New Players In Wireless Service Target Niche Markets

NEW YORK (Dow Jones) -- ESPN, which rules over a vast sports empire spanning television, magazines and the Internet, is eyeing an unusual target for its next conquest - wireless service.

The face of mobile phone service is changing - especially as unlikely players step up to provide that service. ESPN is just one of many parties launching its own service, despite lack of experience in the industry. These new entries believe their companies unique brands and the loyalty of their customers will be enough to drive subscriber growth.

"We want to let fans know that life will never get in the way of sports again," said Manish Jha, who runs ESPN's wireless business. With its own phone service, the sports titan can control the entire user experience.

Potential players get into the business by leasing a carrier's network to provide wireless service, becoming mobile virtual network operators, or MVNOs. Unfettered by the need for towers and transmitters, any company or person with a built-in audience can become an MVNO. And more are popping up in the U.S.

"As the wireless industry is eking toward maturity, it becomes more and more important to get away from the one-size-fits-all service that has served carriers well," said Roger Entner, an analyst for independent research firm Ovum.

ESPN, owned by Walt Disney Co. (DIS), will use Sprint Corp.'s (FON) network for its service, which it expects to launch early next year. Among the most successful and recognizable MVNOs already out there is Virgin Mobile, a youth-oriented prepaid mobile phone service with roots in the U.K. It's jointly owned by Virgin Group (VGN.YY) and Sprint, which also provides the network backbone.

Carriers walk a fine line when leasing out their networks. They generate revenue by selling their service on a wholesale basis, even though it is less profitable than providing the service themselves. But they also risk creating a potential rival.

"Cannibalism is an issue that is weighing heavily on their minds," Entner said. "You don't want to hurt yourself too badly."

Sprint has been the most receptive of the carriers in working with MVNOs. In addition to Virgin Mobile and ESPN, it has an agreement to provide the network for privately held Movida Communications Inc., which will target the U.S. Hispanic market when it launches later this year, and also serves as the wireless network for Qwest Communications International Inc. (Q).

"It's an attractive way for us, through partnerships, to get access to customers that we would have difficulties serving by other means," said Sprint Chief Financial Officer Bob Dellinger.

The MVNO market is currently worth roughly $2 billion in annual service revenue, and has about 5.5 million subscribers, according to Entner. In five years, the MVNO market could be worth $10 billion to $11 billion in annual service revenue. By then, 25 million customers could be subscribing to an MVNO,he said.

While more players suggest the wireless market will speed even faster toward saturation, many observers say there remains room to grow. And MVNOs should help the overall market expand, as they go after their own specific audiences.

"It's just barely getting started," said David Peterschmidt, chief executive of Openwave Systems Inc. (OPVW), which provides software for wireless data systems. There remains a "wide open field" in North America in pushing data service revenue, Peterschmidt said.

P. Diddy: 'I'm In The Wrong Business'

Looking past Virgin's prepaid model, many believe the next wave of MVNOs will be able to charge more by adding unique services.

"These kids can really get their hands on the cash if they think it will change their lives," said Peter Adderton, founder of Amp'd Mobile, which will target the higher end youth market with video and music features. Amp'd will run off of Verizon Communications' (VZ) third-generation high-speed wireless network.

The idea is attracting a diverse mix of parties.

"You mean you can sell phone service without owning a network?" rap and fashion mogul Sean "P. Diddy" Combs said in a keynote speech at the CTIA Wireless trade show in March. "I'm in the wrong business."

While Combs is only considering starting a service, he did offer some justification for his interest: "I don't own spectrum," he said. "I don't have a network infrastructure. I don't take customer service calls. But I do have subscribers. Tens of millions of them."

Combs is just one of many in the entertainment industry who sees potential for using phone service as a medium to push his products. His line of Sean Jean clothing or latest album would fit well with a specific MVNO offering.

"He's savvy enough to know this can be a powerful tool in the future," a spokesman for Combs said.

Likewise, ESPN already has a built-in audience of sports fans, and can deliver premium content such as highlights and columns that go beyond what's offered by existing services.

While ESPN would represent a value-added MVNO, there are other examples of services used for "defensive" purposes, said Sam Kramer, a lawyer with Baker & McKenzie who deals with the industry.

Take Wal-Mart Stores Inc. (WMT), which has partnered with Movida to carry its phones and prepaid cards. The retailing giant is following in the footsteps of Tesco PLC (TSCO.LN). The U.K. supermarket chain offers wireless service partly to be in the mobile phone business, but also to drive traffic into its stores.

Qwest, meanwhile, is the only Baby Bell without a wireless network. To counter that, it has become an MVNO, combining wireless service with its core local phone business.

The Denver regional phone company is more like the traditional resellers of mobile phone service, which have existed since the 1980s, in that it doesn't serve a targeted audience other than its customer base. The older resellers, however, lived with a "label of failure" for years, and many disappeared, only to be replaced by the current new crop of resellers focused on niche markets.

"The new wave coming in is doing it in a much smarter way," Ovum's Entner said.

Still, one difficulty MVNOs face is inexperience in logistical and operational needs, such as selling phones or managing customer service. ESPN already has a presence in most mobile phones by supplying scores and highlights, but it has little experience in actually selling those phones or services.

"As we first started to look at this, we realized this would be one of the most significant challenges for us," ESPN's Jha said, adding the company is receiving support from several third parties.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(END) Dow Jones Newswires"

Posted to the site on 6th May 2005