Why Europe's Mobile Startups Sing

MVNOs are mobile operators that lease space on other carriers' networks. In the U.S., they seem to miss the part about no-frills, low-cost service

by Jennifer L. Schenker

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In 2000, Danish entrepreneur Frank Rasmussen raised $1 million to launch a discount mobile-phone company called Telmore. It was one of a new breed of companies, called mobile virtual network operators (MVNOs), that lease space on networks operated by other carriers, rather than owning their own infrastructure. Perhaps the best-known MVNO in the world is Virgin Mobile.

To keep costs low, most MVNOs rely heavily on the Web for sales and customer support and don't subsidize the cost of mobile phones for customers. Using this strategy, Telmore—with only 40 employees—managed to rack up more than a half a million customers in Denmark, stealing most of them away from local incumbent TDC (TDC.CO), which employs about 15,000 people.

After four years of pitched battle, TDC finally bought Telmore for $73 million, not to kill it, but to add it to its existing arsenal, in much the same way that many traditional airlines now own discount carriers. But the battle is far from over. Under TDC's stewardship Telmore "is starting to get fat," says Rasmussen, who left the company after he sold out.

Big for Investors, Big for Consumers

Now, he's about to launch an even leaner MVNO called BiBoB, with about $7 million in funding and even more ambitious goals. First BiBoB will try to divert business from Telmore, TDC, and other mobile operators in Denmark by offering much deeper discounts. Then it plans to branch out into the rest of Europe. "There are a lot of upsides to creating this kind of low-cost infrastructure business," says Rasmussen. "You can actually fight effectively against very big telcos."

Some 150 MVNOs have been launched in Europe in the last four years and at least a dozen of them have been sold for as much as 20 times the original investment, says John Strand, head of Copenhagen mobile consultancy Strand Consult. The MVNO business has been great for European consumers too, slicing an average 15% to 20% off their mobile bills. Rasmussen figures he can do even better, offering discounts of up to 40% while still earning a profit.

But while MVNOs are booming in Europe, some U.S. upstarts already have failed and others soon could follow suit. Despite investments ranging from $20 million to $300 million per company, many of the U.S. MVNOs have fewer customers than their counterparts in tiny European countries launched at a fraction of the cost. Analysts say that's because too many U.S. startups are trying to act like full-service operators instead of mimicking the business plan of a discount airline.

U.S. Companies' Weight Problem

MVNOs are burning through huge amounts of cash in the U.S. because some operators there subsidize phones, operate their own retail stores, or spend heavily on marketing, sales, and customer acquisition. And they continue to be propped up by big investments even though they are unable to show positive cash flow. "You could say that the MVNO market in the U.S. functions like the guy in the movie Super Size Me. They're being fed until they are no longer fit," says Strand.

Consider the case of Mobile ESPN, which was backed by Walt Disney (DIS) and offered customers sports content via their mobiles for a monthly subscription. The company, which received a reported $70 million in funding, offered consumers only one phone model, which cost between $450 and $500. Its cheapest calling package was priced at $40 a month, far more expensive than the family plans offered by some national carriers in the U.S. that also include sports news.

Mobile ESPN was shut down after less than a year in business, having garnered only 30,000 subscribers. Losses were an estimated $30 million—around $1,000 per customer.