It was vintage Richard Branson. In June 2006, out to maximise publicity for his new financial services and mobile phone businesses in SA, the Virgin founder and chairman leapt off a building in Johannesburg and copiloted a fighter jet across the skies above Cape Town.<\/p>\n
It was a well-crafted marketing campaign with an unambiguous message: the new SA businesses \u2014 financial services firm Virgin Money and mobile virtual network operator Virgin Mobile \u2014 would be the champions of consumers.<\/p>\n
Branson vowed to slay SA\u2019s \u201cbanking beast\u201d and accused SA\u2019s big four banks of \u201cripping off consumers\u201d. It was Captain Branson to the rescue.<\/p>\n
Twenty-one months later and ugly reality has intervened. Loss-making Virgin Mobile has failed to attract anywhere near the number of subscribers it hoped for a nd Virgin Money is saddled with bad debts after the credit binge.<\/p>\n
Both companies have cut staff numbers \u2014 Virgin Mobile from more than 400 to 250.<\/p>\n
And both businesses have new leaders. Virgin Mobile, a 50-50 joint venture with network operator Cell C \u2014 it piggybacks on Cell C\u2019s network \u2014 has its third CEO in as many years.<\/p>\n
Steve Bailey, a former senior lieutenant to former Cell C CEO Jeffrey Hedberg, took over at Virgin Mobile in November. Bailey admits business has been tough and that the company has fallen short of target. \u201cWe have not overwhelmed the industry as we had expected to.\u201d<\/p>\n
Bailey was hired after the resignation of Peter Boyd, who had been at Virgin Mobile for two years. Boyd, now at Virgin International in the UK, was preceded by Sajeed Sacranie, who lasted just five months.<\/p>\n
\u201cWe have gone through a substantial cost-cutting exercise,\u201d Bailey says of the recent restructuring. \u201cThe new cost structure fits the business to our new focus.\u201d That focus is the post-paid consumer market and the upper end of the pre paid market. \u201cWe tried to approach the market too broadly and compete in all segments of the market.\u201d \u201c[Virtual network operators] need to focus on specific segments of the market where they are better able to compete.\u201d<\/p>\n
Arthur Goldstuck, MD of research firm World Wide Worx, says Virgin Mobile relied too heavily on the Richard Branson and Virgin brands. \u201cIt\u2019s not proved as successful in SA as it might have been in other countries,\u201d Goldstuck says. \u201cHis high-profile publicity stunts don\u2019t impress the SA public as much as a clear, cheap and solid up-front offering.\u201d<\/p>\n
He says Virgin Mobile also failed to communicate clearly why consumers should choose it over a telephone company that operates its own network. \u201cThe concept of a virtual operator wasn\u2019t successfully communicated by Virgin.\u201d<\/p>\n
Bailey says the company will turn a profit within 24 months, probably sooner. That\u2019s in spite of having only 200 000 customers \u2014 Vodacom and MTN have 26m and 17m respectively.<\/p>\n
Hedberg, who chairs Virgin Mobile\u2019s board, says Bailey\u2019s appointment has already \u201cinjected significant and positive changes\u201d into the company. \u201cHe has restructured the business and reinstated its focus on the post-paid market and there has been a strong increase in subscribers since the beginning of the year.\u201d<\/p>\n
Virgin Mobile claims to have increased its share of new post-paid customers to between 8% and 10% of the market. \u201cWe are very happy with that, given the relative size of our business and our limited marketing spend,\u201d says Bailey.<\/p>\n
An expanded distribution channel has helped the company in recent months. Retail partners are Woolworths, Spar and Shoprite\/Checkers. It also operates 25 Virgin Mobile-branded stores and has kiosks in 32 Musica stores.<\/p>\n
Bailey says Virgin Mobile is punching well above its weight, despite operating in a regulatory environment that \u201cdoes not favour new entrants\u201d. He says high wholesale mobile interconnect tariffs \u2014 the fees operators charge one another to switch calls between their networks \u2014 protect large incumbent operators and disadvantage new entrants. This is because smaller players have most of their calls placed off-network to the bigger operators, incurring high fees.<\/p>\n
The Independent Communications Authority of SA (Icasa) is expected to begin forcing down call-termination rates this year. Bailey says it can\u2019t come soon enough and would like, eventually, to see the rates at least halved.<\/p>\n
The virtual network operator model, adds Bailey, is the best way of attracting new investment. He says it\u2019s unlikely a foreign investor would want to invest in a new mobile network because the market is already so mature. With the right regulatory conditions, virtual operators, piggybacking off other players\u2019 infrastructure, would do well, he says.<\/p>\n
Asymmetric interconnect, where termination rates are deliberately skewed in favour of new entrants, would greatly assist in driving down prices and fostering significant competition, Bailey says. \u201c[The regulator] needs to decide if it wants to continue to favour the incumbents, or stimulate the market.\u201d<\/p>\n
Goldstuck agrees. \u201cThe single biggest difference the regulator can make to millions of South Africans is to drop the interconnect fee by R1,\u201d Goldstuck says.<\/p>\n
This would help Virgin Mobile and encourage new virtual network operators to invest in the country, he adds.<\/p>\n
The challenges at Virgin Money are altogether different. A joint venture between Virgin and Absa, the company has bad debts significantly above the average.<\/p>\n
Virgin Mobile launched with a line of credit cards and last year expanded into providing home loans.<\/p>\n
\u201cWe\u2019ve had serious challenges,\u201d says MD Vinay Padayachee (pictured). \u201cThe market norm [for bad debt] was running around 9% of book and we were seeing 14%-15%. We realised we were headed for a problem and had to be less aggressive on growth and restructure the business in line with costs.\u201d<\/p>\n
Head count was cut from 120 to 96 and the company reduced the size of its premises. More focus was placed on recovering debt. \u201cWe feel we have the impairments under control,\u201d Padayachee says.<\/p>\n
He says Virgin Money launched at the best possible time \u2014 SA was in the middle of an unprecedented consumer spending boom that lasted from 2002 to 2008. Demand for credit was soaring and Virgin Money signed up 100 000 credit card customers in its first few months of operation. Its call centre couldn\u2019t cope with the demand.<\/p>\n
But then the hangover hit as the economy slowed, inflation rose and the property market slumped.<\/p>\n
Padayachee says Virgin Money is \u201cmaking money\u201d but concedes it\u2019s nowhere near the amount forecast in the business plan. \u201cThe real challenge is around the impairments.\u201d<\/p>\n
The National Credit Act, introduced in June 2007 and designed to protect consumers from unscrupulous lending practices, has had little impact on Virgin Money. The economic slump has had much more effect, Padayachee says.<\/p>\n
He says Virgin Money\u2019s credit card business is growing, but \u201cnot at levels we\u2019d like to see\u201d. It has about 120 000 active customers. A further 70 000 are in collections or have been handed over to lawyers.<\/p>\n
Virgin Money, which launched with a multimillion-rand television advertising campaign, has cut marketing spend to the bone, with most activity taking place below the line. Two-thirds of its marketing spend is online. Padayachee says it\u2019s not the right time to advertise aggressively.<\/p>\n
The home loans business, meanwhile, got off to a slow start but is growing. Launched last year, Virgin Money now has a R500m home loans book. \u201cIt launched in a tight economic cycle, so all it can do is go up,\u201d Padayachee says.<\/p>\n
New products are planned, including a core banking product – a transactional account where employers can deposit salaries. The company may launch vehicle and asset finance business, but that\u2019s not on the cards for 18 months at least.<\/p>\n
Padayachee says Absa and Virgin remain committed to the venture. He says Branson – the Virgin boss is a regular visitor to SA and owns a luxury game farm and lodge in the Lowveld – has a special place in his heart for SA and remains fully committed to Virgin\u2019s businesses here.<\/p>\n
His other big business in SA, Virgin Active, is performing well and is opening health clubs across the country.<\/p>\n
He may not have slain the country\u2019s banking and cellphone beasts, b ut Branson appears unlikely to give up on his two newest SA babies, despite their growing pains.<\/p>\n