MVNOs LEAD THE CHARGE
By: Mark Flanagan

" A service provider that does not own spectrum or wireless network infrastructure, but instead partners with a mobile wireless carrier that agrees to resell or wholesale its airtime services to the MVNO to be marketed under a private label branded name. The MVNO is responsible for all business operations with the exception of the airtime network operations."

When it comes to prepaid wireless, the leading U.S. carriers have historically displayed a negative attitude toward this highly fragmented sector. In the carriers’ eyes, prepaid wireless leaves few reasons for enthusiasm, especially when compared to their core and very lucrative postpaid contract business. Prepaid generates a much lower ARPU and significantly higher churn rate. In addition, Wall Street’s reaction has been negative toward those carriers who embraced the prepaid business model, which certainly did not help matters from a carrier perspective.

But as certain Mobile Virtual Network Operators (MVNOs) executed their prepaid wireless strategies, it caused some carriers to take a hard second look at the prepaid wireless opportunity before it was too late. While the postpaid market had begun to reach saturation levels, prepaid wireless offered a market that had been historically underserved, which showed much promise and tremendous growth potential. The fragmented market that makes up this untapped segment includes youth, credit-challenged, immigrants and infrequent users.

Early entrant

While this uncertain carrier attitude toward prepaid wireless resonated throughout the industry, the first non-carrier player, TracFone, quietly arrived on the prepaid scene. Owned by the powerful Latin American mobile operator America Movil, the company brought to the table extensive experience in prepaid wireless and was quick to recognize a substantial opportunity in a virtually untapped market. Sizing up the potential market and demographic profiles of the potential user groups in prepaid came easily for TracFone, and its success to date speaks for itself.

Birth of MVNOs

Today, the players who make up the MVNO market have helped put a new exciting face on prepaid wireless as this service becomes more mainstream every day. The MVNOs looking to capitalize on the MVNO trend include several national wireless carriers and a wide contingent of experienced prepaid telecom players, some with very established and loyal distribution channel partners.

There is a wide and growing range of companies that are entering the MVNO space, and the number of new players is most certain to grow considerably over the next year. For purposes of this article, I have broken down the present MVNO market into two select categories: Tier 1 and Tier 2 MVNOs.

Tier 1 MVNO overview

Virgin Mobile, Boost Mobile and TracFone are Tier 1 MVNOs providing prepaid wireless services in the U.S. market. These Tier 1 MVNOs are driving significant numbers of new prepaid customers and have helped create much excitement for the market in general. Each offers its subscriber base a unique and different pricing structure.

The brands represented all have direct wireless carrier ownership, and each one is a partially or wholly owned operation of major wireless carriers. The only two major U.S. wireless carriers (Nextel and Sprint Wireless) previously not offering a prepaid wireless program ironically now own 100 percent and 50 percent, respectively, of Boost Mobile USA and Virgin Mobile USA. TracFone is 98-percent owned by America Movil, which owns TelCel, the largest mobile carrier in Mexico and Latin America.

Each MVNO in this category is targeting large retail chains and convenience stores for handset sales and customer acquisition. All three have stringent requirements for companies wishing to become authorized master distributors of their products and services. Virgin and Boost require that all their dealers be preapproved before they can sell any of the company’s products and services, and Virgin has a very strict criteria on the type of businesses (large retail chains) allowed to sell its services. The master distributor discounts for replenishment airtime with all three MVNOs are the lowest in the industry including the discounts offered with the national carriers’ prepaid wireless plans.

Virgin Mobile USA is a 50/50 partnership between Virgin Mobile and Sprint Wireless. Virgin is owned by the very successful world entrepreneur Richard Branson, whose identifiable brand name is well known to the under-30 age bracket and youth market.

To date, the company has quickly leveraged the Virgin brand name and is now well in excess of 1 million subscribers. This includes hitting the 1 million subscriber plateau faster than any other MVNO from its initial service launch date. The Virgin subscriber rate plan is simple and straightforward and is based on a daily usage format of 25 cents per minute for the first 10 minutes and 10 cents per minute thereafter. Text messages (SMS) are a flat 10 cents per message, and more than 60 percent of Virgin subscribers regularly use text messaging.

The company has aggressively targeted the under-30 age bracket and youth segments, primarily marketing its products and services through national retail chains. With its aggressive pricing model, low-cost text messaging and mobile entertainment services, the company enjoys probably one of the best ARPUs in the industry. While the company has a select number of authorized prepaid distribution companies that are reselling the Virgin program, there are very strict rules governing where the products can be sold so as to protect the Virgin brand name.

Boost Mobile USA directly targets the youth market with its prepaid airtime and mobile entertainment (ring tones, graphics and games) services and is a lifestyle-based MVNO. In addition, the company has gained wide appeal for its service with the Hispanic market because of its available coverage in Baja, Mexico, and the general appeal that prepaid wireless has with Hispanic people. The Boost Mobile brand began as a partnership between Australia-based Boost Mobile and Nextel Communications. Today, the Boost Mobile USA brand is now 100-percent owned by Nextel.

Operating on the Nextel network, Boost has a significant market differentiator with its "walkie-talkie" two-way radio system that extends across the U.S. and into Baja, Mexico. The service, which is popular among Boost’s current subscriber base, costs $1.50 and provides unlimited talk time during a 24-hour period. Another significant advantage for Boost is its ability to tap into the national base of Nextel distributors and dealers to promote and drive customer acquisition.

But Boost has been very slow to execute on its national rollout plan, perhaps indicating the internal ambivalence of a postpaid carrier managing a prepaid operation. The service has been available only in California and Nevada for the first 18 months of operation and just recently became available in 14 new states. Boost also requires that every dealer be approved by the corporate office before he is allowed to sell Boost products and services.

TracFone is the largest MVNO provider with more than 3 million subscribers as of Q2 2004. The company has a low ARPU of around $17 per subscriber and has maintained one of the lowest churn rates in the industry. TracFone has successfully targeted the infrequent user, but with the introduction of its double minutes program, the company has witnessed a wider type of demographic profile from its subscriber base.

The carrier offers a unique $149 service plan that provides the subscriber with yearly service access, 300 minutes and double the minutes on all future airtime purchases. The subscriber must purchase the $149 package in order to qualify for the double minutes program which, depending on the amount of purchase, can bring a subscriber’s rate to as low as 10 cents per minute. In addition, the subscriber is not subject to losing his mobile number if he fails to purchase more minutes after the account runs out.

A significant number of TracFone subscriber activations are generated through national retail chains such as Wal-Mart, Sam’s Club, Kmart, Target and several large office supply chains. On the PIN replenishment side, the company also has a number of authorized prepaid distribution companies that distribute their products both through POSA and live card distribution.

Tier 2 MVNO overview

The Tier 2 MVNOs in operation today are businesses from the prepaid long distance sector or have been started by principals with extensive experience in the sector. Many of these companies have entered into the MVNO sector, realizing the paradigm switch that is occurring within the industry and the high demand that is being placed on prepaid wireless from a consumer standpoint. As the industry is witnessing a significant shift from prepaid calling cards to prepaid wireless, these companies are positioning themselves to secure a piece of the prepaid wireless pie.

Tier 2 MVNOs primarily market their products and services through prepaid distribution and agent networks, which is a big advantage for getting their products and services into the markets where prepaid sells best. A significant number of these MVNOs have extensive distribution networks already in place to market their products and services. Many are also leveraging the large distribution footprints that leading POSA providers bring to the table.

These players are presently the only operators that are offering bundled rate programs. These programs have generated a lot of positive interest and results from the distribution channel and its prepaid customers. The bundled rate programs have the general look and feel of a postpaid plan and are being offered by select MVNOs operating on the Sprint Wireless network.

The bundled rate program offers various plans that include a set number of anytime minutes and unlimited nights and weekends. Although the plans start at $39.95, they offer prepaid wireless users the best value for their dollar of any available prepaid plan today. There is an open issue with regard to the single billing date cycle where the subscriber will only receive a prorated number of anytime minutes if they fail to make their monthly service payment on or before the beginning of the monthly service cycle. This appears to be the only real negative of the program.

By offering the bundled rate program, MVNOs have raised the bar on the subscriber pricing model. While no national carrier or Tier 1 MVNO has yet to offer a bundled rate program, one can believe that it is just around the corner, as prepaid has now become cost competitive with postpaid contract programs.

Here is a look at 10 of the top Tier 2 MVNOs that are beginning to make up a major part of this very fast-growing and competitive sector in prepaid wireless:

9278 Mobile operates under the Sprint Wireless network and is a phone-in-the-box program currently available online at 9278mobile.com. In August, the program will be available in wireless stores as well as in c-stores, where the brand is solidly established through the company’s prepaid card programs. The domestic plan is $59 for 400 anytime minutes and 24,600 nights and weekend minutes. For international calling, the plan offers direct, discounted rates to all countries. Using airtime cards, sample rates include 3 cents to most European countries, 15 cents to India, 3 cents to Mexico City and 5 cents to Australia.

Airvoice Wireless operates on the AT&T Wireless network and has been in operation for more than three years. The company, whose marketing plan targets large urban areas, operates in over 18 different states. Airvoice has built its customer base mainly through prepaid distribution companies, and its products are available on a wide number of POSA networks. A significant amount of business is done in hard cards.

The company has exclusive distribution arrangements with its distribution partners in many of its service areas. The service airtime rate plan is a pay-as-you-go plan that prices out at 18-25 cents per minute depending on the amount of purchase. The cards and e-PINs are sold in fixed denominations of $10 to $100.

DBS Communications is the largest MVNO operating on the Cingular Wireless network with the branded label EZ Link Plus. The service is available on both the TDMA and GSM networks in 15 major metropolitan areas, and the company is in the process of expanding to over 10 additional markets.

DBS has developed a very robust technology platform including a state-of-the-art IVR system to support customer activations and airtime replenishments. The company offers subscribers a bundled rate program that starts with its flagship product that sells for $20 and provides the subscriber with 50 anytime minutes and unlimited nights and weekends. Currently, international calls can only be placed to Mexico and other Latin American countries.

The company currently serves over 65,000 subscribers and has mainly built its subscriber base through its in-house sales network that sells direct to dealers. The company has relied on hard-card distribution of its products and services and has certain volume requirements for handset sales and activations with any of its distribution channel partners. The commission plan offered to distributors varies from market to market and is also based on the level of activations and volume of sales.

Global Talk PCS is one of the newest MVNOs to launch service on the Sprint Wireless network. The company offers its subscribers a bundled rate and international long distance program under the Global Talk brand. The company is launching a service platform that provides real-time management and reporting tools for its distribution partners. To help ensure its success, the company has created several key strategic partnerships and has extensive business relationships with a number of prepaid distribution companies and POSA networks.

The Global Talk PCS online web service/support system is a robust user-friendly system that provides for online activations, handset fulfillment and a complete transaction-reporting module to maintain and monitor every aspect of the business for its distribution partners. The company’s goal is to provide a first-class subscriber experience, which the company believes will help reduce churn and bring success to the brand.

Global Talk PCS also allows the customer to make calls anywhere in the world with rates lower than most international calling cards using the unique dial around system called Global Talk International. There are no airtime charges when used during nights and weekends.

JusTalk operates on the AT&T Wireless network. The company’s pay-as-you-go program provides its subscribers with the same price per minute for any U.S. domestic call or international calls to any of its 50 listed countries including Mexico and other Latin American, Asian and European countries.

JusTalk also provides each subscriber with his own toll-free number, which is provided at no additional charge. The company has been building its customer acquisitions through prepaid distribution partners such as PRE Solutions, Blackstone and Via One and also has established relationships with Western Union and Money Gram for processing customer transactions.

Liberty Wireless is one of the largest MVNOs operating on the Sprint Wireless network. The company, which is a subsidiary of Inphonic Inc., offers a hybrid service model, which is the combination of a postpaid and prepaid plan. Like many other Sprint MVNOs, Liberty offers a bundled rate program with fixed anytime minutes and unlimited nights and weekends.

Dealers are compensated by charging the subscriber a $3.95 convenience processing fee for his monthly airtime replenishment. Subscribers of the program are encouraged to establish their accounts with auto-pay that directly deducts their monthly service fee from their credit card, checking or savings account.

Since the program is a non PIN-based program, payments can only be processed online or by fax. The company compensates the distribution channel partner that is responsible for selling the handset and activating the subscriber with monthly residuals. According to Liberty Wireless distributors/agents, this commission stream can take three to five months before the first monthly residual payment is received. The company will also offset this residual stream with any customer chargeback.

Locus Communications is the largest MVNO with AT&T Wireless today and has been in operation in prepaid wireless since 1998. Their branded wireless products Call Plus, Locus Mobile and O2 Wireless are sold through a network of distributors and agents. The Locus program offers international calls to over 50 different countries at no additional cost to the subscriber beyond the base airtime charge.

Their rates vary depending on the brand, with some rates as low as 15 cents per minute, and there is a 90-day expiration on all airtime cards.

O Mobile operates on the Sprint Wireless network and offers its subscribers both a bundled rate program and pay-as-you-go anytime minutes as well. The company also offers its subscribers a low-cost international rate program that is easily accessible by dialing *333 from an O Mobile PCS handset.

The company is building its subscriber base by marketing its program to prepaid distribution companies and agents. In addition to the bundled rate program, O Mobile offers pay-as-you-go minutes at some of the lowest overall rates offered by any MVNO.

Omni Prepaid Cellular is one of the largest MVNOs operating on the Verizon Wireless network and has built its market presence through a large number of distribution partners and agents. The company has developed a very unique niche market with a refurbished $23 (wholesale) handset. For the budget-conscious and first-time consumers, this low-cost handset has proven to be very successful in driving customer activations. The phones come activated to the dealers with 20 minutes of free airtime.

Omni is planning the release of its much anticipated "private-label program" in Q3 2004, which should prove to be very interesting, especially for prepaid distribution companies and large retail chains that are interested in developing their own branded wireless offering. Omni protects the investments of its private-label partners by keeping each private label partitioned in their switch. With this partition, only the refill PINs assigned to a particular private label will load that private label’s mobile numbers.

Omni offers a "live card" program, and its PINs are available for real-time distribution through Debisys, Via One, Airtel Wireless and other large prepaid distribution and POSA partners. The company’s distributor discounts are among the highest in the industry.

Page Plus Cellular is the largest MVNO operating on the Verizon Wireless network with over 400,000+ subscribers. The company has been providing prepaid wireless services since 1999. It has developed a very large distribution footprint through its prepaid distribution channel partners. Page Plus offers single-, dual- and tri-mode CDMA activations and provides its distribution channel with a wide range of refurbished wireless handsets.

The airtime plan is a pay-as-you-go anytime minute plan. Most of the company’s distribution is with airtime cards, but e-PINs are available on some POSA networks. Page Plus pays a 60-minute airtime card as commission to its distributor/dealers for first-time activation. The company credits its success in the marketplace to date by offering superior customer service. ICN

The author is president, Prepaid Consulting Services Inc. He has recently partnered with Steve Kneiss, president and CEO of POSA Systems LLC, to launch Global Talk PCS. Flanagan can be reached via e-mail at mark@prepaidconsulting.com.