Virgin Making Mark Among Mobile Services

October 2, 2004

By Sinead Carew

NEW YORK (Reuters) - When Virgin Group (VA.UL) Chairman Richard Branson put his brand on a U.S. mobile telephone service two years ago, there appeared to be scant space for newcomers to the crowded market.

Little did the British travel and entertainment mogul know that Virgin Mobile USA would grow faster than his wireless ventures in other markets and lead other companies in diverse industries to set up mobile services to promote their brands.

With gimmicks like celebrity voicemail messages aimed at fashion-conscious teenagers, Virgin Mobile has signed up 2 million customers. While this represents only 1 percent of the U.S. mobile market, the joint venture of Virgin and Sprint Corp. (NYSE:FON - news) still turned heads.

Now Walt Disney Co. (NYSE:DIS - news) may lease network space from one of the established wireless companies to create services based on its various entertainment properties. Fellow media giant Time Warner Inc. (NYSE:TWX - news) wants to provide mobile through its cable television unit.

Retailer 7-Eleven Inc. (NYSE:SE - news) has already started selling own-brand mobile services at its 4,400 U.S. convenience stores, using the network of Cingular Wireless (NYSE:SBC - news)(NYSE:BLS - news).

Sprint, which owns half of Virgin Mobile and leases network space to it, is the main U.S. provider of capacity to rival services.

The company says these services do not hurt its business because they go after groups it does not target, such as the youth market. While larger providers like Sprint focus mainly on subscription-based plans, private-label companies like Virgin and 7-Eleven tend to sell prepaid services where customers pay for calls in advance.

The new services bring more choices for consumers, but they are also adding more heat to the already blistering competition in the U.S. market.

"This is like bringing a pot to boil and then putting a cover on it to increase the pressure," Yankee Group analyst Roger Entner said.

OUTSIDER CHANCES

The private-label wireless market could be worth as much as $6 billion a year by 2009, when it could have room for as many as four branded U.S. services with 5 million to 10 million customers each, Entner said.  But Daniel Schulman, who heads Virgin Mobile USA, said new entrants would lose money for about two years. He would not say if his business is profitable yet.  "It's a big risk," Schulman said. "It's a lot more than throwing a brand at a service."

He recalled that soon after Virgin Mobile's inception, Branson told him: "I'm selling my favorite hotel to fund you."  All told, the parent companies provided about $350 million in funding. The joint venture spent $50 million of that on marketing and had to set up and manage everything from billing systems to computers that direct text messages between mobile phones.  While Schulman has added customers quickly enough to appease his backers, he warned that rapid growth also creates problems. Most providers sell phones at heavily discounted prices in order to attract customers.

"The more handsets you sell early on, the more cash you spend that is not covered by enough revenue," Schulman said.

At least some of the customers under Virgin's prepaid plans will leave before they spend enough to cover the cost of the phone.

Nevertheless, such services can be profitable, according to Yankee's Entner, albeit less so than those run by companies that own their own networks.

While traditional operators bring in profit margins of 50 percent to 60 percent, their private-label counterparts get 30 percent to 40 percent, he said. This could drop to about 5 percent if an outside company manages the service.

Retailer 7-Eleven would not reveal its profit targets, but said it expects higher margins from its own service than from selling other brands, such as AT&T Wireless (NYSE:AWE - news).

MOBILE HOBBIES

Al Delattre, a partner at consultant Accenture, said the U.S. market could support as many as 40 types of narrowly targeted mobile services, with themed phones that deliver everything from recipes to business data.

For example, Disney is looking into selling a mobile service to sports fans under its ESPN sports network brand. It is also considering one based on the Disney brand, which is famous for cartoon characters like Mickey Mouse.

Kevin Elliott, 7-Eleven's vice president of merchandising, said the chain has made its service easy to use, targeting the countless people who have little interest in mobile phones but would use one for security reasons.

"It's like a can of private-label corn," Elliott said. "You know what's in it."