Virtual wireless carriers face tough times

After only a few months in the market, wireless companies repackaging cell phone services under their own brands, such as Disney, ESPN and Helio, are struggling to meet expectations.

Disney Mobile, which launched its service in April in the U.S. , cancelled its plans to launch a U.K. version of the service earlier this week. While Disney blamed a difficult retail market for its decision, some wonder if the company's decision to not expand into the U.K. is a reflection of difficult times the service is having at home.

Disney Mobile, Mobile ESPN and Helio, which is owned jointly by EarthLink and SK Telecom of South Korea, are what is known as MVNOs, or mobile virtual network operators. Instead of owning their networks, the companies lease wireless capacity from Sprint Nextel to deliver their services.

Some MVNOs such as Virgin Mobile and TracFone, which offer prepaid services for customers who don't want a service contract or who have bad credit, have done well over the past few years, racking up hundreds of thousands of subscribers. But recently launched MVNOs, which have focused on high-end wireless customers by offering loads of multimedia content and features, have struggled to attract large numbers of customers, calling into question their strategies.

"The real question is whether or not they can sustain a business targeting the same customers that the big cellular operators are going after," said Phil Kendall, director of wireless services at Strategy Analytics, a market research firm. "The beauty of the MVNO model is there is low overhead, because they don't own the network. But they also don't have the marketing splash or the retail presence of the bigger carriers."

Disney, which operates both Disney Mobile and Mobile ESPN, is already facing massive losses from its MVNO ventures. Together, they're expected to lose about $135 million in fiscal year 2006, according to a recent report published by Merrill Lynch.

Mobile ESPN is expected to sign up a total of only 30,000 subscribers this year, well below original estimates of 240,000 subscribers. Merrill Lynch analyst Jessica Reif Cohen has even called for Disney to shut down Mobile ESPN and cut its losses.

Disney executives have said they plan to move forward with Mobile ESPN. But Robert Iger, Disney's president and CEO, noted on the company's fiscal third-quarter conference call last week that Mobile ESPN, which launched during the Superbowl, has not lived up to expectations.

"The results, at least initially, even though it's only been six months, were disappointing and we're monitoring this carefully," he said.

Recent earnings reports from Sprint Nextel, which leases capacity to MVNOs, including Disney Mobile, Mobile ESPN, Helio and Virgin Mobile, also indicated troubles for these operators. For its second quarter of 2006, Sprint Nextel reported it had lost 31,000 MVNO/wholesale subscribers, a 5 percent decline for a total of 5.35 million subscribers.

Competition and the new MVNOs
The new MVNOs are also not tracking well historically with the performance of previous, more successful MVNOs, according to data from Strategy Analytics. For example, Boost Mobile, a youth-oriented MVNO owned by Sprint Nextel, launched in 2002 and racked up about 30,000 customers in its first quarter. And after a full year, Boost had signed up roughly 250,000 subscribers. Virgin Mobile reported it had signed up 1 million customers within nine months of launching its service back in 2002.

By contrast, Helio and Mobile ESPN likely have less than 10,000 subscribers apiece, according to Kendall of Strategy Analytics. Helio, Mobile ESPN, and Disney Mobile don't publish subscriber figures, and these companies wouldn't comment or verify figures estimated by analysts. But a Helio spokesman said the company is pleased with its subscriber growth rate so far.

What makes the newer MVNOs different from the ones that came before them, such as Boost and Virgin Mobile, is that they expect to peel away big-spending customers who already are being wooed by many of the large cell phone companies, such as Cingular, Sprint Nextel and Verizon Wireless, which are investing millions of dollars to market their own high-end services.

Mobile ESPN is going after sports fanatics with a service that offers video clips, alerts and messaging related to sports content. And Helio is targeting ultra-hip young people by offering high-end phones that can access interactive games, high-quality videos and the MySpace social-networking Web site. Disney Mobile is trying to win over families with features that allow parents to keep track of their kids and limit their mobile spending. But customers interested in these services are also likely potential customers for the big carriers' multimedia and mobile data services.

Big cellular operators have a leg up on the MVNO competitors because they have bigger marketing budgets and well-established retail channels.

But Helio and the Disney MVNOs say they also have a strong retail presence. Helio said it will be in more than 2,000 retail locations by the end of August. And the company is also getting ready to open five retail stores in cities around the country that Helio hopes will create buzz around its brand.

"We know we are offering a differentiated product," said Rick Heineman, spokesman for Helio. "And we're very focused on the retail strategy. We're already in over 2,000 locations. And now we're adding our own branded stores, which will also get our product out to more customers."

Homing in on a market
Mobile ESPN also said it feels strongly about its retail presence, which includes large retailers such as Best Buy. It also shares a couple dozen kiosks in malls throughout the country with Disney Mobile. The service is also being sold in more than 500 independent wireless stores. And Sprint Nextel is even featuring Mobile ESPN and Disney Mobile phones and service in many of its stores as well.

In order to compete with the large cell phone companies, Mobile ESPN changed the way it sells its service. When it launched in February, the phone service was already bundled with unlimited data service and sports content.

Now Mobile ESPN offers basic phone packages starting at $39.99 for 400 minutes with some of its sports content included. Most of its video content and text messaging services are sold as add-on packages.

Mobile ESPN also reduced the price of its phone from $199 to $29. After a mail-in rebate subscribers can actually get the phone for free. And it has recently added a new phone to its lineup, the Samsung ACE, Motorola's thin Razr phone look-alike, which costs $99.

While these new MVNOs recognize competition for subscribers is tough, they believe their services are differentiated enough to make them appealing.

"Mobile ESPN never claimed to be all things to all cell phone users," said Rebecca Gertsmark, spokeswoman for Mobile ESPN. "We are a mobile service for avid sports fans. And we see our users wanting a highly personalized service."

Helio also believes its audience is well defined. "Our customers don't want their mom and dad's cell phone company or their mom and dad's cell phones," Heineman said.

Analysts agree that the service and features offered by the new MVNOs are superior to what users can get from the big carriers. They simply question whether this strategy will actually entice ultra-hip urbanites, families or even sports nuts to actually switch their phone service.

"These are all great services," Strategy Analytics' Kendall said. "There's no question the sports content from ESPN looks better on the Mobile ESPN phones than it does on Verizon Wireless's V Cast service, for example. But how many sports fans are really going to cancel their existing cell phone service to subscribe to Mobile ESPN?"