By Ken Hyers
After months of waiting, a new type of mobile carrier, named Virgin Mobile USA, has been launched in the US. Virgin Mobile USA (VMU) is a type of hybrid carrier, known as a Mobile Virtual Network Operator or MVNO. An MVNO, unlike other wireless carriers, owns no wireless network infrastructure, such as towers or basestations, or any of the other transmission facilities necessary for actually sending and receiving
wireless telephone calls. Instead, an MVNO owns only customer care and billing facilities and purchases airtime wholesale from another carrier. Essentially, an MVNO is a brand whose main function is marketing and acquiring customers.
Virgin Mobile USA is a joint venture owned by British Mogul Richard Branson's Virgin Group and the US wireline and wireless carrier Sprint Corporation. VMU offers wireless service to customers using the Sprint PCS network, although all service is branded VMU. Virgin Mobile USA is targeting its services at the youth market (ages 15 – 30), though its core market is the 18 to 24 year old age group. It is a prepaid
service that aims to differentiate itself by positioning its service as a "hip, fun, honest" alternative to other wireless services available today.
Virgin Mobile USA has recognized that the youth market is an under- penetrated market. It believes that over the next five years, 25 to 35 million young people between the ages of 15 and 30 will adopt wireless services in the US. By offering services such as instant messaging (IM), gaming, and music to the mobile phone, it plans to claim a high percentage of those customers.
The launch of Virgin Mobile USA is the culmination of over 18 months of planning. When it was first announced in 2000 that Virgin would launch an MVNO service in the US, the wireless market was red-hot and Virgin Mobile in the UK was the talk of the industry. Like its newly launched US counterpart, Virgin Mobile UK is an MVNO targeting the youth market with a prepaid product. Unlike the US, the UK wireless market is
more highly penetrated, prepaid service is as popular as postpaid, and a young person is as likely as an adult to own a mobile phone. Each of these factors have worked to Virgin Mobile UK's advantage and the company is now the second fastest growing carrier in the country. Nevertheless, the carrier is not yet profitable and does not have major market share. The US market is very different than the UK, and VMU will
likely have a much more difficult time achieving success in this country.
Unlike the UK, US wireless customers are primarily users of postpaid services. Prepaid wireless has been used to attract those customers that have such poor credit that they cannot qualify to sign up for postpaid service, or that are too young to sign a contract. VMU does not view this as a disadvantage, but rather, an opportunity to target an under-penetrated market and make prepaid service mainstream. They plan to
do this by offering competitively priced prepaid service with liberal renewal policies for unused minutes. One serious challenge that they will face, however, is that prepaid churn is significantly higher than postpaid churn, a problem that has bedeviled other prepaid offerings in the US.
Virgin Mobile USA's pricing is unique in the industry in that it offers no "peak" and "off-peak" pricing. Instead, customers are charged $0.25 per minutes for the first ten minutes they talk each day, and $0.10 for each additional minute. VMU expects that customers will use, on average, 250 minutes a month, and use their phones, on average, for 21 days in each month. This works out to about 12 minutes a day, at
$2.70 a day, or $56.70 a month.
A challenge that VMU will face is one of building name recognition. While the Virgin brand is well known in the UK, where Virgin Group operates over 50 Virgin-branded companies including an airline, train service, travel services, and music stores, as well as many other types of services, it is less well known in the US. Virgin Mobile USA will distribute its services through its 21 Virgin Megastores, through Best
Buy's 450 stores, Target's 1,050 stores, Winn Dixie's 1,200 stores, Circuit City's 610 stores, and through over 400 university bookstores. It will also allow customers to automatically replenish their minutes, either by linking their service to a debit or credit card, or by going to one of Circle K's 2,250 stores or 7-11's 5,200 stores. The carrier will also work to build brand awareness through online, print, and
other media advertising, and through a marketing partnership with MTV.
Another challenge that VMU will face is competition from other carriers. The US market is highly competitive, with more than six wireless carriers in most major markets. When Virgin Mobile launched in Australia in 2001, it faced heavy discounting from the other carriers in the country. If Virgin succeeds in attracting significant customer share in the US, other carriers will roll out offerings to match VMU's
success.
Virgin Mobile USA's launch could not come at a worse time given the state of the wireless industry. The US wireless market is already 50% penetrated, and carriers are facing extraordinary pressure to reduce debt and attain profitability. Also, the trend in the US wireless market is towards consolidation, and In-Stat/MDR believes that over the next 18 to 24 months the number of regional and national carriers will
shrink through acquisitions and mergers. Virgin Mobile USA is under- funded and the Virgin Group is working to reduce its exposure by closing unprofitable operations. The crucial test for VMU will be whether it can add enough customers in the fourth quarter of 2002, the busiest time of year for US wireless carriers, to justify continued operation.
In-Stat/MDR believes that VMU will face significant challenges in the US market and believes that its long-term outlook is not favorable. VMU will need to succeed where many other carriers have failed in profitably attracting and retaining prepaid customers. It will need to do so in the face of strong competition from other established carriers, and consolidation will increase the competitive pressures facing VMU.
The carrier is targeting the most fickle of market segments and may find that being hip, edgy, and fun is not enough to succeed in this business.
This article originally appeared in the In-Stat/MDR InformationAlert, Volume #24, June 27, 2002. It was written by Ken Hyers, Senior Analyst, Wireless Carrier Services, [email protected]
This article originally appeared in the In-Stat/MDR InformationAlert, Volume #24, June 27, 2002. It was written by Ken Hyers, Senior Analyst, Wireless Carrier Services, [email protected]
For additional analysis and timely commentary from Ken on the volatile wireless market see: http://www.instat.com/catalog/cat-wp.htm |