The rules of the game in Israel's cellular market are about to change.

Toward the end of the year, Virgin Mobile will begin marketing cellular instruments in Israel. It will become, for all intents and purposes, the country's fifth cellular provider, alongside

Partner Communications

(Nasdaq, LSE:PTNR), Pele-Phone Communications, Cellcom, and Mirs.

Cellular providers like Virgin are known as "virtual operators". They do not operate networks. They market services provided by another company, under a brand name that is not always associated with the original network.

Such is the case with the British One 2 One cellular network, the services of which are sold by both Virgin and Carphone Warehouse. In Israel, Virgin will sell cellular services based on the Pele-Phone network.

From airlines to airtime

Virgin is an international marketer of brands - airlines, soft drinks and alcoholic beverages, music and communications. The company's cellular brand may only be 15 months old, but in the past year, Virgin Mobile has recruited more than one million subscribers in Britain.

The character of Virgin Mobile is very like that of the Orange brand in Israel: young, "cool" and sophisticated. Orange is the brandname of Partner, which must be appalled by Pele-Phone's deal with Virgin. Lehman Brothers recently reported that Partner could well overtake Pele-Phone as the second largest cellular provider in the country. Richard Branson's entry could rock everyone's boat.

Virgin owes its coolth largely to the exploits of its founder, Richard Branson - the eternal uninhibited youth. His last antic was an attempt to circumnavigate the world in a hot air balloon. (He failed.) A few months later he announced his intentions to turn Virgin Mobile into an international cellular brand.

In December 2000, Virgin announced negotiations to establish networks in 30 countries. News of its advent in Israel hit the press on December 8.

Branson who?

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Branson is not a household name in Israel. His best-known products among Israelis are the huge music stores in London, New York and Paris. But is this enough to compete with Orange in the Israeli cellular market? Pele-Phone refuses to divulge the business plans and Virgin still won't officially confirm the company's pending involvement in Israel.

"Wireless is a market of a homogeneous product, and the power of a brand in such a market is likely to be limited," says Shalom (Shally) Tshuva, the CEO of the Foresight consulting firm. "Success depends, to a large extent, on values that are attributed to the brand. Yes, McDonald's came to Israel with a standard product, but sold something else too - the feeling of being abroad that the Israelis love so much. It is not yet clear what Virgin's added value will be." Another problem facing Virgin, Tshuva says, is penetrating an already-saturated market.

Virgin's young, sophisticated image is a far cry from that of Pele-Phone. It has strived to change its image of a high-quality, but expensive, service provider focusing primarily on business executives and the middle class.

Sources at Partner and Cellcom sneer that the Virgin deal-in-the-making attests to the failure of the Pele-Phone brand, and stems from a decision to invest in the development of a new brand rather than the enhancement of the old one. In fact, sources in the industry say that, within a few years, the Pele-Phone brand could disappear entirely, clearing the way for Virgin.

Pele-Phone sneers back. "The Pele-Phone brand name will remain the company's primary brand, regardless of the success of the Virgin brand," according to an official statement from the company.

Virgin will need a license. Enter the regulator

But the road to success will be long and arduous. For five months now Virgin Israel has been operating shrouded in secrecy from the offices of Poalim Communications, a publicly-traded company belonging to the Shrem Fudim Kelner group. Poalim Communications is expected to be the financial backer for the deal.

Virgin Israel will have to get an operating license from the Communications Ministry. The bureaucracy does not have to delay Virgin's launch, as the terms of Pele-Phone's license dictate how it can place its network at the disposal of other service providers. But this doesn't mean that Communications Minister Reuven Rivlin will be in any hurry to sign a Virgin license.

Other obstacles are expected to arise. Sources close to Virgin say it has no intention of being a mere sticker on Pele-Phone handsets. The agreement between the two companies, they say, will include establishing an independent marketing network. The deal will involve allocating switches and a special infrastructure for the Virgin subscribers.

The agreement will also allow Pele-Phone to free itself of a significant portion of the burden of promoting a brand that will capture the hearts of the youth and concentrate on investing in the establishment of an infrastructure for broadband cellular Internet and the acquisition of spectrum.

The deal, however, does come at a price, and a risk - the price being the sharing of revenues between Pele-Phone and Virgin. In Pele-Phone's case, this is a relatively low cost: The company's technology gives it an almost unlimited capacity to take on new subscribers without having to invest much in infrastructure; thus, a large portion of the revenue from the new subscribers will become net profits.

The biggest risk is the failure of the brand. Virgin has indeed amassed more than one million subscribers in Britain within a year, but taking into account the British population (60 million) and the fact that average GDP per capita in Britain is 33% higher than that in Israel, the company's achievement is no more impressive than that of Partner, which has recruited one million users in Israel in 27 months.

Talks with individuals involved in the project indicate that Virgin will try to create a brand for the data communication services (cellular Internet) that Pele-Phone is hard at work developing. Virgin's focus on data communication services, however, could prejudice Pele-Phone's independent cellular Internet brand, Go Next. Pele-Phone holds a 51% stake in Go Next, with the remaining 49% in the hands of Sunycom.com, controlled by Ilan Ben Dov. Ben Dov has already been pressing Pele-Phone for a share in the deal with Virgin. For now, it appears that Pele-Phone is withstanding such pressure admirably.