(Adds source comment, closing share prices)
By Paul Sandle
LONDON, Nov 6 (Reuters) - Britain's Virgin Media is ditching BT's mobile network for rival Vodafone from late 2021 in a five-year deal that will allow it to launch new services such as 5G to its more than 3 million customers.
Virgin Media, which offers cable TV and broadband services, pioneered the mobile virtual network operator (MVNO) model, whereby a company offers own-branded mobile on an established partner's network.
It has used BT's EE network for nearly 20 years, including before BT owned it, but its customers will be switched onto Vodafone's network in 2021 after the company won the new contract.
BT, Vodafone and Telefonica's O2 have all launched 5G services for their own customers, and Hutchison-owned Three has a 5G home broadband product.
MVNOs typically target the value segment and rarely lead with innovations like 5G, which requires an expensive compatible handset and a top of the range contract.
A source close to BT said the company was not prepared to offer Virgin the mix of technology and data it wanted at the price it was willing to pay.
Virgin wanted significantly higher data allowance growth, requiring more investment, and 5G from the start of the contract, which would have eroded BT's technological advantage, the source said.
BT's shares closed down 4.7% on Wednesday. Vodafone ended up 0.3%.
Jefferies analyst Jerry Dellis said Vodafone was likely to have offered much cheaper pricing than BT was willing to concede.
"That represents a material strategic shift for Vodafone, which previously stressed the importance of not allowing MVNOs to undermine retail pricing levels," he said.
The market was exaggerating the impact for BT, he said, calculating that free cashflow would be reduced by about 100 million pounds, or 4% of the total forecast in 2023.
Vodafone had largely shunned major MVNO in its home market, unlike rivals such as BT's EE and Telefonica's O2, which provides the network for Tesco Mobile and Sky Mobile.
Vodafone will supply wholesale mobile services including voice and data to the Virgin Mobile and Virgin Media Business customers under the deal, which runs until 2026.
Virgin said it would offer 5G on Vodafone's network earlier than the transition of existing services.
Lutz Schüler, Virgin Media CEO, said the partnership would deliver benefits to customers, including 5G services in the near future, and bring mobile and broadband connectivity closer together in one package for one price.
Vodafone's UK chief executive Nick Jeffery said Virgin had recognised the huge investments it had made, and continued to make, in building its mobile network.
The group is trying to squeeze more profit from its network, for example by creating more tower sharing deals.
And it already knows Virgin's owner, U.S. group Liberty Global; the two joined forces in the Netherlands in 2016 and Vodafone bought Liberty's network in Germany this year.
BT said Virgin remained a highly valued customer.
"We will continue to provide a full spectrum of mobile services to Virgin Media and support Virgin Mobile customers under our existing MVNO agreement, until they transition," it said. (Editing by Louise Heavens, Susan Fenton and Giles Elgood)