Wholesale Channel – Sprint PCS, Virgin Mobile Venture Creates First U.S. MVNO

Posted: 12/2001

Wholesale Channel

Sprint PCS, Virgin Mobile Venture Creates First U.S. MVNO
By Khali Henderson

After a lengthy courtship, Sprint PCS and the Virgin Group tied the knot Oct. 5, creating a new joint venture, Virgin Mobile USA, the first mobile virtual network operator (MVNO) in the United States.

Under the agreement, the partners initially will have an equal interest in the venture. Sprint PCS will make a $50 million contribution of services and Virgin will invest $50 million in cash.

In the first half of 2002, the venture will complete a nationwide rollout of its pay-as-you-go wireless services and handsets under the Virgin Mobile brand and using Sprint PCS’ nationwide network. Virgin Mobile is targeting the under-30 set in the United States. The venture’s portfolio includes long-distance and nationwide coverage as well as Virgin Xtras wireless web content. Nationwide, retailers serving the youth market are expected to sell the service.

The venture is patterned after Virgin’s successful MVNO in the United Kingdom, which has attracted 865,000 users since it launched in November 1999. Still, analysts are skeptical about whether the MVNO model will pan out for Virgin in the

U.S. market.

The Yankee Group has identified several factors necessary for an MVNO to be successful in the United States. These include a pre-established brand, experience selling and distributing various products; special capabilities in customer service, economies of scale in the supply and demand chains as well as back office, and an existing large base of customers.

“Virgin has been so successful in the U.K. because it does fulfill these requirements; however, the Virgin brand and market is not as firmly established in the United States, and Virgin Mobile will have to do much more to create a strong presence with the (age) 15-30 consumer market on this side of the Atlantic,” says Knox Bricken, a mobile wireless services analyst for the Yankee Group.

Eddie Hold, director of telecom services for Current Analysis Inc., agrees. “Virgin Mobile’s key problem is that it is coming to the party a little late,” he says. Six months ago U.S. wireless service providers were still doing a poor job of targeting the younger users, but that situation is changing, he explains, citing the example of Verizon Wireless’ [FREEUP] offer.

Another major question is what this deal means for Sprint PCS and, in particular, its channel strategy. Sprint PCS declined to discuss the venture.

Analyst Adam Guy with The Strategis Group says the MVNO model is ideal for an incumbent like Sprint PCS seeking to resell its unused capacity. The challenge, he says, is how they will deal with the markets like New York City and Los Angeles where there isn’t extra capacity.

“If Sprint PCS loses retail customers as a result of dropped calls and busy signals due to the increased traffic on its network, this will reduce the value of the deal,” says Guy, adding that a planned 1X upgrade with a capacity boost of 1.6 to 1.8 times is not coincidental.

As for channel conflict, Sprint PCS does not have its own prepaid product, but analysts like Hold say the carrier not avoid a branded offer because of the Virgin deal.

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