Virgin Mobile May Struggle in Shifting Demographic Aim
Published on: 26th Jun 2008
Note -- this news article is more than a year old.
NEW YORK (Dow Jones) Virgin Mobile USA may find itself with growing pains as it attempts to mature alongside its youthful customer base.
In launching an unlimited cellphone plan on Tuesday and agreeing to buy high-end niche wireless reseller Helio Friday, Virgin is setting its sights on a higher-end class of consumers. The move isn't without significant risks. The wireless reseller has done an admirable job of carving itself a segment of the pre-paid market, but it faces much steeper competition in the national carriers.
"The theory that they can walk in the post-paid market and do well I think is optimistic," said Walter Piecyk, an analyst at Pali Research.
In Helio, Virgin gets 170,000 subscribers that Chief Executive Dan Schulman said is roughly the equivalent of 700,000 typical Virgin Mobile customers because they spend more per month. In addition, it gets Helio's unique handsets and access to Sprint Nextel Corp.'s (S) faster third-generation network and services. Helio is a joint venture between SK Telecom and Earthlink.
Virgin believes the advanced services and contract model will help it capture new and existing customers. Roughly 20% of the customers that leave Virgin move to a contract plan, Schulman said. By offering the contract option and higher services, the company is hoping to reduce its turnover rate, which is higher than the industry average because it serves customers who pay ahead of time for their service and aren't locked down by a contract.
While a typical Virgin customer spends $20 a month on pre-paid services, Schulman said the Helio acquisition will allow the company to go after customers who spend between $40 and $70 a month.
"This is a natural evolution," he said.
The company already fired a broadside against the national carriers' unlimited plans earlier this week by offering an $80 flat rate calling plan that requires no contract. The typical unlimited plans from the likes of AT&T or Verizon Wireless cost $99 a month.
But by going after customers who sign long-term contracts, also known as post-paid subscribers, Virgin is butting heads with the national carriers. The business is even more heated than the pre-paid business because the stakes are higher with more lucrative customers, and the competitors are far larger.
"Post-paid is tough, and there's not a lot industry growth," Piecyk said. "I'm not sure under the stewardship of the Virgin team, whose skill set is on the low-end, that they should do any better (than Helio)."
Helio previously made waves with its Ocean dual-sliding handset, but has since fallen behind in its handset selection. Schulman said that Virgin already maintains strong relationships with the handset makers that provide devices to Helio, but it's unlikely they will be able to make much headway in gaining an edge over the national carriers.
AT&T already offers the Apple Inc. (AAPL) iPhone, while Verizon Wireless, have released a number of exclusive phones - several of which offer touchscreen capabilities. T-Mobile USA, a unit of Deutsche Telekom, offers cellphones that can ride on both Wi-Fi and cellular networks, and this week expanded its $10 home phone replacement plan.
Other wireless resellers who tried to take on the carriers have fallen by the wayside. Amp'd Mobile and Mobile ESPN are among the companies that tried to go after post-paid customers and failed.
Part of the difficulty lies in pricing. Piecyk said he expects the national carriers to continue to lower prices to remain competitive and keep subscribers. In that situation, Virgin Mobile would have to continually renegotiate with wholesaler Sprint for better terms.
Schulman said he doesn't consider Virgin's move into the post-paid arena an attack on the larger players. "We're keeping with the movement of our target market," he said.
But in going after more lucrative customers, that's exactly what Virgin is trying to do.
Ultimately, critics believe that Helio's small base of customers won't be enough to significantly change Virgin's business.
"I don't think it will have a material impact on their operations," said Michael Gary Nelson, an analyst at Stanford Group Co.
Despite the criticism, many see the move as a necessity because Virgin's core demographic is feeling the pressure from the economy. With consumer spending tightening, Virgin's customers are among the most likely to stop paying for minutes or drop the service entirely.
In the last quarter, the company reported the customer turnover rate rose to 5.1% from 4% a year ago as a net subscriber additions plumetted 94%. In comparison, Verizon Wireless boasted an industry-low rate of 1.2%.
"It's clearly indicative of how challenging their current business is," Nelson said.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020; firstname.lastname@example.org
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Tags: wi-fi deutsche telekom t-mobile t-mobile usa t-mobile usa sprint nextel virgin mobile verizon wireless verizon apple stanford virgin mobile usa touchscreen sk telecom sprint nextel helio option virgin