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Party Animals, Supermodels & Naked Knights

Dan Schulman doesn't like to get too dressed up — not even when he has an audience with a British knight. Fortunately, the knight in question doesn't like to, either.

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“We both asked the same question before we met each other, and that was whether either of us should wear a suit,” Schulman said about his first meeting last October with Virgin Group founder Sir Richard Branson. “We immediately knew we had certain traits in common.”

Similarities like that helped Schulman land the job of president and CEO of Virgin Mobile USA, the American front of Branson's campaign to make Virgin a global wireless name by pioneering the mobile virtual network operator, or MVNO, model around the world.

For the suitless meeting last fall, Schulman took a redeye flight from the East Coast to meet Branson at his London home. Branson himself had just returned to London from Nigeria. Both were exhausted, but the energy level surrounding the prospect of importing the Virgin name into the U.S. wireless market was through the virtual roof.

Schulman, a former AT&T executive, had recently ended his two-year stint with high-flying e-commerce outfit He was president and CEO of Priceline until what press reports called a surprise ouster took place in May 2001, in the thick of the dotcom meltdown. (Schulman said he left for personal reasons and declined to provide more detail.)

The larger-than-life Branson, a man as legendary for his business acumen and extraordinary personal wealth as for his quixotic attempts to circle the globe in a hot-air balloon, was looking to introduce Virgin Group's mobile virtual network operator (MVNO) model to American consumers. Schulman understood what it meant to build a brand and a virtual business model in the U.S. thanks to his Priceline tenure. And like Branson, he was attracted to the risk.

For both men, that risk is enormous. Branson named his company Virgin under the guiding principle that it would be a neophyte in every new business it entered. Virgin Mobile USA looms as an opportunity to do something no one else has managed to pull off: proving that the MVNO model can work in the crowded and challenging U.S. marketplace.

The mission of an MVNO is to attack demographic segments that wireless carriers have yet to be effective in reaching, such as the youth and prepaid markets. The concept is becoming more important within the wireless industry as penetration rates increase and carriers find they can't be all things to all consumer segments. Analysts believe that most carriers inevitably will need to forge partnerships to help lure new subscribers.

The MVNO concept has taken Europe by storm because carriers there realized they needed partners to help segment the market amid 70%-plus penetration levels. It's been a much tougher sell in the U.S., in large part because MVNOs aren't really new. U.S. wireless carriers have been working with resellers for years, but for many operators the experience has been horrendous. Resellers in this country tend to reach many of the same customers that carriers themselves have already tapped.

But Virgin Mobile might just have the right ingredients for an MVNO. Virgin Group, which sells everything from appliances to music, already has its own distribution model — there are some 11,000 Virgin retail locations worldwide where young people already shop. And its plan to pursue the relatively untapped youth market with a strong brand has resonated with its overseas target audience. Features like a simple pay-as-you-go pricing plan alongside hip and edgy content like the latest pop music tend to have great appeal to that demographic.

All Virgin Mobile USA needed was access to a U.S. carrier's network — and some of its money. Virgin would handle the marketing, billing, customer care and wireless data content on its own.

After courting various operators, Virgin Mobile finally got Sprint PCS into bed. The carrier's newly appointed CEO and President Chuck Levine is a man who moved up the Sprint ranks on the marketing side and understands what it means to segment. Last fall, the two companies inked a 50-50 partnership in which each initially contributed $50 million.

For Virgin Mobile, Sprint PCS proved to be an ideal choice: The carrier is updating its current CDMA network to the next generation of CDMA, known as 1XRTT technology, doubling its capacity in the process and allowing Virgin Mobile ample network space to add new subscribers and offer high-speed, data-hogging applications such as music content. Sprint PCS also boasts just one billing and back-end platform, meaning that Virgin Mobile could easily integrate its own back-office systems into the carrier's network.

“We'll get a fair share of use because we get the young Republicans out there, but not the edgy youth,” Levine quipped during a news conference announcing the Virgin Mobile deal. “They will be able to do a better job than anyone else in the country targeting the youth market.”

Schulman can provide a plethora of statistics supporting the company's strategy to target the under-30 market with what he calls “no bullshit” wireless. In general, he said, existing wireless operators aren't resonating with younger consumers because they offer complicated contracts and pricing plans, along with features that tend to attract more enterprise-oriented users.

It's a business plan that makes sense in principle. But in practice?

“Virgin Mobile really is a one-trick pony,” said Ken Hyers, senior analyst with In-Stat MDR. “We have to find out if they are going to be as nimble as they say they are. They have to succeed in the young adult market.”

That's why Schulman knows his company must be unique in every way: from the handsets and content it offers, to the way it delivers that content, right down to the advertising lingo it uses. It will be very much a marketing game, but unlike incumbent providers, Virgin Mobile has the advantage of spending all of its promotional dollars on the teen market, without the costs associated with building out and operating a wireless network.

The companies Virgin Mobile partners with are critical elements in its MVNO strategy. In all, Schulman and Co. have struck deals with partners that deliver everything from customized mobile phones to back-office and billing systems to voice-driven applications called VirginXtras. Content provider ScreamingMedia and voice software company BeVocal are delivering many of these VirginXtras. By using voice commands, for example, users can schedule wake-up calls, catch up on gossip and even schedule so-called “rescue rings” to bail out of meetings or dates.

Some of Virgin Mobile's more unique features also required unique user interface software, resulting in a partnership with handset maker Kyocera. There, a group of ex-Qualcomm engineers customized the handset user interfaces so that teens could access content with the push (or two) of a button. Kyocera also customized messaging protocols and other features that integrate with Sprint PCS's CDMA network. The outcome was a pair of Virgin Mobile-branded phones known as the Party Animal and the Supermodel.

Virgin Mobile also recently signed content deals with MTV Networks, VH1, the Country Music Channel and Nickelodeon. MTV is probably the most important content provider for Virgin Mobile, since it has defined what's cool in the young market for decades. Later this summer, MTV and Virgin Mobile plan to begin rolling out a wide assortment of branded content that includes games, graphics, ringtones, text alerts and voice mail.

Some of Virgin Mobile's original content, such as Wake Up calls and Rescue Rings, will use voices from MTV's characters, personalities and musical guests. The company also plans to work with MTV and VH1 to promote customized wireless CD stores featuring top albums from the VH1 Top 20 and MTV Buzzworthy artists.

And last month, Virgin Mobile kicked off its nationwide launch with an event in New York's Time Square that featured an outrageous appearance from Sir Richard himself: Wearing only a mock Virgin Mobile cell phone to cover his nether regions, Branson told the crowd he was demonstrating that with its straightforward pricing strategies, Virgin Mobile has nothing to hide.

Amid all the hype, however, a report released earlier this year by Forrester Research paints an ugly picture for many MVNOs. It suggests that the majority of European MVNOs will likely fail because they must compete against mobile operators that increasingly rely on their own targeted marketing approaches. Likewise, U.S. incumbents like Verizon Wireless and Cingular Wireless are starting to see the value of penetrating the younger market, offering customized portals, ringtones and youth-oriented text messaging, complete with more modern and hip marketing campaigns.

Greg Roberts, director of marketing and national promotions for Cingular Wireless, said his company has a head start in the youth market because it has been focusing on teenagers since launching its brand last year (Wireless Review, June 2002, page 44.) “We have a lot of research that gives us a clear indication of what types of products and services to deliver,” Roberts said. “We approach that consumer group in a very smart and educated way.”

Virgin Mobile must also be prepared for copycat offerings, said Andrew Cole, senior vice president of the wireless practice at Adventis. “Virgin will initially be greeted with skepticism by the competition,” he said. “But as they drive subscribers, carriers will be watching them like a hawk and focusing on imitating them.”

Meanwhile, Richard Branson's dream of building a global MVNO company is already faltering in other regions of the world, primarily because of competitive measures many incumbent operators have taken to match Virgin Mobile's offering. The company's most successful effort is in Branson's native U.K., where Virgin Group's venture with One2One managed to drum up 1.8 million customers since its 1999 launch.

But Virgin Mobile's joint venture with Asian wireless operator Optus, which launched two years ago with the goal of entering 10 Asian markets, recently pulled out of Singapore, citing a weak economy and a saturated market after adding only about 30,000 customers since its debut.

And in Australia, Virgin Mobile and Optus have added only 220,000 customers in two years. Analysts say the slow growth is a result of incumbent carriers there dropping prices to match Virgin Mobile's. Optus has already lost some $116 million Down Under and has refused to invest more money in the venture.

But in the U.S., optimism still reigns. With irreverent slogans like “Talk cheap and dirty if you want” and “What's fun, sexy and not looking for a commitment?,” Virgin Mobile clearly fancies itself the new wireless alternative.

“We are very much realists around here,” Schulman said. “We will be constantly shifting based on new needs in the market, competitive needs and new content or partners. That will be the key to our success — to keep one step ahead.”

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© 2014 Penton Media Inc.

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