Virgin was the first high profile mobile virtual network operator (MVNO) success story. It has amassed some 4.1m active customers since launching in November 1999, making it the fastest growing network operator in the UK. Today, however, Virgin reported that customer numbers were growing at just half the rate they did this time last year (down from 150,000 net adds in Q2 2004, to 77,000 in the same period this year), revenue growth was lower than analyst expectations and average revenue per user (ARPU) fell 3.1% to GBP 123.

As an MVNO, Virgin differentiated itself in two key ways: pricing and experience. In fact, they made pricing part of the overall experience. By focusing on simple pre-pay tariffs and the association of the Virgin brand with honest, straight forward offerings in other areas, Virgin Mobile established a reputation for itself as a low-cost, easy alternative to the incumbent operators. This helped it gain a strong foothold among younger customers.

Everything about Virgin’s marketing is geared towards making users feel as if the company understands their lifestyle and is capable of offering products which match that way of life. Pricing is part of this, but brand positioning and the range of services available also play a major role.

However, the company now faces a significant challenge – one which will test how many of its users bought into the Virgin brand purely on the basis of price rather than lifestyle affiliation. As the Virgin Group seeks to leverage its media assets in the mobile space by promoting more data services, it will become apparent whether Virgin Mobile truly has a deeper connection with its users or whether they are simply relying on the MVNO as a source of cheap voice and text.

Virgin doesn’t release data usage stats as part of its KPIs, but the decline in ARPU could be a sign that this operator is just as sensitive to the increased competition in the market as the incumbents who own infrastructure – in a word, Virgin may be ‘maturing’.

Of course, the company paints a slightly different picture. It points to the fact that ARPU actually started to recover towards the end of the quarter and that most of the decline can be attributed to the implications of new Ofcom pricing regulations on interconnect charges. It’s clear, however, that the days of explosive growth are waning fast – in the UK at least (Virgin also operates in the US, Australia and Canada).

Virgin also launched a contract offering during the quarter, with the key differentiator being a pricing offer which provides a discount on line rental if the user chooses not to upgrade their handset at the end of their contracted period. The move to attract contract subscribers is intended to increase ARPU and the overall ‘quality’ of Virgin’s customer mix. However, it is questionable whether Virgin will attract anything other than price sensitive customers if its key differentiator is a cost saving for sticking with the same handset model – this will also slow the rate at which it can introduce advanced new data services.

Specialised MVNOs are lining up to enter the market now, both in the UK and worldwide. There is the Extreme Group (providers of the X-TV sports channel), Disney, MTV, EasyGroup and many others – all with a very specific target audience. The question is whether Virgin, the original pioneer of the MVNO model, will find these niche players start to undermine the marketing message which has served so well up until now?

I suspect Virgin will need to start segmenting its customer base much more deeply if it wants to re-ignite its growth engine. It may need to re-position itself to customers as a series of sub-MVNOs within its existing macro-MVNO architecture.

There are signs this may already be underway. Last month Virgin Mobile launched ‘Lobster’, a sub-brand for a range of customised handsets aimed at 16-30 year olds. The first device, the Lobster 485, is not wildly exciting from a technology point of view, but at GBP 89.99, it represents an affordable photo messaging device and is capable of accessing Virgin Mobile’s BITES data services. It remains to be seen whether future Lobster devices will fulfill the promise of Virgin’s sales and marketing director, Graeme Hutchinson, who stated: “They’re sexy, they’re sublime, and they’re affordable…the Lobster range will offer our customers the chance to stand out in a crowd, with unique handsets stacked with the latest technology that won’t break the bank.â€?

MVNOs will be a key topic for debate at the MEX conference, including how players throughout the value chain – from handset manufacturers to software platform providers – are respositioning themselves to offer a new class of MVNE (mobile virtual network enabling) services. See the full MEX agenda for further information.