Business Stripped Bare (20 page)

So we would not follow the 'confusion marketing' of the other guys. I wanted the whole mobile business to be simple enough that even I could understand what I was being charged. It's a basic business message. If the directors can't get their head around the pricing structure of anything, then how on earth is the consumer going to work it out? And we would move into the prepay market so that more young people and those on lower incomes could join the mobile phone revolution.

We needed to keep the tariffs simple. I wrote in my notebook: '
Let people know exactly what they are paying for – and reward those who stay with us. James said think tins of beans! (The more beans they buy the cheaper the price.)
'

James told me later that all the phone people looked on in horror when it was suggested that we make life easy for people. It wasn't what our telecoms partners wanted at first. They wanted to continue with the established charging structure. Joe Steel had experience of this kind of pricing plan – so we asked him to turn it on its head. He got it straight away. We looked at discounting – which had to be a central part of our offering – and rewards for loyalty. If your whole family bought mobile phones it would be cheaper; if it was a Virgin to Virgin phone call it would be cheaper. So there was a distinct reason to buy Virgin. We wanted people to come into Virgin Megastores to buy their phones and purchase their prepaid vouchers for airtime, and we signed up a huge number of places – filling stations, high street chains, local corner shops, even nightclubs – where people could top up their mobile phones.

For the launch we set a simple tariff: 15p for the first ten minutes, then 10p for the next ten and then 5p after this. Later, I wanted to make this even simpler. We settled on 15p for the first five minutes and 5p after that. There would be no confusion about peak or off-peak, local or national calls. Calls to other mobile networks would be charged at a flat rate of 35p per minute. Customers would pay £12.50 for a one-off service pack, including a SIM card, phone number and £10 of free airtime. And they would be able to buy their own phone, choosing from seven models priced between £70 and £380.

Once all this was set in stone I had faith that the team we had put together would be able to run and deliver a great business. I wasn't let down – each one of the Virgin Mobile team could feature in a business-school case study of how to build great collaborative business teams. Graeme Hutchinson, who played with a heavy metal rock band that made two albums, was our head of sales. Andrew Ralston in the customer services office worked exceptionally hard to ensure consistency across our call centre. Steven Day, the former
Daily Express
journalist, joined as director of communications and did a brilliant job of keeping us in the news, as well as helping with investor relations.

Tom, Joe and the team had a real sense of autonomy at Virgin Mobile. I didn't need to be involved day-to-day, but I was sent regular information and figures, which I looked at each night. From the off, the business acted like a listed company – and that's how all start-ups should try to behave. I loved going to the call centre in Trowbridge in Wiltshire to meet the exuberant staff and join in the parties – they knew how to let their hair down and I was exceptionally proud of them all – and delighted for their success. The young Trowbridge staff would turn out in force when I came to visit and they all volunteered to be Virgin Angels at the V Festivals, helping people put up their tents and handing out goodie bags. One of our parties got a little out of hand and the local paper declared on its front page that it had become an orgy, in which drunk young people coupled indiscriminately in the nightclub car park. Good luck to them, I thought: since outside it was minus ten degrees with a foot of snow. Accurate or not, this nonsense was better than a full-page recruitment advert – the following week we were inundated with people wanting to work at Virgin Mobile!

The launch idea was a great caper too: extremely saucy, it made the headlines in all the major UK newspapers. On 11 November 1999, I appeared with seven very attractive women – all naked, except for some strategically placed orange cushions – announcing Virgin Mobile in a giant see-through mobile phone in Trafalgar Square, in the centre of London. Our slogan was: 'What you see is what you get.' I said the confusing range of offers and tariffs out there was just there to fool people, and that if everyone in the UK with a mobile switched to Virgin, they would save a combined £1.6 billion per year.

The Metropolitan Police turned up to find out if our lovely ladies really were stripped bare. We made a swift exit.

I had no idea, back then, how successful this business would become.

On 21 February 2001, I was in Cannes at the 3GSM World Congress, and I announced our intention of making Virgin Mobile the first global MVNO, with non-stop plans to serve ten countries across five continents in the coming years. I informed the delegates about our partnership with Singapore Telecommunications which would result in the launch of Virgin Mobile Asia that summer, and said that partnership plans for Virgin Mobile USA would be announced imminently.

I said Europe, Africa, China, India, Indonesia, Hong Kong, Taiwan, Vietnam and elsewhere throughout South-East Asia and the Pacific Rim were all ripe for MVNOs. I felt I had to explain how it all made sense. 'I believe no self-respecting GSM or future UMTS network could afford to be without an MVNO.' (There were so many acronyms in this business, I'd had to spend the morning rote-learning them. For the record, GSM stands for Groupe Spécial Mobile – the most popular world standard for mobile networks. UMTS – Universal Mobile Telephone System – is its successor.)

It was easy to see why you might want to set up an MVNO. The start-up costs are tiny compared to buying an existing mobile business, and practically non-existent when compared to the cost of building a new network. But what were the benefits for existing network operators?

MVNOs are great at cutting network churn. If a customer is going to leave an operator isn't it better that they go to the MVNO partner than to a rival? Then at least they are still on the network and there's a half-share of ongoing revenues. The MVNO has its brand and the network has its own brand, and different brands attract different people. Two good brands together will invariably attract more custom than one good brand on its own. So, I argued, networks should think of MVNOs as a kind of insurance policy. Collaborating with an MVNO spreads the risks of the business. The 3G standard had made a lot of extra services possible – from on-the-go email to video messaging – but no one really knew how best to exploit, package or sell these services. 'So,' I argued, 'an MVNO with a different strategy on the same network increases the likelihood of success, while stimulating traffic and revenues.'

It wasn't the wittiest presentation I had ever given and it wasn't the glitziest. But my audience was certainly paying attention. The market was in a quandary, and people were anxious to find 3G business models that would work.

The original mobile networks were built mainly for ordinary voice telephony, and assumed transmission rates that these days seem quite slow. At the end of the 1990s, the International Telecommunication Union created a new set of standards called 3G, so that network operators could offer users a range of more advanced services, including video calls and high-speed Internet access. Because 3G networks each use a much narrower band of the radio spectrum than the old networks, there was now room on the spectrum for newcomers to come and try their hand at the mobile telecoms business. At least, that was the theory.

What actually happened was rather different. In Germany and in the UK, for example, the governments' auctions of 3G licences impoverished the very markets they were supposed to encourage. In the UK, the auction effectively imposed a crippling tax on mobile phone operators. It all helped Gordon Brown and Tony Blair and their New Labour project. The money heading for the UK government's coffers was an unbelievable £22 billion, which was a lot of schools and hospitals. To that extent you could see why they were tempted into taking advantage. But it backfired in a way, as the auction winners spent so much on their licences that they ended up really dragging their feet building their networks and developing the very services that the government wanted to promote! We were concerned that T-Mobile might not give us access to 3G, so we wanted to bid ourselves.

Our consortium decided to stick at £1.5 billion, and when bidding for licences began, we were decisively outgunned by silly money. On 5 April 2000 we pulled out of the bidding. At the end of April, the winners were announced: TIW, the Canadian Telecoms company in which Hutchinson Whampoa, better known for 3, have a stake, paid £4.3 billion; BT, One2One and Orange, around £4 billion; Vodafone paid a swingeing £5.9 billion!

We had had a lucky escape by sticking to our principles and only bidding what we thought the licence was worth, not allowing ourselves to get carried away by the open gambling nature of the process itself.

*

In February 2001, as I was speaking at Cannes, describing what I believed was the future for mobile telecommunications – even as I was juggling, or trying to juggle, all those unlovely capital letters, like something out of Dr Seuss – Virgin Mobile's plans were gathering pace in the United States.

In America, the problem with the mobile market wasn't so much that the government had sucked the blood out of it, but more that everyone was reeling from the sheer cost of creating the infrastructure you need to take full advantage of the 3G standard. In the wake of deregulation, companies had piled billions of dollars into new communications gear to deliver everything from telephone services to viable TV networks to high-speed Internet capacity. The capital spending on infrastructure was massive – more than $100 billion in 2000. Dozens of telecoms start-ups set in place during the previous few years began running out of money and folding. Between June and September 2000, the telecoms giants in the US also began to melt down.
Business Week
in September talked about an industry downturn as the Big Three local phone companies – Verizon Communications, BellSouth and SBC Communications – watched their shares slide.

Annual revenues – increasing at a respectable 10.5 per cent a year – were simply not keeping pace with the cost of these soaring capital projects. Investors were getting their fingers burned. This was what made Virgin Mobile's MVNO such an intriguing option for our new partners, Sprint.

The problem was, Sprint was hurting just as much as everybody else. They were spending more and more time firefighting, less and less time thinking strategically. Shaken by a bad set of quarterly results, Sprint began to lose their enthusiasm for our innovative scheme. Things began to look dodgy and after nearly a year and a half of discussions and investment there was pressure from the finance team to shut it all down. Charles Levine, the president of Sprint PCS, the wireless division of the US telecoms giant, wanted to go ahead, but he was facing strong opposition. It was time for a last-gasp effort. Gordon encouraged me to phone Sprint's group president, Ron LeMay, and the chairman and chief executive, Bill Esrey.

I said it wouldn't cost them a lot.

No response.

I said it would make money for them in a new category.

Nothing.

I wheeled out the big guns. I told them we could transform their stuffy image.

Nothing.

'Look,' I said, fairly desperate by this time, 'you need a brand like Virgin. Right now you're the phone company of choice for . . . for
young Republicans
.'

And Bill changed his mind.

We were on.

In June 2000
Red Herring
, the business technology magazine, listed the '100 Most Important Companies in the World' and their branding. Virgin didn't make the list.
Forbes
magazine spent time following me for a cover story in July 2000 and its writer Melanie Wells concluded that our brand was stretched too thinly across too many businesses. Gordon McCallum had told me to my face that Virgin was still 'a British brand'.

We needed to be more focused and show we could deliver an outstanding product to tough international markets. We needed to prove ourselves in the right place. And that place was the United States.

In October 2001, Sprint and the Virgin Group officially announced our joint venture – a Virgin-branded MVNO running on Sprint's PCS digital system. Our aim was to target fifteen- to thirty-year-old consumers in the United States.

Our eyes and ears in America was Frances Farrow. I'd asked her to join the board of Virgin Atlantic back in 1993 and she was a thoughtful and incisive person. She was now CEO of Virgin USA, the headquarters of the Virgin Group in North America, responsible for expanding the Virgin brand, developing new business and managing investments in the region.

Conventional wisdom had it that the prepaid market simply wouldn't work in the United States. Prepay phones effectively guarantee anonymity, and people told me that the only people wanting phones like this were the three Ps market: pimps, pushers and prostitutes! We were less than charmed by that argument. We said that it was fundamentally wrong; that the prepay phone was an attractive category for younger people who didn't want to lumber themselves with niggling financial commitments.

We were reminded of an extremely smart guy called Dan Schulman, the CEO of Priceline.com, one of the most recognised brands on the Internet. Dan, who had previously been president of AT&T's consumer markets, was just then bringing Priceline.com into profit. We had already been talking to him about Virgin Atlantic flights on his price comparison site; now we began talking about the future of mobile phones. On 15 June 2001, we were able to confirm the rumours – and we launched Virgin Mobile in the USA.