Mobilevirtualfinal PDF

ISE / Main project / MVNO Page 1 of 37 September 1, 2004
Innovation Strategy and Entrepreneurship

Main project
MVNO innovation

Gunther BACELLAR
Kunal BHAGAT
Cyril BOUCHET
Sang-Uh HAN
Aldous MITCHELL
Vineet SINGH
Table of content
1. Executive summary.....................................................................................................................4
2. Context of MVNO innovation....................................................................................................6
2.1. MVNO various models ....................................................................................................6
2.2. MVNO Technical Basis ...................................................................................................7
2.3. Key forces behind MVNO innovation................................................................................8
2.4. Current and potential players ..............................................................................................9
2.5. Why do MNOs host MVNOs?..........................................................................................10
3. Virgin Mobile case....................................................................................................................13
3.1. Company Overview..........................................................................................................13
3.2. Target markets...................................................................................................................13
3.3. Corporate Strategy ............................................................................................................15
3.4. Distribution Strategy.........................................................................................................17
3.5. Shareholder Commitment .................................................................................................17
3.6. Recent Performance..........................................................................................................19
3.7. New Markets.....................................................................................................................20
3.8. Drivers of Virgin Mobile Success.....................................................................................20
4. Transatel case............................................................................................................................22
4.1. From idea to launch...........................................................................................................22
4.2. From launch to breakeven.................................................................................................22
4.3. A two fold strategic market approach...............................................................................23
4.4. Highlights in the Innovation process ................................................................................27
5. Key lessons ...............................................................................................................................30
5.1. The use of Alliances..........................................................................................................30
5.2. Choice of target segment...................................................................................................31
5.3. Evolution in strategy .........................................................................................................32
5.4. MVNE as an Interdependence and Integration risk reduction..........................................33
6. Glossary....................................................................................................................................35
Table of figures
Figure 1: Various MVNO model depending on position in the value chain .....................................6
Figure 2: MVNO models acting in different points in the value chain ..............................................7
Figure 3: MVNO - Heavy Model, system architecture.......................................................................8
Figure 4: MVNO penetration in Europe .............................................................................................9
Figure 5: Virgin Mobiles Approach to the Market ..........................................................................13
Figure 6: Virgin Mobiles Target Market segments .........................................................................14
Figure 7: Virgin Mobiles Unique Value Chain ...............................................................................15
Figure 8: Services Available from Virgin Xtras ...............................................................................16
Figure 9: Virgin Mobile Ownership Structure..................................................................................18
Figure 10: Subscriber Growth (000)................................................................................................19
Figure 11: Revenue and Profitability Profile ( million)..................................................................20
Figure 12: MVNE position in the value chain..................................................................................24
Figure 13: Transatel's MVNE value proposition ..............................................................................25
Figure 14: Categorization of potential MVNOs using an MVNE....................................................26
Figure 15: Two MVNEs players in Europe, Transatel and Spinbox.se............................................27
Figure 16: Impact of MVNE on 5I integration risk framework........................................................33

1. Executive summary
A Mobile Virtual Network Operator (MVNO) is an organization that offers mobile subscriptions
and call services to customers but does not have an allocation of radio spectrum. With the
emergence of the MVNO business model, access to the scarce resource of the radio spectrum is no
longer limited to license holders (Mobile Network Operators). This dynamic shifts the boundaries
of competition by enabling entry of new players and lowering the set up cost to launch mobile
services. It is a significant reshaping of the mobile service industry that extends the service
provider model of capital intensive / high margin plays (service factory) to labor intensive / low
margin plays (mass services).
In order to illustrate the implementation of this innovation we have chosen two companies with
different approaches: Virgin Mobile and Transatel.
Innovation
characteristics
Virgin Mobile Transatel
Timing and choice of
entry mode
November 1999
Alliance with T-Mobile,
targeting end users
June 2001
Independent start-up,
targeting end users
Construction of the
supply chain
Direct and indirect sales,
leverage on Virgin and T-
Mobile capabilities
Indirect sales through shops
Perception of value
creation and value
capture
Leverage on Virgins brand,
focus on outstanding
customer experience,
simplicity of offer
1) Multi-country operator
enabling lower costs for
frequent travelers
2) MVNO enabler (MVNE)
Approaches to market
definition and
segmentation
Individual buyers
Low spending segment
1) Frequent travelers
2) MVNOs
Level of resource
commitments
High - 200 m (85 equity,
115 debt)
Low 3 m
Exit strategies and the
reversibility of
commitments
Full scale commitment in
England
Monitoring and progressive
funding for the US launch
Step by step fund raising
Differences in market
expectations as gleaned
from firm
announcements
Actual realization in line with
expectations in UK
Success beyond expectations
in the US
Change of strategy due to
lack of funds
Licensing of innovation
(MVNE)
Expectations for market
growth versus
substitution
Mobile market growth into
lower end segments
Substitution to main mobile
operators in the business
travelers segment
Service differentiation is made possible through the ownership and control of the SIM card;
however, it is a necessary but not sufficient condition of success. According to us, the key drivers
of success are to be found either in the MVNOs ability to profitably offer lower prices (e.g.
Transatel on roaming calls), to extend an existing customer relationship or to substantiate potential
relationship (e.g. Virgin Mobile with Virgin brand values appeal to target segments).
In terms of approach to innovation, Transatel and Virgin have taken quite different routes. Of
particular interest, we found Virgins use of alliances and choice of market segments as well as
Transatels shift of strategy along the innovation route and the impact of MVNE value creation
through interdependence and integration risks reduction for other brands.
Virgin used their first alliance with T-Mobile to learn about the telecom business, leveraging the
power of their brand. Based on that experience, Virgin group built a network of alliances in order
to leverage on their brand and new experience. The success of their individual alliance with Sprint
PCS in the US is a proof of the validity of their approach.
Individual alliances Network of alliances
Competence Leverage Virgin Mobile US Virgin Group
Competence Acquisition Virgin Mobile UK
Virgins choice of young people as target segment is critical for two main reasons: this is the
segment upon which they get the best leverage on their established brand value by ensuring lower
acquisition costs; it is a segment considered a complement by the MNO and not a substitute due to
the difficulty to profitably address it. Will complement positioning of today become substitution in
the future?
Transatel did not get the funding necessary to pursue their initial strategy of acquisition of frequent
travelers. In a classical move, they are now licensing their innovation by proposing to brands
(e.g. American Express, Peugeot, etc.) a quasi turn-key MVNO operation in-sourcing. This
business now represents half of their revenues and is the part on which Transatel focuses now.
After MVNO, the appearance of MVNEs, i.e. MVNO enabler, is another interesting shift of the
boundaries of MNO value chain. With the increase of maturity of the industry, strategies of
specialization in specific sub-part of the value chain become possible and thus reopen the issue of
how value is captured.
Especially, MVNEs enable brands to extend into mobile services to consumers with a considerable
reduction of interdependence and integration risk vis--vis the MNO. This change could
potentially trigger a significant trend of diversification of powerful consumer brands in the mobile
business, leveraging on their brand awareness and their existing customer base. This constitutes a
significant threat for MNOs with low brand equity as they could found themselves cornered into
commodity provision of network bandwidth.
2. Context of MVNO innovation
The competitive mobile telecommunication industry has been characterized by a dynamic flow of
new technologies, players and market opportunities, the combinations of which have triggered
various advances affecting every stakeholder in the industry value chain. One of the innovations
that emerged from the ongoing market dynamics is the concept of the Mobile Virtual Network
Operator (MVNO) business model. An MVNO is broadly defined as an entity that provides mobile
telephony services to its customers, but does not have its own allocation of radio spectrum.
2.1. MVNO various models
Radio
Spectrum
Network
Services
Traffic
Rating
SIM card
Value Added
Services
Billing and
Customer
Care
Distribution Marketing
Mobile Network Operators
Heavy Model - MVNO
Light Model - Service Provider
Medium Model - MVNO
Radio
Spectrum
Network
Services
Traffic
Rating
SIM card
Value Added
Services
Billing and
Customer
Care
Distribution Marketing
Mobile Network Operators
Heavy Model - MVNO
Light Model - Service Provider
Medium Model - MVNO

Figure 1: Various MVNO model depending on position in the value chain
It is possible to classify MVNO in three different operating models, according to the value created
by the company:
Light-model Service Provider: MVNO acting in this model solely engages customers,
branding and packaging the subscription and displaying its brand through the phone screen.
The MVNO depends on the host (mobile network operator) for roaming, provisioning, and
billing but offers its own value-added services. All emphasis lies on the customer and brand
experience. The host provides customer care for the network issues, the MVNO for other
issues. Sainsburys follows this model in UK, depending on host BT Cellnet for network
access and SIM-card issuance.
Medium-model: MVNO has the same control over customer engagement as in the light
approach, but it focuses and depends more on services than on customer care for
differentiation. Although the host handles roaming and network services, the MVNO
provides provisioning, billing, customer care, and value-added services including SIM-
based services. MVNO issues its own SIM cards that give it control over on-screen
branding and SIM-based services. Sense Communications, for example, offers mobile
service in Norway on Telenors and Telias network. The company offers services such as
Sense Update, which gives subscribers single-click access to games and information
services.
Heavy-model: MVNO controls the calls by having its own network elements and switches
that give it call control. MVNO also has full control over all services and negotiates its own
interconnect and roaming agreements with other operators. Hosts only provide radio
spectrum and coverage. Having its own resources for access, services and customers,
MVNO faces a bigger challenge to give equal attention to the customer as the brand
MVNO can. Tele2, a Pan-European telecommunication company, enter in the mobile
telephony business as an MVNO in Denmark by adopting the heavy-model. Tele2, runs its
own switches and network elements, like home location registers, relying on host network
Sonofon only for masts and spectrum.

Figure 2: MVNO models acting in different points in the value chain
1

The availability of such alternatives is just one aspect of the innovative nature of MVNOs that has
the potential to uproot existing industry structures. From the customers perspective, there is no
perceived difference between MVNOs and MNOs, and this is one of the crucial advantages of the
MVNO model to drive the acceptance of this innovation the MVNO is the ultimate customer-
centric mobile telephony approach in the market.
2.2. MVNO Technical Bas is
A cellular network connects handsets to base stations through the radio infrastructure, which is
linked to mobile switching centers (MSC). The MSC communicates with databases to authorize
access to the system, compile billing data and enable consumers to make calls. The MSC also
connects with value added service platforms that provide voicemail and other services.
The MVNO concept separates the radio spectrum infrastructure from the intelligent components of
the network that include access to the authorization database and collection of billing data. The key
economic benefit of the MVNO business model over the MNO model is based on the premise that
service differentiation is independent of the radio infrastructure, and determined mostly by the
added value of the intelligent components under the control of the MVNO. By controlling access

1
Turning MVNO Pain Into Gain, July 2001, The Forrester Report
authorization and PSTN (Public Switched Telephone Networks) switching, MVNOs offer services
indistinguishable from existing MNO mobile services, while retaining virtually absolute control
over all aspects of the telephony service all without the substantial investment in radio spectrum
licenses.

Figure 3: MVNO - Heavy Model, system architecture

2.3. Key forces behind MVNO innovation
The innovative impact of the MVNO concept is further accelerated by the 3 key trends affecting
MNOs and the mobile telephony industry:
(1) Maturity/Saturation of existing markets - MNOs in saturated, mature markets such as in
Europe face stagnating profits and increasing rivalry with existing competitors. MVNOs
ability to market to previously unreachable market segments provides strong impetus for
MNOs to offer their radio infrastructure as a platform for the MVNOs.
(2) Modularization of industry value chain - Continuing advances in network equipment
performance, usability, and deployment costs, in tandem with maturing markets, provides
the basis for specialization within the industry value chain to occur, leading to the
emergence of dedicated players that may provide particular functions within the value
chain more efficiently. With this modularization and specialization, entry into the mobile
telephony market is no longer restricted to telco-players, but open to other industry players
that seek to leverage their brands and other core business strengths without being
encumbered by technical issues. The MVNO model hence, opens up the mobile telephony
market to outsiders, and by extension, gives rise to a new class of telephony entities that
specialize in delivering turnkey MVNO services to the non-telco companies. These
MVNOs Enablers (MVNE) are covered in further detail in the following sections.
(3) Deployment of 3G service infrastructure - The auctioning of 3G radio spectrum left many
potential players without a license, and the few licensees with tremendous amounts of debt.
With little public interest for advanced data services and waning demand on voice traffic,
MNOs are faced with increasing losses as they contend with the intensifying market rivalry.
The MVNO concept and MVNOs themselves present to MNOs a unique opportunity to
achieve growth. For 3G licensee, the MVNO concept can be leveraged to offer non-
licensees 3G coverage while allowing the MNO to fill up excess network capacity. For
fixed telecom companies, the MVNO model will enable them to enter the mobile telephony
market to strengthen their positions and reap rewards in the ongoing fixed-mobile
convergence.
These forces, merged with the flexibility inherent in the business model, are the key drivers that
reinforce the MVNO concept as a major innovation affecting the entire industry along its value
chain.
2.4. Current and potential players

Madrid
Lisboa
Munich
Luzerne
Milan
Rome
Athnes
Vienne
Dsseldorf
Copenhague
Tampere
Ntodden
Zoetemeer
Bruxelles
Tilburg
Montpellier
Paris
Lille
Strasbourg
Stockholm
< 5%
<10%
<15%
<20%
<25%
Source: OMSYC April 2004
Forecasts 2006: Out
of total telecom
mobile customers
Virgin in the UK: 3.6 M end-users
UK MVNOs are serving
4,5M end users vs. 45
million total reaching 10%
market shares after 4 years
There are 320 M end users in
western Europe, therefore
more than 30M should be
served by MVNOs within next
5 years
Campuzmobile, Chess, LunarMobile /
Vrar, Glocalnet, Hemel-Fortun,
Universal Telecom, Djuice/Telenor
Mobile, Optimal Telecom- Tango,
Ostkraft, ACN Mobile, RSL COM,
Halebop Mobile, Song, Vattenfall
Teletoni, Sense, Ventelo , Spray, Smart,
Hello MTV, Pepppar, Maingate
Virgin Mobile, Fresh, One Tel
(Centrica), Kingston Mobile, BT
Sense Mobile, Sainsburys,
Transatel, Tesco
Sun Telecom, Toledo Telecom,
Mondial Tlcom, United Telecom,
Happy Many, The Mobile Factory,
J im Mobile, Transatel, Plus line
(Delaize)
Axiti, Tele 2, CBB, Debitel
(Smarttalk), A+ Telecom (Telecom
Plus), Telmore, Migway, M1, Eiro,
Smart Koncept, LIC, Facilicom
(Netnet)
Ventelo , Chess, Sense, Teletopia,
BS Mobile, Tele 2, Hello, Lyse,
Pgone, You Communications,
Combitel, ACN Norge, Song
Networks, TDC Norge, Safetel
Wireless Maingate, Axiti
Saunalahti (J appli), Finnetcom (RSL
Com), Globetel, CDF Mobile, Terraflex
Europe, ACN Mobile, Cubio, Tele 2,
SongNetworks, MTV, Wireless
MainGate, Fujitsu Service, Pgone
(Ventelo ), Go Mobile)
T-Net
Debitel, Tele 2, AH Mobiel,
ID&T Mobile, Scarlet,
Versatel, Transatel
Madrid
Lisboa
Munich
Luzerne
Milan
Rome
Athnes
Vienne
Dsseldorf
Copenhague
Tampere
Ntodden
Zoetemeer
Bruxelles
Tilburg
Montpellier
Paris
Lille
Strasbourg
Stockholm
< 5%
<10%
<15%
<20%
<25%
Source: OMSYC April 2004
Forecasts 2006: Out
of total telecom
mobile customers
Virgin in the UK: 3.6 M end-users
UK MVNOs are serving
4,5M end users vs. 45
million total reaching 10%
market shares after 4 years
There are 320 M end users in
western Europe, therefore
more than 30M should be
served by MVNOs within next
5 years
Campuzmobile, Chess, LunarMobile /
Vrar, Glocalnet, Hemel-Fortun,
Universal Telecom, Djuice/Telenor
Mobile, Optimal Telecom- Tango,
Ostkraft, ACN Mobile, RSL COM,
Halebop Mobile, Song, Vattenfall
Teletoni, Sense, Ventelo , Spray, Smart,
Hello MTV, Pepppar, Maingate
Virgin Mobile, Fresh, One Tel
(Centrica), Kingston Mobile, BT
Sense Mobile, Sainsburys,
Transatel, Tesco
Sun Telecom, Toledo Telecom,
Mondial Tlcom, United Telecom,
Happy Many, The Mobile Factory,
J im Mobile, Transatel, Plus line
(Delaize)
Axiti, Tele 2, CBB, Debitel
(Smarttalk), A+ Telecom (Telecom
Plus), Telmore, Migway, M1, Eiro,
Smart Koncept, LIC, Facilicom
(Netnet)
Ventelo , Chess, Sense, Teletopia,
BS Mobile, Tele 2, Hello, Lyse,
Pgone, You Communications,
Combitel, ACN Norge, Song
Networks, TDC Norge, Safetel
Wireless Maingate, Axiti
Saunalahti (J appli), Finnetcom (RSL
Com), Globetel, CDF Mobile, Terraflex
Europe, ACN Mobile, Cubio, Tele 2,
SongNetworks, MTV, Wireless
MainGate, Fujitsu Service, Pgone
(Ventelo ), Go Mobile)
T-Net
Debitel, Tele 2, AH Mobiel,
ID&T Mobile, Scarlet,
Versatel, Transatel

Figure 4: MVNO penetration in Europe
2

MVNOs have emerged all over Europe. The main players are Virgin Mobile in England, Tele2 and
Debitel who both have pan-European ambitions
Other potential players
We show below some examples of companies with good chance to position as MVNO. In retailing
for instance, Tesco has launched its services in UK and so has done FT in Media.

2
Transatels presentation

Figure 3 Example of companies with good chance to position themselves as MVNOs
3

Strong brand, existing relationship with a customer base and strong distribution network, are key
characteristics of potential MVNOs. It is then for them an issue of brand extension into mobile
services, where their competitive advantage would then be their ability to acquire customers
cheaply.

Figure 4 Key characteristics to become an MVNO
4

2.5. Why do MNOs host MVNOs?
There are two types of reason why MNOs host MVNOs: regulatory and economic.

3
Mobile Virtual Network Operators, Fraser Curley, November 2001, Arthur D. Little
4
Mobile Virtual Network Operators, Fraser Curley, November 2001, Arthur D. Little
The role of the regulator is to ensure that the market is efficient, i.e. competitive enough, to ensure
fair treatment of consumers. One way to do so is to encourage or force opening of the incumbent
networks to newcomers. This is the reason why in some countries, steps have been taken to force
MNOs to host MVNOs. This is the case for example in Germany and in the US. In Germany,
Debitel was a reseller of mobile subscription of the main MNOs (T-Mobile, Vodafone and E-Plus).
As such, it ended up managing the relationship of millions of subscribers for the account of the
main MNOs. A logical step for them was to go up in the value chain in order to increase their
margin and become an MVNO. Once the control over the SIM card is lost for the MNO,
theoretically it makes it possible for Debitel to switch its customers from one network to the other,
a significant threat for the MNOs, changing the negotiation power of the partners. Strong support
from the regulator was necessary to implement that move from regulator to MVNO.
Reversely in France, ART (French telecom regulator) ruled against Tele2 in its claim to get access
to Orange network as anMVNO in December 2002. Tele2 had yet signed six of such agreements
in other European countries...
On an economic perspective, the incentives for MNOs to host MVNOs are three-fold: sell excess
capacity, benefit from scale effect and address indirectly othe rwise unprofitable segments.
Building a mobile network represent a huge fixed cost necessary to cover all the territory. Once
built, such network has a lot of capacity available. Usually, third or fourth mobile operators have a
stronger incentive to host a MVNO in order to increase their scale and be able to compete with the
main players more efficiently, e.g. T-Mobile in England
5
(formerly One-2-One). Indeed, such
operators arrived later on the market and therefore were left with a smaller market to address and
had to use higher frequency (1800 MHz instead of 900 MHz), with the consequence of requiring
more radio base stations to cover the same surface. More equipment for fewer customers means a
lot of excess capacity. In this case the marginal cost of adding a customer is small and MNOs have
the opportunity to recoup quicker their fixed investment by selling minutes of traffic at average
cost.
In addition to that, even if the MNO has to increase the capacity of its network to cope with
growing traffic, in most of the case it can be done very efficiently. Hence, there is a really strong
scale effect when traffic increases. Nowadays, with the new high fixed cost associated with
introduction of 3G, we can say that the incentive of hosting a MVNO is no longer restricted to the
smaller MNOs.
From the point of view of the Mobile Network Operator (MNO) the assessment whether MVNO
innovation is a complement (addressing complementary segments) or a substitute (cannibalization)
for its own customer base is instrumental in the decision to host a MVNO or not. Typically a
MVNO is considered as a complement when it is addressing the lower end of the market that
MNOs can not address profitably. Low-end segment represents the double disadvantage for the
MNOs to be difficult to attract (high acquisition cost) and to generate low revenues. This is a low

5
Bonus Project : MVNO outsourcing at T-Mobile UK
margin play requiring a strong focus on efficiency and MNOs are not organized for that. A
MVNO, with a lean organization, a much targeted approach and an appealing brand can do that
much better, e.g. Virgin Mobile.
Last but not least, there is an issue of effective segmentation and price discrimination. As a matter
of fact MNOs sell minutes during day time at a higher rate than in the evening, night and early
morning. The day time minutes are called peak time minutes to justify their higher value.
However, the real peak time in the network is in the evening during off-peak time! What we see in
fact is price discrimination, effectively charging more business customers who are the typical day
time users. But consequently residential users, who a more price sensitive, tend to call more in the
evening to benefit from the lower rates. MNOs are then confronted with the issue of selling
minutes in the (technical) peak hour at low rate when in fact most of the cost of a telecom network
is driven by the necessity to cope with the peak. There is thus a strong incentive to spread the
residential traffic more evenly during the day, but without reducing the business revenues. This is
when using a MVNO can be very useful. MNOs can charge to the MVNO a per minute fee
independent from the time in the day, the MVNO then passing this flat fee structure to its
customers. Indeed, chances that business customers would churn to a company targeting low end
users are pretty low. Therefore, MVNOs can be use as effective price discriminators by MNOs.
3. Virgin Mobile case
3.1. Company Overview
The company was formed in 1999 through a 50:50 joint venture between T-Mobile
6
and Virgin
Group. T-Mobile, which was known as One 2 One in 1999, is a leading UK mobile network
operator, and the Virgin Group, one of the worlds best recognized service groups. Virgin Mobile
was the UKs first MVNO. As an MVNO, Virgin Mobile uses T-Mobiles network and spectrum.
However, the customers exclusive contact is with Virgin Mobile, which provides the handset and
SIM card under its own price structure, with its own value added services through its own sales
channels with its own customer care infrastructure.
The company launched commercial operations in November 1999 and since then has demonstrated
significant growth in its subscriber base, testament to the power of the Virgin brand name, their
subscriber targeting strategy and their unique service proposition. The companys subscriber
growth to date has been among the fastest recorded by a new operator. As of April 2004, Virgin
Mobile reported over 4 million subscribers
7
.
3.2. Target markets
Virgin Mobile has a wide target audience. Leveraging the broad appeal of the Virgin brand in
order to capture significant market share, the company continues to use a broad scale approach.
Despite this, certain pockets of the population are specifically up weighted. Students are the most
notable group due to their importance as opinion leaders. The chart below outlines Virgin
Mobiles strategy:
Family
Youth
Small Bus 20/30s female
CUSTOMER CENTRE Web Virgin
Megastores
Our
Price
V.Shop
Virgin
dbases
Mass
Enquiry
Catalogue
The Shop
DM
MASS CALL TO ACTION
Out
bound
13 million
customers
repeat buy
Virgin
(50 to 75%
ABC1)
Virgin Places The Web
Third Party
Distributors

Figure 5: Virgin Mobiles Approach to the Market

6
As January 2004, Virgin Group is a 100% shareholder of Virgin Mobile
7
Max Kelly, Corporate Development Manager, Virgin Group
Customer Profile
8

Virgin Mobiles registration card analysis shows that it has indeed achieved a broad appeal in
terms of age. The company almost exactly matches the market profile with its user profile, with
47% of users under 35 for both Virgin and the market. However, Virgin Mobile has a slight skew
towards males which account for 65% of its users versus the markets 54%. Virgin Mobiles
customer base reflects its retail oriented approach to date: of Virgin Mobiles subscribers 89% use
the phone primarily for personal use compared to 79% for the market. Virgin Mobile is
particularly strong among the markets most affluent 20% which account for 33% of its users.
Virgin Mobile is also popular among the second most affluent 20% which account for 23% of its
users.
Target Market Segments
From launch, Virgin Mobiles strategy has been to target existing and new users in the individual
buying market and thus avoid cannibalizing T-Mobiles subscriber base. This market extends
across the personal and small business market but excludes post-paid higher ARPU generating
corporate customers, the traditional source of subscribers for T-Mobile. Within its market, Virgin
Mobile has identified several target heartlands based on source of value, Virgin affinity and
ability to target. The exhibit below illustrates Virgin Mobiles targeted approach to penetrating
these sub-segments of the market:

Heartland

Source of value
Source of Virgin
affinity

Targeting
Youth
School
College
First jobbers
Work hard/play
hard
Regular
socialiser
Regular, heavy
users
User groups
Brand values of
fun/innovation,
(although this
market is highly
fragmented in
attitude)
Price
Virgin
Megastores
V.Shop
Virgin.net
Virginstudent.co
m
Virgin Mobile
Student Brand
Managers
30/40
something:
Male
Female
Credit worthy
Low propensity
to switch
Core, traditional
Virgin market
Virgin Atlantic
Virgin Direct
Virgin Vie
Switchers Traditional
higher users
Heritage in
challenging
status quo
Brand
positioning and
Direct marketing
Figure 6: Virgin Mobiles Target Market segments

8
Figures from Virgin Mobile Document A
3.3. Corporate Strategy
Virgin Mobiles vision is to become a leading player in the UK mobile market. It seeks to achieve
this vision by developing a service-based relationship with its customers, helping them get much
more from their mobile phones. To this end, the company has been highly successful in achieving
this vision by marrying the complementary strengths of its two founding partners the retail
strength of the Virgin brand with the high quality network of T-Mobile. The combination
represents a unique proposition in the market which has thus far been difficult for many other
potential partnerships to replicate.
A differentiating service proposition based on value calling, access to innovative services and branded
content, and excellent customer care provides the foundation of Virgin Mobiles ability to attract both
new and existing mobile subscribers. To reach the target customer, a young, individual buyer with an
attractive user profile, Virgin Mobile pursues an integrated distribution approach supported by an
aggressive marketing campaign.
Contribution Service Provision Distribution Customer
90 Virgin
Megastores
+ 217 Our Price
Outlets
www.virgin
mobile.com
Virgin Mobile
Call Centre
One2One
Network
Virgin Group
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3rd Party Products
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Students.com
RAC Red
Lastminute.com
Pre-paid and mass market
Flexibility due to zero fixed
monthly costs
Low standard call costs
Youthful image
Value-for-money image
Virgin Xtras
Free choice of handset
Third Party
Distribution
Channels
V
i
r
g
i
n

T
r
a
i
n
s
One 2 One
Network

Figure 7: Virgin Mobiles Unique Value Chain
Value for Money
Virgin Mobile was formed on the fundamental ethos of the Virgin Group providing its customers
service with greatest transparency and high value for money. As such, the company was
positioned not as a leader in mobile technology but as a provider of good-value-for money and
customer-care mobile service provider.
In contrast to the confusing variety of tariff packages offered by other operators, Virgin Mobile
offers one simple, transparent and easy to understand tariff package charged at a rate of 15 pence
for the first five minutes of calls made each day and 5 pence for each subsequent minute with no
contract or monthly rental charge. Unlike its competitors, the company sells handsets to its
subscr ibers at or close to the full wholesale cost. In doing so Virgin Mobile substantially lowers
the cost of acquiring each subscriber by removing the heavy handset subsidies offered by other
operators.
A simple, customer-friendly tariff package and fully-costed handset, reinforced by the attractions
of associating with the Virgin brand itself, has helped the company improve its subscriber
stickiness and loyalty. On the basis of this attractive proposition, in May 2004
9
Virgin Mobiles
customers were found to be the most contended and satisfied pre-pay customers of any mobile
communications provider in the UK.
Innovative Value Added Services
One of the key differentiating factors of Virgin Mobile is its ability to leverage the Virgin Groups
expertise in the fields of entertainment, shopping and communication services, and life
management products and offering value added services through its handsets to access these
services. That is, in addition to customary information services also offered by other operators,
providing mobile sports, stock, and travel information, Virgin Mobile subscribers have access to
the branded products and services of the Virgin Group. From launch, all Virgin Mobile handsets
have been specially designed by manufacturers with a Virgin Mobile service button which
allows customers easy access to a suite of value added services under the Virgin Xtras brand. For
example, subscribers are able to receive savings on flights to New York on Virgin Atlantic by
booking through Virgin Mobile. The subscriber simply presses the Virgin button on his phone to
be connected to the call centre through which he can immediately book the flight. Similarly, a
subscriber can select the Jukebox function on his phone and listen to music provided by Virgin
Megastores and Virgin Radio. Virgin also offers its subscribers access to content from third
parties including lastminute.com and Yahoo! Furthermore, Virgin Mobile was the first company
in the world to introduce an integrated MP3 mobile phone and first company to offer all of its
customers a content-rich voice portal.
Proactive Information
Services
Offers
Virgin benefits
behind the button
Shop
Virgin.Net
Text Messaging
Jukebox
Going Out/Staying In
Traffic News
Book Virgin
Other Services
RAC Red
Email
Access Services

Figure 8: Services Available from Virgin Xtras

9
Poll conducted by independent researchers from JD Power and Associates Virgin Mobile Press release (26 May,
2004)

Excellent Customer Care
In addition to value for money and access to innovative services, Virgin Mobiles strategy is to
offer its subscribers excellent customer care. The guiding principles upon which Virgin Mobiles
customer care philosophy are based include providing a different customer experience which is
innovative and fun, treating ne w and existing customers in the same way by offering one unique
proposition, and personalizing services and contacts with the customer as much as possible. In
order to achieve these aims the company meets its customer needs in an efficient and low cost way
and to take advantage of opportunities to develop new touch points with the customer. As part of
this strategy, Virgin Mobile allows customers to choose whether to access customer care services
either through well-trained human operators at the call centre or through a sophisticated voice-
activated menu system. By ensuring its subscribers are extremely satisfied with the level of
service, Virgin Mobile believes it can successfully drive them to use more airtime, take out more
value added services, and stay with the company longer. In recognition of its superior customer
care service, the company has received customer service awards every year since inception
10
.
3.4. Distribution Strategy
11

To reach the target customer, a young, individual buyer with an attractive user profile, Virgin
Mobile pursues an integrated distribution approach combining several innovative channels to the
market through a three-phase implementation strategy. In Phase I Virgin Mobile targeted
subscribers through an exclusive distribution agreement with two businesses within the Virgin
Group, Our Price and Virgin Megastores, through direct marketing via Virgin Mobiles call centre
and online through Virgin.com.
In Phase II of its distribution strategy the Company accelerated its subscriber growth through
V.Shops, a new concept in retailing developed by the Virgin Group targeting the technology,
media and telecom space. Virgin Mobile had a central role in developing the V.Shop concept and
has an exclusive agreement with V.Shop to distribute Virgin Mobile phones.
In Phase III of its distribution strategy Virgin Mobile expanded its retail sales distribution
capability in order to access a broader consumer market. Key target categories for expanded retail
distribution included the grocery sector and mass high street merchandisers. With sponsorship and
support from T-Mobile, Virgin Mobile has in place agreements with third parties including
Sainsbury, Tesco, Safeway, Asda, John Lewis, Littlewoods, Argos, The Link, Dixons, Carphone
Warehouse, Comet, Phones 4 U, Toys R Us and Rymans to sell its phones through their outlets.
3.5. Shareholder Commitment
Virgin Mobiles shareholders, the Virgin Group and T-Mobile
12
, bring considerable technical,
operational and financial strengths to their joint venture. Together the shareholders have

10
11
Source: Virgin Mobile Document A and Virgin Mobile website
12
From November 1999 to January 2004
demonstrated their strong commitment to Virgin Mobile through an equity investment of
approximately 85 million
13
. The chart below illustrates Virgin Mobiles ownership structure at
the time of its inception:
Employees
VIRGIN GROUP DeutscheTelekom
Bluebottle UK Limited
One 2 One
Bluebottle Investments S.A.
Virgin MobileTelecomsLimited
49% voting
50% voting
100% ownership of BCL
1% voting*
Bluebottle Call Limited

Figure 9: Virgin Mobile Ownership Structure

The Virgin Group brings one of the worlds most powerful brands to the Company. From its
launch in 1968, Virgin has expanded into a retail and service empire spanning travel, music,
entertainment and financial services. Virgins track record in starting up new businesses, strong
marketing and branding expertise and powerful retail network has contributed significantly to
Virgin Mobile. In addition Virgin has contributed key personnel to Virgin Mobile. Virgin
Groups commitment to the mobile sector and the Virgin Mobile brand is further evidenced by its
expansion to overseas markets such as Australia (with carrier Optus), USA (with carrier Sprint
PCS) and now Canada (with carrier Bell Mobility).
Through T-Mobile, Virgin Mobile has access to one of the UKs largest cellular network.
Following its acquisition of T-Mobile One 2 One in 1999, Deutsche Telekom invested heavily to
improve coverage of the network. In addition T-Mobile provides Virgin Mobile with access to an
extremely valuable large network of outlets for distributing its vouchers. Additionally, T-Mobile
provides Virgin Mobile with access to the purchasing managers within these organizations that
help facilitate signing of distribution agreements with high street names such as Sainsbury, Dixon,
Carphone Warehouse and Tesco. T-Mobile also brings considerable technical expertise in prepaid
billing drawn from its experience as the operator with one of the largest prepaid subscriber bases.
T-Mobile has also contributed key personnel to Virgin Mobile.
Virgin Mobile represents a key element in T-Mobiles competitive strategy. Brand segmentation
allows the T-Mobile network to access a new market for mobile phones without risking its own
customer base. This brings incremental subscribers and incremental revenues to T-Mobile.
Furthermore, the pricing plans offered by T-Mobile with reduced prices for evening and weekend
access have left it with its network considerably underutilized during the day. As Virgin Mobiles
pricing proposition does not differentiate between day or evening usage, the usage patterns of

13
Source: Virgin Mobile Document A. In addition, the company raised 115 million in syndicated bank loan in
November 2000 Virgin Mobile website
Virgin Mobile subscribers tend to dovetail with T-Mobiles. By attracting new subscribers in
addition to taking share from other operators , Virgin Mobile has enabled T-Mobile to take over
20% market share (including Virgin Mobile).
3.6. Recent Performance
Virgin and T-Mobile Partnership
14

In 2003, Virgin and T-Mobile were involved in a court case over the terms of the dissolution of
their mobile phone joint venture. The nub of the dispute revolved around the 4.56 monthly flat
fee paid by T-Mobile for each customer signed up by Virgin Mobile, regardless of whether the
customer was active or inactive.
In January 2004, T-Mobile, Virgin Group and Virgin Mobile announced that the three
organizations had settled the litigation, and established new agreement under which
T-Mobile and Virgin Mobile signed an enhanced telecoms supply agreement running for a
minimum 10 years. Separately, Virgin Group acquired T-Mobiles 50% stake in Virgin Mobile
thereby becoming the sole shareholder of Virgin Mobile whereas T-Mobiles role was modified as
a network supplier.
Subscriber Growth
Virgin Mobiles subscriber growth to date has been among the fastest recor ded by a new operator
in UK. In April 2004, the company announced the acquisition of its fourth million customers,
confirming its position as the UKs largest MVNO.

0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2000 2001 2002 2003 2004
Projected Actual

Figure 10: Subscriber Growth (000)
15

14
Reuters 10/3/2003 and Virgin Mobile website 29/1/04
15
Figures from Virgin Mobile website 2004 actual subscriber figure is only Q1 2004

Revenue and Profitability Growth
Since launching operations in November 1999, the company has experienced a steady growth in
revenues. In August 2001, it achieved its first month of positive EBITDA, five months ahead of
projections. Q1 2002 was Virgin Mobiles first full quarter of positive EBITDA and PBIT,
establishing itself as the fastest -growing mobile start up ever seen in the UK.

-200
-100
0
100
200
300
400
2000 2001 2002 2003
Revenue EBITDA

Figure 11: Revenue and Profitability Profile ( million)
16

3.7. New Markets
In October 2000, Virgin Mobile took its brand overseas to Australia with a A$100 million
partnership with Optus, becoming the first MVNO in Australia.
The company launched it presence in the USA in July 2002 in a joint venture with Sprint PCS. In
less than two years, it has secured over 1.75 million customers in the USA, making it the fastest
growing wireless communications company in that country.
In March 2004, Virgin Group and Bell Mobility announced a partnership to bring Virgin Mobile to
Canada. The Virgin Mobile Canada expected to launch its services through a nationwide rollout
later in 2004 using Bell Mobilitys digital wireless network.
3.8. Drivers of Virgin Mobile Success
The key drivers for this ventures success have been the individual strengths and competencies of
Virgin and T-Mobile England and the synergies drawn off their association in terms of their unique
service offerings.

16
Figures from Virgin Mobile website 2003 figures are half year annualized
Virgin
The strengths that Virgin brings to the table in this joint venture are:

o Brand Strength Virgin is a well known and established brand in the market (among top
50 brands in the world) with a certain set of values and a Brand Identity which is suited
for promoting services. The power, popularity and reach of the Virgin Brand negate the
requirement of trying to establish the credibility of the venture and bestow upon it a certain
sense of quality and legitimacy.
o Powerful retail/distribution network By selling through Our price, Virgin Megastore
and Virgin.com, Virgin Mobile has leveraged the wide and established retail network of
Virgin.
o Complimentary nature of other Virgin Group products The offering of mobile phone
services fits perfectly into the bouquet of services already on offer by Virgin i.e. retail and
airlines and in fact adds to it. Adoption or utilization of any one-service results in price
benefits in the others thus ensuring customer loyalty and creating a positive feedback loop.
o Innovation Track Record Virgin has a stellar record in starting new business and
innovating on the basic value proposition. Key quotes
17
of Richard Branson on the subject
include: Be best not biggest; compete on quality as well as price innovative business
must capture every fleeting idea. We [at Virgin] experiment endlessly with new methods,
new companies, and new marketing, especially when we can get others to pay for it!,
Protect the downside, always be ready to walk away

T-Mobile
T-Mobiles contributions towards the success of this venture are:

o National network work underutilized capacity - T- Mobile has a nation wide network
infrastructure thus ensuring wide coverage. Their network has a lot of excess capacity,
which lowers quite significantly the marginal cost of operating it through a partnership
such as Virgin Mobile. The selling of this excess capacity also results in economies of scale.
o Complement ary mobile service and customer targeting to T-Mobiles existing
customer base - Virgins high profile brand and Virgin Mobiles unique value proposition
result in a complimentary set of customers viz. One 2 Ones customer base thus resulting in
minimal cannibalization and increased revenues.
o Technical Expertise One 2 One possesses the technical proficiency required for the
venture, their network has more capacity per customer than any other service provider in
the U.K., besides there have been substantial investments in upgrading the quality of the
network in the recent past.

Unique Service Proposition
Virgin Mobile has been able to capitalize on the synergies of the partnership and leverage the
competencies and strengths of the individual partners to offer, as explained in the preceding text ,
Value for Money and Innovative Value Added Services which are unique to Virgin Mobile thus
ensuring its rapid growth and increasing popularity in the targeted market segment.

17
From The House that Branson built: Virgins entry in the new millennium, case written by Manfred Kets de Vries
4. Transatel case
4.1. From idea to launch
Jacques Bonifay and Bertrand Salomon are INSEAD alumni, both attending in 1994. In 1999,
Jacques was in charge of Strategy and Business Development for the Professional and Consumer
Division of Alcatel terminal division and Bertrand was working at Bouygues Telecom, Director
for the mobile Internet activity. They met again in 1999 at the ball celebrating the fifth anniversary
of their graduation where they discussed new business ideas. They were both working for big
companies and felt it was time for them to grow their own ideas.
This was a time of fast evolution in the telecom market, WAP was going to be launched with some
limitations that GPRS would overcome, and a lot of new value added services were emerging. It
seemed that the critical part was to properly address customers with a proper service design,
through proper mastery of the SIM card. This led Jacques and Bertrand to the idea of launching a
Mobile Virtual Network Operator (MVNO).
They had an initial Business Plan, requiring a 10 mEur funding, in which expectations were to get
between 300 and 400 thousand customers within a four -year time frame. The key idea of that plan
was to target frequent travelers and offer them seamless services over their travel zone as well as
competitive pricing for their roaming calls. The concept should sound attractive to newly coming
Mobile Network Operators (MNOs), who were not strong in the business market segment: hosting
an MVNO targeting frequent travelers would help them lure away customers from their
competitors.
Leveraging on Bertrands goodwill within Bouygues Telecom, they could sign a Letter of Intent
framing such type of cooperation. They then started to work on developing the technical solutions
and recording relevant patents. For this, they hired a former colleague of Bertrand. In May 2000,
they manage to raise 600 kEur from Pyramid Technology Ventures and business angels. With that
money they built the service platform and started discussions with one2one, the fourth English
MNO. On the basis of these progresses, they managed to raise an additional 350 kEur in January
2001. They then started a pilot launch in June 2001 in France and UK.
4.2. From launch to breakeven
They already had at that time cash problems and they realized how difficult and costly it was to
attract customers with an unknown brand like Transatel. This is what pushed them from February
2001 onwards to speak to potential partners for a new market approach: white brand. Under this
approach the actual marketing and sales activity is done by a well-established company, benefiting
from strong brand name and existing relationship with a significant customer base. Transatel
would enable all network services for such partners. In September 2001, discussions of
partnerships were close to finalization with American Express and Eurostar.
9/11 changed significantly the direction of events. American Express was momentarily out of
touch and then decided in this moment of crisis to deal only with pure core activities. As for
Eurostar, they were suffering from an unprecedented traffic decline which called all their attention.
In February 2002, they sign with Base, a Belgian MNO. Base is especially interested by getting
new MVNOs on their network since they have a proactive wholesale strategy. They liked in
Transatel the concept of enabling powerful brands to become MVNOs. However times are really
difficult in the telecom industry. Rumors of bankruptcy of major telcos make it very difficult for
established companies to make the step of entering the MVNO business. Finally they could
convince COLT to step in and signed a contract with them in April 2002. Unfortunately, COLT
new owners, by changing most of the management team actually blocked the decision to move
forward. In parallel, Transatel studies the project with Carrefour and with PSA.
In the mean time, the service is commercially launched on Bouygues network. A distribution
agreement is signed with The Phone House and the customer base starts growing. Belgium is
launched commercially on the first of November 2002. Transatel managed also to sign with some
Belgian alternative fixed operators.
Revenues grow significantly in 2003. An agreement is signed in the summer with Pelefon, an
Israeli MNO, not having coverage in Belgium. A pilot project with PSA is launched. White
brand pre-sales activities are monetized through consulting projects for potential candidates. The
Netherlands is connected to the multi-country network through a partnership with Teleforte.
Today, revenues have reached a level of 200 kEur per month, with a 100% growth rate every six
month. The revenue split is 50% white brand and 50% frequent travelers. The margin is higher
and more sustainable on the frequent traveler business than on the white brand, by nature of the
business. 70% of the reve nues come from Belgium. This is explained by the fact that Belgians,
living in a small country, are more natural travelers and are much more sensitive to roaming
related issues. Due to the better awareness to Transatels value offering, acquisition costs are lower
and Transatel focus its financial resources there. Additionally, it seems that Base has a very
pragmatic approach of facilitating wholesale business on its network.
The total funds raised are 2.3 mEur and 0.4 mEur of research tax credit. They have just reached the
operational break-even.
In 2004, Transatel signed with two pan-European fixed telecom service providers and should sign
with their first Dutch MVNO in July. Transatel is currently renegotiating the conditions of their
partnership in England with one2one, now T-Mobile England.
4.3. A two fold strategic market approach
The strategy is to pursue for some time the twofold approach: frequent travelers and MVNO
Enabler (MVNE). For this, the next steps are to continue develop the technical platform and grow
the network coverage by signing with MNOs in current and new countries.
In the longer term, the idea is to sell the frequent traveler activity in order to concentrate the
effort on the MVNE approach. Frequent traveler could be sold either to a player of the travel
industry or to one of the MNO. The rationale for continuing service to end-users is to use the
customer base as a demo of what can be done for potential MVNOs, as well as getting a full
understanding of the constraints of MVNOs in order to better support them.
A natural exit for the MVNE business (white brand) could be being bought by:
o A fixed-mobile operator, which deemed that activity too strategic for its core business to be
outsourced (Tele2?)
o A MNO who wants to develop a true proactive approach towards MVNOs (Bouygues?)
o IT outsourcing specialist, which want to extend into telco (Atos, EDS, Convergys, etc.)

Figure 12: MVNE position in the value chain
18

The service Transatel proposes as a MVNO enabler is:
o Integration with the MNOs network
o Management of the Call Data Records, Rating and Billing
o Call routing
o Voice Mail services
o SIM card management
o Development of SIM card based services

18
Transatel presentation

Figure 13: Transatel's MVNE value proposition
19

Transatel intention is to further develop the added value they provide by going up in the value
chain. For instance, they plan to develop capabilities to interface with the MNOs intelligent
network platform to enrich their service offering.
They approach to potential MVNOs is to demonstrate first of all that MVNO can be a profitable
standalone business and that on top of this there can be a lot of synergies developed with their core
activities. For instance, retailers are potential MVNOs, offering telecom services to their loyalty
card owners. Another example are banks, which could use an MVNO service offering as a
differentiating factor in order to attract young customers.
A typical margin for an MVNO could be 35%, to be shared between the MVNO and the MVNO
enabler. The main reason for Transatel going towards the MVNO enabler strategy is the lack of
funds to sustain a customer acquisition approach. MVNO candidates are established players with
more means and even more importantly benefit from a strong brand and an existing customer base,
making the acquisition cost much lower than for a no-name player. The advantages for MVNO
candidates to go through Transatel are that they benefit from:
o economies of scale (the platform and all the costs of establishing a relationship with
MNOs) are shared with other players
o much shorter time to market
o reduction of risks associated with such a venture without being a seasoned telecom
professional

19
o support on the marketing side for cracking the telecom specifics
Telecom-literate NON Telecom-literate
Mass
market
Niche
market
B2C
fixed Telcos
(Tele2)
Mass market
ISPs
(AOL)
Content brands
(Disney, Nike,
Virgin, MTV)
Retail chains
(Tesco, Sainsburry,
CPHW, Albert Heijn; Delhaize)
B-2-B
Fixed Telcos
(Colt, Yellow Telecom,
PhonePlus)
Automotive
(PSA, Ford)
Machine-2-machine
/ Road Transport
Communities
(Lawyers,
night partiers
Campuz Mobile
(student))
+ ++
++ +++
Wireless data
(mixed GPRS,
UMTS, WLAN)
B-2-E / Private
corporate MVNO
Banks / Credit
Card Companies
(Barclays, AMEX)
Oil industry,
(Shell)
Freq. Travellers
(Transatel)
Telecom-literate NON Telecom-literate
Mass
market
Niche
market
B2C
fixed Telcos
(Tele2)
Mass market
ISPs
(AOL)
Content brands
(Disney, Nike,
Virgin, MTV)
Retail chains
(Tesco, Sainsburry,
CPHW, Albert Heijn; Delhaize)
B-2-B
Fixed Telcos
(Colt, Yellow Telecom,
PhonePlus)
Automotive
(PSA, Ford)
Machine-2-machine
/ Road Transport
Communities
(Lawyers,
night partiers
Campuz Mobile
(student))
+ ++
++ +++
Wireless data
(mixed GPRS,
UMTS, WLAN)
B-2-E / Private
corporate MVNO
Banks / Credit
Card Companies
(Barclays, AMEX)
Oil industry,
(Shell)
Freq. Travellers
(Transatel)

Figure 14: Categorization of potential MVNOs using an MVNE
20

There are two main European actors in the MVNE business: Spinbox.se in Scandinavia and
Transatel in western and southern Europe. The reason behind the fact that they are two is twofold:
o since MNOs are not equipped to deal with MVNOs there is a natural role to play for
MVNE
o Due to the crisis in the telecom sector, most of the players have just disappeared: only the
strongest could survive.

20
Lisboa
Madrid
Munich
Luzerne
Milan
Rome
Athnes
Vienne
Dsseldorf
Copenhague
Bruxelles
Paris Strasbourg
Stockholm
Lisboa
Madrid
Munich
Luzerne
Milan
Rome
Athnes
Vienne
Dsseldorf
Copenhague
Bruxelles
Paris Strasbourg
Stockholm
Madrid
Munich
Luzerne
Milan
Rome
Athnes
Vienne
Dsseldorf
Copenhague
Bruxelles
Paris Strasbourg
Stockholm

Figure 15: Two MVNEs players in Europe, Transatel and Spinbox.se
21

4.4. Highlights in the Innovation process
I nterdependence and I ntegration issues
On the technology point of view there have not been major uncertainties: the technical solution
worked from the beginning. Interdependence becomes a real issue in two cases:
o Launch of services supported by new technology: for instance Location Based Services,
which are planned to be a major breakthrough given by 3G, will make the MVNO very
much dependent on the MNOs capability (let alone the willingness!) to provide them.
o Lack of telecom experience from the MVNO: in that case, due to the increased dependence
on the MNO, the interdependence risk automatically increases.

21
A strong integration is required between MVNO and MNO. In a typical case, most of that
integration is legally ruled in the framework agreement between MNO and MVNO/E. But
integrating in practice can be a painful process and create a lot of delays. In the case of Transatel,
who is small compared to its partners, it means a constant effort to have their requests taken into
consideration. In this case as well the lack of telecom experience of the MVNO increases the risk,
this time of integration. This is due to the difficulty for the MVNO to precisely specify what it
needs, leading to delays to ensure finally full compatibility of the systems.
Reversibility of commitments
In terms of the decision to exit during the course of this adventure, the issue was very much framed
by the issue of lack of funds and the associated risk of trading insolvent. Trading insolvent can
have legal implications for the CEO and the companys directors. Therefore consideration on
exiting took the form mostly of discussions on where are the limits to be qualified as trading
insolvent. The founders sought advices from their auditors, from other entrepreneurs who had been
in similar situations. It doesnt seem that there had been a time where exit was considered due to
the fact that the market would not materialize.
Value creation and value capture
Transatel initial positioning on multi-country mobile operator targeting frequent travelers creates
value in an original way. By being present in several connected country, they are able to render the
borders almost irrelevant for the mobile users. Since roaming fees (fees to call or receive a call in a
foreign country) are based on inter-operator invoicing which are traditionally high in this industry,
there is a huge cost gain by being the operator on both sides of the border. Part of this cost
reduction is passed to the frequent traveler. The attractive pricing based on a reduced cost base
constitute Transatels competitive advantage. This advantage is sustainable as long as this practice
will not be considered a serious threat by major mobile operators. Indeed, they currently have now
much more to loose than to gain by reducing the currently very lucrative roaming fees. In addition,
such contiguous network coverage is difficult to achieve and constitute an outstanding
achievement on Transatel side. Strong brands will naturally have the strategy to first develop their
national presence before moving to another country. This extended network coverage is also a key
asset for attracting pan-European players such as some of the alternative fixed line operators.
Adapting strategy to reality
When it appeared that Transatel would never get enough funds to pursue its initial strategy, they
quickly turned to the MVNE strategy, which they had already thought of. This point can be
generalized for their approach to innovation: they constantly keep an ear on what was going on the
market and an up to date list of opportunities to pursue or alternatives just in case. Often, such
pool of ideas helped them to quickly and flexibly react to market opportunities. Another example
of that approach is the fact that they changed their market focus from France to Belgium as soon as
they realized that the market was more receptive to their approach there.
Key success drivers
The first key success driver for Transatel is that both founders complemented each other very well:
o Jacques forcefully embodies the vision and gives to the organization the energy to move
forward and is the one removing road-blockers
o Bertrand is the one who ensure that things are delivered consistently and with a high
quality level. He has the role to keep things in order and to control that the right track is
followed
o Both founders have developed a capability to synchronize and come to agreement on
decisions very efficiently.
According to us, a second success driver was the ability of the founding team members to leverage
on their personal credibility to progressively be accepted as partners by major European
companies. It starts with the excellent reputation that Bertrand has within Bouygues, which made it
possible for them to get their MVNO agreement (and moreover in France!). In this case, their
small size has been a help very likely, as it is quite improbable that Bouygues would have accepted
a powerful player in their network, out of fear of aggressive retaliation by Orange and SFR. On the
basis of that breakthrough and further using Bouygues support, they managed to sign an agreement
with One-2-One in UK. They could then launch their multi-country service and gain a natural
credibility in front of other MNOs. We can only emphasize again the performance for a start-up of
managing to sign MVNO agreements with partners, which usually think with a minimum unit of
account of 10 m.
5. Key lessons
5.1. The use of Alliances
Virgin chose to develop its MVNO innovation in the form of 50/50 joint ventures with MNOs. The
reason given by them is that they want the MNO to be fully committed in the success of the
innovation, as they realize that otherwise, if the innovation is too successful, the MNO will have a
natural tendency to undermine it.
Virgin T-Mobile England
Experience None Fourth mobile operator in UK
Global MNO
Intents First consumer brand mobile
service provider
Increase profitability through scale
effect
Capabilities Attractiveness of Brand values:
Fun, innovation, value for
money, excellence in customer
relationship, distinctly irreverent
style
High quality network coverage
Network operation

Markets Low user, prepaid
Extension to higher segment?
Medium to High End Users
Virgin and T-Mobile went to court due to disagreement on contractual obligations. One of the
results was the decision of Virgin to buy-back the 50% owned by T-Mobile in Virgin mobile and
the signature of a modified 10-year agreement. According to Virgin, the reason for the break-up of
the alliance is not due to the nature of the alliance but to the vague write-up of the contract. Since,
they could not agree on the interpretation, they had to settle that in court. Consequently, they felt it
was not possible to continue as equal partners and they splat, even though at the same time they
signed a renewed, more precise ten-year agreement.
Another interpretation could be that T-Mobile wasnt aware of all the learning process taking place
on Virgin side and they felt unduly exploited in that relationship. These feelings could have been
exacerbated by cultural issues: one can easily imagine that a One-2-One Virgin relationship could
be smoother that a T-Mobile Virgin one. This could have led to failure of finding a business
solution to contractual disagreements.
The alliance with Sprint PCS benefited much from Virgins experience. The learning having been
done on Virgin side, the relationship is more balanced over time. The shareholders agreement
nicely embeds the principles of a fair and effective relationship. On a cultural point of view,
English and American pragmatism combines well into joint and focused effort for a successful
launch.

Virgin Sprint PCS
Experience MVNO in UK and Australia Global Telco
Intents First consumer choice on the
mass market
Efficiently penetrating the under -30-
pay-as-you-go market
Capabilities Attractiveness of Brand values
Proven business model to
address low-end users
Expertise on Prepaid market
MNO covering most of the US
Markets Low user, prepaid Medium to High End Users
Virgin Mobile US is considered a huge success. It is growing extremely fast and will be this year
one the 10 American companies fastest to reach the one billion $ revenue threshold.
Virgins approach to alliance is pictured in the following matrix
22
.
Individual alliances Network of alliances
Competence Leverage Virgin Mobile US Virgin Group
Competence Acquisition Virgin Mobile UK
Transatel has not used formal alliances, but by many aspects we can consider that they are having
an informal alliance with Bouygues Telecom.
5.2. Choice of target segment
Virgins choice of young people as target segment is critical for two main reasons: this is the
segment upon which they get the best leverage on their established brand value by ensuring lower
acquisition costs; it is a segment considered a complement by the MNO and not a substitute due to
the difficulty to profitably address it.
A key issue for profitability indicators of mobile service providers is the ratio of acquisition cost
on the net margin per month generated per user. This ratio basically gives the number of month an
average customer needs to stay with you to pay back. Since the MVNO had only small fixed
investment to incur relatively to the ones of the MNOs, it can accept on a financial point of view
lower average ratio than MNOs. For this reason, it can focus its management attention on
profitably addressing lower-end segments. One main driver of the profitability ratio is the
acquisition cost, which includes the following elements: advertising, handset subsidy, sales
commission to distributors and promotional activities. Due to the power of their brand is due to
their strong focus on a specific target, Virgin is able to spend its advertising pounds much more
efficiently than other MNOs according to their own study
23
. A very tight control of distribution
channels, a lot of effort invested in negotiations with handset providers and last but not least a lean
organization with minimal overheads complement their approach and lead to a profitable play in

22
The Use of Alliances in Implementing Technology Strategies Yves Doz, Gary Hamel
23
the lower-end segment. This is usually not achievable by MNOs and the ones who anyway target
lower-end segment usually do it in an unprofitable manner. There is therefore a good rationale for
letting MVNO address these complementary segments
A key question is whether complement positioning of today become substitution in the future. This
could occur if the MVNO, having gained momentum on the lower-end market, decides to play on
the MVNO ground of medium to high end users. This question is even more relevant in the case of
Virgin Mobile UK since the end of the alliance makes future move on Virgin side less predictable
and controllable for T-Mobile. Not surprisingly, neither of our contacts in T-Mobile and Virgin did
elaborate on that issue.
Transatels choice of target segment is very much determined by their value proposition: it must be
frequent travelers. They chose to address business travelers rather than tourists for obvious
reasons. They have a higher purchasing power, travel more frequently and associate well mobile
cost reduction logic to their travel. One could even argue that business travelers are the only target-
able segment for Transatel.
5.3. Evolution in strategy
Transatel did not get the funding necessary to pursue their initial strategy of acquisition of frequent
travelers. In a classical move, they are now licensing their innovation by proposing to brands
(e.g. American Express, Peugeot, etc.) a quasi turn-key MVNO operation in-sourcing. This
business now represents half of their revenues and is the part on which Transatel focuses now.
This new idea came naturally when they realized how costly it was to address customers directly
and when then thought about partnerships with American Express and Eurostar. This idea of
partnership extended into this MVNE concept under which there is a clear split of responsibility in
the partnership, which becomes a provider/supplier outsourcing relationship where each party
focus on what they know to do the best. It turned Transatel business from a capital intensive
(acquisition costs) B2C play to a more manageable B2B play. By keeping the B2C side of the
business they can demonstrate the proof of concept and keep an edge on what their B2B customers
might want in the future.
On the contrary, the success of Virgins strategy implementation proved the validity of their
concept. They are now concentrating their effort on exploiting that strategic positioning by further
growing their customer base and replicating abroad. They used a classical diversification strategy:
leverage on their capabilities (brand values, excellence in customer relationship and mastery of the
innovation process) to extend their business scope in their home country. By doing so, they build
new capabilities (telecom sales, marketing and customer administration expertise). They then
leverage on this new capability to extend again their scope, geographically this time.
5.4. MVNE as an Interdependence and Integration risk reduction
After MVNO, the appearance of MVNEs, i.e. MVNO enabler, is another interesting shift of the
boundaries of MNO value chain. With the increase of maturity of the industry, strategies of
specialization in specific sub-part of the value chain become possible and thus reopen the issue of
how value is captured.
Especially, MVNEs enable brands to extend into mobile services to consumers with a considerable
reduction of interdependence and integration risk vis --vis the MNO. Using Ron Adners 5Is
implementation risk framework, we analyze the impact of the role of MVNE for potential MVNOs
5I Implementation
Risk Framework
MVNO alone
24
MVNE+MVNO
1. Impossibility
risk
MEDIUM
Due to lack of experience,
especially if internal
implementation team is not
seasoned enough in telecom
LOW
MVNE has done it already
2. Incentives and
controls risks
MEDIUM
LOW
Well defined by nature, since
most of them are ruled by the
outsourcing contract
3. Initial market
choices risk
LOW
Quite straightforward since the
goal of the brand extension is
first of all to offer more to a
well known customer base
LOW
MVNE helps to decide on
how to best design offers
targeting chosen segments
4. Interdependence
risk
HIGH
Due to medium impossibility
risk and lack of support on the
MNO side to accelerate the
learning process MNOs are
not organized for that
LOW
MVNE knows well the
interdependence; they
facilitate risk management
and help reduce it
5. Integration risk
HIGH
The process from contract
signing and the first subscriber
is always well over one year.
Therefore integration risks are
high, and exacerbated by the
complexity of billing and
CRM systems required
LOW
Fast-track Time to Market:
MVNE platform is already
integrated
Figure 16: Impact of MVNE on 5I integration risk framework

24
Bonus project
We see that how important is the role of the MVNE to facilitate the MVNO innovation. This
change could potentially trigger a significant trend of diversification of powerful consumer brands
in the mobile business, leveraging on their brand awareness and their existing customer base. This
constitutes a significant threat for MNOs with low brand equity as they could found themselves
cornered into commodity provision of network bandwidth.

6. Glossary
ARPU - Average Revenue Per User. One of the key performance indicators in mobile network.
Value Added Services (VAS) services are often cited as ways of increasing ARPU

AuC - Authentication Center - A component of the infrastructure equipment in the GSM network.
Its purpose is to validate subscribers logging on to the network

BSC - Base Station Controller - this is the network node that connects the Base Transceiver Station
(BTS) and the Mobile services Switching Center (MSC).

BTS - Base Transceiver Station - The Base Transceiver Station is composed of an antenna and
transceiver. The BTS handles the radio interface with the mobile phone. It is the first entity within
the GSM network that detects the mobile signal. The parameters of a cell are defined by the
transceiver signal strength of the BTS.

Carrier - A company, such as any of the "baby Bell" companies, which provides network
communications services, either within a local area or between local areas.

CCB - Customer Care & Billing

CDMA - Code Division Multiple Access - A technology for digital transmission of radio signals
between, for example, a mobile telephone and a radio base station. In CDMA, a frequency is
divided into a number of codes.

ESN - Electronic Serial Number - The unique identification number embedded in a wireless phone
by the manufacturer. Each time a call is placed, the ESN is automatically transmitted to the base
station so the wireless carrier's mobile switching office can check the call's validity.

ESP - Enhanced Service Provider - Any telecommunications service that utilizes computer-based
processing applications to provide the customer with value-added telephone services. Voice mail is
an example of an enhanced service.

GPRS - General Packet Radio Service. A GSM data transmission technique that does not set up a
continuous channel from a portable terminal for the transmission and reception of data, but
transmits and receives data in packets. It makes very efficient use of available radio spectrum

GSM - Global System for Mobile Communication is the pan-European standard for digital cellular
telephone service. GSM was designed for European markets to provide the advantage of automatic,
international roaming in multiple countries. The SIM (Subscriber Identification Module) card is a
vital component in GSM operation. The user can store all relevant data for the phone on a
removable plastic card. The card can be plugged into any GSM compatible phone and the phone is
instantly personalized to the user.

HLR - Home Location Register - A database residing in a local wireless network that verifies the
identity of a local subscriber by comparing the transmitted MIN and ESN to the valid entry in the
database.

IN - Intelligent Network - A capability with well developed network infrastructure in a telecom
network environment allowing new services such as free phones or televoting to be developed
quickly and introduced on any scale, from a local trial to network-wide.

LBS - Location Based Services

MCS - Mobile Switching Center - Interface between the base station system and the switching
subsystem of the mobile phone network
base station - The central radio transmitter/receiver that maintains communications with a mobile
radiotelephone with a given range.

MIN - Mobile Identification Number - It is the identification number of a mobile unit within a
carriers network. It differs from the ESN number, which is assigned by the manufacturer, not the
carrier.

NDC - National Destination Code. Used to identify a carrier in a given country.

Radio Spectrum - the range of frequencies used, for example, by broadcasting radio, terrestrial
television and satellite television. Spectrum is required for the provision of any kind of cellular
telephone service. consists of radio waves of different frequencies (for example, 900 MHz). All
radio spectra are regulated, with some licensed and others unlicensed.

Roaming - A service offered by mobile communications network operators which allows a
subscriber to use his/her radio or phone while in the service area of another carrier. Roaming
requires an agreement between operators of technologically compatible systems in individual
markets to permit customers of either operator to access the other's systems.

SMS - Short Message Service. A method of delivering a short (120-200 character) message to your
digital cellular phone.

SP - Service Provider - A company that provides mobile phone users with services and
subscriptions to mobile phone networks.

TDMA - Time Division Multiple Access - TDMA is a technology for delivering digital wireless
service using time-division multiplexing (TDM). TDMA works by dividing a radio frequency into
time slots and then allocating slots to multiple calls. In this way, a single frequency can support
multiple, simultaneous data channels. TDMA is used by the GSM digital cellular system.

UMTS - Universal Mobile Telecommunications System. UMTS is a mobile communications
system which, among other features, will offer direct connection between terminals and satellites.
UMTS is one of the ITU's proposals for technologies for world standards for 3G mobile
communications (IMT-2000).

VAS - Value Added Service - Value Added Services, VAS or VADS, services are often cited as
ways of increasing ARPU

VLR - Visitor Location Register - A local database function that maintains temporary records
associated with individual subscribers. The VLR contains subscriber location and service
information that is accessed by the Mobile Switching Center(MSC) to retrieve information for the
handling of calls to and from subscribers currently being served by that MSC.

2G - Second generation. Refers to the second generation cellular phones that introduced digital
technology (CDMA, TDMA, and GSM).

2.5G - 2.5 generation cellular technology enables increases in data bandwidth available over
current 2G cellular networks. 2.5 G technology can be implemented by cellular operators thru
software updates to their network, whereas 3G requires new hardware installations. The most
common 2.5 G deployment to-date is General Packet Radio Service, or GPRS.

3G - In mobile telephony, third-generation protocols support much higher data rates, measured in
Mbps, intended for applications other than voice. 3G networks trials started in Japan in 2001. 3G
networks are expected to be starting in Europe and part of Asia/Pacific by 2002, and in the US
later. 3G will support bandwidth-hungry applications such as full-motion video, video-
conferencing and full Internet access. 1G, 2G, 2.5G, IMT-2000, UMTS, WCDMA

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ISE / Main project / MVNO Page 1 of 37 September 1, 2004

Innovation Strategy and Entrepreneurship

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