Branson's pickle: Why has Virgin Mobile fallen from grace?

Just how did Virgin Mobile fall from grace? Once heralded as the model for a new type of mobile phone company, potential bidders for parent company Virgin Media are now evaluating a disposal of its mobile phones arm. The "virtual" operator's future as part of a converged communications provider is looking increasingly uncertain.

Virgin Mobile, one of the great success stories of the UK mobile phone industry, has had a turbulent time since it was acquired by NTL:Telewest - now rebranded as Virgin Media. The plan to integrate the fast-growing mobile operator into the cable operation to trigger a revitalisation of the enlarged company, has yet to bear fruit and a number of key management figures from the mobile side of the business have since moved on. What progress Virgin Mobile has made improving its profitability has been overshadowed by its parent's travails.

Virgin Mobile was acquired by NTL:Telewest in July last year for nearly £1bn, but the tie-up has yet to work out how either would have hoped. The strategic rationale for the deal was that consumers had become sick of paying multiple suppliers for similar communications services and that by adopting the Virgin brand, the enlarged business could better take the fight to competitors in the television and internet sectors.

The company launched its "quad-play" package last September, enabling subscribers to pay for mobile and fixed-line telephony services as well as broadband and cable television as part of one package. With the Virgin brand and the quad-play offer central to the strategy for reviving the struggling cable company's fortunes, Virgin Mobile looked to be in a strong position to enter a new phase of growth.

Yet when Virgin Media reports second-quarter results tomorrow, investors will inevitably focus on the cable company's performance in the television market as it continues to wage a war of words with arch-rival BSkyB. Virgin's progress in the broadband market will also attract interest with rivals BT and Carphone Warehouse making good progress and investors will also be alert to any comment on the potential sale of the cable company later this year. With so much going on, the performance of Virgin Mobile is likely to be largely overshadowed and the concern for Sir Richard Branson is that the Virgin brand has been damaged by Sky's aggressive marketing tactics in the television sector and the failure of the Virgin Media re-launch.

The mobile division's current low profile is a far cry from its reputation in the early part of this decade. The business was founded in 1999 by a group of businessmen, led by Tom Alexander, who struck a deal with Sir Richard to use the Virgin brand to launch the world's first "virtual" operator. The model was based on the assumption that Virgin would look after the customer relationship and lease capacity on another company's mobile phone network, in this case T-Mobile. The model was soon adopted across the world, enabling service providers to offer low-cost tariffs or to target niche customer groups.

Virgin Mobile quickly built a large customer base by targeting young mobile phone users with cheap pre-pay services. It became famous for its youth-oriented advertising featuring celebrities such as Busta Rhymes and Wyclef Jean in offbeat television spots and quickly built a four million customer base. Similar Virgin Mobile services have been launched in other markets including the US, Australia and Canada. After successfully listing the business in 2004, the company was soon snapped up by NTL:Telewest, a move that suggested the cable TV provider was keen to tap into the mobile company's growth potential. Only seven years after it launched, Virgin Mobile provided Sir Richard with the largest return on investment of any Virgin company.

Yet since its acquisition by NTL, Virgin Mobile's progress has been limited. Growth has stagnated with the company maintaining its customer base of 4.3m while the launch of mobile TV - Virgin Mobile's big-ticket event over the past year - proved a flop. In June, the company's top two executives - Alan Gow, who took over from Mr Alexander last year, and Joe Steel - exited the company they helped found. Despite its argument that it had abandoned its high-growth strategy in order to focus on more profitable contract customers, the perception within the mobile phone industry was that the company was in turmoil.

David Thompson, an analyst at Bryan Garnier, said that the Virgin brand has been damaged by the recent problems at Virgin Media and that the decision to acquire the mobile phone company should be questioned given that growth in the key 15-24-year- old customer segment has collapsed.

Enders Analysis has also put the issue of Virgin Mobile's progress into the spotlight, arguing that recent changes to the quad-play pricing could reduce take-up of the package to "a trickle," and represented "another nail in the coffin for the fixed-mobile convergence bandwagon".

Alan Gow, the outgoing head of Virgin Mobile, said that the company had not abandoned its growth ambitions but had been forced to adapt to a more competitive market landscape.

Mr Gow said that with around 10 per cent market share in the pre-pay market and only around 2 per cent in the contract market, Virgin Mobile still had substantial growth potential, particularly given Virgin Media's overall customer base of around five million homes. He said that the mobile operator would step up its growth strategy in the second half of the year, offering a free handset as part of its quad-play package, on a periodic basis.

Analysts remain hopeful that despite the overall company's problems, Virgin Mobile can regain its reputation as a growth engine. Graeme Oxby will replace Mr Gow in September and will look to revive the mobile operator's fortunes.

Is the Virgin brand in danger?

Sir Richard Branson has utilised the Virgin brand he launched in the 1970s to great effect, launching everything from cola drinks, music labels and transport services under the label. When he sold Virgin Mobile to NTL:Telewest last year, not only did he generate his largest return on investment, he also agreed a deal to rebrand the cable TV business under the Virgin banner. However, the unseemly spat with Rupert Murdoch's Sky has damaged the Virgin brand according to analysts. Yet it is not only in communications that Virgin has taken a backward step. Virgin Trains lost its Cross Country rail franchise last month while the company's Virgin Atlantic airline has become embroiled in the fuel surcharge price fixing scandal.