As Mobile ESPN falls, a Helio rises
ESPN fumbled as a wireless mobile service operator, but it had the right idea. Helio is one company that could succeed where the sports network failed.
By Michal Lev-Ram, Business 2.0 Magazine writer-reporter

(Business 2.0 Magazine) -- The top guns at Walt Disney Co. had every reason to think they had a winner when they launched a wireless service, Mobile ESPN, on Super Bowl Sunday earlier this year.

That's because major U.S. cell phone operators like Verizon (Charts) and Sprint Nextel (Charts) have become so big and their customer acquisition costs so high that they've been more than happy to lease their networks to anyone willing to chase after niche customers. In return, the carriers get a share of the new subscriber revenue.

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Mobile ESPN seemed perfectly positioned to dominate the "Mobile Virtual Network Operator" (MVNO) market. The giant sports network, after all, has lots of young, male customers, attractive content, and the financial backing of parent company Disney (Charts).

But ESPN's foray into wireless services stumbled badly. Last month - just eight months after its launch - Disney pulled the plug. Countless post mortems in the weeks since have pronounced the nascent MVNO market dead.

They're all wrong.

Mobile ESPN failed for specific reasons. But a look at other MVNOs shows that most are thriving. They're adding subscribers and expanding their services and handset models. More important, a few are generating upwards of $100 per month per subscriber, more than double the average for all cell phone services.

"Mobile ESPN made a lot of mistakes," says Ken Hyers, a wireless analyst at ABI Research. "Other MVNOs have done a much better job."

Market research firm Yankee Group, for one, is standing by its estimates that the number of U.S. mobile phone users served by MVNOs will double, to more than 30 million, by 2010.

Leaner revenues, fatter margins

By comparison, the number of U.S. mobile subscribers is to grow 12 percent, to 246 million, in four years, reports JupiterResearch. That increase helps explain why the major U.S. carriers - AT&T/Cingular, T-Mobile, Verizon and Sprint Nextel - are willing to cede a little ground to MVNOs.

Here's how an MVNO works: Instead of investing in its own licensed spectrum and cell towers, an MVNO leases service from one of the big four mobile carriers and then sells handsets and services under its own brand name. Mobile ESPN, for instance, used Sprint Nextel's network.

Analysts say the MVNO model is perfect for target customers, such as kids, tech geeks, or specific ethnic groups, that are underserved by the Verizons of the world. The big MVNO players include Virgin Mobile, Amp'd, Voce, and Helio.

"The thinking is that if an MVNO is well targeted and well run, it's going to reach an audience that other operators can't," says Hyers.

Because they don't have to pay to build or maintain infrastructure, MVNOs enjoy far lower operational costs. Wider margins mean they can be highly profitable with even a few hundred thousand subscribers.

Right opportunity, wrong execution

That's the opportunity that ESPN, with a strong and lucrative customer base of sports buffs, chased. But as ESPN's stumble shows, running an MVNO can be risky business - especially for companies with no prior experience in wireless services.

ESPN miscalculated, analysts say, by thinking that customers loved its sport content so much that they would rush to its wireless services too. What's more, sports is one niche that the major carriers have covered: Mobile ESPN's potential customers already have access to similar content through other operators.

Another mistake: ESPN sold only one phone, at a whopping initial price of $500, and made it available only through Best Buy and online. That left customers, who rarely buy phones they can't first touch, with too few shopping venues.

ABI's Hyers says ESPN bet wrong that a strong brand alone spelled success. At most, he estimates that Mobile ESPN drew 30,000 subscribers - well below the hoped-for 250,000.

"They marketed the heck out of it," says Hyers, "but they very badly misjudged the market."

The MySpace advantage

Other MVNOs are taking a smarter approach.

The biggest player by far is Virgin Mobile USA. A joint venture between Richard Branson's Virgin Group and Sprint, the MVNO has more than four million teen and twenty-something subscribers. Virgin wisely was among the first carriers to sell prepaid services, a hit with young consumers. And it's kept the momentum going with celebrity-endorsed campaigns, ways to earn free minutes, and text messages that cost a penny apiece.

And then there's Helio, founded by Korea's SK Telecom and Earthlink. Analysts say it's a prime example of how an MVNO is perfectly positioned to dominate a niche market.

Helio caters to a customer base it describes as young, connected consumers. They're the 18- to 32-year-old early adopters who communicate with pals around-the-clock and are willing to pay hefty prices for exclusive phones. Thanks to the Korea connection, Helio's got a pipeline to some of the most innovative devices, and can bring them to market more quickly than other operators.

Helio currently sells two ultrasleek phones, the Hero ($225) and the Kickflip ($200), at 2,500 retail stores and has plans to open five Helio-branded shops in the U.S. by year-end. The stand-alone stores will come with video screens and lounges where young consumers can listen to music or play video games.

Helio's shrewdest move may just be its partnership with MySpace, the red-hot social networking site owned by News Corp (Charts). With MySpace Mobile, Helio customers can update their profiles and post pictures from their phones.

"You can't be a one-hit wonder," says Michael Grossi, Helio's head of business development. "You've got to have a lot of [features] in your arsenal to give consumers to switch over" from traditional carriers.

Although Mobile ESPN lost that playbook, don't count Disney out yet. ESPN content is still coming to mobile phones - via traditional carriers. And Disney is betting that Disney Mobile, a four-month-old MVNO aimed at kids and their ever-vigilant parents, can pick up the ball. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.