended to add Sprint wireless services to the cable bundle. Pivot was not an MVNO but a jointly branded and marketed venture similar to the deal that Qwest now has with Verizon. The venture, however, was supposed to create unique services linking the cable companies’ broadband services and TV programming content to the mobile device, but few of those planned services made it to the market.

At first glance, Sprint’s MVNO business seems to be in a downward spiral. The high-profile demises of Disney Mobile in 2007 and Mobile ESPN in 2006 affected Sprint little operationally due to their tiny subscriber bases. Another of Sprint’s MVNOs hispanic-focused Movida declared bankruptcy earlier this year, but last month Kansas City operator APC Wireless bought the struggling carrier for $2.8 million, subscriber base intact. In fact, despite the MVNO fallout of the last two years, Sprint grew its wholesale subscriber base by 1.2 million customers in 2006 and 1.3 million customers in 2007. Even the failure of Pivot had little effect. The cable companies had launched joint service with Sprint in only a few markets, and what subscribers Pivot did attract were simply transferred over to Sprint.

At the end of 2007, Sprint had 7.67 million hold subscribers, two-thirds of them on Virgin Mobile, which Sprint owns a 50% stake in, and the remainder divided among other resellers an MVNOs such as Sprint’s former local arm Embarq. Overall, the wholesale business doesn’t bring in much money. Sprint doesn’t break wholesale revenue numbers, but it recorded in the fourth quarter $268 million from wholesale and affiliates sources. Given Sprint has a combined 8.52 million wholesale and affiliate subscribers, its average revenue per subscriber for non-retail customers is roughly $10.50 a month, compared to the $58 for a postpaid CDMA customer or $28 for a prepaid customer.

If all of Qwest’s 800,000 subscribers jumped to the Verizon network at the beginning of the third quarter, Sprint would only see a revenue decline of approximately $8.4 million at the end of the reporting period. Wholesale, however, has also been propping up its subscriber base in the last year, accounting for most of its net gains or offsetting net losses of postpaid customers. Any large exodus of customers may not be viewed too kindly on Wall Street.

Still, Tower Group chief analyst Bob Egan said it’s highly likely Sprint looks at the loss of Qwest as a positive development. Though he said he couldn’t speculate on whether Sprint ended the partnership rather than Qwest, he said both probably were probably in mutual agreement.

“It’s time for Sprint to slim down and focus on its core business,” Egan said. “Sprint wasn’t making any money off of Qwest. It was a distraction.” Given Sprint’s operational and financial troubles of late, new CEO Dan Hesse is looking for ways to sever unprofitable ventures from the core business, Egan said. Given that Sprint is reportedly considering selling or spinning off Nextel to make itself more attractive to a potential buyers like T-Mobile, shedding MVNO entanglements is logical next step, Egan said.

“The one thing I know about Hesse is he’s quickly going through that company, finding out what it needs to focus on,” Egan said. The MVNOs definitely don’t merit that focus, Egan added

In any case, such a grand exodus of Qwest customers to the Verizon network is unlikely. Qwest’s contract with Sprint is good for another year, though it will start reselling Verizon service immediately. Qwest still has to figure out the details of transitioning its subscribers to the new network. Unlike a GSM operator, Qwest can’t just ship out new subscriber identity module (SIM) cards to its customers. Each phone has to be activated on the Verizon network, IAGR’s Entner said.

“They should be able to use the same devices, but each will need a firmware upgrade,” Entner said. “CDMA devices are a little more proprietary than GSM ones, plus they’ll want to use Verizon’s data services.” Verizon uses Qualcomm’s BREW platform as its content distribution platform. BREW clients would have to be loaded onto the phones for them to access its Get It Now or V Cast services.