January 31, 2001 10:05 AM PST

Virgin phone service to reach U.S. shores

The British are coming, with hopes of shaking up the United States mobile phone market yet again.

Virgin Mobile--a division of the conglomerate that owns Virgin Atlantic Airways, the Virgin Megastores, Virgin Cola and the fastest-growing mobile phone company in the United Kingdom--is close to a deal that would bring its brand into the U.S. market, company insiders say. A deal is expected in the next several weeks, they say.

Virgin's entry would be the first significant example on this side of the Atlantic of a new model taking off in Europe, in which Virgin and others that partner with established carriers are dubbed "virtual network operators." The model has yet to gain traction in the United States, but analysts say other companies are likely to follow Virgin's lead, producing mobile phone service from popular brands like Nike or America Online.

Virgin won't comment on who its partner in the United States is likely to be, and insiders say the timetable could be extended if last-minute snags are hit. Speculation has centered on Sprint PCS, which already has a "private label" program in place for this type of relationship, and on AT&T Wireless.

Despite starting well behind companies like Orange or Vodafone in the United Kingdom, Virgin has become the fastest-growing cell phone provider in that country, with more than 700,000 customers added in 15 months of operation. Analysts are skeptical as to whether it can replicate that success in the United States, however.

"I don't think the Virgin brand is as well-known in the United States as it is in the U.K.," said Iain Gillott, who heads mobile consulting company iGillott Research. "But I don't think that precludes other brands from trying it. The model makes a lot of sense."

The brand game
In the virtual operator model, a brand well-known to consumers takes over the role of selling the wireless service from the carrier. The customer would buy a Virgin-branded phone and dial up through a Virgin-branded service, but the actual network would be owned and operated by a traditional phone company. This means that the carrier has to share some of the revenue, and therefore phone companies in the United States have been more resistant to the model than have their counterparts in Europe.

Virgin Mobile USA President John Tatum, who has helped lead the company's advance market research team in San Francisco for the past few months, says that most of the big carriers have been interested in talking to the company about a partnership. Final details have yet to be settled, though he expects to have a deal in the next few weeks.

"The Virgin brand reaches a customer segment that they see their brands don't necessarily reach," Tatum said. "They've all been interested at least in kicking the tires."

The main advantage of the new model, analysts say, is exactly that--allowing a consumer company to reach consumers that the telecommunications brands haven't touched.

The youth market is one particularly profitable segment that has seen wide adoption of cell phones in Europe and Asia, but still lags in the United States. Virgin is planning to market its service to this demographic. That will be harder than in its home country, but the Virgin music stores scattered around major U.S. cities will give the company a leg up, Tatum says.

"We recognize that the Virgin brand is strong here but doesn't have the presence it does in the United Kingdom," Tatum said. "We realize that we'll have to put a large marketing effort behind the product."

The brand tie-in allows the company to offer more than simply phone service, such as deals at Virgin Music stores, or discounts on travel services when shopping through Virgin's mobile phone-based e-commerce service. Although phone-based e-commerce has not yet hit its stride with consumers, Virgin executives believe it will ultimately be a profitable channel for sales.

Analysts say other brands that resonate with other demographics are likely to follow suit. Nike, for example, has put its brand on consumer electronics devices. America Online already offers phone service through Talk.com, and analysts say the company is a short step forward to offering its own branded cell phone service.

The virtual cell phone
Whatever Virgin's eventual success in the United States, its U.K. record and the prospect of its arrival in the U.S. market is sparking interest in the idea of the virtual operator on this side of the Atlantic.

There are a few examples of ordinary resale here. WorldCom, which has tried unsuccessfully to buy its own network for years, is the largest such example; smaller companies would include the likes of Working Assets, which also offers a long-distance service.

General Motors' Onstar service, which offers wireless Net access for some high-end cars using Verizon Wireless' network, is another example that draws closer to the European model.

The virtual network model can go deeper than simply that of reselling another companies' network minutes, however.

With each of its other deals, which include smaller ventures in Singapore and New Zealand, Virgin has created a joint partnership in which it and the underlying carrier are co-owners of the co-branded service. That gives the carrier an incentive to continue offering service and support, even if the new venture starts competing against its original service.

U.S. carriers have been slower than their European counterparts to adopt this model but are warming to the idea, analysts say. Some are loath to lose any cut of revenue to partners, while some are already running into capacity problems in large cities and are unwilling to give up spectrum they might need for future high-speed Internet applications.

"For service providers this is a tempting market, because if you don't offer it someone else will," said Eddie Hold, an analyst with research firm Current Analysis. "But it's better to own the customer yourself."

The high prices to be paid by companies including Verizon Wireless and Cingular Wireless for new wireless spectrum at the recent government auctions may prod them to be more open to new brands selling their services, some predict.

"That kind of price tag encourages you to be a little more open to new business models," Gillott said.

 

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