Survival of the Fittest: MVNOs Enter Wireless Resale

People are keeping a close eye on MVNOs as they enter the market—especially since many believe their time is now.

Mobile virtual network operators (MVNO) are under the microscope as the industry looks to see if these new business models are going work. For the most part, an MVNO is a mobile reseller, but they aren’t exactly. Some analysts say definitions diverge when it comes to the business model.

Technology consultancy Ovum, for example, characterizes an MVNO as a mobile provider that does not own spectrum but issues the subscriber identity module (SIM) card (for GSM networks) and owns its own network code. In this instance the virtual provider would have its own mobile numbers. Typically, an operator like this would own at least a switch through which all calls to and from its subscribers would travel. If a call came into the switch, the MVNO would own the data and be able to monitor and control that call.

The other type of MVNO more closely resembles the traditional reseller, and in Ovum’s opinion can be described as an enhanced service provider (ESP). An ESP would not own the network or any of the operations or business systems associated with it, yet it would brand the host SIM card. “By far the largest majority of virtual providers to date are enhanced service providers,” says Ines Respini, a senior consultant at Ovum.

Yet other definitions would say an MVNO owns most of its own information technology systems and is purely using the other company’s network, and that even telematics operators would fit the bill.

A Plethora of Business Models

One thing that MVNOs have in common is that no two business models are exactly alike. Some fixed communications providers have launched their own MVNOs to expand service offerings to both businesses and consumers. One example is NTL, which uses Orange’s network in the United Kingdom. Other players entering the mix include British Gas and other utility companies.

Retail and entertainment companies are also entering the market and are given life simply by their brand potential alone—most notably the megabrand Virgin, which started its mobile operations in Europe and has spilled into Singapore and Australia. It will be trying its hand in the U.S. mobile market through its partnership with Sprint PCS.

To differentiate themselves from traditional mobile providers, MVNOs have several options. Price has thus far been the most popular. “Mobile prices are quite high by subscriber, so virtual operators who are coming in with lower prices are gaining large numbers of subscribers,” Respini says.

However, lower prices alone are not enough. Price structure is also a consideration, Respini says, singling out Virgin, which she says “revolutionized pricing in the U.K.” Its pricing structure allows that the more time a user spends on the phone, the lower the rate per minute. (For more on billing models, see “MVNO Billing Options,” page 56.)

Another business formula aims at a niche or target market. Virgin targets youth, and its service offerings reflect this. Robin Hearn, Ovum’s regional director of advisory services, predicts that a specialized operator, such as a state or regional provider identifying with a certain population segment, might find some success in the U.S. market. For example, he says, targeting the Spanish-speaking communities in the United States might serve a popular niche and provide a healthy consumer base. While many MVNOs seem to be targeting consumers, Respini says some virtual mobile providers in Europe are targeting small-to-medium enterprises.

The European Outlook

To date MVNOs have mostly sprung up in Europe; however, mobile resale is still a relatively nascent market.

Many say the first MVNO came out of Scandinavia with the birth of Sense Communications (see sidebar “Rough Road for a Pioneer,” page 57). Respini says that if successes in Europe were measured by the number of subscribers, MVNOs would not be deemed that successful, because the European markets are saturated. “Virtual operators that are entering the [European] market aren’t really going to get a whole lot of subscribers that are going to generate a whole bunch of money,” she says.

Yet this level of saturation is almost necessary for existing mobile providers to be willing to open up their networks to resellers. When the subscriber curve is still increasing, a provider will likely not make its resources available to others. It is when a provider’s subscriptions level out that it seeks resale agreements to increase network traffic. Whereas MVNOs used to be seen as cannibalizing a provider’s operations, they are now seen as another source of revenue.

Virgin, by far, is the most successful with its approximately 1.2 million subscribers, Respini notes. She estimates that other ESPs are in the tens of thousands to a couple hundred thousand at most.

Touching Base in Asia

The Asia-Pacific region has been the next stomping ground. Virgin Mobile launched its services in Singapore in October. Yet Australia seems to be leading the pack in this region; Virgin Mobile opened its doors to customers there in October 2000. “Australia is becoming quite a mature MVNO market,” says Scott Kirkman, consulting manager for global consulting services at ADC. “But the Australian market is not large and can only support a certain number of players.”

The success of every MVNO rests solely on its business case. “A smaller, nimble operator can definitely take a significant market share,” says ADC’s Russell Paten, senior account manager, “Virgin is doing well in the Australian market, and part of that is because they concentrate on a niche market. There are business cases for MVNOs in every market.”

What About the U.S.?

Without a doubt, the U.S. market is far behind Europe and Asia-Pacific. Hearn at Ovum says one cause is the very fragmented nature of the mobile network technology that exists in the United States. Whereas Europe operates with one predominant technology—GSM—the U.S. market has instances of CDMA, TDMA and GSM. And providers in the United States all have varying rollout plans and strategies, whereas Europe at least has ubiquitous networks and infrastructure.

Hearn believes that U.S. operators might still be opposed to allowing MVNOs to have a significant role in the States. “You’ve got to get to the situation where a U.S. operator believes it needs to get traffic on its network up,” he says. “It needs perhaps someone else helping it with the marketing.”

One virtual operator of sorts has been operating in the U.S. since 1996. Although the company doesn’t call itself an MVNO, Tracfone has been operating in the mobile resale space and has pieced together its virtual network of more than 60 mobile providers’ infrastructure. Today, the company hosts more than 1.8 million subscribers, managing its own billing, customer care and operations support systems. While Hearn doesn’t believe there will be a big MVNO play in the United States overall, he predicts, “We may see more if Virgin is very successful.”

Virgin and Sprint are in quiet periods and are very hushed about their services slated for launch early this year. The companies have stated that they will offer services on a prepay basis targeting the 15- to 30-year-old crowd. And there is still an uncertainty in the industry about how well prepay services will take hold in the U.S. market. Analysts are watching this closely.

Hearn says that while Sprint originally targeted consumers, it has now decided to pursue enterprises and has been quite happy to leave the consumer market to Virgin. “As far as I can see, it is withdrawing private plans from the market—the low end,” he says. “It is clearing out of the market so Virgin can get into it, but it won’t admit that’s the case. They’ve acknowledged the fact that they are doing that, but they won’t say it’s because of Virgin.” This way Virgin picks up many new customers, pays for the minutes and drives up the traffic on Sprint’s network.

Regulation Ahead?

Part of what slowed the initial MVNO entrants in the mobile space was the resistance they met from existing providers. Seeing them as competition, mobile operators were not quick to allow them space on their infrastructure.

Does this mean that regulatory bodies in the United States will step in to open up mobile networks?

“I don’t think with the current legislative body or the nature of the body, we’re going to see the regulators coming in and saying, ‘You must give access,’ ” Hearn says. He believes that all regulators will do is point out the fact that 56 percent of the population has access to seven or more mobile providers already and that probably 80 percent have access to at least four.

European regulators, on the other hand, are addressing the issue of mobile access. In Europe there is a strong desire to support MVNOs, as they are thought to enhance competition. Regulatory bodies want to harmonize regulations across Europe. The Independent Regulators Group is heavily involved in these efforts, according to Ovum’s Respini. “Their recommendations will have a lot of sway” with the European Union, she says.

“A year ago there was much more resistance [in Europe] than there is today,” Respini says. “Most network operators I’ve spoken to are looking at it as part of their overall strategy,” Respini says.

In some cases host operators are seeking out and actually inviting MVNOs that could target markets the hosts might not already reach.

In addition, the decline in average revenue per user has given providers an incentive to allow MVNOs onto their networks to resell their capacity.

Hearn explains that the average revenue in Europe or the United Kingdom is about $150 per subscriber per year. In the United States, however, the average is still about $500—mainly, Hearn believes, because European plans are typically prepay, whereas U.S. subscribers mostly have services on a contract basis.

If They Can Make It Here…

Whether MVNOs can truly make it both in the United States and elsewhere remains to be seen. “The business model for an MVNO is tenuous at best,” Respini asserts. “The MVNO really needs to get a good discount when they buy airtime on a wholesale basis.”

Respini suggests that MVNOs will want to negotiate between a 20 and 40 percent discount if they expect to survive. “Those at 40 are getting a good deal and we think can operate as a commercially viable virtual operator,” she says, “while I think 20 percent would be really difficult for a virtual operator to make the margins needed to survive.”

Rick Findlay, director of wireless industry solutions at Convergys, says MVNO success boils down to one simple competitive issue: whether the MVNO can do any better than the host operator. “The jury,” he says, “may still be out on that one.”