British cable company NTL Group Ltd. recently agreed to buy billionaire entrepreneur Richard Branson's mobile phone company, Virgin Mobile, for $1.67-billion (U.S.), a sizable increase from the initial offer of $1.5-billion. Analysts said the acquisition -- which came just after NTL bought competitor Telewest -- made the company Britain's first "quadruple play," with cable, wired telephone service, high-speed Internet and a cellular telephone business.
So what, you might say. Telephone companies get bought all the time; it's all part of the continuing industry consolidation, owing to competitive pressures and such. One of the more interesting aspects of this deal, however, is that Virgin Mobile isn't actually a phone company -- if by "phone company" you mean the company that owns the wires in the ground and the poles on your street and the trucks with guys in overalls.
Virgin Mobile doesn't own any of that.
More than anything else, Virgin Mobile is (like many of the other firms in Sir Richard Branson's empire) a marketing company. It doesn't really own anything, apart from a brand name and some office space with helpful marketing and sales people. And yet, NTL was willing to pay more than $1.5-billion for the privilege of acquiring it.
Virgin is what telecom players call a "mobile virtual network operator" or MVNO, and therefore it doesn't own any network capacity or lines of its own. It simply rents space on a real phone company's network -- in this case, T-Mobile.
Sir Richard was one of the first to realize that telecommunications service, and particularly cellular service, was rapidly becoming a commodity, and one of the only ways to maximize your profit margins in that kind of business is to market yourself properly. And Virgin has been more than capable of doing that -- it now has more than five million subscribers in the U.K., and last year passed the three million mark in the United States, just 2½ years after starting business. It's no coincidence Virgin has done exactly the same thing in the airline industry, another business that has become commoditized.
It didn't take long for other companies to follow Virgin's example, and today MVNOs are relatively common in Europe. They are less so in North America, in large part because of differences in the way mobile industries evolved in the two regions. Telecom analysts say they expect that to change, however, as more and more players get into the MVNO game in the United States. A telecom consulting company called DiamondCluster said last fall, for example, that it expects more than 30 million Americans will get their cellular phone service from an MVNO by 2010. International Data Corp. says 10 million use one now, and they generate $4-billion in annual revenue.
MVNOs can take different forms. Virgin sells itself as primarily a youth brand, with its edgy and sexy advertising campaign, and it also tries to play on the fact that most North American cellular customers feel they are being overcharged by their carriers through extra fees and long-term contracts. Walt Disney Co. said last fall that it planned to launch its own MVNO service in partnership with Sprint Nextel Corp. some time this year, using Disney characters to appeal to families. And a company called GreatCall Inc. has launched a mobile phone offering in co-operation with Samsung Electronics Co. Ltd. that is aimed at older phone users, offering handsets with larger buttons and more comfortable earpieces, as well as one-touch access to an operator.
Some MVNOs are pushing themselves as technology leaders, including Amp'd Mobile, which recently closed a round of funding from several venture capital groups (including Intel Capital and Universal Music Group) and has now raised more than $250-million. The company has said that it plans to take advantage of higher-speed cell networks such as EV-DO and HSDPA to offer broadband content to cellphones, including streaming audio and video clips, as well as downloadable and on-line games. There have even been rumours that Apple Computer Inc. might launch an MVNO and offer an iTunes phone.
A company called Helio LLC, meanwhile -- co-founded by Sky Dayton, founder of Internet service provider Earthlink and wireless provider Boingo -- is pitching itself to young users who want to stay in touch through instant messaging and other services. Helio recently announced a partnership with Yahoo Inc. that will allow Helio customers access to any of Yahoo's services from their phones. Helio, which is expected to launch soon, is a partnership with SK Telecom.
Xero Mobile is zeroing in on price. It plans to launch in the fall and target college students with phones that are cheaply priced -- provided the students are willing to watch a certain number of video ads on their cellphone handset every day.
With so many MVNOs launching, however, some industry watchers are already predicting a shakeout of some kind.
"For every MVNO that succeeds, there will be two or three that will fail," according to telecom analyst Daniel Torras of Pyramid Research. The firms most likely to succeed as MVNOs, he says, will be those with strong brands, premium content, and an existing and loyal customer base.
Yankee Group analyst Roger Entner, meanwhile, has said that when it comes to mobile virtual networks, "the low-hanging fruit are gone. To succeed going forward, you have to microsegment very specific products to very specific customers."
One big risk for a virtual network operator, as more than one analyst has pointed out, is that the company relies on someone else for the service it is selling -- and, in most cases, that someone is a competitive telecom carrier. Not only are there service issues to consider, but there is also the "squeeze play" problem: In other words, if an MVNO gets too large, the carrier providing its capacity might just decide to change the terms of the deal. That's why successful MVNOs such as Virgin usually offer their telecom partners an equity stake in the company.
The bottom line, analysts say, is that a virtual network operator such as Virgin may appear not to own anything, but it still has to have something compelling to offer -- either in terms of its service or its brand name or both -- or it will almost certainly fail. Those that are able to find that magic bullet, however, could become the mobile powerhouses of tomorrow.
Get set for MVNOs
PHOTO: PIERRE ANDRIEU/AFP/GETTY IMAGES
A mobile virtual network operator is a cellphone company that doesn't own any spectrum. It leases space on another company's network, then resells it under its own brand name.
10 MILLION
Number of U.S. consumers who currently get their cellular phone service from an MVNO, according to International Data Corp.
30 MILLION
Number of U.S. consumers expected to receive their cellular phone service from an MVNO by 2010, according to consulting company DiamondCluster.
$4-BILLION
Annual revenue currently generated by MVNOs in the U.S., according to International Data Corp.