The 3G battle
Steve Bailey, the new chief executive of Virgin Mobile SA, is in for the battle of his life if he hopes to lift the number of users much above its present base of 200000.
Virgin arrived in South Africa in 2006 with all the fanfare its founder Richard Branson is famous for. But in spite of introducing free SMSes and 99c Virgin-to-Virgin calling, its promises to shake up the industry and provide a whole new experience for customers have hardly materialised, if the numbers are anything to go by.
Times are tougher than ever, the market for cellphones has just about reached the limits of its potential, Vodacom and MTN show no signs of letting up on the all but ruinous interconnection fees they charge the company, and the losses for Virgin continue to mount.
It goes without saying that Bailey himself exudes confidence. If there was any doubt, a recent item on IT Web announced that he had bought 50% of the company.
If only, he laughs.
“I would love to be in a position to own 50% of this company. If I could take 50% I would. That talks to the way I feel about it.”
Bailey, 40, a chartered accountant from Jeppe Boys’ High and Wits University, who was born in Britain and arrived in South Africa when he was 16, finds himself in an interesting position.
He has been with Cell C for seven years, as sales, finance and operations boss. Cell C owns 50% of Virgin Mobile.
The two companies have a joint venture that allows Virgin, which does not have a network of its own, to piggyback on Cell C’s network. And yet they regard each other as competitors.
“We do actually compete in the market,” Bailey said.
How did Cell C feel about its operations chief going off to lead a competitor, given all the inside knowledge he must have about what now is a rival company?
“They supported me taking the role,” he says. As a half owner it is in their interests to have someone they trust in the position. One can see that, but it still sounds odd.“There’s an interest from Cell C to ensure the company (Virgin) does well, but at an operational level there is confidentiality between the two of us and we are competitors.”
Not of the buddy-buddy kind but genuine competitors, he insists.
“We want to grow Virgin to the next level so they (Cell C) felt I was a good person to put in here.”
He won’t say what the next level might be, in terms of numbers, but says his strategy for getting there will focus on service, on providing a unique experience for the customer.
This, of course, is what Virgin has promised from day one, but in spite of this it has shed customers.
Bailey contests this. With some difficulty, because he has just admitted that although Virgin has “connected” around 600000 customers since it launched, it now has 200000.
Meaning that 400000 have left?
“Four hundred thousand are not using the service at the moment.”
Why not?
“It’s relatively normal in the cellphone industry that customers stop using your service.”
Why would they do that unless they were unhappy with the service?
“No, it’s not unusual over time,” he insists. Even if customers are blissfully happy with the service they’re getting they still up and off, apparently.
Bailey says he will target the upper end of the market.
The thing about the upper end of the market is that these are typically people who use, need, or want, 3G. And Cell C does not have a 3G network.
Given Virgin’s intended market, did it choose the wrong partner, perhaps?
“Not at all. There are still a lot of customers who don’t need 3G on their phones.”
Those at the top end, whom he says he is trying to attract, usually do. Won’t the absence of 3G complicate his efforts?
“Not really,” he says. Virgin has Edge, also a high-speed data service which gives “a quite satisfactory experience”, enables users to download emails, access the Internet at good speeds and so on.
Vodacom and MTN have feasted off the corporate market since the beginning, but given the acute levels of frustration and dissatisfaction experienced by corporates with these companies one wonders if there is an opportunity here that a niche player like Virgin might be able to exploit.
An opportunity to provide an individual service of the kind small private banks supply well-heeled customers, and which companies with bigger subscriber bases couldn’t possibly provide?
No, says Bailey.
“I would need 3G to compete in the corporate market.”
What about Edge?
“If you want to plug Virgin into your laptop then it’s not quick enough. To get that top-end client it would be better to have 3G.”
Ah. So maybe Cell C was the wrong choice, after all?
Bailey says he “understands” Cell C is “busy looking at” rolling out a 3G network.
Until then he will target upper-end clients who are happy without.
“If you’re using a mobile in your car you don’t need high-speed data.”
Virgin’s business strategy is to buy minutes in bulk, package, rebrand and sell them.
In effect it’s a repackaging exercise. This means that just about everything turns on the rates they get for those minutes.
And so it is no surprise that Bailey says his biggest battle will be to persuade the regulator to do something about the high interconnection fees Virgin is forced to pay MTN and Vodacom every time a Virgin user calls someone on the MTN/Vodacom network.
For a company without its own network this makes it “extremely difficult” to turn a profit.
For example, Virgin has to pay MTN an average of at least 60% of any call and in peak periods more than R1 a minute.
“I can’t charge my customers less than we have to pay MTN so it restricts the amount of benefit I can pass on,” he says.
“Because I’m a smaller network most of my calls have to go to other networks.”
So far the regulator seems to have been deaf to the pleas of Virgin and Cell C, which has around five million users compared with Vodacom’s 25 million and MTN’s 15 million.
Any light at the end of this years-long tunnel yet?
“I think the regulator’s listening to us,” says Bailey. “But these things appear to happen more slowly than we’d like.”
The crux of the problem remains the immoveable fact that “bringing down interconnect rates is not in the interests of the incumbents,” he says.
Although he burbles enthusiastically about how “the competitive landscape is changing and bringing new opportunities”, this, at least, doesn’t look like changing any time soon
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