Care for a cell phone with that Big Gulp? 7-Eleven workers across the country might be making that offer if a new type of wireless service provider is allowed to take root in the U.S.
In Europe, the concept of mobile virtual network operators — or companies such as banks or retailers that dont own networks but buy services from operators and then offer wireless services under their own brands — has been gaining momentum. There are as many as seven MVNOs in the U.K. The most famous, Richard Bransons Virgin Mobile, has about 675,000 customers that fill about 8 percent of One 2 Ones network.
Companies in the U.S. envision similar scenarios here, especially since Virgin Mobile opened a San Francisco office and has been publicly looking for a network operator partner. But the difference between the markets in Europe and the U.S. might make it difficult for the model to survive and thrive here.
The definitions of MVNO and traditional resellers, which have been around in the U.S. since the early days of cellular, vary by who defines them. Generally, a reseller buys minutes from an operator in bulk, then resells it. An MVNO sometimes has a closer relationship with the operator. In Europe, the MVNO controls the subscriber-identity module card, which allows it to offer additional services and control billing. In the U.S., however, few operators use networks that require SIM cards, so resellers are limited to delivering only the same services offered by the network operator.
U.S. resellers have struggled mightily to build their businesses, but few have been successful. “The objective of the network operator was to extract as much value from the reseller so it can barely keep limping along, and then capture any excess profits to itself,” says John Tantum, president of Virgin Mobile USA.
Indeed, thats how reseller agreements often still look. Simple Communications has a deal with Sprint PCS that allows Simple to resell across the country anywhere that Sprint PCS has a network.
But Sprint PCS hasnt made it simple for Simple.
“I pay higher wholesale rates than they sell retail,” says Bill Coker, Simples president and chief operating officer. “So I have to be creative about how I manage the back office.” Simple only offers prepaid services, eliminating the need to invest in billing systems. The strategy seems to be working so far, as Simple has amassed 50,000 customers and launched in eight markets.
Coker would like to expand the companys services, but Sprint PCS makes that difficult, he says. Hed like to offer international long-distance, for example, but Sprint will only let him do that through Sprint. “Frankly, the rates Sprint charges me are outrageous,” he says. So Simple doesnt offer international calling.
Operators, even some in Europe, are resistant to resellers because they view them as competition. “A lot of operators are seeing MVNOs as a mixed blessing,” says Eric Kintz, associate partner at Roland Berger Strategy Consultants. “On one hand it brings in money, but on the other if they go through an MVNO, they lose customer control and are restricted to a dumb pipe.”
For now, in Europe its mainly the smaller operators eager to fill their networks that work with MVNOs. Vodafone AirTouch doesnt, but One 2 One, the fourth-largest operator in the U.K., does.
But the concept is gaining momentum since European operators spent exorbitant amounts of money on third-generation licenses. MVNOs can help them fill their new networks quickly and bring in revenue to help pay those license fees. “The shift since 3G licenses in the telco mindset is that maybe a dumb pipe is not so stupid,” Kintz says. Also, major European operators may want to become MVNOs in markets where they failed to win a 3G license.
Creative agreements can encourage operators to be more fair. In Australia, Singapore and the U.K., Virgin splits ownership in its MVNO operations with local network operators. Because the operators have a stake, they have incentive to help the company be successful, Tantum says. Virgin Mobile USA started in July, but was looking for a partner even before then. Though it has not yet found a partner, Tantum is confident his company will launch service in the U.S. this year.
Most operators have been open to discussing a deal with Virgin, he says, partly because they are realizing their own shortcomings. “Operators are beginning to recognize that their proposition and brands cant be all things to all people,” he says. Virgin plans to specifically target the youth market using its recognizable Megastores as retail outlets.
But there may be more trouble ahead for Virgin Mobile in the U.S. Although Virgin will want to strike a deal with a large operator that has nationwide coverage to match its retail footprint, the major wireless carriers may view the strong Virgin brand as a threat. “Plus, they have a consumer-oriented approach and we havent reached those levels of penetration in the U.S.,” Kintz says.
Still, big-name companies like Virgin and Worldcom, which has an extensive resale operation, have less trouble making deals with network operators than small or unknown resellers. “The hard part isnt cutting the contract but getting the volume to get the notoriety,” says Paris Holt, chief executive of Unified Signal Holding. Resellers often approach operators with plans to amass 100,000 customers in a year and only end up with 5,000. Operators dont want to spend the resources to manage relationships with countless small operators that wont bring in significant revenue, he says.
Holt says his company has an answer to the problem from the operator and reseller perspectives. Unified Signal has built a back-end platform that handles everything that resellers need to acquire, care for and bill customers.
Resellers are interested in Unified Signal because they dont have to invest in their own back-end platforms. Operators are interested because they can decide to deal with just Unified Signal, which in turn handles the many relationships with resellers of all sizes.
Unified Signal is building deals with operators that include wireless, long-distance, local, Internet service providers and energy companies. That can make it easier for resellers to add other services so they can offer bundles to customers.
“My dream channel is RadioShack,” Holt says.
RadioShack has more than 7,000 stores or dealers and activates 2 million wireless phones per year for other operators. “If I made them into a reseller, I could make them almost as large as SBC [Communications],” Holt says.
Unified Signal has also talked with Amazon.com, long rumored as an ideal wireless reseller. Such companies “want to be in telecom, but they dont know how,” Holt says.
Retailers such as supermarkets or convenience stores are more likely MVNOs in Europe than the U.S. because those stores already sell wireless phones. In Europe, rumors have surfaced that Wal-Mart Stores may begin serving as an MVNO, but the retailer would be an unlikely candidate in the U.S., where it doesnt have the experience of selling mobile phones, Kintz says.
At the end of the day, its not clear that the resale or MVNO models can work. “The MVNO model is yet to be proven,” Kintz says.
In many segments of telecommunications, such as the competitive carrier marketplace, the resale model hasnt been successful. But Virgin Mobile believes it can work.