Venture that nearly failed rescued reputation

Virgin Mobile, the company that resuscitated Richard Branson's business reputation in Britain, has grown at a phenomenal rate. Launched in November 1999, it already has more than 3.6 million customers and has spawned a model that Virgin has copied in Australia and America.

But the venture almost failed to get off the drawing board when Virgin's original partner Cellnet backed out at the eleventh hour.

Instead, Virgin partnered with One2One, a joint venture between Cable & Wireless and US group MediaOne. One2One's strategy of free weekend and evening calls had left it with a network that hardly anyone used during the day. It hoped Virgin would even things out.

The two sides signed a deal in summer 1999 hoping to launch Virgin Mobile in November. A few weeks later, however, C&W announced it was selling One2One. Deutsche Telekom swooped and it looked as though Virgin Mobile was dead in the water. The Germans, though, signed off the joint venture. Virgin invested about £27m with T-Mobile, which One2One became under its new German owners, who invested the same amount. The year after its launch, Virgin Mobile organised a £115m borrowing facility with a consortium of six banks led by JP Morgan and Royal Bank of Scotland.

It has used £100m of that facility, reaching profitability - excluding financial charges - in August 2001 and reporting an annual operating profit the next year.

Virgin Mobile performed well, signing up its millionth customer in June 2001 and two millionth just over a year later. It targeted the youth market, the biggest users of pre-pay deals, and tried to simplify the system of call charges. But, behind closed doors, the relationship was acrimonious.

That spat went public last year when it emerged that T-Mobile, was trying to wriggle out of its contract, a move led by its UK boss, Harris Jones.

Jones saw the Virgin Mobile deal as just another cost because for every customer on Virgin Mobile, T-Mobile paid the venture a monthly marketing support fee. This payment was a proxy for the fee - known as a termination charge - that T-Mobile collects from other networks to connect their callers to Virgin Mobile's customers. Virgin Mobile should get this termination fee, even though it does not own the network infrastructure.

The marketing support fee - which has never been made public but is understood to be about £4 a month for each Virgin Mobile customer - was set on a sliding scale so eventually T-Mobile would end up paying Virgin Mobile nothing and retain all the termination fees for itself.

Despite this, T-Mobile decided to try to break its contract with Virgin in 2002. The case ended in the high court and T-Mobile lost, the judge saying its conduct was "deserving of moral condemnation". A few weeks before, Jones resigned to be replaced by Brian McBride, formerly vice-president of northern Europe for Dell Computers. McBride has since played a key role in reaching yesterday's deal with Virgin.