Wireless Goes Virtual

It's been only a few weeks since the No. 2 wireless service provider Cingular (a joint venture between SBC Communications (NYSE: SBC) and Bellsouth (NYSE: BLS)) agreed to purchase No. 3 AT&T Wireless (NYSE: AWE) for $41 billion, but the consolidation buzz is still going strong. Many investors are hoping that the trend will continue, reducing the number of players in the market and easing the cutthroat competition.

Earlier this week, however, Qwest Communications (NYSE: Q) announced that it would enter the wireless fray in nationwide fashion. Another surprise came from Ma Bell: AT&T (NYSE: T) hinted that it might once again go wireless. In a strange twist, AT&T could operate the business as AT&T Wireless, since it retains rights to the name once the current company is sold.

Hold the phone. What gives here? How can two telecom giants suddenly jump into the wireless market? Won't that cost them billions of dollars and years to build out a network?

Nope. The secret is that they'll be operating virtually, as Mobile Virtual Network Operators (MVNO). An MVNO doesn't own the network equipment; it leases the use of wireless infrastructure from another company. In the case of Qwest, it has an agreement to lease airtime from Sprint PCS (NYSE: PCS). In this way, the role of the MVNO is simply a wireless service provider, not a network operator.

Basically, MVNOs come in two types: those that bundle wireless service with other telecommunication offerings, and those looking to capture subscribers with an appealing brand. Qwest and AT&T are in the first category, looking to offer a complete package of services to existing and potential customers. Two branded MVNOs in the U.S. are Virgin Mobile and Boost Mobile, both targeting youth markets. Virgin also uses the Sprint PCS network, while Boost Mobile operates as a division of Nextel (Nasdaq: NXTL).

As the wireless market in the U.S. matures, MVNOs may become the norm rather than the exception. Virgin and Boost have both demonstrated that a strong brand with targeted content to a specific demographic can produce amazing results. For example, Virgin has landed over 1 million subscribers in less than 18 months with strong approval ratings. If the trend continues, wireless may eventually go the way of landline networks, where transport is a commodity and branded content and service become the growth story.

Motley Fool contributor Dave Mock takes comfort in that Richard Branson's Virgin Group has not yet branded underwear -- yet. He owns shares of Nextel.