In 2000, Danish entrepreneur Frank Rasmussen raised $1 million to launch a discount mobile-phone company called Telmore. It was part of a new breed of companies, called mobile virtual network operators (MVNOs), that lease space on networks operated by other carriers, rather than owning their own infrastructure. Perhaps the best-known MVNO in the world is Virgin Mobile.
To keep costs low, most MVNOs rely heavily on the Internet for sales and customer support and don't subsidize the cost of mobile phones for customers. Using this strategy, Telmore"”with only 40 employees"”managed to rack up more than a half a million customers in Denmark, stealing most of them away from local incumbent TDC (TDC.CO), which employs about 15,000 people.
After four years of pitched battle, TDC finally bought Telmore for $73 million, not to kill it, but to add it to its existing arsenal, in much the same way that many traditional airlines now own discount carriers. But the battle is far from over. Under TDC's stewardship Telmore 'is starting to get fat,' says Rasmussen, who left the company after he sold out.
Big for investors, big for consumers
Now, he's about to launch an even leaner MVNO called BiBoB, with about $7 million in funding and even more ambitious goals. First BiBoB will try to divert business from Telmore, TDC, and other mobile operators in Denmark by offering much deeper discounts. Then it plans to branch out into the rest of Europe. 'There are a lot of upsides to creating this kind of low-cost infrastructure business,' says Rasmussen. 'You can actually fight effectively against very big telcos.'
Some 150 MVNOs have been launched in Europe in the last four years and at least a dozen of them have been sold for as much as 20 times the original investment, says John Strand, head of Copenhagen mobile consultancy Strand Consult. The MVNO business has been great for European consumers too, slicing an average 15% to 20% off their mobile bills. Rasmussen figures he can do even better, offering discounts of up to 40% while still earning a profit.
But while MVNOs are booming in Europe, some U.S. upstarts already have failed and others soon could follow suit. Despite investments ranging from $20 million to $300 million per company, many of the U.S. MVNOs have fewer customers than their counterparts in tiny European countries launched at a fraction of the cost. Analysts say that's because too many U.S. startups are trying to act like full-service operators instead of mimicking the business plan of a discount airline.
U.S. companies' weight problem
MVNOs are burning through huge amounts of cash in the U.S. because some operators there subsidize phones, operate their own retail stores, or spend heavily on marketing, sales, and customer acquisition. And they continue to be propped up by big investments even though they are unable to show positive cash flow. 'You could say that the MVNO market in the U.S. functions like the guy in the movie Super Size Me. They're being fed until they are no longer fit,' says Strand.
Consider the case of Mobile ESPN, which was backed by Walt Disney (DIS) and offered customers sports content via their mobiles for a monthly subscription. The company, which received a reported $70 million in funding, offered consumers only one phone model, which cost between $450 and $500.
Mobile ESPN was shut down after less than a year in business, having garnered only 30,000 subscribers. Losses were an estimated $30 million"”around $1,000 per customer.
Strand estimates that surviving U.S. MVNOs such as Virgin Mobile USA, Movida Cellular, and Helio are losing anywhere from $7.60 to $833 per customer.
No champagne on a beer budget
Such problems might be avoided if U.S. MVNOs took the same approach as their European counterparts, says Telmore founder Rasmussen. 'You don't need to have shops and consultants,' he says. 'If you want to be competitive on customer service let people do things by themselves.' With full-service operators, for instance, customers who want a copy of their bill typically call a service representative, who sends one out in the mail. But at MVNOs like BiBoB, subscribers fetch their own records over the Web and print them out themselves.
Using the Net to cut costs isn't the only thing that sets apart European MVNOs. Many use clever marketing tactics, such as distributing SIM cards (the chips that link a phone to a specific user account) through supermarkets and convenience stores. Telmore did something even wilder: It blew 60% of one year's marketing budget on a giant party for all of its customers, offering live music, draft beer, and free hot dogs. Rasmussen figures the 6,500 people who showed up became roving ambassadors for Telmore, helping it nab 250,000 new customers that year.
Consultant Strand says that only one U.S. MVNO appears to be on the right track"”and it was founded by a European. Sonopia, based in Silicon Valley, was started last April by Danish entrepreneur Juha Christiansen, 42. The mobile industry veteran co-founded British mobile-phone software maker Symbian and later served as Microsoft's (MSFT) vice-president for mobile software and server products. Sonopia, which raised $12.7 million in May in a second round of venture financing, 'is definitely using the European MVNO model as opposed to the champagne budgets of the U.S. MVNOs,' says Christensen.
Your name here
The Danish entrepreneur insists his lean approach will be the path to success. He notes that even though Virgin Mobile's five-year-old U.S. operation has attracted more than 4 million customers, it's still losing money. Sonopia, by comparison, should break even with only 100,000 customers due to its lower cost structure. The company doesn't subsidize handsets, for instance. And it has hired a low-cost team in Kiev to manage its network operations and write network and handset software.
'When you start adding all these things up, it makes a real difference,' Christensen says. 'We have the same average revenue per user as the other MVNOs, but while it takes them something like 20 months to earn their money back on a subscriber, it takes us only eight or nine months.'
Sonopia also has started signing up organizations that want to offer their own mobile services to members and customers"”a concept similar to affinity credit cards. The company has logged deals with the National Wildlife Federation and Minor League Baseball's Long Island Ducks. The Ducks package includes a customized green Motorola (MOT) Razr phone emblazoned with the team's duck emblem and featuring the team's quack ringtone.
If Sonopia does well in the U.S. market, Christensen's plan is to tackle Europe. But he could find it a tough go. After all, that's where guys like Rasmussen have shown the rest of the world how to make a mobile startup fly.
Check out the BusinessWeek.com slide show to learn more about how particular MVNOs have fared.
Schenker is a BusinessWeek correspondent in Paris.
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