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

Innovation Strategy and EntrepreneurshipMain project

MVNO innovation

Gunther BACELLARKunal BHAGATCyril BOUCHETSang-Uh HANAldous MITCHELLVineet SINGH


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Table of content

1. Executive summary.....................................................................................................................42. Context of MVNO innovation ................................................................................................. ...62.1. MVNO various models ................................................................................................. ...62.2. MVNO Technical Basis ...................................................................................................72.3. Key forces behind MVNO innovation ................................................................................82.4. Current and potential players ..............................................................................................92.5. Why do MNOs host MVNOs?..........................................................................................10

3. Virgin Mobile case....................................................................................................................133.1. Company Overview ..................................................................................................... .....133.2. Target markets...................................................................................................................133.3. Corporate Strategy ............................................................................................................15

3.4. Distribution Strategy.........................................................................................................173.5. Shareholder Commitment .................................................................................................173.6. Recent Performance..................................................................................................... .....193.7. New Markets.....................................................................................................................203.8. Drivers of Virgin Mobile Success.....................................................................................20

4. Transatel case ............................................................................................................................224.1. From idea to launch...........................................................................................................224.2. From launch to breakeven.................................................................................................224.3. A two fold strategic market approach...............................................................................234.4. Highlights in the Innovation process ................................................................................27

5. Key lessons ...............................................................................................................................30

5.1. The use of Alliances................................................................................................ ..........305.2. Choice of target segment.............................................................................................. .....315.3. Evolution in strategy .........................................................................................................325.4. MVNE as an Interdependence and Integration risk reduction..........................................33

6. Glossary ....................................................................................................................................35


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1. Executive summary

A Mobile Virtual Network Operator (MVNO) is an organization that offers mobile subscriptionsand call services to customers but does not have an allocation of radio spectrum. With theemergence of the MVNO business model, access to the scarce resource of the radio spectrum is nolonger limited to license holders (Mobile Network Operators). This dynamic shifts the boundariesof competition by enabling entry of new players and lowering the set up cost to launch mobileservices. 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 / lowmargin plays (mass services).

In order to illustrate the implementation of this innovation we have chosen two companies with

different approaches: Virgin Mobile and Transatel.

Innovationcharacteristics

Virgin Mobile Transatel

Timing and choice ofentry mode

November 1999Alliance with T-Mobile,

targeting end users

June 2001Independent start-up,

targeting end users

Construction of thesupply chain

Direct and indirect sales,leverage on Virgin and T-

Mobile capabilitiesIndirect sales through shops

Perception of valuecreation and value

capture

Leverage on Virgins brand,

focus on outstandingcustomer experience,simplicity of offer

1) Multi-country operator

enabling lower costs forfrequent travelers2) MVNO enabler (MVNE)

Approaches to marketdefinition andsegmentation

Individual buyersLow spending segment

1) Frequent travelers2) MVNOs

Level of resourcecommitments

High - 200 m (85 equity,115 debt) Low 3 m

Exit strategies and thereversibility ofcommitments

Full scale commitment inEngland

Monitoring and progressive

funding for the US launch

Step by step fund raising

Differences in marketexpectations as gleaned

from firmannouncements

Actual realization in line withexpectations in UK

Success beyond expectationsin the US

Change of strategy due tolack of funds

Licensing of innovation(MVNE)

Expectations for marketgrowth versus

substitution

Mobile market growth intolower end segments

Substitution to main mobileoperators in the business

travelers segmentService 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 driversof success are to be found either in the MVNOs ability to profitably offer lower prices (e.g.


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Transatel on roaming calls), to extend an existing customer relationship or to substantiate potentialrelationship (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 asTransatels shift of strategy along the innovation route and the impact of MVNE value creationthrough 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 orderto leverage on their brand and new experience. The success of their individual alliance with SprintPCS in the US is a proof of the validity of their approach.

Individual alliances Network of alliancesCompetence Leverage Virgin Mobile US Virgin GroupCompetence Acquisition Virgin Mobile UK

Virgins choice of young people as target segment is critical for two main reasons: this is thesegment upon which they get the best leverage on their established brand value by ensuring loweracquisition costs; it is a segment considered a complement by the MNO and not a substitute due tothe difficulty to profitably address it. Will complement positioning of today become substitution inthe future?

Transatel did not get the funding necessary to pursue their initial strategy of acquisition of frequenttravelers. 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 ofspecialization in specific sub-part of the value chain become possible and thus reopen the issue ofhow value is captured.

Especially, MVNEs enable brands to extend into mobile services to consumers with a considerablereduction 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 asignificant threat for MNOs with low brand equity as they could found themselves cornered intocommodity provision of network bandwidth.


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2. Context of MVNO innovation

The competitive mobile telecommunication industry has been characterized by a dynamic flow ofnew technologies, players and market opportunities, the combinations of which have triggeredvarious advances affecting every stakeholder in the industry value chain. One of the innovationsthat emerged from the ongoing market dynamics is the concept of the Mobile Virtual NetworkOperator (MVNO) business model. An MVNO is broadly defined as an entity that provides mobiletelephony services to its customers, but does not have its own allocation of radio spectrum.

2.1. MVNO various models

RadioSpectrum

Network Services

TrafficRating

SIM cardValue Added

Services

Billing andCustomer

Care

Distribution Marketing

Mobile Network Operators

Heavy Model - MVNO

Light Model - Service Provider

Medium Model - MVNO

RadioSpectrum

Network Services

TrafficRating

SIM cardValue Added

Services

Billing andCustomer

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 brandexperience. The host provides customer care for the network issues, the MVNO for otherissues. Sainsburys follows this model in UK, depending on host BT Cellnet for networkaccess and SIM-card issuance.

Medium-model: MVNO has the same control over customer engagement as in the lightapproach, but it focuses and depends more on services than on customer care fordifferentiation. 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 mobileservice in Norway on Telenors and Telias network. The company offers services such asSense Update, which gives subscribers single-click access to games and informationservices.

Heavy-model: MVNO controls the calls by having its own network elements and switchesthat give it call control. MVNO also has full control over all services and negotiates its owninterconnect and roaming agreements with other operators. Hosts only provide radiospectrum and coverage. Having its own resources for access, services and customers,


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MVNO faces a bigger challenge to give equal attention to the customer as the brandMVNO can. Tele2, a Pan-European telecommunication company, enter in the mobiletelephony business as an MVNO in Denmark by adopting the heavy-model. Tele2, runs itsown switches and network elements, like home location registers, relying on host networkSonofon 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 hasthe 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 theMVNO 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 islinked to mobile switching centers (MSC). The MSC communicates with databases to authorizeaccess to the system, compile billing data and enable consumers to make calls. The MSC alsoconnects with value added service platforms that provide voicemail and other services.

The MVNO concept separates the radio spectrum infrastructure from the intelligent components ofthe network that include access to the authorization database and collection of billing data. The keyeconomic benefit of the MVNO business model over the MNO model is based on the premise thatservice differentiation is independent of the radio infrastructure, and determined mostly by theadded 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


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authorization and PSTN (Public Switched Telephone Networks) switching, MVNOs offer servicesindistinguishable from existing MNO mobile services, while retaining virtually absolute controlover all aspects of the telephony service all without the substantial investment in radio spectrumlicenses.

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 affectingMNOs and the mobile telephony industry:

(1) Maturity/Saturation of existing markets - MNOs in saturated, mature markets such as inEurope face stagnating profits and increasing rivalry with existing competitors. MVNOsability to market to previously unreachable market segments provides strong impetus forMNOs 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, providesthe basis for specialization within the industry value chain to occur, leading to theemergence of dedicated players that may provide particular functions within the valuechain more efficiently. With this modularization and specialization, entry into the mobiletelephony market is no longer restricted to telco-players, but open to other industry playersthat seek to leverage their brands and other core business strengths without beingencumbered by technical issues. The MVNO model hence, opens up the mobile telephonymarket to outsiders, and by extension, gives rise to a new class of telephony entities thatspecialize in delivering turnkey MVNO services to the non-telco companies. TheseMVNOs 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 toachieve growth. For 3G licensee, the MVNO concept can be leveraged to offer non-


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licensees 3G coverage while allowing the MNO to fill up excess network capacity. Forfixed telecom companies, the MVNO model will enable them to enter the mobile telephonymarket to strengthen their positions and reap rewards in the ongoing fixed-mobileconvergence.

These forces, merged with the flexibility inherent in the business model, are the key drivers thatreinforce the MVNO concept as a major innovation affecting the entire industry along its valuechain.

2.4. Current and potential players

MadridLisboa

Munich

Luzerne

Milan

Rome

Athnes

Vienne

Dsseldorf

Copenhague

Tampere

Ntodden

Zoetemeer

Bruxelles

Tilburg

Montpellier

ParisLille

Strasbourg

Stockholm

< 5%

< 10%< 15%


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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 keycharacteristics of potential MVNOs. It is then for them an issue of brand extension into mobileservices, where their competitive advantage would then be their ability to acquire customerscheaply.

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


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The role of the regulator is to ensure that the market is efficient, i.e. competitive enough, to ensurefair treatment of consumers. One way to do so is to encourage or force opening of the incumbentnetworks to newcomers. This is the reason why in some countries, steps have been taken to forceMNOs 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 themain MNOs. A logical step for them was to go up in the value chain in order to increase theirmargin 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 supportfrom 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 accessto Orange network as an MVNO in December 2002. Tele2 had yet signed six of such agreementsin other European countries...

On an economic perspective, the incentives for MNOs to host MVNOs are three-fold: sell excesscapacity, 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 astronger incentive to host a MVNO in order to increase their scale and be able to compete with themain 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 andhad to use higher frequency (1800 MHz instead of 900 MHz), with the consequence of requiringmore radio base stations to cover the same surface. More equipment for fewer customers means alot of excess capacity. In this case the marginal cost of adding a customer is small and MNOs havethe opportunity to recoup quicker their fixed investment by selling minutes of traffic at averagecost.

In addition to that, even if the MNO has to increase the capacity of its network to cope withgrowing traffic, in most of the case it can be done very efficiently. Hence, there is a really strongscale 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 thesmaller MNOs.

From the point of view of the Mobile Network Operator (MNO) the assessment whether MVNOinnovation 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 aMVNO is considered as a complement when it is addressing the lower end of the market thatMNOs can not address profitably. Low-end segment represents the double disadvantage for theMNOs 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


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margin play requiring a strong focus on efficiency and MNOs are not organized for that. AMVNO, with a lean organization, a much targeted approach and an appealing brand can do thatmuch better, e.g. Virgin Mobile.

Last but not least, there is an issue of effective segmentation and price discrimination. As a matterof fact MNOs sell minutes during day time at a higher rate than in the evening, night and earlymorning. 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 infact is price discrimination, effectively charging more business customers who are the typical daytime users. But consequently residential users, who a more price sensitive, tend to call more in theevening to benefit from the lower rates. MNOs are then confronted with the issue of sellingminutes in the (technical) peak hour at low rate when in fact most of the cost of a telecom networkis driven by the necessity to cope with the peak. There is thus a strong incentive to spread theresidential traffic more evenly during the day, but without reducing the business revenues. This iswhen using a MVNO can be very useful. MNOs can charge to the MVNO a per minute feeindependent from the time in the day, the MVNO then passing this flat fee structure to itscustomers. Indeed, chances that business customers would churn to a company targeting low endusers are pretty low. Therefore, MVNOs can be use as effective price discriminators by MNOs.


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3. Virgin Mobile case

3.1. Company OverviewThe company was formed in 1999 through a 50:50 joint venture between T-Mobile 6 and VirginGroup. T-Mobile, which was known as One 2 One in 1999, is a leading UK mobile networkoperator, and the Virgin Group, one of the worlds best recognized service groups. Virgin Mobilewas 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 andSIM card under its own price structure, with its own value added services through its own saleschannels 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, theirsubscriber targeting strategy and their unique service proposition. The companys subscribergrowth to date has been among the fastest recorded by a new operator. As of April 2004, VirginMobile 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 inorder 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 mostnotable group due to their importance as opinion leaders. The chart below outlines VirginMobiles strategy:

Family

YouthSmall Bus 20/30s female

CUSTOMER CENTRE Web VirginMegastores

OurPrice

V.ShopVirgindbases

MassEnquiry Catalogue

The Shop

DM

MASS CALL TO A CTION

Outbound

13 millioncustomersrepeat buyVirgin(50 to 75%ABC1)

Vir in PlacesThe Web

Third Party Distributors

Figure 5: Virgin Mobiles Approach to the Market

6 As January 2004, Virgin Group is a 100% shareholder of Virgin Mobile7 Max Kelly, Corporate Development Manager, Virgin Group


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Customer Prof il e 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, with47% of users under 35 for both Virgin and the market. However, Virgin Mobile has a slight skewtowards males which account for 65% of its users versus the markets 54%. Virgin Mobilescustomer base reflects its retail oriented approach to date: of Virgin Mobiles subscribers 89% usethe 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 itsusers.

Tar get M arket 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 extendsacross the personal and small business market but excludes post-paid higher ARPU generatingcorporate customers, the traditional source of subscribers for T-Mobile. Within its market, VirginMobile has identified several target heartlands based on source of value, Virgin affinity andability to target. The exhibit below illustrates Virgin Mobiles targeted approach to penetratingthese sub-segments of the market:

Heartland Source of valueSource of Virginaffinity Targeting

YouthSchoolCollegeFirst jobbersWork hard/playhardRegularsocialiser

Regular, heavyusersUser groups

Brand values offun/innovation,(although thismarket is highlyfragmented inattitude)

PriceVirginMegastoresV.ShopVirgin.netVirginstudent.comVirgin MobileStudent BrandManagers

30/40something:MaleFemale

Credit worthyLow propensityto switch

Core, traditionalVirgin market

Virgin AtlanticVirgin DirectVirgin Vie

Switchers Traditionalhigher users

Heritage inchallengingstatus quo

Brand positioning andDirect marketing

Figure 6: Virgin Mobiles Target Market segments

8 Figures from Virgin Mobile Document A


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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 muchmore from their mobile phones. To this end, the company has been highly successful in achievingthis vision by marrying the complementary strengths of its two founding partners the retailstrength of the Virgin brand with the high quality network of T-Mobile. The combinationrepresents 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 brandedcontent, and excellent customer care provides the foundation of Virgin Mobiles ability to attract bothnew 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 anaggressive marketing campaign.

Contribution Service Provision Distribution Customer

90 VirginMegastores

+ 217 Our PriceOutlets

www.virginmobile.com

Virgin MobileCall Centre

One2One

Network

Virgin Group

V i r g i n

A t l a n t

i c

V i r g i n H o l

i d a y s

V i r g i n

C o s m e t

i c s

V i r g i n

D i r e c

t

V i r g i n W i n e

V i r g i n

E n t e r

t a i n e m n t

3rd Party Products

Yahoo! Students.com RAC Red Lastminute .com

Pre-paid and mass market

Flexibility due to zero fixedmonthly costs

Low standard call costs

Youthful image

Value-for-money image

Virgin Xtras

Free choice of handset

Third PartyDistribution

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 M oney

Virgin Mobile was formed on the fundamental ethos of the Virgin Group providing its customersservice 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 andcustomer-care mobile service provider.

In contrast to the confusing variety of tariff packages offered by other operators, Virgin Mobileoffers one simple, transparent and easy to understand tariff package charged at a rate of 15 pencefor the first five minutes of calls made each day and 5 pence for each subsequent minute with nocontract or monthly rental charge. Unlike its competitors, the company sells handsets to itssubscribers at or close to the full wholesale cost. In doing so Virgin Mobile substantially lowers


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the cost of acquiring each subscriber by removing the heavy handset subsidies offered by otheroperators.

A simple, customer-friendly tariff package and fully-costed handset, reinforced by the attractionsof associating with the Virgin brand itself, has helped the company improve its subscriberstickiness and loyalty. On the basis of this attractive proposition, in May 2004 9 Virgin Mobilescustomers were found to be the most contended and satisfied pre-pay customers of any mobilecommunications provider in the UK.

I nnovative Value Added Services

One of the key differentiating factors of Virgin Mobile is its ability to leverage the Virgin Groupsexpertise in the fields of entertainment, shopping and communication services, and life

management products and offering value added services through its handsets to access theseservices. 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 tothe branded products and services of the Virgin Group. From launch, all Virgin Mobile handsetshave been specially designed by manufacturers with a Virgin Mobile service button whichallows customers easy access to a suite of value added services under the Virgin Xtras brand. Forexample, 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, asubscriber can select the Jukebox function on his phone and listen to music provided by VirginMegastores 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 companyin the world to introduce an integrated MP3 mobile phone and first company to offer all of itscustomers a content-rich voice portal.

Proactive InformationServices

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)


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Excell ent Customer Care

In addition to value for money and access to innovative services, Virgin Mobiles strategy is tooffer its subscribers excellent customer care. The guiding principles upon which Virgin Mobilescustomer care philosophy are based include providing a different customer experience which isinnovative 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. Inorder to achieve these aims the company meets its customer needs in an efficient and low cost wayand to take advantage of opportunities to develop new touch points with the customer. As part ofthis strategy, Virgin Mobile allows customers to choose whether to access customer care serviceseither 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 morevalue added services, and stay with the company longer. In recognition of its superior customercare 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, VirginMobile pursues an integrated distribution approach combining several innovative channels to themarket through a three-phase implementation strategy. In Phase I Virgin Mobile targetedsubscribers through an exclusive distribution agreement with two businesses within the VirginGroup, 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 throughV.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 andhas an exclusive agreement with V.Shop to distribute Virgin Mobile phones.

In Phase III of its distribution strategy Virgin Mobile expanded its retail sales distributioncapability in order to access a broader consumer market. Key target categories for expanded retaildistribution 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 includingSainsbury, Tesco, Safeway, Asda, John Lewis, Littlewoods, Argos, The Link, Dixons, CarphoneWarehouse, 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 Max Kelly, Corporate Development Manager, Virgin Group11 Source: Virgin Mobile Document A and Virgin Mobile website12 From November 1999 to January 2004


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demonstrated their strong commitment to Virgin Mobile through an equity investment ofapproximately 85 million 13 . The chart below illustrates Virgin Mobiles ownership structure atthe time of its inception:

Employees

VIRGIN GROUP DeutscheTelekom

Bluebottle UK Limited One 2 OneBluebottle 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 itslaunch 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, strongmarketing and branding expertise and powerful retail network has contributed significantly toVirgin Mobile. In addition Virgin has contributed key personnel to Virgin Mobile. VirginGroups commitment to the mobile sector and the Virgin Mobile brand is further evidenced by itsexpansion to overseas markets such as Australia (with carrier Optus), USA (with carrier SprintPCS) 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 toimprove coverage of the network. In addition T-Mobile provides Virgin Mobile with access to anextremely valuable large network of outlets for distributing its vouchers. Additionally, T-Mobile

provides Virgin Mobile with access to the purchasing managers within these organizations thathelp 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 segmentationallows the T-Mobile network to access a new market for mobile phones without risking its owncustomer 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 weekendaccess 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


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Virgin Mobile subscribers tend to dovetail with T-Mobiles. By attracting new subscribers inaddition to taking share from other operators, Virgin Mobile has enabled T-Mobile to take over20% market share (including Virgin Mobile).

3.6. Recent Performance

Vi rgi n and T- M obil e Partnership 14

In 2003, Virgin and T-Mobile were involved in a court case over the terms of the dissolution oftheir mobile phone joint venture. The nub of the dispute revolved around the 4.56 monthly flatfee paid by T-Mobile for each customer signed up by Virgin Mobile, regardless of whether thecustomer 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 whichT-Mobile and Virgin Mobile signed an enhanced telecoms supply agreement running for aminimum 10 years. Separately, Virgin Group acquired T-Mobiles 50% stake in Virgin Mobilethereby becoming the sole shareholder of Virgin Mobile whereas T-Mobiles role was modified asa network supplier.

Subscri ber Gr owth

Virgin Mobiles subscriber growth to date has been among the fastest recor ded by a new operatorin 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 29/1/0415 Figures from Virgin Mobile website 2004 actual subscriber figure is only Q1 2004


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Revenue and Profi tabili ty Gr owth

Since launching operations in November 1999, the company has experienced a steady growth inrevenues. 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

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10 0

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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. Inless than two years, it has secured over 1.75 million customers in the USA, making it the fastestgrowing 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 rolloutlater 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 ofVirgin and T-Mobile England and the synergies drawn off their association in terms of their uniqueservice offerings.

16 Figures from Virgin Mobile website 2003 figures are half year annualized


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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 top50 brands in the world) with a certain set of values and a Brand Identity which is suitedfor promoting services. The power, popularity and reach of the Virgin Brand negate therequirement of trying to establish the credibility of the venture and bestow upon it a certainsense of quality and legitimacy.

o Powerful retail/distribution network By selling through Our price, Virgin Megastoreand Virgin.com, Virgin Mobile has leveraged the wide and established retail network ofVirgin.

o Complimentary nature of other Virgin Group products The offering of mobile phoneservices fits perfectly into the bouquet of services already on offer by Virgin i.e. retail andairlines 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 subjectinclude: Be best not biggest; compete on quality as well as price innovative businessmust 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 partnershipsuch as Virgin Mobile. The selling of this excess capacity also results in economies of scale.

o Complementary mobile service and customer targeting to T-Mobiles existingcustomer base - Virgins high profile brand and Virgin Mobiles unique value propositionresult in a complimentary set of customers viz. One 2 Ones customer base thus resulting inminimal cannibalization and increased revenues.

o Technical Expertise One 2 One possesses the technical proficiency required for theventure, 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 thenetwork in the recent past.

Unique Service Proposi tion

Virgin Mobile has been able to capitalize on the synergies of the partnership and leverage thecompetencies 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 thusensuring 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


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4. Transatel case

4.1. From idea to launchJacques 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 ConsumerDivision of Alcatel terminal division and Bertrand was working at Bouygues Telecom, Directorfor the mobile Internet activity. They met again in 1999 at the ball celebrating the fifth anniversaryof their graduation where they discussed new business ideas. They were both working for bigcompanies 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 somelimitations that GPRS would overcome, and a lot of new value added services were emerging. Itseemed 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 aMobile 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 planwas to target frequent travelers and offer them seamless services over their travel zone as well ascompetitive pricing for their roaming calls. The concept should sound attractive to newly comingMobile Network Operators (MNOs), who were not strong in the business market segment: hostingan 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 Intentframing such type of cooperation. They then started to work on developing the technical solutionsand 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 thatmoney they built the service platform and started discussions with one2one, the fourth EnglishMNO. On the basis of these progresses, they managed to raise an additional 350 kEur in January2001. They then started a pilot launch in June 2001 in France and UK.

4.2. From launch to breakevenThey already had at that time cash problems and they realized how difficult and costly it was toattract customers with an unknown brand like Transatel. This is what pushed them from February2001 onwards to speak to potential partners for a new market approach: white brand. Under thisapproach the actual marketing and sales activity is done by a well-established company, benefitingfrom strong brand name and existing relationship with a significant customer base. Transatelwould enable all network services for such partners. In September 2001, discussions of

partnerships were close to finalization with American Express and Eurostar.


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9/11 changed significantly the direction of events. American Express was momentarily out oftouch and then decided in this moment of crisis to deal only with pure core activities. As forEurostar, 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 gettingnew MVNOs on their network since they have a proactive wholesale strategy. They liked inTransatel the concept of enabling powerful brands to become MVNOs. However times are reallydifficult in the telecom industry. Rumors of bankruptcy of major telcos make it very difficult forestablished companies to make the step of entering the MVNO business. Finally they couldconvince COLT to step in and signed a contract with them in April 2002. Unfortunately, COLTnew owners, by changing most of the management team actually blocked the decision to moveforward. In parallel, Transatel studies the project with Carrefour and with PSA.

In the mean time, the service is commercially launched on Bouygues network. A distributionagreement is signed with The Phone House and the customer base starts growing. Belgium islaunched commercially on the first of November 2002. Transatel managed also to sign with someBelgian alternative fixed operators.

Revenues grow significantly in 2003. An agreement is signed in the summer with Pelefon, anIsraeli 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 sixmonth. The revenue split is 50% white brand and 50% frequent travelers. The margin is higherand 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 roamingrelated issues. Due to the better awareness to Transatels value offering, acquisition costs are lowerand 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 signwith 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 MVNOEnabler (MVNE). For this, the next steps are to continue develop the technical platform and growthe network coverage by signing with MNOs in current and new countries.


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In the longer term, the idea is to sell the frequent traveler activity in order to concentrate theeffort on the MVNE approach. Frequent traveler could be sold either to a player of the travelindustry or to one of the MNO. The rationale for continuing service to end-users is to use thecustomer base as a demo of what can be done for potential MVNOs, as well as getting a fullunderstanding 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 beoutsourced (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 routingo Voice Mail services

o SIM card managemento Development of SIM card based services

18 Transatel presentation


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Figure 13: Transatel's MVNE value proposition 19

Transatel intention is to further develop the added value they provide by going up in the valuechain. For instance, they plan to develop capabilities to interface with the MNOs intelligentnetwork platform to enrich their service offering.

They approach to potential MVNOs is to demonstrate first of all that MVNO can be a profitablestandalone business and that on top of this there can be a lot of synergies developed with their coreactivities. For instance, retailers are potential MVNOs, offering telecom services to their loyaltycard owners. Another example are banks, which could use an MVNO service offering as adifferentiating factor in order to attract young customers.

A typical margin for an MVNO could be 35%, to be shared between the MVNO and the MVNOenabler. The main reason for Transatel going towards the MVNO enabler strategy is the lack offunds to sustain a customer acquisition approach. MVNO candidates are established players withmore 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 MVNOcandidates to go through Transatel are that they benefit from:

o economies of scale (the platform and all the costs of establishing a relationship withMNOs) 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



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LisboaMadrid

Munich

Luzerne

Milan

Rome

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Vienne

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LisboaMadrid

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Stockholm

Madrid

Munich

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Stockholm

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

4.4. Highlights in the Innovation process

I nterdependence and I ntegrati on issues

On the technology point of view there have not been major uncertainties: the technical solutionworked 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 verymuch 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 dependenceon the MNO, the interdependence risk automatically increases.



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A strong integration is required between MVNO and MNO. In a typical case, most of thatintegration is legally ruled in the framework agreement between MNO and MVNO/E. Butintegrating 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 intoconsideration. 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 itneeds, leading to delays to ensure finally full compatibility of the systems.

Reversibil i ty 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 canhave 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 tradinginsolvent. The founders sought advices from their auditors, from other entrepreneurs who had beenin similar situations. It doesnt seem that there had been a time where exit was considered due tothe fact that the market would not materialize.

Val ue creation and value capture

Transatel initial positioning on multi-country mobile operator targeting frequent travelers createsvalue 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 aforeign 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 costreduction is passed to the frequent traveler. The attractive pricing based on a reduced cost baseconstitute Transatels competitive advantage. This advantage is sustainable as long as this practicewill not be considered a serious threat by major mobile operators. Indeed, they currently have nowmuch 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 outstandingachievement on Transatel side. Strong brands will naturally have the strategy to first develop theirnational presence before moving to another country. This extended network coverage is also a keyasset for attracting pan-European players such as some of the alternative fixed line operators.

Adapting str ategy to reali ty

When it appeared that Transatel would never get enough funds to pursue its initial strategy, theyquickly turned to the MVNE strategy, which they had already thought of. This point can begeneralized for their approach to innovation: they constantly keep an ear on what was going on themarket 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 exampleof that approach is the fact that they changed their market focus from France to Belgium as soon asthey realized that the market was more receptive to their approach there.

Key success dr ivers


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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-blockerso 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 isfollowed

o Both founders have developed a capability to synchronize and come to agreement ondecisions very efficiently.

According to us, a second success driver was the ability of the founding team members to leverageon their personal credibility to progressively be accepted as partners by major Europeancompanies. 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, theirsmall size has been a help very likely, as it is quite improbable that Bouygues would have accepteda 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 agreementwith One-2-One in UK. They could then launch their multi-country service and gain a naturalcredibility in front of other MNOs. We can only emphasize again the performance for a start-up ofmanaging to sign MVNO agreements with partners, which usually think with a minimum unit ofaccount of 10 m.


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5. Key lessons

5.1. The use of AlliancesVirgin chose to develop its MVNO innovation in the form of 50/50 joint ventures with MNOs. Thereason given by them is that they want the MNO to be fully committed in the success of theinnovation, as they realize that otherwise, if the innovation is too successful, the MNO will have anatural tendency to undermine it.

Virgin T-Mobile EnglandExperience None Fourth mobile operator in UK

Global MNOIntents First consumer brand mobile

service provider

Increase profitability through scale

effectCapabilities Attractiveness of Brand values:

Fun, innovation, value formoney, excellence in customerrelationship, distinctly irreverentstyle

High quality network coverage Network operation

Markets Low user, prepaidExtension to higher segment?

Medium to High End Users

Virgin and T-Mobile went to court due to disagreement on contractual obligations. One of theresults 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 ofthe 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 itwas not possible to continue as equal partners and they splat, even though at the same time theysigned a renewed, more precise ten-year agreement.

Another interpretation could be that T-Mobile wasnt aware of all the learning process taking placeon Virgin side and they felt unduly exploited in that relationship. These feelings could have beenexacerbated 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 beendone on Virgin side, the relationship is more balanced over time. The shareholders agreementnicely 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 successfullaunch.


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Virgin Sprint PCSExperience MVNO in UK and Australia Global TelcoIntents First consumer choice on the

mass marketEfficiently penetrating the under -30-

pay-as-you-go marketCapabilities Attractiveness of Brand values

Proven business model toaddress low-end usersExpertise 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 yearone 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 alliancesCompetence Leverage Virgin Mobile US Virgin GroupCompetence Acquisition Virgin Mobile UK

Transatel has not used formal alliances, but by many aspects we can consider that they are havingan 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 thesegment upon which they get the best leverage on their established brand value by ensuring loweracquisition costs; it is a segment considered a complement by the MNO and not a substitute due tothe difficulty to profitably address it.

A key issue for profitability indicators of mobile service providers is the ratio of acquisition coston the net margin per month generated per user. This ratio basically gives the number of month anaverage customer needs to stay with you to pay back. Since the MVNO had only small fixedinvestment 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 theacquisition cost, which includes the following elements: advertising, handset subsidy, salescommission to distributors and promotional activities. Due to the power of their brand is due totheir strong focus on a specific target, Virgin is able to spend its advertising pounds much moreefficiently than other MNOs according to their own study 23 . A very tight control of distributionchannels, a lot of effort invested in negotiations with handset providers and last but not least a leanorganization 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 Hamel23 Max Kelly, Corporate Development Manager, Virgin Group


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the lower-end segment. This is usually not achievable by MNOs and the ones who anyway targetlower-end segment usually do it in an unprofitable manner. There is therefore a good rationale forletting MVNO address these complementary segments

A key question is whether complement positioning of today become substitution in the future. Thiscould occur if the MVNO, having gained momentum on the lower-end market, decides to play onthe MVNO ground of medium to high end users. This question is even more relevant in the case ofVirgin Mobile UK since the end of the alliance makes future move on Virgin side less predictableand controllable for T-Mobile. Not surprisingly, neither of our contacts in T-Mobile and Virgin didelaborate on that issue.

Transatels choice of target segment is very much determined by their value proposition: it must befrequent travelers. They chose to address business travelers rather than tourists for obviousreasons. They have a higher purchasing power, travel more frequently and associate well mobilecost 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 frequenttravelers. 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 directlyand 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 inthe partnership, which becomes a provider/supplier outsourcing relationship where each partyfocus 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 customersmight want in the future.

On the contrary, the success of Virgins strategy implementation proved the validity of theirconcept. They are now concentrating their effort on exploiting that strategic positioning by furthergrowing 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 theinnovation process) to extend their business scope in their home country. By doing so, they buildnew capabilities (telecom sales, marketing and customer administration expertise). They thenleverage on this new capability to extend again their scope, geographically this time.


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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 andtransceiver. 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 thetransceiver signal strength of the BTS.

Carrier - A company, such as any of the "baby Bell" companies, which provides networkcommunications 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 isdivided 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 basestation 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 isan example of an enhanced service.

GPRS - General Packet Radio Service. A GSM data transmission technique that does not set up acontinuous 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 cellulartelephone 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 avital component in GSM operation. The user can store all relevant data for the phone on aremovable plastic card. The card can be plugged into any GSM compatible phone and the phone isinstantly personalized to the user.


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VAS - Value Added Service - Value Added Services, VAS or VADS, services are often cited asways of increasing ARPU VLR - Visitor Location Register - A local database function that maintains temporary recordsassociated with individual subscribers. The VLR contains subscriber location and serviceinformation that is accessed by the Mobile Switching Center(MSC) to retrieve information for thehandling of calls to and from subscribers currently being served by that MSC.

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

2.5G - 2.5 generation cellular technology enables increases in data bandwidth available overcurrent 2G cellular networks. 2.5 G technology can be implemented by cellular operators thrusoftware updates to their network, whereas 3G requires new hardware installations. The mostcommon 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 inMbps, intended for applications other than voice. 3G networks trials started in Japan in 2001. 3Gnetworks are expected to be starting in Europe and part of Asia/Pacific by 2002, and in the USlater. 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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