Study: Virgin failure doesn't invalidate MVNO model

The failure of Virgin Mobile Singapore Pte. Ltd. to make a dent in Singapore's mobile phone market doesn't invalidate the concept of mobile virtual network operators (MVNOs), according to a research note from Pyramid Research.

The company recently closed its doors in the city-state after it invested US$50 million and attracted just 80,000 subscribers, according to Pyramid.

In many markets, the MVNO model is not only viable, but inevitable. But companies need to understand that an MVNO model that succeeds in one market may fail dramatically in another, Pyramid said.

An MVNO is a company that provides mobile services to end users through a subscription agreement, but does not have its own radio spectrum license and network infrastructure. An MVNO negotiates with licensed mobile network operators to buy excess network capacity for resale to customers, according to Pyramid's definition.

In Singapore's particular conditions, the Virgin train wreck was caused by several mistakes, Pyramid said. These include:

-- pricing SMS (short message service) too high in a market which has some of the most price-conscious SMS users in the world.

-- poor positioning by targeting a highly competitive yet cash-strapped segment of the market -- the young and trendy -- which condemned them with low ARPU (average revenue per user).

-- lacking distribution and brand. Virgin didn't have a strong enough brand name in Singapore and, more important, didn't have an effective distribution system.

-- conflicts of interest with its partner Singapore Telecommunications Ltd. (SingTel) which meant that when Virgin ran into trouble with its low-end target market, it was unable to go after more affluent customers because that would infringe on SingTel's target mid-range market.

Virgin Mobile has itself used the MVNO model successfully in other countries such as the U.K. It now faces different challenges as it tries to move into the U.S. market, under a $150 million joint venture agreement it signed in May with Sprint Corp., creating the first nationwide MVNO in the U.S.

Virgin is not widely known as a brand in the U.S., distribution will be difficult to pull off effectively and several major U.S. companies are expected to enter the market as MVNOs. But Virgin may have success among urban youth and others who want a simpler prepaid plan, Pyramid said.

One particular advantage of the MVNO model is that it offers a higher rate of return on investment than being a spectrum owner, an advantage that will become even greater in the 3G (third generation) environment, with its high spectrum license fees and build-out costs, Pyramid said.

Pyramid Research is the communications and Internet division of the Economist Intelligence Unit, part of The Economist Group.

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