January 31, 2005 9:44 AM PST

Making cell phone companies out of thin air

It seems like anybody with a well-known brand name is going into the cell phone business, and Sprint's wireless network is somewhere in the background.

Mobile virtual network operators, or MVNOs, are companies like Virgin Mobile USA that sell cellular service without actually owning a network to carry the calls. MVNOs resell calling minutes bought from major carriers--or more accurately, a major carrier. Among the major U.S. wireless providers, Sprint practically stands alone in its willingness to open its network to what some would call upstart competitors.

It's out of necessity, not choice, that Sprint's network is the backbone for nearly every MVNO. U.S. giants Cingular Wireless and Verizon Wireless want little to do with these deals because, representatives say, the payoff has too many risks, such as overcrowded networks that ruin coverage and voice quality for everyone.

Perhaps more importantly, they say, why play a role in creating new competitors: niche-chasing start-ups, or giant entrants such as the cable industry, which could brand cell phones to create a quadruple offering of Internet, television, home telephony and cellular service?

News.context

What's new:
Lots of Americans don't want--or can't get--a cell phone from the few major carriers. But new virtual operators are popping up to serve these niche markets--without even building networks. Enter Sprint.

Bottom line:
Other U.S. wireless carriers are reluctant to provide access to virtual operators. With Sprint the only wholesaler of note, the potential to infuse competition in a consolidating industry--and to reach underserved markets--is reduced.

Still, lots of companies are looking into the opportunities this kind of service affords. Even AT&T--Ma Bell, the onetime telephone giant now being acquired by SBC Communications--has plans to re-enter the cell phone business with a call to Sprint, sources said.

The market MVNOs look to serve in general could be a huge one: about 40 percent of U.S. residents don't own a cell phone yet, and of that, a large percentage are the teenagers and young adults the MVNOs target. Because they don't require users to sign contracts, MVNO services are expected to be popular with teenagers, as well as those without sufficient credit histories.

The latest of the growing number is SK-EarthLink, a cell phone operator literally made from thin air. The $440 million joint venture between Korean wireless giant SK Telecom and Net provider EarthLink hasn't erected a single cell tower. Rather, it'll be reselling minutes on Sprint's cell phone network, along with SK Telecom handsets and cutting-edge media.

SK-EarthLink debuts in March and will be part of EarthLink's bundle of broadband, wireless access and phone offers. The companies say that a market full of fewer, and bigger, players leaves plenty of room for small, agile entrants.

"We looked at the landscape and saw a few mass-market players and lots of consolidation," said Brent Cobb, vice president of EarthLink. "There's a lot of room for companies focusing on specialty markets, niche types of opportunities."

Aside from SK-EarthLink, several other firms are relying on Sprint-owned cell phone networks: Qwest, Virgin Mobile USA and, soon, Boost Mobile. Time Warner is in talks with Sprint.

Elephants in fear of mice?
Sprint's status as practically the only network source for MVNOs definitely doesn't help the emerging virtual carriers. If Sprint continues to shoulder the MVNO burden virtually alone, the consolidating cell phone industry won't get the flood of new virtual carriers some have predicted. Instead, just a trickle of new operators will appear, reducing the effect competition has of stabilizing or reducing prices. The unwillingness of the other carriers to play ball with MVNOs could suggest that they don't think it's as good an idea for their futures. Sprint is making money selling access to MVNOs, but that's income its competitors are apparently willing to forgo.

"There's definitely a trade-off for carriers," said Albert Lin, an analyst with American Technology Research. "At a minimum, MVNOs introduce an unpredictable level of activity on a network, and another competitor to the marketplace. But if Sprint can show they are making money doing it, other carriers will join in and there will be more of these."

Sprint spokeswoman Melinda Tiemeyer said that, to date, there have been no complaints about the capacity of Sprint's network, and customer defections to rivals is down. There are no signs, she says, that the 2.8 million MVNO customers on its network are hurting service

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