Sam Best and sister Annie of Oklahoma check out Virgin Mobile USA cell phones at the Virgin Megastore in Times Square.
		By Todd Plitt, USA TODAY

All recently launched or announced mobile phone services that use the networks of traditional carriers. Others, including Walt Disney (DIS), Wal-Mart (WMT) and cable giants, are strongly considering jumping into the cell phone business. (Related story: Among new horses in the cell-service race)

While the mobile phone carriers are consolidating — witness Cingular Wireless' (BLS & SBC) pending $41 billion purchase of AT&T Wireless (AWE)— wireless resale is exploding.

AT&T said last week that it will resell Sprint's cell service. AT&T spun off its AT&T Wireless unit in 2001 but gets to reclaim the brand name for its resale offering after the Cingular deal closes.

In a few years, you'll be increasingly likely to bypass mobile-phone companies to buy your wireless service from your alma mater, department store or high-speed Internet provider.

Wireless resale is not new. MCI resold service until the business imploded in 2002 amid billing and customer service problems. TracFone, a unit of Mexican giant American Movil, is the biggest reseller, amassing 3 million prepaid wireless customers since 1996.

But 2004 "is becoming a breakout year" for resellers, says Adam Guy of research firm Compete. As mobile subscriber growth slows, traditional carriers want to boost revenue by merging or by tapping market niches that have resisted the lure of cell phones. Those include teens, seniors and low-income users.

"The low-hanging fruits are gone," says Yankee Group analyst Roger Entner. "To succeed going forward, you have to micro-segment very specific products to very specific customers."

Selling more while saving brand

Because the big wireless carriers are loath to muddy their mainstream brands or take on more fickle or lower-margin subscribers, some are wholesaling network services to niche players. For the carriers, the lower per-customer revenue is offset by no marketing and customer-service costs. A large carrier spends about $400 just to acquire a retail customer.

The wireless reseller, known as a mobile virtual network operator (MVNO), gains revenue without shelling out tens of billions of dollars to buy spectrum and build cell phone towers. TracFone became profitable last year, even as most major cell phone carriers were still losing money after a decade or more.

The prepaid wireless market, much of which is operated by resellers, is expected to nearly double to $6.8 billion by 2007, Yankee Group says.

Among the most ballyhooed MVNOs is Virgin Mobile USA. The firm teamed with Sprint, each chipping in about $180 million upfront for billing and customer-service systems and marketing. It began reselling Sprint's service in July 2002 to 11- to 24-year-olds.

"We said it was an under-penetrated marketplace with very unique needs," says Virgin Mobile USA CEO Dan Schulman. Teens lack a credit rating or access to a credit card and either can't sign contracts because of their age or don't want to get locked into plans.

So Virgin offered colorful phones and prepaid cards at retail stores. It offers calls for 25 cents a minute for the first 10 minutes and 10 cents thereafter. It pipes in hip-hop ring tones, MTV music snippets and news, and "rescue rings" that let teens set their phones to trill so they can escape dull conversations. Virgin advertises heavily on MTV and The Comedy Channel.

With 1.75 million subscribers, Virgin is the fastest-growing cell phone service and now among the top 10 overall. Yet Daniel Torras of Pyramid Research says it's vulnerable to entrants like Disney that "can kill Virgin quite quickly" with deeper ad budgets and brands.

Wholesale beats no sale

For Sprint, the most aggressive wholesaler, the setup has allowed it to fill unused minutes on its network. "If you've got a 10-bedroom house and the family is only using five, why not rent them out?" says Sprint President Len Lauer.

The company, he says, was struggling in the prepaid market because of customer turnover. Plus, he says, "Sprint has a lot of brand equity, and we did not want to take it down to the edgy feel needed to attract kids. We'd lose our brand appeal to 28- to 50-year-olds."

Yet analyst Pat Comack of Guzman & Co. says that by giving ammunition to its rivals, Sprint "is kind of shooting itself in the foot."

Sprint likely sells wholesale airtime to Virgin for 5 cents a minute, which marks it up to 10 cents to 25 cents a minute, Guy says. Average retail prices on traditional plans are 9 cents a minute.

But Lauer says Sprint, with a market share of 15%, was "not winning" most retail decisions. So of the increasing wholesale deals he asks, "Would you rather have one horse or four horses in the race?"