CARRIERS LOOK BEYOND BRAND

The mobile virtual network operator was a tough sell in the U.S. until Virgin Mobile and Sprint PCS changed the mindset of an entire industry. Today, carriers striving to penetrate new markets are becoming potential MVNO players with well-known entities ranging from Wal-Mart to the WWF.

Imagine new wireless service providers with names like Gucci Mobile, Wal-Mart Wireless or even WrestleMania Wireless. In a sector where wireless carriers continually strive to partner with popular brand names, it's not such a far-fetched concept. Such partnerships have enabled carriers to penetrate new markets and find more customers willing to pay for the brands they love.

The mobile virtual network operator (MVNO) concept has taken Europe by storm, not only because the wireless industry there has reached penetration levels of more than 70%, but because European carriers that are taking on huge debt loads in the course of launching 3G networks have embraced the concept of partnering. Now industry watchers are waiting for the MVNO model to explode in the U.S. as wireless market growth begins to mature and carriers look for new ways to target underserved segments.

While MVNO was the favorite acronym spouted by industry analysts throughout 2001, U.S. carriers were loathe to admit that they needed help targeting different consumer segments such as the youth and prepaid markets.

The world's most well-known MVNO, Virgin Mobile, hoped to offer nationwide service in the U.S. by the end of 2001, but the international conglomerate only recently signed a deal with Sprint PCS after working hard to convince the carrier that its name could target the youth market more effectively than Sprint PCS.

Now the deal has served as a catalyst for more MVNOs, analysts say.

“MVNOs definitely have a home in the U.S.,” said Richard Siber, partner with Accenture. “We'll see some carriers moving away from consumer markets to enterprise markets. When you do that, you are beginning to segment, and other markets need to be targeted.”

MVNOs may be the key to unleashing innovative wireless data applications, which are lacking in the U.S. market. Wireless carriers are heavily entrenched in the voice business, unwilling to take some of the risks involved with creating cutting-edge wireless data services.

“We're not going to have strong, vibrant data services without MVNOs pushing the envelope,” said Dave Murashige, vice president of marketing for the wireless networking group for Nortel Networks. “We need someone to get the industry out of the box.”

The concept of an MVNO isn't new; carriers have been working with wireless resellers for years. For example, General Motor's OnStar private-labels Verizon Wireless' service to support its nationwide telemetry offer. OmniSky and GoAmerica Communications resell from wireless carriers such as AT&T Wireless.

However, a new form of reseller is emerging, sparked by Virgin's entrance into the mobile world. Analysts refer to these types of MVNOs as brand MVNOs, and a slew of companies representing industries ranging from airlines to retailers are studying the wireless space. All brand MVNOs will be required to handle their own marketing, branding and billing when they buy capacity from a carrier. But there are even more stringent requirements for MVNO partners.

Potential MVNOs should evaluate whether they have a strong brand name that transfers value to the wireless consumer, analysts say. Citibank, for example, has a powerful brand name and strong recognition, but it's unclear what specific consumer segment it could successfully target with wireless services, said Charles Golvin, senior analyst for Forrester Research. “There are a lot of people on the MVNO wannabe side that haven't thought through what their brand means and why the consumer would be attracted to it,” he said.

For instance, Virgin, which sells everything from appliances to music and has its own distribution models, plans to attack a market segment most carriers have not targeted to date: the youth market. The company intends to offer a hip pay-as-you-go service similar to what it offers in the U.K. Each of Virgin's phones in the U.K. comes with a host of WAP services called Virgin Xtras, allowing customers to receive discounts on CDs, DVDs, videos and computer games.

As the MVNO market in the U.S. takes its cue from MVNO developments in Europe, a recent report issued by Forrester Research suggests the majority of MVNOs in Europe likely will fail because they don't have the powerful brand, strong management and definable customer niche. “Few MVNOs will execute perfectly or compete against cutthroat mobile operators effectively using a targeted market approach; in fact, such an approach can lead to failure, brand damage and loss of customers in core product lines,” wrote Forrester analyst Michelle de Lussanet.

But retailers such as Wal-Mart and Target should enter the MVNO space because of their experience with distribution and credit-scoring, said Andrew Cole, global wireless practice leader for Adventis, a wireless consulting firm involved in a number of MVNO negotiations. Retailers can play a critical role in tapping the prepaid market for carriers that don't want to be exposed to the lower revenue and higher churn prepaid customers bring.

“MVNOs have to transfer the economics of the wireless business,” Cole said. “Distribution is so critical.”

The World Wrestling Federation — the world's largest supplier of pay-per-view content — is trying to determine what its brand would mean in the wireless space. The WWF recently signed a deal with Qualcomm to develop WWF-specific wireless data applications based on Qualcomm's BREW technology, but it hasn't determined whether it will partner with a carrier to offer WWF applications or enter the MVNO space.

“If we were looking at becoming an MVNO, there are a number of steps that need to be taken before we get there,” said Roger Marment, executive vice president of international business development for WWF Entertainment. “I draw the analogy of the electricity market. You trust your utility, but you wouldn't necessarily trust WWF Light and Power to carry your electricity.”

Marment said WWF fans — 57% of which own mobile phones — are early adopters of technology, earn incomes well above the median and own at least 2.1 computers per household, making wireless WWF content crafted around the organization's notorious edgy soap opera story lines a no-brainer, Marment said. WWF fans may be able to access data applications such as WWF Web content, pay-per-view clips and even play treasure hunt games for free Wrestle Mania tickets.

“We can charge for content. We know [fans] will pay for it,” Marment said.

While becoming an MVNO may be a positive way for companies to extend their brands, they also put themselves at the mercy of the wireless operator's network. If in-building penetration or coverage is poor, security is breached or data speeds are slow, MVNOs' brands suffer. This is why many MVNOs insist that carriers share the risk.

Sprint PCS and Virgin initially will have an equal interest in and mutual governance roles for Virgin Mobile USA. Sprint PCS is making a $50 million contribution of services to the joint venture, while Virgin plans to invest $50 million in cash.

And more operators are asking their vendors to come up with ways to solve quality issues an MVNO might encounter. Nortel is working with operators to solve some of these technological issues through its Shasta bandwidth manager product, a service node that provides MVNOs with IP services firewall capability, QOS policy enforcement and bandwidth management.

“MVNOs are the blind transport provider,” Murashige said. “MVNOs have their own set of traffic and subscriber attributes, yet traffic must be metered, tracked and QOS assured through the same platform. The MVNO is wholly reliant on the network provider for QOS. Without that, MVNOs cannot be successful.”