Got Brand?
By Cara Garretson and Peggy Salz, Thu Mar 07 00:00:00 GMT 2002

UPDATED: Today's wireless services are all about the name...

Wireless services aren't about network anymore. Subcribers care less about who owns the network and more about getting the services they want at a good price from a name they can trust.

Brand is what matters today. A mobile service provider with the right brand can build a strong business by targeting offerings to the needs of different customer segments. Of course, many of today's biggest wireless brand names Vodafone, AT&T Wireless, NTT DoCoMo -- are already network operators, but they are being challenged by a new breed of service provider that has figured out the key to wireless success doesn't lie in how much spectrum you own, but in how well you can target customers with the right services, and how cheaply you can do it.

Take Virgin, for example. The record label/transatlantic airline/retail operator and more has managed to transfer its brand name to the mobile services market in its home country the U.K. and in Australia, and has plans for the U.S., Singapore, Hong Kong, Taiwan, Japan, and continental Europe. By renting network space from mobile operators in what's loosely referred to as a mobile virtual network operator (MVNO) arrangement, the company saves the cost of securing spectrum and building a network while leveraging its strong brand to enter a new product market.

By and large, there are few companies that can successfully expand their brands beyond both product categories and regional boundaries. Even AOL Time Warner unarguably a global brand with its fingers in many different product and service areas appears to have backed off a rumored foray into the MVNO market. Virgin itself faces a major challenge this summer as it attempts to bring its mobile services to the U.S. a country obsessed with its own scores of big brands where Virgin has little name recognition.

Yet for the handful of contenders who can make their names count with wireless customers, providing services without the network overhead might be just the way to generate a whole new revenue stream from an existing customer base.

Own vs. rent

The MVNO model, which has caught on in Europe where six countries have at least 10 operating MVNOs each, according to Ovum and in parts of Asia such as Hong Kong, Singapore, and Australia, has two strict requirements. To succeed, MVNOs must already have brand awareness with a solid customer base, and they must have a partnership with at least one operator that makes renting wireless network space affordable.

In the true sense of the model, the MVNO would also own some of the network infrastructure usually network equipment that stores customer data although many, including Virgin Mobile, focus more on owning the customer than owning a piece of the network.

These two requirements dictate success because they determine whether or not an MVNO can make a decent margin. If a startup with no brand tries to enter the market, millions of dollars would be spent on customer acquisition, market positioning, and general awareness.

"The only way for the MVNO model to be successful is to have an existing relationship with customers and established marketing and distribution systems, otherwise it becomes way too expensive," says Knox Bricken, an analyst with Yankee Group in Boston, Massachusetts. And if an MVNO can't strike a good deal with a mobile operator, the amount it pays for renting network space will significantly eat into its revenue.

MVNOs need to strike deals with wireless operators that give them at least a 20 percent discount off the retail price of the service, since it costs MVNOs on average 20 percent of a wireless operator's expenses to provide service, says Ines Respini, a senior consultant with Ovum's London office.

In fact, the lack of MVNOs in the U.S. has largely been attributed to disinterest on the part of wireless operators to strike MVNO deals. However, with the telecommunications industry in bad financial shape, wireless operators are beginning to see MVNOs less as threats and more as revenue opportunities.

Finding the right wireless operator to partner with can make or break a company. A European wireless company called Sense Communications embraced the MVNO model in the early 1990s. But because the company couldn't find a mobile operator willing to rent space on its network, the idea failed, recounts Ovum's Respini.

The company relaunched in Scandinavia in early 2000, this time actively recruiting wireless partnerships, and now it claims to be the third-largest mobile operator in Norway.

Assuming an MVNO has the required brand and a favorable operator partnership, then the model makes sense, since companies can enter the wireless market without the time and cost investment of building a network. "An MVNO will do well if it builds a great distribution channel and a great brand to focus on a specific target market," says Seamus McAteer, principal analyst with Zelos Group in San Francisco, Calif.

Indeed, Virgin Mobile's strategy in entering the U.S. market is to focus strictly on the under 30 crowd, since that's the segment of the market it has been successfully selling its albums and other gear to.

"We obviously can't give too much away about our strategy for the US, but let's just say we're very excited about it," says Tom Alexander, Virgin Mobile managing director.

"We are planning to do as we did in the UK - offer a flexible, simple, good value proposition, with none of the catches or hidden charges previously always associated with owning a mobile phone. We don't necessarily narrow down our target market to the young - we prefer to think of them as the young at heart," adds Alexander.

Another important factor that makes the MVNO an attractive business model is the fact that regulators are either leaving them alone or encouraging them. "Regulators are generally positive to MVNO arrangements, they are disposed to encourage them because they provide additional competition and additional services," says Andrew Cole, global wireless practice leader with the Boston offices of Adventis, a strategy consulting firm.

Since spectrum is a fixed resource, only so many companies can own spectrum licenses, therefore competition in the wireless market is automatically limited. The MVNO model offers a means to expand competition, and theoretically drive prices down, in a way that regulators can support.

Risk vs. reward

Despite the low barrier to entry this model represents, MVNOs can still be risky bets. Currently, renting network space makes sense for third-and forth-tier wireless operators that have excess capacity and need to recoup their infrastructure investments. But as consolidation in the wireless industry marches forward fewer small players will be left, and that may mean less network space for rent.

Also, if the telecommunications sector bounces back from the economic slump it has experienced over the last year and a half, wireless operators across the board may be less interested in sharing their network with potential competitors, opting instead to focus on building their brand and targeting multiple customer segments.

MVNOs also risk misunderstanding the market. They must determine the right mix of services be it integration of business information for corporate customers, prepaid offers for younger consumers, or wireless phone updates for affinity groups such as soccer fans and package and price them accordingly.

Often their best bet is to go after a market segment that their wireless operator partner has not, but that doesn't mean it will be the most lucrative end of the customer base. "You're not targeting the lucrative business market; it's a smaller piece of the pie you're fighting for," says Robin Hearn, a senior analyst in Ovum's Boston office.

But that is not necessarily an unprofitable deed, according to Alexander: “Virgin’s economic structure is geared to be able to service lower-value customers profitably” and not just target heavy users. “Unlike the traditional networks we don't have billions of pounds worth of debt to service, accrued in the purchase of masts, infrastructure, brand-building and 3G licences. Therefore with our lower cost base and lower overheads we can still make a healthy profit from what might be considered to be lower value customers to the other networks.”

“The best analogy is to compare Virgin’s approach with that of a low-cost airline like Easyjet. “It makes a very healthy profit from what are considered to be 'lower-value' customers, while the likes of BA struggle to make money, even from the few highest-value customer who travel in first class.”

Another hurdle to penetrating the wireless market, particularly in the U.S., is the brand recognition that many wireless carriers have already established. "Maybe the real reason MVNOs haven't take off here is does someone really want to buy a phone from a record company?" asks David Steinberg, founder and CEO of InPhonic a wireless services company based in Washington, D.C., referring to Virgin. Steinberg maintains that while brand is important in the U.S., so is offering a solid telecom product.

Virgin Mobile appears to be confident with its plans for the U.S market. The company promises not only a grand debut, to create awareness, but also attractively packaged services. “We will have an extensive retail footprint across the US, being available direct and on the web. We will once again offer an extensive suite of money-saving, useful and innovative value added services, and we will, as you would expect from Virgin Mobile, launch with a bang, and will support our activities with a massive nationwide above- and below-the-line advertising, marketing and PR campaign,” explains Alexander.

InPhonic and dozens of other U.S. wireless companies such as Aether Systems, 724 Solutions, and Air2Web could also be a thorn in the MVNO's side. These companies co-brand wireless services with mobile operators to provide added functions and features such as corporate data integration or real-time stock quotes that aren't offered in basic mobile service packages. These relatively young companies that sprang up in the late 90s during the Internet boom interact with customers without stealing brand away from their carrier partners an arrangement that is no doubt more comfortable to the wireless operators.

When opportunity knocks

For those that get the model right, being an MVNO can offer great rewards. It can be a chance to extend an already successful brand even further, and a launching point into new markets. For example, if Virgin Mobile takes off in the U.S. and in Singapore, perhaps many more Virgin Megastores will open around the country, building off of the name of the wireless service.

As the wireless market matures and new technologies evolve, the demand for wireless services will only increase. The promised increased bandwidth of third-generation, or 3G, wireless networks means more space for new and different services, which could spell opportunity for new service providers.

And while the global wireless market is still the incumbent mobile providers' to lose, savvy service providers are poised to grab customers away if those carriers fail to offer the bells and whistles their customers want. "For customers, it's really contact with the service provider that's key. They've moved away from network operators and towards service providers," says Ovum's Respini.

Could Virgin reach its stated goal of becoming the brand of the young and hip around the world? Could Virgin Mobile become the first truly global wireless service provider? It's too soon to tell. But if the company can parlay its mix of a popular brand with willing network partners into all the markets planned, it certainly stands a chance. If nothing else, companies like Virgin are proving to wireless network operators that it's not going to be business as usual for much longer.

Cara Garretson is the Washington, D.C., correspondent for the IDG News Service.

Peggy Anne Salz monitors the global telecoms markets and contributes regularly to Communications Week International.