Bustillo, who used to work for Spain's second-biggest operator Vodafone, established Airis Mobile in May as an arm of low-cost technology firm Airis and hopes to attract 50,000 mobile customers in a year.

The business model Bustillo has set up - offering deals with low-cost smartphones and cheap call rates to other European countries - is tailor-made for the economic crisis as thousands of Spaniards seek work in neighbouring countries.

"Really we are competing with (low-cost internet telecoms firm) Skype," Bustillo said in an interview, adding consumers have shifted to place less emphasis on operators and more on handsets since Apple introduced its iPhone.

So-called mobile virtual network operators (MVNOs) like Airis Mobile do not own networks. Rather, they rent capacity from established operators to sell on to their customers, usually at low prices due to their small overheads, with cheap distribution through the internet or convenience stores.

Their share of the Spanish market grew to 10 percent in March from 7 percent a year before as cash-strapped consumers look to save money.

"Virtual operators can certainly take a bit more market share ... We aren't going to be as big as Telefonica or Orange, what we're looking for is something specialised," Bustillo said.

Across Western Europe, MVNOs have 13 percent market share. Markets vary hugely, according to data from consultancy Analysys Mason, with MVNOs accounting for 24 percent of the market in Germany, which has a strong tradition of discount retailing, and just 5 percent in Italy.

"There are some MVNOs that have successfully played on brand, (but) it's a relatively small proportion of the total. Most are targeting price or convenience," said Ceri Jones, manager at Analysys Mason.

NO GET RICH QUICK

Bustillo's model has been proven to work in Spain by others like Austrian Meinrad Spenger, who set up virtual operator Masmovil in 2008 and now has 140,000 clients and predicts MVNOs could reach 15 percent market share in a few years.

In March, industry leader Telefonica's market share fell to 35.6 percent from 38.6 percent a year earlier, while Vodafone's shrank to 25.7 percent from 28.6 percent. Total mobile revenues in Spain dropped to 2.9 billion euros ($3.7 billion) at end-2012 from 3.4 billion euros a year before.

For 6.9 euros a month, Airis Mobile offers 1 GB of internet surfing, national calls for under a cent a minute and calls within the EU for 9 cents a minute. SIM-only customers at Telefonica get 500 MB internet, 500 free texts and free national calls with a 15 cent connection charge for 9 euros a month.

But Spain's leading operators are relaxed about the growth of MVNOs. Virtual operators have high margins, but their marketing budgets are usually small, which limits their reach to potential customers, and they do not tend to subsidise handsets - a key selling point for customers wanting expensive models.

In some countries like France, MVNOs have had to get their pricing approved by incumbents that also benefit from wholesale rates. Virtual players have also lost market share there after widespread price cuts from traditional operators.

"There is an opportunity for MVNOs but it's a really difficult and tough market place ... It's not a get rich quick scheme that's going to work for everybody," said Carrie Pawsey, senior analyst at technology and telecoms research firm Ovum.

Virtual operators are usually much more limited in scope, targeting immigrant communities with own-language services and low international rates or small businesses often overlooked by traditional operators. Fixed-line specialists in Spain have led MVNO growth in recent months by offering mobile services packaged with home phone and internet services.

Generalists tend to be bought by operators when they get to a big enough size to be a real competitive threat and used as a sub-brand, something that has happened in the Nordic countries, where there is a longer history of MVNOs in the market.

Virtual operators are also heavily dependent on friendly regulation. Spain's telecoms watchdog did not open up the market to MVNOs until 2006, more than ten years after some countries, and in 2008 they had just 1.3 percent of the market.

But while MVNOs are unlikely to compete head-to-head with firms like Telefonica, they promote competition and are vital for innovation when incumbents are weak, said Jacques Bonifay, chairman of the European Association of Full MVNOs.

"Because we are still small and we need to innovate to survive, we are really pushing hard," he said.

($1 = 0.7716 euros)

(Editing by Leila Abboud and Mark Potter)

By Clare Kane and Robert Hetz