IF 2006 WAS THE YEAR OF THE LAUNCH for mobile virtual network operators, then 2007 has so far been the Year of the Crash.

The last few months have brought a screeching halt to the MVNO hype that dominated 2005 and most of 2006, when new players were gearing up, looking for investors and entering the market with commercial launches. Since late last year, the casualties have included Mobile ESPN, Amp’d Mobile Inc.—and now Disney Mobile.

“We are in a correction phase,” said Alex Besen, founder of the Besen Group. “We need to have this kind of correction before you move into the next phase.”

Besen said he expected to see “a few more” MVNOs withdraw from the market or declare bankruptcy in the course of the correction.

In a déjà vu announcement, The Walt Disney Co. said last week it would shut down Disney Mobile as of Dec. 31 in order to pursue a licensing model for the MVNO’s flagship parental-control application, which allows parents to set usage limits on their child’s phone. The move mirrors Disney’s shuttering of Mobile ESPN, which occurred less than a year ago.

The unplugging of Disney Mobile does not come as a complete surprise; Tom Staggs, senior executive VP and CFO of Walt Disney Co., indicated at a recent investor conference that the company was re-evaluating its MVNO business due to concerns about distribution and scale, and was prepared to change its MVNO strategy.

Although Disney Mobile has not disclosed the size of its customer base, Shahid Khan, partner with IBB Consulting Group L.L.C., estimated that the company has gained fewer than 20,000 subscribers and perhaps as few as 10,000. Mobile ESPN’s customer base has generally been pegged at fewer than 30,000 subscribers.

“The MVNO model has proven, as we’ve seen with other companies this past year, to be a difficult proposition in the hypercompetitive U.S. mobile phone market,” said Steve Wadsworth, president of the Walt Disney Internet Group, which ran Disney Mobile. “In assessing our business model, we decided that changing strategies was a better alternative to pursue profitable growth in the mobile services area.”

According to Disney, current Disney Mobile customers will receive service and support until Dec. 31, 2007. The company said it will offer a reimbursement program for eligible subscribers. Content and application sales were halted last week.

A flawed model?

Besen argued the current spate of MVNO flame-outs isn’t due to the business model itself, but with the postpaid model selected by the companies. He pointed to Tracfone and Virgin Mobile USA L.L.C. as MVNOs that have both been relatively successful.

Khan of IBB pointed out an apparent contradiction in the business model of many MVNOs: Companies often choose a narrow focus on a particular demographic in order to differentiate their offerings, but at the same time base their success on gaining large numbers of subscribers. He reckoned that a typical MVNO needs 1 million to 2 million subscribers and between three to six years to break even.

MVNOs that introduce unique services also must contend with the inevitable spread of such services to the national carriers. Helio L.L.C., for example, first introduced a mobile connection to MySpace.com—but similar services are now offered by AT&T Mobility and T-Mobile USA Inc. Similarly, most national carriers now offer GPS handset tracking and/or parental controls, an offering pioneered by Disney Mobile.

A little less crowded

The remaining crop of relatively new MVNOs include Helio and Voce on the postpaid side, and kajeet Inc. and GreatCall Inc.’s Jitterbug service on the pay-as-you-go side. Kajeet and Jitterbug have each recently raised nearly $40 million in venture-capital support.

Khan categorized Helio as being “on life support” through the intervention of deep-pocketed co-parent SK Telecom, which recently pledged another $270 million in funding for Helio following EarthLink Inc.’s troubles. Helio, which is expected to burn through as much as $360 million this year, had been a significant drag on EarthLink’s earnings in recent quarters, and the ownership of the MVNO is being renegotiated based on SK taking on more financial responsibility. Helio has so far been funded with nearly $800 million from its parents.

Rick Heineman, spokesman for Helio, said the company’s approach to mobile sets it apart from the MVNOs that have failed.

“You have to be a mobile service provider through and through, as opposed to somebody playing in the mobile space,” Heineman said. “It’s not just about an application or a set of content for us. It’s really about the complete package of mobile the way people want it, a combination of service and devices.”

“Mobile ESPN and Disney both … had great applications,” said Heineman. “But I think there’s a difference between having a fantastic application and being a mobile service provider.”

Heineman said the demise of other MVNOs “clears the field for healthy players like Helio to grow even faster with less clutter in retail channels and competition for shelf space.”

According to Helio’s most recent statistics, the MVNO’s subscriber base is up to 140,000, reflecting an increase of 40% in the past three months. The MVNO claims an average revenue per user of $90.

Heineman also said that the parent company of an MVNO plays a critical role, and Helio’s connection to cutting-edge technology through SK Telecom—and the fact that SK Telecom already plays in the mobile space—are important factors.

Giving it a try

Disney initially was among the companies most willing to experiment in the MVNO space, but also has proven to have the least tolerance for a poorly performing MVNO. The company started two MVNOs, Mobile ESPN and Disney Mobile, and announced intentions to launch another incarnation of Disney Mobile in the United Kingdom. The international operation, however, was scuttled before it even started. The company pulled the plug on Mobile ESPN after less than a year of operations in favor of a licensing model, and the central application now exists as a service available exclusively to Verizon Wireless subscribers.

Disney Mobile launched in June 2006 and will end service on Dec. 31, 2007—18 months after its commercial entrance to the market. Both of Disney’s MVNOs operated over Sprint Nextel Corp.’s network.

Khan said that a global company like Disney has a good chance of making money on a licensing model that can be offered in markets around the world.

“It’s a good thing that they’re unbundling the service from the actual MVNO business,” he said. When it comes to the mobile space, he added, Disney “at least … had the guts to go out and try. A lot of others just sat on the sidelines and were left behind. Hindsight is 20/20.”

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