ESMT–309–0094–1

ES0941

April 2, 2009

ESMT Case Study

Virgin Mobile UK
Introduction
Since launching its operations as a mobile virtual network operator (MVNO) in November 1999,
Virgin Mobile (VM) had proved to be one of the remarkable success stories of the UK mobile
phone industry. VM had achieved a number of significant milestones right from its inception. With
a steadfast focus on the 18–35 year-old prepay segment, by June 2001 it had captured more than
one million customers, making VM the fastest (among the major UK mobile communications
providers) to have achieved that milestone.

Within five years of launch VM had an active customer base of over four million and its customers
were found to be among the most-satisfied in the pre-pay sector according to surveys conducted
by J.D. Power and Associates. VM had also been included in ‘The Sunday Times 100 Best
Companies to Work For’ and was part of the FTSE4Good. The company had been recognized as
the most admired brand in the UK with a distinct customer proposition and market positioning.a
VM believed its strong growth had been driven by its brand and differentiated approach to the
market. The brand was consumer rather than technology-oriented, and this strategic message
had remained consistent with the same core management team in place since inception in 1999.

But despite VM UK’s success, the mobile telecommunications market in the UK was undergoing
profound transformation. Tom Alexander, CEO of Virgin Mobile in the UK reflected on these
changes and asked himself if Virgin Mobile’s niche strategy could be sustainable in the future, or
would the company need to adopt a different strategy to survive and thrive in the dynamic
market environment?

a
According to research conducted by HPI Research.

This case study was written by Jamie Anderson of TiasNimbas Business School and Martin Kupp of ESMT
European School of Management and Technology. Sole responsibility for the content rests with the authors. It
is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective
handling of a management situation.
Copyright 2009 by ESMT European School of Management and Technology, Berlin, Germany, www.esmt.org.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording,
or otherwise - without the permission of ESMT.
ESMT–309–0094–1 Virgin Mobile UK

The Virgin Group

The Virgin Group Ltd (VG) consisted of many separately run companies united by the Virgin brand
of British celebrity business tycoon Sir Richard Branson. VG’s core businesses were travel,
entertainment and lifestyle. Virgin was one of the UK’s best known consumer brands, associated
with excellent service and having the consumers’ interests at heart. In the words of Richard
Branson: “I look for opportunities where we can offer something better, fresher and more
valuable…I think one of the reasons for our success is the core values which Virgin aspires to. This
includes those that the general public thinks we should aspire to, like providing quality service.
However, we also promise value for money, and we try to do things in an innovative way, in areas
where consumers are often ripped-off, or not getting the most for their money. I believe we
should do what we do with a sense of fun and without taking ourselves too seriously, too! If Virgin
stands for anything, it should be for not being afraid to try out new ideas in new areas.”

Although Branson retained complete ownership and control of the Virgin Brand, each of the
companies operating under the Virgin brand was a separate entity, with some being wholly or
partly owned by Branson. Occasionally, Branson licensed the brand to a company that had
purchased a division from him, such as Virgin Radio (now part of SMG plc) and Virgin Music (now
part of EMI). With a few exceptions, all the companies began as wholly owned Virgin subsidiaries.
By end 2004, there were 42 Virgin-branded companies listed on the group website. Virgin
businesses numbered around 275 in all.

Virgin Mobile UK was floated as a joint venture between Virgin and T-Mobile in 1999. In January
2004, in connection with the settlement of various disputes involving VM, T-Mobile and certain
Virgin Group companies, Virgin purchased out T-Mobile’s stake in VM, and later in the same year
Virgin Group sold part of its stake in VM, offering 62,500,000 shares through an Initial Public
Offering (IPO) priced at 200p. VM's shares were listed on the London Stock Exchange on 26th July
2004 and subsequently included in the FTSE 250 index.

Virgin Mobile UK was not Virgin’s only venture into mobile telecommunications. The company
made an attempt to launch Virgin Mobile in Singapore in 2001 in partnership with Singapore
Telecom, but the company was only able to acquire 30,000 customers before shutting its doors.
Although both partners had agreed that the Singapore market had been too saturated too sustain
a new entrant, some analysts believed that Virgin’s hip and trendy positioning had failed to
connect in the Singapore market. Virgin Mobile USA and Virgin Mobile Australia had been
altogether more successful ventures by late 2004, and Virgin Group was preparing to enter South
Africa.

The UK mobile communications market

The UK mobile industry had exploded since the turn of the millennium, and by mid 2005 growth
in the UK mobile industry continued to exceed expectations, due to increased consumer adoption

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of multiple devices, the ongoing structural shift from fixed to wireless, and increasing adoption
of new services.

Penetration of mobile phones in the UK (measured in SIM connections) crossed 100% as early as
mid-2004. But favorable factors and ongoing technological advances were expected to continue
to deliver growth that outpaced average economic growth. While the UK market was
competitive, growth prospects remained promising. Total UK wireless minutes increased by 16% in
2004, but only 29% of the UK’s outbound voice traffic was carried over wireless networks in 2004,
up from 26% the previous year.

The four main established competitors (Vodafone, Orange, O2 and T-Mobile) had largely avoided
head-to-head price competition, competing more on dimensions such as coverage, quality,
service and value added services than on winning market share through price wars (see Exhibit 1
for UK market share breakdown). Ofcom, the UK telecoms regulator, tracked UK mobile price
trends on a long term basis, and its research indicated that mobile pricing in both the prepay and
contract markets had remained remarkably stable over the period 1999–2004, despite the
presence of five service providers. In terms of market share, between 1999 and 2004 the UK
market had been almost evenly divided amongst the four major operators, with virgin
representing a distant fifth place with approximately 8% market share at the end of 2004. This
competitive situation had provided Virgin the opportunity to position itself as not only a strong
brand experience, but as a value leader as well.

In the past operators had focused on new customer acquisition, with subscriber growth typically
translating into growth and profitability. But during 2004 the majority of new customers—up to
90%—were coming from the prepaid segment, and the major operators had turned their attention
to managing customer contribution. The critical drivers were average revenue per user (ARPU),
subscriber customer acquisition costs (SAC) and churn (the number of customers lost each
month). For the year ended March 2005, the UK market added only 7.3 million new net
subscribers, but churn was 17.2 million, implying a 24.5 million pool of gross additions. As UK
penetration reached maturity and new net additions slowed, the incumbent operators were
expected to look much harder at their own levels of churn as a way of slowing subscriber losses.
Many had indicated that this would be a key focus during 2005, particularly O2.

As in other developed markets, the UK mobile market had traditionally been segmented into
prepaid users, postpaid customers and corporate/government and small and medium enterprises
(SME) customers. The prepaid segment continued to grow, but operators had little knowledge of
their prepaid customers compared with contract, and customer churn remained high. On
contract, the big four network operators, according to analysts, made at least 65% of their total
EBIT, off 34% of their customers, as the higher ARPU generated far higher actual profit.

Despite lower ARPUs prepaid had several advantages compared to contract, such as: higher
average per minute charges; reduced credit risk; and lower administrative costs with no itemised
bills. As long as mobile phone subsidies were kept reasonable in the prepaid segment (ie, about a

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three-month paybacks versus three years for contract), prepaid could be very profitable for
operators. Vodafone and O2, with their large contract subscriber bases, derived 25% and 33% of
their respective service revenue from the prepaid segment by the end of 2004. The corporate
segment was very attractive, but costly to serve. Voice and SMS had been very profitable services
for operators, and mobile data services were considered promising but still at a relatively low
level of adoption.

More broadly, the mobile industry was facing a significant technological and competitive shift -
industry analysts had long talked about the ‘convergence’ of media, fixed and mobile telecoms,
and by early 2005 several telecom operators and media companies across Europe were racing
towards integrating media offerings with cable, fixed and mobile networks. The primary goal of
this service convergence was the concurrent delivery of all media types—voice, data, and video—
to an easy-to-use graphical user interface, independent of location. The related goal of network
convergence was to make all services profitable and enable multiple business models. This fixed-
mobile convergence (FMC) involved a unified core network, multi-radio terminals as well as other
terminal devices such as PCs or digital televisions, access networks that complemented each
other and common multi-access service delivery platforms. Some UK mobile operators such as
Vodafone were rumoured to be in the market to acquire fixed-line assets to deliver FMC services,
while some media and cable companies such as NTL-Telewest (the UK’s largest provider of
consumer broadband and second largest provider of consumer fixed-line and pay TV services) had
declared their interest in merging with or allying to mobile companies.

Virgin Mobile business model

Virgin Mobile UK operated as a mobile virtual network operator (MVNO) and provided cellular
services without owning spectrum access rights. To customers, Virgin looked like any other
cellular operator, giving the impression of a full-fledged mobile operator. But the company did
not own or operate base station infrastructure. Speaking about Virgin’s entry to the UK mobile
phone industry in 1999, Richard Branson declared: "If you can run one business well you can run
any business. There just needs to be a crying-out need for you to enter the marketplace. The
time to go into a business is when it's abysmally run by other people... There is no reason we
can't offer anything that a company like Vodafone can…We will by no means be as big as them,
but we will have a slice of the market.''

Being an MVNO, VM needed less capital. The company did not have to invest in network
hardware. Because of its partnership with T-Mobile, it already had access on long-term
contractual terms to billions of pounds’ worth of state-of-the-art mobile network assets. The
company enjoyed the scale benefits of the network operators, without the associated investment
and technology risk.

Although other incumbent operators could realise the benefits of scale once their large fixed cost
base was covered, VM had a very low fixed cost base compared to traditional MNOs – for

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example, capital expenditure (CAPEX) as a percentage of earnings was just 2.1% for the year
ended March 2005. Therefore, assuming constant service gross margins, the key factor to
ensuring incremental value was acquisition costs. Even a prepaid subscriber spending £10.5 per
month could contribute value to VM.

Although VM and T-Mobile did not disclose their contractual agreement, it was believed that VM
paid 2.9p per minute for outbound voice traffic and one pence per SMS carried on the T-Mobile
network. Estimated gross margins for outbound Virgin mobile voice and SMS traffic carried over
the T-Mobile network were estimated at 57.1% and 73.3% respectively for the year to March
2005. T-Mobile passed through all inbound interconnect charges received from third parties in
respect of inbound calls, or messages sent, to Virgin customers.

For T-Mobile, the main benefit of the partnership with Virgin was to tap into consumers with
whom it had a low brand affinity, therefore having a low risk of self cannibalization, and to
maximize utilization of its network capacity thereby achieving greater economies of scale.
Intriguingly, in 2000, T-Mobile UK was voted as having the worst network quality, and in the same
year Virgin Mobile was awarded best network quality. In January 2004, Virgin Mobile secured
access to T-Mobile’s network for a further 10 years, including 3G network access. The agreement
not only covered existing voice and non-voice services using GSM, but also future data services
(with a three-month delay to T-Mobile launch) using GPRS (2.5G) and UMTS (3G) including
roaming on O2’s 3G network. The agreement did not include other services such as WiFi or access
to T-Mobiles portal t-zones.

Unlike most other competitors, VM’s business model was designed for a very specific group of
customers—the Virgin brand targeted the ‘youthful’ or ‘young-at-heart’. Many surveys and awards
(OFCOM, J.D. Power, HPI Research, Mobile Choice magazine) highlighted the attractiveness of the
VM brand and services to these customers, and by 2005 approximately 50% of the VN customer
base was aged 28–34. Analysts believed that the success of Virgin’s MVNO model depended on
three core competencies:

 The ability to leverage an existing customer base to acquire customers at a lower cost
than the competition. Virgin had acquired prepaid customers at significantly lower
subscriber acquisition cost than the four established mobile network operators during
the period 1999–2001.
 The ability to reduce churn rates through brand loyalty, excellent customer service and
new “sticky” services. VM reported the lowest industry churn at 17.5% for 2004 versus
the average contract churn of 25% and average prepay churn of 33% at the two listed
operators, O2 and Vodafone. These numbers showed the incumbents focus upon post-
pay retention over prepay, which had been positive for VM.
 The ability to create new revenue streams by penetrating its niche segment, leveraging
new distribution channels with innovative and more targeted value propositions.

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ESMT–309–0094–1 Virgin Mobile UK

VM firmy believed that the key to delivering a truly unique customer experience was customer
service, and the company’s management believed that superior customer care was the most
important aspect of VM’s operations. In the words of Tom Alexander:

There’s no great mystery to Virgin Mobile’s approach. We are a marketing and service
business: we focus on customers, not engineering; we focus on the brand experience,
not technology. We give our customers what they want—not what’s easiest for us to
provide. And what our customers want is exactly what we stand for: value for money,
outstanding service, great products and a sense of fun…Because we’re not a network
operator, we’re free to focus on people, not hardware. We focus on our own people,
through our singular Virgin Mobile culture; and we focus on our customers, by providing
them the best customer service in the business…Attention to the needs of our
customers—in our role as the Consumer Champion—is at the heart of everything we do.

Alexander believed that there were five key areas that best illustrated how Virgin’s business
philosophy set it apart from the competition. In his own words:

 At our company, as well as in our marketplace, we focus on people, not just numbers.
We have a singular company culture, fuelled by excitement and passionate
commitment. We believe our people should always come first: happy staff treat
customers well, which helps to grow the business, creating shareholder returns. Simple.
 The Virgin brand gives us a prominent profile in a crowded marketplace. The strong
heritage and reputation of our brand is a powerful competitive advantage, and our
distinctive approach to advertising, packaging, point-of-sale marketing and sponsorship
has won many fans.
 Our products are innovative and industry-defining. We give our customers exactly the
features and functionality they want, because we listen to what they have to say and
tailor our offer accordingly. We’ve worked hard to make our service easy to sell, easy to
buy, and easy to use.
 And we back everything up with market-leading, award winning customer service.
 We have a different business model, which provides scalability and high cash returns in
an industry traditionally characterised by accelerating capital investment. Our low-cost
business model gives us a solid foundation of consistent profitability from our existing
base, while being flexible enough to accommodate new and exciting areas of growth
with minimal investment.

Product
VM’s saw itself as the ‘Consumer Champion’. In the words of Virgin Mobile UK CEO Tom
Alexander: “We believe in putting consumers first by making our offer as clear and
straightforward as we can. We believe that offering exceptional value isn’t just a question of
money; it’s also about making life simpler”. Virgin prided itself as having no-hidden costs as part
of any of its offers.

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Virgin was the first operator in the UK to abolish peak rates, the first to offer free voicemail, as
well as the first to offer prepay airtime bundles where unused minutes rolled over to the next
month. The other mobile companies had followed later. VM’s standard pay-as-you-go tariff,
‘Flex’, let customers top up when they needed to with vouchers that never expired (while
connected to the network)—or they could use e-top ups, credit or debit cards. Customers were
also offered the option of paying by direct debit each month. Customers were provided with
many ways to run and pay for their account with Virgin—but all options provided the same core
tariff structure.

Customers could join network via a SIM card only starter kit starting at £10, including £5 of
airtime. VM also offered an extensive range of stylish mobile phones—many included cameras and
music players—at reasonable prices. In October 2004 Virgin revamped its handset portfolio and
strengthened its high-end handset range in an effort to attract high-usage customers. The
company offered nineteen different phones, giving it the widest handset portfolio amongst UK
mobile service providers—in comparison Vodafone offered just eight handsets.

Virgin did not require customers to take out a contract to get a mobile phone, and it was the first
operator in the industry to offer monthly installment plans to pay off a handset—more like
consumer financing than a subsidy. If consumers chose to leave the Virgin network before paying
of their mobile phone, they only needed to pay-out the remaining amount owing—there was no
contractual lock-in. For every £100 spent on calls and messages Virgin offered £10 off a new
phone. Customers could earn up to £100 off any new phone in the company’s range. Recognizing
that theft of handsets was a problem, particularly amongst its teen consumers, Virgin offered
theft insurance as part of its mobile phone offers.

Virgin packaged its products in simple but brightly colored boxes and consumer-electronics type
packaging, and instead of being locked away behind a counter product bundles were stacked in
position ready to be taken away by customers without needing a salesperson to help them.
Everything was provided in the ‘starter-pack’ boxes to allow the customer to register their SIM
card, without the need for in-store paperwork.

In addition to voice, text and handsets, virgin also offered value added information services.
Virgin Mobile Bites, launched in August 2004 gave customers a completely new form of
entertainment—bite-sized boredom busters delivered straight to their phones, any time, day or
night. Virgin Mobile Bites helped customers keep abreast of all the hottest celebrity gossip and
the latest stories and opinions from the worlds of music, entertainment and sport.

During late 2004 Virgin launched various customer-retention initiatives, such as:

 Big Bonus, whereby a customer spending more than £30 received a 10% discount in the
subsequent month;
 Flash it!, whereby for every £10 spent in a Virgin Megastore, customers received a £1
free airtime voucher, as long as they showed a Virgin mobile phone at the till;

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ESMT–309–0094–1 Virgin Mobile UK

Pricing
Compared to the tariff plans of the established operators which were complex and confusing to
many consumers, Virgin took a very simple and transparent approach to pricing. According to one
analyst: “The main operators in the UK seem to have the objective of confusing consumers at the
top of their agenda when designing their tariff plans. It is virtually impossible to compare prices
and plans across networks due to the dizzying number of plans on offer. Compared to these
tactics, the simplicity of Virgin’s tariffs come as a breath of fresh air.”

VM believed in giving its customers value for money in a transparent way. VM used ‘common
sense pricing’ structures such as its daily declining call rates, having the only prepay bundles that
allowed unused minutes to be utilized the next month. VM’s basic prepay tariff plan was as
follows:

 First five minutes of calls each day: 15p per minute

 Each minute after that: 5p per minute
 Text messages to Virgin Mobile phones: three pence per message
 Voicemail retrieval (provided airtime left): Free
 Calls to other UK networks: 35 p per minute
 Text messages to other UK networks and BT landlines: 10p per message
 Picture messages to all UK networks: 30 p per message
 Virgin Mobile Bites - free to explore for 30 days. After that, a flat rate of 30p per day. If
not used, no charge applied. WAP chat and downloads costs extra -0.5p per Kb

Virgin Prepay Bundles were launched in October 2004 and started at £7.50 for 40 minutes’
airtime or 100 texts (or 20 minutes and 30 texts off-net), up to £24 for 200 minutes or 800 texts
(or 100 minutes and 200 texts off-net). Prepay bundles targeted customers who made a high
number of calls to other mobile networks, and were up to 70% cheaper than Virgin’s standard
prepay tariff if customers used up a 400 minute bundle on off-network calls. If customers mainly
called friends or family on the Virgin network they were still better-off with Virgin’s standard
tariff package (see Exhibit 3 for a summary of the Virgin Bundles).

By March 2005 VM was cheaper by a significant margin than the four established operators, for
both standard prepay and bundled prepay offers. Vodafone was approximately 19.6% more
expensive than VM’s standard prepay tariffs, and O2, 14.4%.

Place
Effective and targeted distribution played a key role in VM’s success. In just 5 years, VM had built
a distribution network of around 6,000 sales outlets, with another 50,000 outlets selling airtime.

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VM capitalized on the value of the Virgin brand by putting dedicated Virgin Mobile “stores within
stores” inside 96 Virgin Megastores nationally, many staffed by dedicated, expert VM people.
Each store stocked the entire range of products. The store within a store concept proved very
successful, and VM introduced Virgin Mobile Stores into several WH Smith outlets.

There were a total of 104 Virgin Mobile Stores throughout the UK in 2005 where only Virgin’s
services were sold—this represented about one-third of some other operators. However, VM had
plans to increase the number of direct outlets in line with growth in the Virgin Megastores. Virgin
Mobile Stores were designed to offer customers a unique experience—as the perfect environment
to showcase VM’s products and services. Customers were made to feel relaxed and staff made a
point of being friendly but not ‘salesy’. VM’s in-store ‘experts’ were trained to be open, honest
and knowledgeable, and to help bring Virgin Mobile to life. Customers could try before they
bought a phone to see if the phone was right for them; they could set up Bites or Bundles, and
self-service interactive kiosks showed customers the range of VM products and services on offer.
According to Tom Alexander: “We hand-pick our Virgin Mobile Stores staff. They’re warm and
friendly, they always give their best, they like talking to people… and we’re proud of them!” In
the words of Rebecca James a VM customer from London: This is the first time I have been so
impressed by a company’s shop that I’ve had to write and tell them about it. Fantastic!” (See
Exhibits 4 and 5 for images of Virgin Stores).

VM services were also available in specialist mobile retailers such as Carphone Warehouse,
Phones 4U and The Link. Virgin also innovated by being the first mobile company to offer its
products through such well-known high street stores as Woolworths, Comet, Argos, Sainburys,
Tesco, and Asda. The high street channel was particularly attractive for Virgin as these retailers
typically charged lower commissions than traditional industry channels. Encouraged by the
success of the Internet-based marketing initiatives, VM had also invested to grow this cost-
effective distribution channel. Virgin was also planning concession outlets within specialty retail
stores to further strengthen Virgin’s High Street presence.

VM’s extensive use of retailers was an important difference between its distribution approach
and the approach of the established mobile network operators. For example, O2 reported 40–50%
of its sales were attributable to its owned retail channels, while for VM this number was only
22%. Mobile retail specialists (Carphone Warehouse, Link and Phones 4U) accounted for
approximately 42% of new VM customers.

In 2004–2005, VM continued to expand its distribution network.

 The total distribution network was expanded by 20%, adding products to approximately
1,000 new outlets. VM products were made available from approximately 6,000 outlets
throughout the UK.
 Total number of VM Stores had gone up to 104, from 85. This phase of the VM Store
rollout was complete, with ongoing opportunities for further expansion as the Virgin

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Megastores network grew. VM’s Stores continued to be a very effective distribution

channel for VM, attracting high value customers.
 The VM Store concept was expanded in October 2004 with a pilot at eight WH Smith
locations. VM would continue to explore opportunities to further expand the VM Stores
on the high street.
 VM established an independent dealer network of 600 outlets, supplied through a
number of distributors and began to distribute products to dealers directly. This new
channel had made a significant contribution to connections.
 The Internet formed a very effective distribution point for VM. Various Internet-based
marketing initiatives during 2004–05 were very successful, and VM intended to continue
to develop this cost-effective distribution channel. Customers could recharge, but and
activate online.

An essential component of VM’s brand strategy was to provide superior customer service. VM
consistently received the highest ratings in the UK mobile market for its customer care.

VM achieved the highest customer satisfaction rating in the prepay market in the JD Power &
Associates survey for 2004 and 2005, the first two years of inclusion. Customer service rating in
the survey was substantially ahead of all of its competitors. VM also won Best Customer Service
for the fourth year in a row at the Mobile Choice Consumer Awards 2004.

Promotion
The Virgin brand was widely perceived to be stylish, provocative and irreverent—a true original.
But it was also well established, and had an aura of strength and credibility. It had a tremendous
market heritage. People of all ages responded to it. VM spent only €23 million (4.4% of sales) on
advertising and marketing during FY2004. Whereas, Vodafone spent €990 million during the same
period.

VM won a number of marketing awards, demonstrating its brand’s effectiveness:

 The top Gold Award at the IPA Advertising Effectiveness Awards 2004
 Best Ad Campaign for ‘Idle Thumbs’ at the Mobile Choice Consumer Awards in October
2004.

VM used high-profile sponsorship to remain in the public eye. It focused on music and sports in
line with the Virgin brand: dynamic and exciting, and which created opportunities for bright new
talent. VM was also supporting a British Superbike team and the R6 cup, which was designed to
find and promote young, up-and-coming talent to the main Superbikes circuit.

VM Louder was the name used for all music sponsorship activities. Every summer, hundreds of
thousands of music fans flocked to the VFestival, for which VM sponsored. During that time, VM

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had brought VFestivalgoers innovations such as ‘Text the Fest’ on the main stage screens, and
free beer for VM customers. Virgin Mobile customers were given preference for V Festival tickets
before they officially went on sale, and received exclusive invitations and free tickets to one off
gigs, shows and events (See Exhibits 6 and 7 for images from VFestival events). The company also
sponsored a UK-based motorbike racing team.

According to VM’s brand and marketing director, Andy Mallinson: “Salt and pepper, cheese and
tomato, ham and eggs—some things are just meant to go together. Our sponsorships focus on
activities that ideally complement our dynamic and exciting brand. From Superbikes to music
festivals we strive to connect with people with plenty of get-up-and-go. Our sponsorships focus
on music and sports—on activities which are entirely at home with the Virgin brand: dynamic and
exciting, and which create opportunities for bright new talent.”b

VM’s TV advertising had been recognized as amongst the most entertaining in the UK, and unlike
the frequently ‘broad-brush’ advertising of its competitors was completely targeted at the
company’s chosen segment. Virgin’s “The Devil Makes Work For Idle Thumbs” television campaign
won the 2004 Mobile News award for Best National PR/Advertising Campaign—an award also won
by VM in 2000 and 2001.

Organization and culture

VM employed talented, motivated people, irrespective of their age, sex, sexual orientation,
physical abilities or religious beliefs. An important recruitment channel for the company was its
own website, and many of its employees had become aware of the company by being Virgin
Mobile customers.

Virgin Mobile believed in clear communication and consultation with employees on matters that
affected them—from the working environment to the company’s performance. An Employee
Forum that consisted of elected employees represented the concerns and interests of staff to
management. Employee satisfaction surveys were conducted twice a year, with over three-
quarters of employees regularly reporting that they found the work atmosphere ‘upbeat’ or
‘pretty good’. VM regularly featured among the top places to work in the UK, and in 2005 was
included in The Sunday Times Top 100 Best Places to Work in Britain.

VM emphasized a “jeans and T-shirt” culture. There was a rack by the elevator banks where
visitors were asked to deposit their ties. VM had a roughly 50:50 male to female split and ages
ranged from early 20s to over–40s. Staff was allowed to wear casual clothes and music could
often be heard playing in the office. There was a great sense of respect for the workers.

In July 2004, when VM was floated, the company gave all eligible Virgin Mobile employees shares
in the company. The company ran a scheme that made it easy for any new Virgin Mobile

b
Empower staff, leave them alone, and get results, B&T, June 25, 2004.

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ESMT–309–0094–1 Virgin Mobile UK

employee to become a shareholder in the company. ‘Save As You Earn’ enabled employees to
make regular savings with an option to buy shares at the end of a three year plan.

All employees received a free Virgin Mobile phone as a matter of course; and all are members of
the Virgin Group Tribe scheme, which offered a range of discounts on products and services from
across the Virgin Group, as well as other organisations. Virgin offered three additional days
holiday after three years’ service and after one year, people were entitled to take a three month
(unpaid) break. Virgin encouraged its staff to get involved in charity and community work, and
provided an additional five sabbatical days each year for employees to take at their discretion.

VM kept employees updated regarding its operational and financial performance. The CEO wrote
a letter to employees about the company’s results. Employees were encouraged to discuss
company strategy, results and goals at staff conferences and through other communications. The
annual staff conference was part work, part fun, and included a strategy briefing and Q&A with
top management, where staff had the chance to quiz the executive team on anything and
everything. This was followed by a weekend-long party where VM people could celebrate with
each other, their family and friends.

“It’s the little things that make it worthwhile working here, like receiving a Christmas card from
Richard Branson—it makes me feel valued by the whole company.” Laura Coggins, Team Manager
& Customer Service Specialist.

VM did not have a layered management system and so had quite low staffing levels. Hence
people had greater responsibility and accountability, and put in longer hours. According to Andy
Mallinson: “The most important thing is that we empower people to do the job, we give them the
tools to do the job properly and just let them do it….we’re not looking over their shoulders all
the time.”c VM operated a ‘thank you’ scheme called ‘SHOUT!’, which lets its people nominate
colleagues who had done a particularly good job. These exceptional employees were eligible to
win a European weekend city break every month.

Mallinson remarked: “The first step was to make sure employees were provided with a good
package and a decent wage. But beyond that what makes a great employer is what you add on
top of that. We have a great culture in our company where we have huge respect for the
individual. We have fun and we don’t work in a culture of blame”. Branson had always
maintained that if the staff were looked after, they would do a good job, leading to satisfied
customers and happy shareholders. In his own words: “Convention dictates that a company
should look after its shareholders first, its customers next and last of all worry about its
employees…Virgin does the opposite. For us employees matter most. It just seems common sense
to me that if you start with a happy, well-motivated workforce, you're much more likely to have
happy customers. In due course the resulting profits will make your shareholders happy.”

c
Ibid.

12
Virgin Mobile UK ESMT–309–0094–1

The competitive environment

Virgin Mobile had carved out a highly differentiated niche in the UK mobile market during the
first five years of its existence. While its main rivals had attempted to serve a wide range of
customer segments with broad product and service portfolios, Virgin had remained highly focused
on its target customer segment. But by early 2005 some analysts were questioning the
sustainability of Virgin’s strategy in the face of a number of new developments.

EasyMobile
The most tangible example of higher competition in the UK had been the launch of EasyMobile, a
50:50 JV between EasyGroup and TDC, a Danish network operator that had been challenged by
low-cost MVNO’s in its home market. VM’s share price fell 15% within days of the EasyGroup
announcement of its intention to launch a mobile offer.

EasyMobile was based on a concept pioneered by no-frills MVNO Telmore in Denmark. Since its
inception in November 2000, Telmore had captured 9% of the total mobile telephony market in
Denmark through a simple, transparent and low-cost internet-only model that had proved a big
hit with customers. It had led a massive price decline in mobile prices, with charges for voice
calls dropping 54% in 2003 alone. By early 2004 Telmore had reached 500,000 customers to
become the fourth largest mobile operator in Denmark. The basic elements of Telmore’s
approach that were to be replicated by EasyMobile were as follows:

1. Uniform product for all

 no handsets, only SIM-card provided

 no subscription fee
 one tariff all the time
 no portal or complex multimedia services

2. All interaction via the Internet or over the mobile phone via SMS

 adding on/canceling services

 recharging account/call specifications/balances via text messages
 self service FAQ/trouble shooting
 minimal telephone service

3. Low cost operation

 no network infrastructure
 no high-street shops

13
ESMT–309–0094–1 Virgin Mobile UK

 flat organization with few employees

 minimal marketing budget
 all subscribers pre-pay

EasyMobile launched in March 2005 with aggressive headline tariffs for the first three months,
offering customers six pence per minute (ppm) for all calls (to fixed or any mobile), and two
pence for SMS (again both on or off-net). From June, EasyMobile indicated that calls would move
back to the original levels of 15ppm for all mobile and fixed calls and 6p per SMS.

Carphone Wharehouse Fresh

Following EasyMobile’s launch one of the UK’s biggest mobile retailers Carphone Wharehouse
reduced tariffs on its own MVNO Fresh to make them mildly cheaper than those offered by
EasyMobile. The highlights of the new tariff included: Off-net mobile calls 5p per minute
(compared to 35p per minute on VM standard prepay tariff). This was expected to move back to
15p per minute in mid-June. All SMS 1.7p per text (compared to off-net SMS 10p on VM, on-net
3p). This was expected to move back to 5p from mid-June. Fresh had acquired approximately
150,000 customers by March 2005. Like Virgin Mobile, Fresh utilised the T-Mobile network.

Hutchison ‘3’
In addition to the new pricing pressure from EasyMobile’s arrival and aggressive tariffs from
Fresh, the UK market was being impacted by the aggression of new entrant ‘3’ and the
emergence of Tesco Mobile. ‘3’s marketing campaign began in January 2003, with an initial
launch plan to set brand credentials. Coverage was 40–45% at launch, rising to 60–70% by the end
of the year. Outside of 3G coverage areas ‘3’ had 2–2.5G national roaming in place with O2. The
company focused on lead services such as Video Telephony and Football clips in the run-up to
network launch on March 3. Industry commentators believed that the initial campaign provided
poor positioning, and unclear brand values. Much of ‘3’s initial advertising was mixed in terms of
look and feel and key messages, and consumer uptake was slow. But perhaps the biggest
hindrance to adoption was price—few customers required more than the 200 to 500 minutes
offered by the top-end packages of competing carriers, and these deals were offered at a price
that was 30–40% cheaper than the initial ‘3’ base package. Customers also appeared to be
unwilling to pay extra for added services that were perceived to be not much different (perhaps
with the exception of video messaging) to services offered by competitors such as Vodafone live!

In an effort to boost ‘3’ UK’s poor performance the company executed a strategy review and
turn-around plan. The company slashed its tariffs to levels that were significantly below Virgin,
traditionally the lowest in the UK market. The company launched a new advertising campaign
that focused heavily on the new ‘3’ value proposition—voice calls at only 15p per minute, and ‘no
minimum contract’. From late 2003 ‘3’ also began offering free phones with some offers, and

14
Virgin Mobile UK ESMT–309–0094–1

launched an offer of 100 voice minutes per month for only £15. It appeared to industry observers
that the new tariffs represented cuts beyond the break-even level, and were clearly designed to
deliver a user base as rapidly possible, in the hope that use of its services would grow rapidly and
compensate. It seemed that 3 UK was betting everything on growth over a 12–18 month horizon.

Combined with improvements in network coverage, 3’s realigned strategy had an immediate
effect. The company started to see its market share grow rapidly, although from a small base.
Given that the company was able to offer customers larger and larger bundles of minutes at very
low marginal cost, it aimed to compete head-on with the incumbent providers on price. By mid
2004 ‘3’ was adding over 60,000 new customers per week, and by mid 2005 reported a customer
base of 3.2 million. ‘3’ believed that it would hit the 4 million customer mark by the end of the
year.

Interestingly the company had been able to rebuild its brand as a technology innovator, and was
seeing increasing uptake of its value added services by subscribers. There had been a clear
change in the skew of the company’s UK growth towards prepay, with 68% of the net growth in
the UK base in the year to March 2005 coming from prepay subscribers. The company was
continuing to target high-end prepay users with big yield discounts—more than 50% depending
upon the bundle.

Tesco Mobile
Tesco Mobile, a 50:50 JV with O2 had shown significant customer momentum since launch in late
2004, with an estimated 750,000 customers signed up by mid 2005. Tesco had used its distribution
power to target the family segment of prepay, with the main value proposition being one of
simplicity with flat rates per minute and no differentiation between peak and off-peak usage.
Since Christmas, Tesco had doubled the space given to its MVNO offering (though retaining the
space given to rival offerings). Together with an improved range of handsets and a new pricing
offer, Tesco had seen sustained growth and boasted of a target of up to 2 million customers
longer-term. The main features of its tariff offer were:

1. All mobile calls 20p per minute

2. All calls to fixed line 20p per minute
3. All SMS 10p each
4. Scheme to allow half price (at 10p per minute) calls to three favourite phone numbers
(fixed or mobile).
5. Family and Friends number offering.

A proven non-food retailer with growing share of the Electronics market, Tesco’s mobile growth
was being closely monitored by industry analysts, particularly with O2’s 50% share and continued
Chairmanship of the venture.

15
ESMT–309–0094–1 Virgin Mobile UK

Reactions of existing competitors

The established operators had not sat still in the face of actions by companies such as ‘3’ and
Tesco. O2 had won significant prepay market share in 2004–05 with new bundled offers—adding
1.1 million new customers (785,000 prepay and 335,000 contract) over a twelve month period.
Orange also launched a series of special promotions in 2004 based around ‘tailor-made’ monthly
programs, while Vodafone had launched a concerted marketing campaign to target what it
described as the ‘young, active, fun’ segment via its Vodafone Live! Portal, new prepay packages
and a marketing campaign with British footballer David Beckham. T-Mobile UK had been working
to increase its store base, build brand and grow customer acquisition through a more aggressive
approach to the market. All of the established operators had focused on reducing prepaid
subscriber acquisition costs, and by 2004–2005 Orange and O2 had achieved SACs that were
significantly lower than Virgin (see Exhibit 8), whereas Vodafone and T-Mobile were roughly on-
par.

Impact of intensified competition upon Virgin Mobile

In the face of intensified competition, VM’s percentage share of prepay net adds had slowed
since the highs of 2003/04, and had become far more erratic (see Exhibit 9). By March 2005 VM’s
voice pricing was still cheaper by a significant margin than for the four established operators.
Vodafone was approximately 19.6% more expensive than VM, and O2, 14.4%. But Fresh,
EasyMobile and Tesco were all significantly cheaper using the same usage assumptions. For
instance, both Fresh and EasyMobile were 62.6% cheaper than VM, whilst Tesco was 20.1%
cheaper. ‘3’ was 27.9% cheaper than VM for usage alone. The level of competition for SMS traffic
had also become much more intense. While VM’s pricing for on-network SMS at 3p per text had
been industry-leading up until mid 2004, its off network charge of 10p per text was relatively
expensive. During late 2004 other operators launched SMS buckets that, assuming full usage,
offered texts on and off network for about 3–4p per text.

Perhaps not surprising given this intense competition, VM stated in early 2005 that advertising
and customer acquisition and retention costs would rise in 2005, and guided EBIT margins
downwards. But Tom Alexander was bullish about the future:

While new entrants continue to come into the marketplace, Virgin Mobile’s performance goes
from strength to strength. Success in the UK mobile market is based on a combination of factors,
rather than on price alone. As markets mature, our key strengths—great customer service, deep
consumer insight and a strong brand image—are increasingly powerful differentiators.”d

d
Virgin Annual Report 2005, 21.

16
Virgin Mobile UK ESMT–309–0094–1

Virgin Mobile’s profitability

VM’s financial and operating performance to March 2005 represented the fifth successive year of
double-digit revenue and EBITDA growth for the business. While revenues had grown from £76.2
million to £521.3 million over the previous five years, profit margins had also expanded, with
EBITDA margin reaching 19.2% in 2005, and operating free cash flow margin reaching 16.2%. In
the 2005 financial year ended March 31, Virgin grew its active customer base to over four million
Meanwhile service revenues grew by 16.2% for the year. These gains reflected an increase in
market share in both customers and revenues—all with a minimum of investment. As Virgin had
grown it had been able to keep its operating costs flat, driving down average cost per customer
by 23% while maintaining the best customer service in the industry. The company’s ability to grow
with minimal investment resulted in operating free cash flow of £84.5 million, or a margin of
16.2%.

But despite these results, Virgin Mobile’s share price fell 7% on the announcement of its results as
the company indicated it saw competition in the UK mobile market continuing and a further
flattening of service revenue growth. Active subscriber additions were lower than forecast, with
the company adding 417,000 net additions in the Christmas quarter. However, taking into account
higher churn and a falling active subscriber proportion to 77.2%, Virgin Mobile only added 276,000
active net subscriber additions. This was around half the number of active net adds that Virgin
Mobile added in the December 2003 quarter. Interestingly, Virgin also seemed to be drifting from
its traditional positioning—by March 2005 more than 50% of the companies subscribers were over
the age of 35.

In addition to reduced additions, margins had been negatively impacted by two key
developments in the market:

1. Termination rate cuts: Termination rates were cut by 30% by the UK regulator in September
2004. This resulted in gross margin for inbound voice declining to 61.4% in the year to March 2005
from 68.5% in the year to March 2004.

2. Decreases in outbound voice and SMS yields: The trend of increasing bundling of minutes
and SMS by mobile operators negatively impacted Virgin’s per minute and per message yields.
Given that Virgin Mobile’s incremental cost of capacity was broadly fixed (rate payable to T-
Mobile), gross margin suffered as yields declined. Analysts forecast that outbound voice and SMS
gross margins would decline to 56.0% and 72.8% in the year to March 2006 from 57.1% and 73.3%in
the year to March 2005, but that this scenario could be worse in the case of a more extreme
competitive situation.

Due to its variable cost base, Virgin Mobile was much more exposed to a decrease in yields than
traditional network operators, and was also highly geared to a change in churn and SAC levels. A
change in competitive activity in the UK had the potential to significantly impact margins in
Virgin Mobile, as demonstrated in Exhibit 10. According to analyst Bear Stearns International:

17
ESMT–309–0094–1 Virgin Mobile UK

“We currently forecast an EBITDA margin of 19.6% in the year to March 2006, churn of 25%, and
SACs of £27 (£25 in year to March 2004). If SACs were to increase by £4 to £31, and churn from
25% to 30%, we estimate that margins would compress by 290 basis points to 16.7%.”

Despite the concerns of the analyst community regarding Virgin’s exposure to increasing
competition, VM’s Chairman Charles Curassa remarked: “Turning to the future, VM is very well-
positioned to continue to grow revenues and earnings. We expect further growth in the prepay
segment, through the development of new products, services and innovative distribution. We’ve
also broadened our offer to encompass new areas of the market—in particular the consumer
contract sector. These new areas offer exciting potential future growth prospects for the
Company.”

Moving forward
Without the concerns of network constraints, rollout and investment, Virgin mobile had
experienced success over the period 1999–2004 by leveraging its understanding of the consumer
and targeting the burgeoning prepay market. And CEO Tom Alexander believed that Virgin was in
a good position to continue its track-record of success:

We have enjoyed great success in the prepay market—and we’ll continue to do so. It
remains a constant focus. There is still plenty of growth to come, as we continue to
introduce innovative products that challenge market norms. Our superior customer
service, an essential part of our strategy, differentiates us from our competitors. We’re
confident these advantages will continue to attract customers away from our
competitors, while new services and technologies will help to increase the value of our
existing profitable base. We have a solid base on which to build. We know we can count
on our products, our proven commitment to customer service, and most of all, our
talented, passionate, dedicated people, to ensure that we continue to capitalise on the
many exciting opportunities the market offers.

But would Virgin Mobile be able to sustain growth and profitability given the changes underway in
the UK market by early 2005, or was it about to be overtaken by aggressive new rivals such as ‘3’
and Tesco?

18
Virgin Mobile UK ESMT–309–0094–1

Exhibit 1: UK Mobile industry market share, March 2005

BT Mobile 0.7% Fresh 0.2%
Tesco Mobile 1.1%
Hutchison UK 5.4% easy Mobile 0.0 %

Virgin Mobile 8.4%

Vodafone UK 23.1%

T-Mobile UK
(excl. VMOB) 17.9%

Orange UK 21.2%

O2 UK. 22.1%

Source: Bear, Stearns International Limited estimates.

Exhibit 2: UK operator customer survey

Virgin Vodafone O2 Orange T-Mobile 3 Tesco

Mobile

Signal coverage 7.50 7.20 6.70 7.40 6.70 2.50 8.70

Value for money 8.30 5.30 5.00 5.70 6.60 3.00 7.70

Overall value 8.00 6.00 4.00 5.00 6.00 2.00 6.00

Recommended 79% 56% 26% 46% 58% 16% 67%

Source: ABN AMRO, reviewcentre.com.

19
ESMT–309–0094–1 Virgin Mobile UK

Exhibit 3: Virgin pre-pay mobile bundles

Exhibit 4: Virgin Mobile store Exhibit 6: Virgin Mobile recharge at

VFestival

Exhibit 5: In store promotion Exhibit 7: Virgin Mobile angels

20
Virgin Mobile UK ESMT–309–0094–1

Exhibit 8: Virgin and competitor pre-paid subscriber acquisition cost

80

70

60
Prepaid SAC (£)

50

40

30

20

10

0
2000/01 2001/02 2002/03 2003/04 2004/05

Virgin mmO2 Orange T-Mobile

Source: ABN AMRO (Operator YE), company data.

Exhibit 9: Market share of prepaid net additions

100%

75%

50%

25%

0%

-25%

-50%
June 03 Sep 03 Dec 03 Mar 04 June 04 Sep 04 Dec 04 Mar 05
Virgin UK Vodafone UK Orange UK H3G UK mmO2 UK Tmobile UK

21
ESMT–309–0094–1 Virgin Mobile UK

Exhibit 10: Virgin Mobile: Impact of increase in Churn and SACs on March 2006
margins (forecast estimates)
15.0 17.5 20.0 22.5 25.0 27.5 30.0 32.5 35.0

21 24 23.3 22.7 22.1 21.5 20.9 20.3 19.7 19.1

23 23.5 22.8 22.2 21.5 20.8 20.2 19.6 18.9 18.3

March
25 23.0 22.3 21.6 20.9 20.2 19.5 18.9 18.2 17.5
2006
27 22.6 21.8 21.1 20.3 19.6 18.9 18.2 17.5 16.8
SAC(£)
29 22.1 21.3 20.5 19.7 19.0 18.2 17.5 16.7 16.0

31 21.6 20.8 20.0 19.1 18.3 17.5 16.7 16.0 15.2

33 21.2 20.3 19.4 18.6 17.7 16.9 16.0 15.2 14.4

Source: Bear, Stearns International Limited estimates.

Exhibit 11: Pre-paid subscriber growth, March 2002–March 2005.

70%

60%

50%

40%

30%

20%

10%

0%

2002/03 2003/04 2004/05

-10%

Virgin Virgin (active only) Vodafone O2 Orange T-Mobile

Source: ABN AMRO, company data.

22
Virgin Mobile UK ESMT–309–0094–1

Exhibit 12: Virgin Mobile revenue growth versus the market

18000 160%

16000 140%
14000
120%
12000
Revenue (GBP m)

100%
10000

Growth
80%
8000
60%
6000
40%
4000

2000 20%

0 0%
2000/01 2001/02 2002/03 2003/04 2004/05

Virgin Total market Market (total rev) Virgin (total rev)

Source: Virgin company data.

Exhibit 13: Virgin Mobile share price performance (p) 2004–2005

23
ESMT–309–0094–1 Virgin Mobile UK

Exhibit 14: Virgin Mobile UK financial results to 31 March 2005

24
Virgin Mobile UK ESMT–309–0094–1

Virgin Mobile UK financial results to 31 March 2005 (cont’d)

25
ESMT–309–0094–1 Virgin Mobile UK

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