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MAJ Anthony V. Montoya, USA (Ret) 1984 JCG THE JOURNAL REPORT: TECHNOLOGY

Telecommunications

Holes in the Wireless World

Launching targeted services on the back of existing networks seems like a cheap way to cater to underserved consumers. It isn't so simple.

By LI YUAN May 15, 2006; Page R6

Anthony Montoya had a simple idea: a cellphone service targeted at the 40 million spanish-speaking immigrants and children of immigrants in the U.S. As a group, they have a strong desire to communicate with family members in their home countries and have been poorly served by existing cellphone companies, he believed. The idea seemed like a sure thing. But, in a lesson to other would-be wireless entrepreneurs, getting the service off the ground proved to be a lot harder than Mr. Montoya and his partners imagined. The venture, called Movida Communications Inc., spent eight months trying to find investors willing and able to finance the project. It had to line up a deal with a retail outlet to sell its phones. And it had to arrange to lease the use of an established cellular network. Movida, which was launched in April of last year, then had to overcome a whole new set of challenges in its first year of operation. Movida is one of many mobile virtual network operators, or MVNOs. These companies are set up to serve niche markets, offering special features or services to attract customers and using the networks of existing carriers rather than building new ones. Interest in launching such services is high, because the lack of infrastructure investment makes MVNOs seem like a relatively inexpensive way to tap promising markets. Yankee Group, a Boston-based research firm, estimates that about 13 million subscribers are being served by more than 30 MVNOs in the U.S. But, as Movida has discovered, it isn't easy being a small start-up in a market that also has attracted some of the biggest names in telecommunications, technology and entertainment. "It's a very, very hard business, because you're basically starting a wireless service from scratch," says David Bottoms, vice president of strategic partnerships for Sprint Nextel Corp., based in Reston, Va. He says Sprint, which leases use of its network to Movida, among others, has turned down about 95% of the MVNO proposals it has received. Adds Dan Schulman, chief executive of Virgin Mobile USA LLC, one of the earliest MVNOs: "A lot of people will get their toes into the water and find that the water is quite cold and quite a few sharks are swimming with them." Big and Little MVNO start-ups in the U.S. have been inspired by the success of Virgin Mobile USA, a joint venture between Sprint and the U.K.'s Virgin Group Ltd. Since its launch in July 2002, Virgin Mobile has gained more than four million customers by providing teens with features like ringtones and games from Viacom Inc.'s MTV Networks. Another successful MVNO, Boost Mobile LLC, founded by Australian businessman Peter Adderton in 2002, has attracted more than 2.7 million customers by positioning itself as a hip-hop-lifestyle wireless service. Among its features are ringtones, wallpapers and music videos with strong hip-hop flavor. Mr. Adderton sold the company for an undisclosed amount in early 2004 to the former Nextel Communications Inc., which was merged with Sprint last year. Such success stories don't just inspire entrepreneurs, though: They also have started to attract other big players. Walt Disney Co., for instance, owns two MVNOs: Mobile ESPN makes it easy for sports fanatics to check game scores and see video clips, and one of the features of Disney Mobile, to be launched in June, is that parents can control how many minutes a month a child can talk on a cellphone. With big names taking such an interest in the MVNO market, the smaller players are increasingly vulnerable. Analysts and people in the industry expect consolidations and perhaps some bankruptcies in the next few years as many small players run out of money before profits kick in. An MVNO is a capital-intensive business, and it generates very tight margins, says Ozgur Aytar, an analyst at Pyramid Research Inc. in Cambridge, Mass. That gives bigger companies with deeper pockets a distinct advantage. "The market will be dominated by ventures supported by strong players with established brands, rather than companies built by entrepreneurs," says Ms. Aytar. Putting It Together All of which puts a lot of pressure on entrepreneurs like Movida's Mr. Montoya, who worked on the launch of Virgin Mobile USA as the senior director of business development at Sprint. He later moved on to manage sales and marketing for Sprint in the San Francisco Bay area and in Chicago. Mr. Montoya, a third-generation Mexican immigrant and a fluent Spanish speaker, found that big wireless carriers didn't serve the Hispanic market well; they didn't offer any specially targeted services and they simply translated marketing materials for the mass market into Spanish. For instance, a print advertisement for the Hispanic market could be a picture of a Caucasian man with Spanish text. "That was almost insulting," he says. With the idea of starting his own MVNO, he quit his job at the end of 2003 and got in touch with two former Sprint colleagues, Joe Gensheimer, who was the company's general counsel until the end of 2002, and John Chambers, who left Sprint PCS in 2000 as vice president of regulatory affairs. They worked out a narrowly focused business plan: a prepaid wireless service for Hispanic immigrants and their children. They saw the group as a natural target for a dedicated service. Recent immigrants often don't speak English well and in many cases don't have bank accounts, fixed addresses or Social Security numbers, all of which are sometimes required to subscribe to a standard cellphone service. The Movida cellphone service wouldn't require any identification or credit record. Mr. Montoya also believed that this group wanted to place many phone calls to their home countries at a low cost, and Movida planned to fulfill that need. It also planned to appeal to its target market's cultural background. Spanish is the main language for the handset menu and customer service, and the content offered by the service focuses on news and pop culture in Latin America. The Movida partners planned to sell their phones at major Hispanic grocery stores, but they also figured that the endorsement of a major retailer would give them some credibility. They contacted some of the biggest retail chains and reached an agreement with Wal-Mart Stores Inc., which they found to be in tune with Hispanic consumers, says Mr. Montoya. Finding an investor that could provide both capital and some expertise in the Hispanic market proved to be the most difficult part. Smaller venture-capital and private-equity firms were interested but didn't have enough capital to offer them. Large venture-capital firms often didn't understand the Latino market. When Messrs. Montoya and Gensheimer mentioned during one meeting that they would need an investor that could help them market to Hispanic consumers, a partner at a New York venture-capital firm quipped, "I have a gardener from Mexico," according to the two Movida executives. Finally, through a friend of a friend of a friend of a friend, they got in touch with Cisneros Group, a Venezuelan conglomerate that holds interests in many companies, including Univision Communications Inc., the leading Spanish-language media concern in the U.S. After half a dozen meetings in Miami and New York, Cisneros became the majority and controlling shareholder in February 2005.

NEW CALLING Joe Gensheimer (left) and Anthony Montoya of Movida

Cisneros appointed a chairman from its ranks, while Mr. Montoya became the president, Mr. Gensheimer the chief operating officer and Mr. Chambers general counsel. In the search for a wireless carrier to lease network use from, the Movida team's deep roots at Sprint helped them get a foot in the door. But Sprint wouldn't commit until it was convinced the Movida partners could meet the requirements the carrier sets for any MVNO. The more successful an MVNO is, the higher the fees it pays to the carrier. So Sprint and other carriers set the bar high to try to ensure that the MVNOs they host will thrive. The carriers generally look for a thorough and conservative business plan. An MVNO should address a market segment that the host carrier isn't focused on. It should have a distribution deal in place with a retail outlet, and the financial strength to sustain low returns in the first few years. "They wanted to make sure that even if many things went wrong, it would still work," says Movida's Mr. Gensheimer of the talks with Sprint. Challenges Galore In the end, Sprint did lease the use of its network to Movida -- and many things did go wrong after Movida launched in April 2005 in Phoenix and San Diego. Movida's brochures weren't shipped to some of the Wal-Marts and Hispanic grocery stores. And there were some technical problems: The text-messaging service didn't work for the first week because the connection with the Sprint network wasn't configured properly. Worst of all, some phones initially weren't registered in Wal-Mart's computer systems, and so couldn't be checked out at the cash registers. The technical problems were solved, but there were other surprises. Even though Movida targets Hispanic customers, it found that so many of its customers were primarily English speakers that it had to expand its English-speaking customer-service team. Even good news brought chaos. In August, Wal-Mart told Movida it wanted the start-up's phones to be in 600 of its stores before the holiday season, doubling the original planned distribution. The Movida team wasn't prepared for this. They had to ask Cisneros for more funding and beg their suppliers to move faster. Then the hurricane season arrived. Damage from two consecutive storms knocked out phone service to Movida's customer-service center in Argentina, and the phone service wasn't fully restored until a week later. New customers who couldn't reach Movida's service center couldn't activate their phones. "I was almost in tears," says Mr. Gensheimer. Movida pulled through, though. Messrs. Montoya and Gensheimer decline to disclose customer numbers or revenue. But they say Movida is doing well enough that Sprint gave back half of its system-setup fee on Movida's first anniversary, an incentive Sprint offers to many MVNOs. Movida handsets are now sold in more than 800 Wal-Mart stores in 40 states. The fundamental principle of running an MVNO is managing costs, Messrs. Montoya and Gensheimer say. "It's all about watching our expenses," says Mr. Montoya. "It's a thin-margin game." To save money, they travel cheaply; they recall staying at a $37-a-night hotel in Atlanta during a big wireless-industry show in 2004. They bought a lot of equipment from online auction site eBay, including data-storage devices and system routers, and tried to persuade some equipment and back-office service vendors not to charge them upfront Many of them agreed. The whole experience of running an MVNO is "like carrying a bucket of water," says Mr. Montoya. "From time to time, you see a hole in the bucket and try to stop it. And then you see another hole. But we did pretty well. We minimized all the holes and kept as much water in the bucket as possible." --Ms. Yuan is a staff reporter in The Wall Street Journal's New York bureau. Write to Li Yuan at [email protected]

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