Virgin Mobile Shakes Things Up Again
By Carlo Longino, Fri Apr 29 18:00:00 GMT 2005

MVNO pioneer Virgin Mobile has announced a new contract service, eschewing the typical prepaid-only approach of most virtual operators. Will it force incumbent operators to change how they treat contract customers?

Virgin Mobile UK caused quite a stir when it launched in 1999 by setting itself up as a consumer advocate and introducing a ridiculously straightforward prepay tariff -- and rode its success ever since. The company is now hoping to do the same for the 70 percent of British mobile users on postpaid accounts by introducing a contract service.

Always the agitator, Virgin says its contract plans don't have the "13-month catch" that other operators' do. It says most handset subsidies are paid back over the life of a year-long contract, so at the end tariffs should fall to reflect this -- accordingly, when users hit the end of their 12- to 18-month contracts, Virgin will cut their rates by up to half or offer them a new phone if they want to re-up for another year.

The approach makes some sense, and is likely to cause some consternation for incumbent carriers, whose focus always seems to be on attracting new customers with special deals and cheap handsets, rather than keeping their existing customers by offering the same level of enticements. In the age of mobile number portability, customers are generally offered little financial incentive to stick with their existing carrier, when switching can mean a cheap new handset and/or a better tariff -- a perplexing situation for many consumers, who don't understand why their history of custom is rendered essentially useless.

Analysts Ovum have a few concerns. They worry the tariff could be overly confusing for consumers, doing little to come through on the simplicity for which Virgin is known, and not really appearing that different from the incumbent contract plans Virgin implies are too complex.

The main stumbling point, though, could be the actual prices: Ovum says they're higher than comparable tariffs from other operators, the assumption being they're cheaper over the long run because they're reduced after the initial 12- or 18-month period. This could deliver value to users with little interest in regularly upgrading handsets, but for users that want to frequently get new handsets -- and with new services requiring more powerful handsets with support for new features and technologies emerging on a consistent basis -- it doesn't sound appealing.

What really makes the Virgin offer interesting is its potential as a disruptive force to force other operators to reevaluate how they deal with existing customers, who often feel burned when they realize all the cheap offers carriers advertise are limited to new customers. It makes little sense why carriers don't do more to retain their existing customers, particularly with what they spend to acquire new customers.

It's doubtful that many carriers will be eager to follow Virgin's lead and cut tariffs for continuing users, as it hurts their beloved ARPU stat. But if carriers could reduce customer-acquisition costs, it could offset decreased ARPU. Carriers make a lot of noise about wanted to reduce their dependence on handset subsidies (and cut what it costs them to get new subscribers), but it's as if they want to have their cake, and eat it too, by reducing their costs and not passing any of the benefits on to customers.

Most efforts at customer retention have been somewhat empty gestures that make for great marketing campaigns and press releases, but don't seem to amount to much in the market, and don't offer the bulk of their customers any real savings -- and of course don't cost the carriers much in return. In the US, Sprint and Nextel have plans that don't sock users with high fees should they go over their allotted minutes, but with typical plans offering so much airtime so cheaply, overage isn't much of a concern here these days. The same goes for Cingular's much-vaunted Rollover Minutes, which lets users "store" unused minutes should they need them in subsequent months.

It's hard to say if any of these measures really help carriers retain their current customers. The only big difference may be in Cingular's plan, where users can build up so many rollover minutes, they can switch to a cheaper plan until they exhaust them -- a loophole that the company would likely close if it starts damaging ARPU. Virgin's plan could cause a shake-up, if for no other reason that it offers customers real, very visible savings, rather than a meaningless feature that might save them money at some point.