THE GROUND CONTINUED TO SHIFT in the tumultuous mobile virtual network operator space this month as one player announced plans to call it quits, another explores a potential merger and a third prepares to morph into a reseller of wireless services.
Embarq Holding Co. L.L.C. CFO Gene Betts confirmed the company’s plans to wind down its wireless offering, which runs on former parent Sprint Nextel Corp.’s network. Betts cited decreasing sales as he told a Morgan Stanley investor conference crowd that the service would likely be discontinued within the next year.
That news came on the heels of Virgin Mobile USA Inc.’s confirmation that it is in “preliminary discussions” with SK Telecom to explore strategic opportunities – opportunities that are widely believed
to include a potential merger of Helio L.L.C. and Virgin Mobile USA’s MVNO services. The move would not only marry two struggling service providers, it would combine one of the largest U.S. MVNOs (Virgin Mobile USA claims 5 million customers) with one of the smallest (Helio counts 200,000 customers).
And Qwest Communications International Inc. preceded news of the potential Virgin Mobile USA/Helio tie-up by announcing that it will move its customer base from Sprint Nextel to Verizon Wireless when its current deal runs out early next year. The five-year deal with Verizon Wireless, expected to begin this summer, will see Qwest stop selling its branded offerings on Sprint Nextel’s network in favor of becoming a strict reseller of Verizon Wireless’ phones and services. The move was purely economical, Qwest executives said, with Verizon Wireless offering “much, much better” terms than the Sprint Nextel contract.
Room for hope
The recent moves are the latest hiccups in the short but dark history of MVNOs. The space has seen an astounding number of casualties, from high-profile players such as Disney Mobile and ESPN Mobile to smaller independent efforts such as Amp’d Mobile Inc., Voce, XE Mobile and, more recently, Movida Communications Inc. And times are tough for the survivors, too: Shares of Virgin Mobile USA’s October initial public offering raised $412.5 million, but the company saw shares plummet from $15.69 to $1.90; the stock rebounded slightly on the rumored merger. Helio, which is funded solely by SK Telecom after co-parent EarthLink Inc. turned off the cash spigot, posted a net loss of $326 million during the most recent quarter.
But don’t bury the MVNO business model just yet, warned Iain Gillott of iGR.
“You’ve got to be careful; not all MVNOs are doing poorly,” Gillott said. “The problem is, in all honestly, we’re running out of people to sell to. Everybody’s got a cellphone, and those who don’t, somebody in the family does, so they can get on a family plan. It’s not like there are massive amounts of money to be made here.”
Perhaps not, but at least a few players are still eager to jump into the MVNO pool. Sprint Nextel’s recent WiMAX tie-up with Clearwire Corp. includes MVNO agreements with Comcast Corp., Time Warner Cable Inc. and Bright House Networks that will see the cable companies offer services through Sprint Nextel’s WiMAX and cellular networks. The deal also allows Intel Corp. and Google Inc. to dabble in the MVNO space if they choose.
The few players who appear to be thriving – namely, Kajeet Inc., Tracfone Wireless Inc. and a few others – typically survive by catering to low-end users who generate slimmer margins and often tax customer-service departments, Gillott explained. Some successful MVNOs are opting for cheaper, no-frills handsets and forego branded retail stores, opting instead to sell their wares through the Internet, big-box chains and other outlets and inking customers the carriers aren’t interested in anyway.
Several of the now-defunct players managed to rack up tens of millions of dollars in venture capital from investors who believed big-spending teens and young adults would produce sky-high average revenues per users. But those players also attracted the attention of network operators eager to boost data revenues to offset shrinking margins from voice. And it didn’t take long for deep-pocketed carriers to snare precisely the kind of customer many MVNOs coveted.
“People used to say that the Soviet Union was like a big bear sleeping in its cave,” Gillott said. “You could tiptoe into the cave and steal a few berries and he wouldn’t wake up. Now if you go in and start jumping up and down on his chest, he’s going to wake up and he’s going to eat you.
“What Amp’d did was go in the cave and start jumping up and down on Verizon, which was the parent network. Well, duh, the bear woke up.”
