Does the prepaid mobile virtual network operator have a bright future addressing underserved demographics, or are the players in this space clinging to a flawed business model?

Unsurprisingly, responses to that question vary depending on who you talk to. In the United States, Boost Mobile is a fully-owned subsidiary of Sprint, while MVNOs such as ESPN, Disney and Amp'd all went belly-up and Helio was bought by Virgin Mobile USA, basically the last MVNO standing here.

"Wireless growth on the postpaid side is slowing and that trend will continue over the next 5 years, which is good news for prepaid, because that segment is still growing," said John Votava, corporate communications manager, Boost Mobile, Irvine, CA. "Between 2003 and now prepaid has seen almost 50 percent growth, while growth has not been as high on the postpaid side.

"As a prepaid vendor, we're poised to try and capitalize on those prepaid growth opportunities," he said.

With the current economic downturn, more people may be seeking affordable mobile phone plans.

"With economy going the way it's going, it presents us with another opportunity, offering flexible payment opportunities, by the minute, the day or the month," Mr. Votava said.

"If consumers are having trouble coming up with the money for a postpaid contract, we let them switch between the various payment options," he said.

At the end of second quarter of this year, Boost Mobile claims that it had more than 4.2 million customers.

The company recently slashed its rates from 20 cents per minute to 10.

Boost doesn't require contracts, credit checks or background checks.

"We allow customers to freely procure the wireless services in the way that best suits them," Mr. Votava said.

All vendors in the prepaid/MVNO have an inherent Achilles' heel: churn.

"As far as a threat or a weakness dealing with a prepaid environment, churn is a major downside of the industry, customers that come and go as they please," Mr. Votava said.

"Many are aspirational, young customers just getting their feet wet, and prepaid helps them build up stability and credit, then they're able to make that leap to a postpaid," he said.

Another common pitfall is that when customers lose their handset or a handset breaks, they are often not pleased with the replacement policy, or lack thereof, and prepaid vendors lose customers that way.

Boost has marketed itself via TV, radio, billboards and outdoor posters at bus stops, magazines and an Internet banner ad campaign, as well as house ads on its own mobile platform.

Boost works with sales partners such as Amobee, Ad Infuse and JumpTap.

"Our distribution channel is unique," Mr. Votava said. "We work with a lot of dealers and distributors, retail partners such as Target, Walmart and Best Buy, mom-and-pop shops and liquor stores.

"We have various opportunities to reach the customer," he said.

Boost is running mobile advertising on its WAP deck, with brands such as Adidas, Burger King and Clairol hair products running mobile ad campaigns.

Customers can download various applications, games, ringtones and wallpapers attached to the Boost Mobile servers.

The social networking applications it offers include Hookt by Air G and Loopt.

The bread-and-butter of the prepaid market has traditionally been teens.

"Previously we've focused on a youthful target customer ages 14-24, and we've focused on rap/hip-hop infused lifestyle branding, action sports, campaigns focused on urban youth," Mr. Votava said. "With the market going the way it's going, we've hired a new leadership team and formed a new strategy.

"We took a look at what we were offering in the market and saw a lot more opportunity that we could be capitalizing on," he said. "We have a very good product here, reliable handsets from Motorola, but we need to find the right market."

Accordingly, Boost Mobile is expanding our target market to the 18-35 demographic, looking to gain a new audience with singles, families and Hispanics.

Its marketing strategy won't change dramatically overnight, however.

"We plan on continuing to maintain our youthful irreverence when we do advertising," Mr. Votava said. "Our campaigns used to target a broad swath of the population nationwide, but we've narrowed down to a regional focus and we're really drilling down to the communities where these folks live to deliver our value message."

Virgin Mobile USA
So what about Sir Richard Branson's MVNO venture?

"We've already lived through most of the weaknesses and challenges to the MVNO space, and we're one of the last left standing," said Jayne Wallace, vice president of corporate communications for Virgin Mobile USA, Warren, NJ.

"People didn't understand the model, investors and the business press said that if you didn't own cell phone towers and the infrastructure of the network, then you didn't own anything of value," she said.

"It's true that Amp'd and Helio came in and had a very tough time, and lots of stories have been written about the demise of the MVNO."

So how has Virgin Mobile USA stayed around for five years and grown?

Some of it can be attributed to the fact that the company is a joint venture between Sir Richard's Virgin Group Ltd. and Sprint. Since the Helio acquisition, Korean giant SK Telecom is also a major shareholder.

"One of the basic reasons we have succeeded is the Virgin brand, which is compelling," Ms. Wallace said. "Disney and ESPN fit that, but they nothing else going for them, while Amp'd didn't have a recognizable name."

Keeping costs low has also been key.

"We started Virgin Mobile with the philosophy of mass-market distribution, but without physical stores, so that has kept our operating expenses and back-end infrastructure costs low," Ms. Wallace said.

"Instead, we decided to go the broad-based large retail store avenue, with partners such as Walmart, Target, Best Buy, 7-11, CVS and Duane Reade," she said.

Ms. Wallace said that scale has made the biggest difference.

Virgin Mobile USA claims to be a billion-dollar company and has in the ballpark of 5 million customers, putting it in the same category as Boost Mobile, more or less.

Amp'd had fewer than 200,000 members when it folded, while Helio had 170,000 customers when it was bought by Virgin Mobile USA in August.

Trumpet, an MVNO backed by electronics chain RadioShack, also had a couple hundred thousand customers when it went under.

"We were able to ramp up quickly because of our scale," Ms. Wallace said. "That scale also lowered costs when we bought phones and signed distribution deals."

As with any business model, it goes without saying that offering good products is important.

"We changed whole category, which traditionally was known for clunky, disposable phones that weren't that good," Ms. Wallace said. "Now we make quality handsets and offer great content to improve the customer experience."

The Helio acquisition was geared toward courting a higher-end postpaid market.

"The Helio acquisition has been incredibly beneficial for a lot of reasons," Ms. Wallace said. "It's a great technology platform with terrific sophisticated devices, it gives us a postpaid platform back office, and Helio's ARPU is quadruple what ours is.

"All around very good match, because we're polar opposites, each has different assets that are complementary, upscale versus lower end, very little distribution versus very broad distribution," she said.

"We'll bring Helio devices to much bigger audience and expand our ability to offer everything, prepaid and postpaid, and get all that under the Virgin Mobile brand."

Virgin Mobile USA has launched the Shuttle 3G with Helio's Buddy Beacon with more data services and new social networking features.

The Ocean 2, a postpaid Helio from Virgin Mobile handset, will come out in first quarter of 2009.

Toward the second half of 2909 more postpaid handsets will be released.

Eventually, the Helio brand will be phased out and the handsets will all be branded Virgin Mobile USA.

Virgin Mobile USA, like Boost Mobile, is expanding its target demographic.

"We're still youth-oriented, but we appeal to consumers ages 9 to 90, and half of our customers are over 35," Ms. Wallace. "At the very beginning, we had very different messaging, the early commercials were edgy and provocative.

"Our brand identity spoke to young people, saying 'This is a way for you to have a mobile phone,'" she said.

"Branson saw a market of underserved people who don't have credit cards, teens and young adults, another category of people who choose not to sign a contract, and we provide them a very affordable, competitive value."

Virgin Mobile USA's marketing strategy focuses on features: mobile-to-mobile, unlimited messaging, roll-forward minutes, various categories of content, including ringtones and Ringback Playlists, and mobile data services, including mobile Web access.

"We do a lot of online marketing, although we could never compete with the major carriers as far as dollars," Ms. Wallace said. "We have closed the gap between what you could get from a postpaid contract phone versus what you can get with prepaid."

In addition to online banner ads on publishers such as Vibe.com and CNET, Virgin Mobile USA serves TV and magazine ads and communicates with its customers via SMS and email.

In addition to Boost Mobile, Virgin Mobile USA sees its main competitors as AT&T GoPhones, Verizon INpulse pay-as-you-go phones, Qualcomm's Leap Wireless, which includes Cricket and Jump Mobile, and MetroPCS.

Virgin Mobile USA has expressed confidence, even given the slow economy.

"Right now everybody's growth has slowed, but prepaid is growing, and it's a model that's very accepted in the rest of the world," Ms. Wallace said. "I can get exactly what I want without signing a contract, so why sign a contract?

"Consumers can change their plan from month to month without paying a penalty," she said.

Virgin Mobile USA most fascinating, innovative service is Sugar Mama, its first efforts to integrate mobile advertising into its platform.

"Sugar Mama is our first mobile advertising play, we invite people to go to the Internet to watch commercials from partners such as Xbox, Pepsi and Subway, good content created for the internet," Ms. Wallace said. "For every minute of advertising you watch, you earn a minute of airtime.

"People have to opt in, and we recognize that their time is valuable, so we give them rewards for that and content that's relevant and interesting," she said.

Virgin Mobile USA claims that more than 800,000 of its customers are Sugar Mama users.

These customers can earn up to 75 minutes of free airtime a month, and to date have earned more than 35 million free minutes.

"The click-through rate on Sugar Mama has been extraordinarily high," Ms. Wallace said. "We've gotten a great response, and it is a relatively small audience, but it's a captive audience, and advertiser knows they are engaged in it."

The MVNO has continues to experience with mobile advertising.

Fund My Phone is a cross between social networking and mobile advertising.

Customers pass along the ads to earn free minutes, emailing them or sending them via a Facebook widget to friends to extend the audience for Virgin Mobile USA's advertisers.

These include Arena Football, Dr. Pepper, Foot Locker, Subway, the U.S. Navy and various movie trailers.

Virgin Mobile USA has also signed a deal with AOL's Third Screen Media to serve on-deck banner ads from brands such as Herbal Essence, Office Depot and Papa John's Pizza.

The MVNO did its first advertising-based campaign with Burger King, selling a value menu of ringtones for $1 each.

"Customers got ringtones at a lower rate, and Burger King was thrilled," Ms. Wallace said. "We got a great click-through rate to their page from ours, and we sold 90,000 ringtones in three weeks, an almost 35 percent increase.

"We're certainly looking to do more of those kinds of things," she said.

Analysts not sold
Despite the optimism expressed by Boost Mobile and Virgin Mobile USA, many analysts are skeptical of the prepaid/MVNO model, in large part due to the churn factor.

Many cite the examples of ESPN, Disney, Amp'd and Helio.

"The MVNO is dead in the U.S.," said Bonny Joy, analyst at Strategy Analytics, New York. "We have seen a lot of players folding their tents based on this model.

"They tried to differentiate themselves from carriers, but weren't able to make it profitable," he said. "There is no fundamentally solid business model to run a MVNO in this market."

Major carriers are skittish of the model, downplaying their prepaid offerings in fear of losing more lucrative, stable postpaid customers.

"Prepaid consumers are very high-churn customers, so carriers are not so keen in adding customers in that space, because they're not high value," Mr. Joy said. "They are cost-conscious consumer to whom major carriers aren't interested in offering services.

"The major carriers are not so keen on building solutions to compete with these players such as Virgin Mobile and Boost, because there is likely a chance that some of their high-paying customers will be dragged down to that prepaid model, which represents a tiny part of their base."

Mr. Joy attributes the relative staying power of Boost Mobile and Virgin Mobile USA to the backing of Sprint.

Boost runs on the Nextel network, while Virgin Mobile USA operates on Sprint's CDMA network.

"Both companies are Sprint-oriented, which is one reason these companies have longer life than other prepaids," Mr. Joy said. "Still, the business model is doomed to fail in the U.S., because it doesn't differentiate its service offerings enough from those of mainstream carrier services."

Mr. Joy does concede that British MVNO BLYK Mobile has found success in Europe.

"They've found a sweet spot in the MVNO space, because they run on an advertising-based business model," Mr. Joy said. They have enough differentiators in the teen segment, but they're the only one showing some signs of stability.

"All other MVNOs have failed or are in the direction of failure," he said.

He says he doesn't consider Boost Mobile a true MVNO, because it is a wholly owned subsidiary of Sprint, making Virgin Mobile USA the last player standing in the U.S.

"Virgin Mobile USA is operating at a loss, but they still have a sizeable chunk of the youth prepaid segment," Mr. Joy said. "They're offering services based on price, the cost benefits and value, passing some of the cost benefits on to customers.

"It's the low end of the business where carriers aren't keen on competing," he said. "They do have strong backing, and they have less pressure on a cost basis."