In Shaky Times, Wireless Offers Strong Signal

NJBIZ, Dec 8, 2008 by Ruth, João-Pierre S

As the economy copes with slowed business, providers with growth plans remain profitable

TECHNOLOGY

WARREN - While much of the consumer sector struggles to lure dollars from an increasingly cost- conscious public, companies in the wireless market with smart growth plans have a strong signal for growth.

Thanks to the widespread use of cell phones and wireless personal digital assistants, customers are keeping service providers like Wanen-based Virgin Mobile USA Inc. busy. Last month, Virgin, which predominandy offers prepaid cellular service, reported a profitable third quarter, though die market is not completely free of economic challenges.

Virgin Mobile reported net income of $4. 1 million on revenue of $323.2 million for three months ended September, compared to a net loss of $7.4 million on revenue of $319.5 million for the year-ago period. In spite of those positive results, wireless has not gone untouched in this bleak season. Peter Lurie, general counsel and a co-founder of Virgin Mobile, said while the wireless market is growing, the tightening of the economy has been felt.

"We've seen our customers under some strain being more careful about their expenditures," he said.

Lurie said Virgin has grown rapidly by catering to a previously underserved market through prepaid service offerings. This service is particularly tantaliz- ing to customers who are credit-challenged, said Robert Rosenberg, president of The Insight Research Corp., in Boonton, a telecom market research firm.

Lurie said Virgin Mobile USA's customers purchase blocks of airtime in advance without the need for extensive contracts. "About half our cus- tomers are new to wireless," he said. "About one -third of them are from lower-income households with under $35,000 in income."

Rosenberg said the downturn may not hit the industry as hard as other sectors, such as retail goods, thanks in part to the ubiquity of wireless devices. "This is the foundation of commerce in the 21st century," Rosenberg said. "It's a necessity. It's like food."

But not all wireless service providers are experiencing Virgin's growth - in fact, one of its parents is losing cash and subscribers. Virgin Mobile USA is a joint venture between Sprint Nextel Corp. and Britain's Virgin Group. Virgin Mobile customers use the Sprint wireless network under an arrangement between the companies. Virgin is responsible for the service, and its subscribers are not counted among Sprint's customers.

Sprint, of Overland Park, Kan., reported a net loss of $326 million on revenue of $8.8 billion for the quarter ended Sept. 30, compared to net income of $64 million on revenue of $10 billion for the year-ago period. Sprint attributes its losses primarily to decreases in wireless revenue; the company said it served 50.5 million subscribers as of Sept. 30, down from 54 million at the end of third quarter 2007.

Since its launch in 2002, Lurie said Virgin Mobile grew to 1 million customers in 2003, 3 million customers in 2005 and 5 million customers at the end of 2007. The company also counts roughly 150,000 postpaid subscribers through its Los Angeles-based Helio subsidiary, acquired in August.

In contrast, the bulk of costumers using major wireless carriers, such as Verizon Wireless - which boasts about 70 million subscribers - sign multiyear contracts for cellular service. Lurie said the major carriers now offer their own prepay, or pay-as-you-go services, such as AT&T's GoPhone and InPulse from Verizon. "In my view, those are all responses to our entry to the wireless market," Lurie said.

Competition shows no sign of letting up. Rosenberg, of Insight, said service providers are finding ways to market to a broad range of customers. "There is no part of the wireless market that is untapped - maybe the under5-year olds," he said, only half -jokingly. "They are marketing to 10- and 1 1-year-olds."

Virgin Mobile still is looking to grow, though Lurie said the company is not after the same customers as its larger peers. Virgin has kept costs down by not opening its own retail locations to sign up customers. Instead, "we distribute through the big-box retailers - Target, Wal-Mart and Best Buy," he said. Furthermore, the company is not offering high-end handsets to rival devices like Apple Inc.'s iPhone, which would require customers to enter into long-term commitments for Virgin to recoup its costs.

"We offer competitively priced products with full features, but not the most expensive devices," he said.

Even with the addition of Helio's postpaid service, Lurie said Virgin Mobile will continue to pursue customers looking for lower-priced services and products. "We're not going to compete for high-usage business users," he said.

E-mail tojpruth@njbiz.com