Making cell phone companies out of thin air

It seems like anybody with a well-known brand name is going into the cell phone business, and Sprint's wireless network is somewhere in the background.

Mobile virtual network operators, or MVNOs, are companies like Virgin Mobile USA that sell cellular service without actually owning a network to carry the calls. MVNOs resell calling minutes bought from major carriers--or more accurately, a major carrier. Among the major U.S. wireless providers, Sprint practically stands alone in its willingness to open its network to what some would call upstart competitors.

It's out of necessity, not choice, that Sprint's network is the backbone for nearly every MVNO. U.S. giants Cingular Wireless and Verizon Wireless want little to do with these deals because, representatives say, the payoff has too many risks, such as overcrowded networks that ruin coverage and voice quality for everyone.

Perhaps more importantly, they say, why play a role in creating new competitors: niche-chasing start-ups, or giant entrants such as the cable industry, which could brand cell phones to create a quadruple offering of Internet, television, home telephony and cellular service?

Still, lots of companies are looking into the opportunities this kind of service affords. Even AT&T--Ma Bell, the onetime telephone giant now being acquired by SBC Communications--has plans to re-enter the cell phone business with a call to Sprint, sources said.

The market MVNOs look to serve in general could be a huge one: about 40 percent of U.S. residents don't own a cell phone yet, and of that, a large percentage are the teenagers and young adults the MVNOs target. Because they don't require users to sign contracts, MVNO services are expected to be popular with teenagers, as well as those without sufficient credit histories.

The latest of the growing number is SK-EarthLink, a cell phone operator literally made from thin air. The $440 million joint venture between Korean wireless giant SK Telecom and Net provider EarthLink hasn't erected a single cell tower. Rather, it'll be reselling minutes on Sprint's cell phone network, along with SK Telecom handsets and cutting-edge media.

SK-EarthLink debuts in March and will be part of EarthLink's bundle of broadband, wireless access and phone offers. The companies say that a market full of fewer, and bigger, players leaves plenty of room for small, agile entrants.

"We looked at the landscape and saw a few mass-market players and lots of consolidation," said Brent Cobb, vice president of EarthLink. "There's a lot of room for companies focusing on specialty markets, niche types of opportunities."

Aside from SK-EarthLink, several other firms are relying on Sprint-owned cell phone networks: Qwest, Virgin Mobile USA and, soon, Boost Mobile. Time Warner is in talks with Sprint.

Elephants in fear of mice?
Sprint's status as practically the only network source for MVNOs definitely doesn't help the emerging virtual carriers. If Sprint continues to shoulder the MVNO burden virtually alone, the consolidating cell phone industry won't get the flood of new virtual carriers some have predicted. Instead, just a trickle of new operators will appear, reducing the effect competition has of stabilizing or reducing prices. The unwillingness of the other carriers to play ball with MVNOs could suggest that they don't think it's as good an idea for their futures. Sprint is making money selling access to MVNOs, but that's income its competitors are apparently willing to forgo.

"There's definitely a trade-off for carriers," said Albert Lin, an analyst with American Technology Research. "At a minimum, MVNOs introduce an unpredictable level of activity on a network, and another competitor to the marketplace. But if Sprint can show they are making money doing it, other carriers will join in and there will be more of these."

Sprint spokeswoman Melinda Tiemeyer said that, to date, there have been no complaints about the capacity of Sprint's network, and customer defections to rivals is down. There are no signs, she says, that the 2.8 million MVNO customers on its network are hurting service

quality. The carrier doesn't provide revenue figures from selling wholesale access to its network, preferring instead to speak in glowing, but amorphous, terms.

"We have no concerns," Tiemeyer said. "Customer satisfaction is on the way up. We anticipate this to be a very (good) business," she said.

The carriers' cold shoulder toward MVNOs is thawing, argues A.T. Kearney analyst Andrew Cole. Cingular is now testing the waters by supporting, rather quietly, 7-Eleven's MVNO. Verizon Wireless backs a cell phone option available through OnStar, the in-car wireless remote attendant. But, publicly at least, Cingular and Verizon representatives still say the operators aren't a willing MVNO host.

"You can't just throw any kind of (stuff) on the network," said a Verizon Wireless source. "You get a busy network, and you open yourself up to devices that aren't approved for use on our network."

Cingular Wireless isn't likely to change its view on MVNOs, either, said Ed Whitacre, CEO of SBC, which co-owns Cingular Wireless with BellSouth. He pointed out that MVNOs don't own or operate the network their customers use, and therefore lack the hands-on control for really good service. If customer service problems drive people away from the MVNO, they generally blame the underlying network owner.

The top two carriers have also managed to beat rivals in customer satisfaction ratings because of the built-in overcapacity of their networks, meaning calls have much more room on the network--thus, fewer are dropped. The customers will take it out on their MVNOs, which will in turn blame the wireless operator, making everybody look bad.

The MVNOs target teens, bad-credit hipsters, ethnic minorities and other niches that wireless operators have long ignored. But the big carriers are beginning to focus on these slivers--most large carriers now target the long-neglected Hispanic demographic, for example--and don't want to kill their own market.

Sprinting ahead
Working with virtual carriers may come easy for Sprint, because it arguably was the first MVNO.

About 3.1 million of Sprint's 23.2 million subscribers actually rely on 11 midtier cell phone operators. These publicly traded companies have one client: Sprint. They do everything Sprint does. They act essentially as infrastructure, leasing their networks only to Sprint. As a result, they rely on Sprint to come up with new handset services and plans to win more customers.

Aside from photo messaging, Sprint hasn't had much success delivering sizzling cell phone products to its affiliates, and they were grumbling. MVNOs were a perfect solution, because Sprint doesn't have to come up with winning ideas; just the network. The MVNOs sweat the marketing stuff, choosing the handsets and the types of plans.

If Sprint is going to continue to be the only networked friend MVNOs have, it may find itself with more friends than it had expected. Many other recognizable brand names are expected to jump into MVNO-hood, promising future Sprint paydays. Strategy Analytics market analyst David Kerr said he has made a friendly wager that Wal-Mart Stores will be the next giant entrant to sell wireless phones under its own brand. Other candidates are Costco Wholesale, Kohl's and Home Depot.

They haven't jumped in yet, but Kerr and many others think it's only a matter of time.