MVNOs: Changing Wireless Rules

These days, you no longer have to be a telecom-related company to sell mobile data and voice services. Whether retail companies such as Virgin, Target, Harley-Davidson or Wal-Mart, or utility companies in oil, energy and electricity, everyone seems to be getting into the mobile space. The vehicle by which these companies hope to reach untapped consumer bases with non-traditional offerings is mobile virtual network operators (MVNOs). MVNOs are resale-oriented operators that purchase bandwidth and spectrum from existing network operators.

The advantage to existing network operators is that MVNOs can draw subscribers to existing networks—a plus, in light of the 3G spectrum debacle. “A resale model through MVNO opens up a way to perhaps reduce debt, and increase cash position by increasing traffic to their networks,” says Rick Findlay, director of wireless industry solutions for Convergys.

In fact, the MVNO model is giving carriers, such as T-Mobile, Cable & Wireless, Sprint PCS and Cingular Wireless, a way to make money from extra bandwidth and spectrum.

Additionally, traditional or new network operators that wanted to expand in the mobile market without investing in 3G licenses have gone the MVNO route. PwC Consulting reports in its white paper “Competitive Advantage for MVNOs,” co-written with Convergys, that Telia Mobile in Sweden, for example, aims to lease mobile network capacity from 3G operators in Germany, France, the United Kingdom, Italy and Spain.

The Evolution

MVNOs ride on top of the networks of existing wireline, cable and mobile networks, enabling companies to enter markets where they possess no licenses, or where they want to add new services to existing operations without core infrastructure worries.

Some MVNOs may own a switch and others network elements; some differentiate on services and platforms; and some MVNOs forge a close relationship with a host network operator through a joint venture.

Convergys and PwC break MVNOs into three segments: non-facility-based MVNOs, hybrid MVNOs and facility-based MVNOs.

Many start out as a non-facility-based MVNO. They depend on the host carrier’s infrastructure. Calls to and from subscribers are treated as if they were calls to the host’s customers. All verification operations are carried out by the host, most of the time using a partitioned Home Location Register (HLR). That means the host has to gear its databases to receive, process and supply data concerning the MVNO’s customers, as well as its own.

“MVNO retail offerings may scarcely differ from those available from its host; in fact, some MVNOs simply repackage the host’s services, using the host’s SIM cards,” says PwC’s Mark Gregory, a partner responsible for telecom strategy practice in Europe. Packaging, branding and pricing of the service and some control of the customer would rest with the MVNO. “The MVNO would make minimal investment, possibly confining facilities to retailing and distribution, customer service and billing,” he says. In such cases, MVNOs will sell subscriptions for more than one host.

As MVNO models evolve, so does the strategy for marketing. One common thread is that branding is usually very strong—either to the masses, or to a niche segment. By leveraging existing loyalties to certain brands, MVNOs push messages of new value to existing and potential customers, all without the headaches of building up core network requirements.

Brand MVNOs

An increasing mobile population has attracted non-telecom players to look at services that complement their products. Consumer-focused brand MVNOs lead the market thus far, driven by strong brands and existing customer loyalty. Virgin Atlantic, IKEA, Wal-Mart, Target, Nike, Disney, Ford and General Motors are all making inroads to expand their products with the addition of mobile services.

Companies with a strong brand, a large loyal customer base and proprietary content will get into the content wholesale game first as a means to test the waters and see how others mitigate risk. These companies have established loyalty, and can appeal to customers who previously would not consider mobile service, either because they are unfamiliar with current offerings or prefer to purchase from a well-known brand.

In the United States, PwC’s Gregory notes that the MVNO segment is in its rudimentary stages, with the most recognizable MVNOs emerging from the data services and automotive segments. BlackBerry and Palm offer data-oriented MVNOs to PDAs from RIM and Palm Computing. General Motors offers OnStar, enabling users to access a broad range of information in their vehicles through wireless connections.

“The dynamic to watch is the fact that a lot of the bigger companies will essentially play the role of wholesalers of their content to carriers for MVNOs, as an MTV, for example, will provide content to a Virgin Mobile,” says Paul Hughes, Yankee Group analyst. Yankee Group has recently released “Emerging MVNOs: Examining the Billing and Customer Care Requirements,” a report examining MVNOs abroad and in the United States.

“All are looking for a simplistic way to bring services to market and demonstrate that it’s a value,” says Hughes, noting that Wal-Mart, Office Max, Staples, AOL, GM, Harley-Davidson, NASCAR and MTV all represent different segments, yet all have the chance to target prepaid or youth segments. The youth and senior citizen demographics are two market segments most analysts agree have strong brand loyalty and intergroup loyalties that MVNOs can target.

“They are all evaluating how to minimize customer acquisition costs,” says Hughes, noting that such costs can range up to $200 per subscriber. “If you already have customers in your store,” he says, “the acquisition costs can be much lower.”

A Closer Look: Virgin Mobile

Virgin Mobile believes churn is a major reason host operators will consider heavily branded MVNOs.

“T-Mobile was struggling in its attempt to grow; they had extra capacity, so they married up with us to explore parts of the market they wouldn’t normally tap into,” says Steven Day, director of corporate affairs, Virgin Mobile. Despite the potential for cannibalization, there seems to be a stronger argument for the added value MVNOs bring to the host carriers. “If the incumbents are losing one in four customers to a rival, then they might as well have the partnership with one of those ‘rivals’; then, you gain that traffic anyway. You’d rather lose a customer to your partner than to Vodafone,” says Day. With high churn becoming a problem, MVNOs are an alternate retail distribution channel, thus stemming large acquisition costs and churn.

“Our churn rates are 45 percent lower than other U.K. carriers because of the personalized service we offer,” says Day. He adds that the partnership has also increased traffic on T-Mobile’s network. Virgin represents almost 2 million of the 11 million subscribers on T-Mobile’s network, making T-Mobile the fourth largest carrier in the United Kingdom, and Virgin Mobile the fifth. “An MVNO should be a true partnership,” Day says, “for then each party has a vested interest in doing its best to please the customer.” In Virgin Mobile’s case, there is a 50-50 split between Virgin Mobile and T-Mobile. Virgin Mobile also resells wireless services using T-Mobile’s network infrastructure in Australia.

It is too soon to say whether economic and cultural differences in the United States will impede similar success here in the United States for Virgin’s partnership with Sprint PCS. Also, the United Kingdom and Europe in general have a high prepaid customer base, which lends itself to the MVNO model.

Mobile’s “confusion marketing” is infamous for making it incredibly difficult for customers to feel they are really getting a good deal. “Mobile carriers demand consumers sign one-year contracts for services they don’t even understand; there’s just too many options, too much credit scoring,” says Day. “Traditionally, in mobile, subscribers have to choose what the company offers rather than what they want. It’s ridiculous.” In contrast, Virgin Mobile plans to pioneer subscriber-friendly mobile services in the United States. “We will grow quickly here as well, as we will have effective, fun, clear packaging that does not confuse subscribers. They will not be surprised at the end of the month when they get their bills.”

Also, rather than offering “heavy” packages, Virgin will focus on fun and easy services that Day believes will gain popularity mostly through word of mouth. “Sure, we’ll offer text and WAP and all the leading-edge services, but what people really want is their lifestyle to be enhanced,” he explains. “If you’re an ardent fan of ‘Friends,’ for instance, you will be able to get an update on what happened in the episode you missed, or scores for your favorite sports. The pricing will be clear, and the phone won’t cost anything unless the phone is used; no 12-month contract or monthly fee; just pay for what you use.”

Virgin also wants to eliminate the concept of peak rates. “We want to encourage people to use the phone all day—that way we spread the use of the network over a 24-hour period for better ROI,” says Day. “We didn’t want to confuse potential customers with peak and off-peak rates.”

Virgin Billing and

Customer Care

Of course, critical to Virgin’s success, or that of any MVNO, will be the service quality. That will require strong customer management, billing and customer care applications to manage dropped calls and customer service.

“Despite our lack of experience with telecom-specific challenges, we learned quickly that billing systems must evolve at the same speed as networks now moving toward 2.5 and 3G,” says Day.

Virgin has licensed ADC’s Singl.eView convergent billing and commerce product to put in a new billing platform for real-time prepay, postpay and pay-as-you-go accounts. It provides real-time authorization of voice, data, content and commerce services. SingleView will give Virgin Mobile complete control of its own billing operations for the first time since the company’s inception. During the World Cup, for instance, Virgin offered premium content services where subscribers were charged per session for video and audio on demand.

Affinity MVNOs

Other than the popular, household names creating MVNOs, quickly emerging will be an alternative segment called affinity MVNOs. “While brand MVNOs’ customer bases are usually a ‘mile wide and an inch deep,’ affinity MVNOs are usually an inch wide, a mile deep,” says David Dague, Sentori’s director of marketing. Sentori works with two affinity MVNOs: Working Assets and Accel Wireless.

Because affinity MVNO customers are usually less price-sensitive, these types of MVNOs will have a longer lifetime value with lower churn.

“They are also less of a threat to host carriers in terms of subscriber cannibalization, because they serve a narrow market where the host is sure to be under-penetrated; it’s not a situation where they will be swapping retail customers for wholesale revenue, like the typical brand MVNOs,” says Dague.

In these MVNOs, messages are very targeted to a base that strongly supports certain ideals, concepts or brands.

A Closer Look:

Working Assets

One of the more successful case studies in this category is Working Assets, which has earned more than $5 million for 60 nonprofit groups through its resale efforts. The money has been garnered from its long-distance, Internet and credit card services and the social, economic and political messages it promulgates on its Web site www.workingforchange.com.

“Our message resonates strongly within our subscriber base,” says Sue Green, director of the company’s wireless division, noting the company now has 20,000 subscribers in wireless and 380,000 long-distance customers. “The subscribers strongly believe in its cause as a multiservice communications reseller offering long-distance and wireless services to the consumer market, as well as credit card and business long-distance services,” she adds.

The organization fosters an environment where users offer donations for progressive nonprofit groups through service bundles subscribers buy. Small percentages of revenue are garnered from bundled services, which are then used as a proposition for parties affiliated or interested in certain environmental, social or political issues.

Because its customers are more concerned with its ideals than its financial contracts, price-driven loyalties are mitigated and churn issues that worry most network-based wireless carriers are eliminated. “Therefore, theirs is a much more profitable customer base,” says PwC’s Gregory. That will result in higher ARPU, lifetime value and enhanced profitability. PwC has worked closely with Sentori to help Working Assets develop a standalone bill.

Working Assets is working to phase in the standalone platform to rate tolls and charges, and then pass them to the billing system used for long distance. EUR Systems generates and prints the final bill.

Working Assets’ combined outsourced system includes Sentori Billing Solutions’ 3G billing and customer care platform, which is hosted via a strategic relationship with EUR Systems. Sentori brings billing and customer care software focused on wireless, while EUR provides the hardware, hosting, systems management, and operation and support services, including bill print/stuff/mail, payment processing and contact center services.

On-the-Fly Customization

To enable MVNOs to host multiple brands, ostensibly multiple companies off the same network, the vendor market is coming up with ways to repackage and rebundle with different pricing. “Systems will have to have strengths in rating flexibly,” says Joan Marwitz, Portal’s senior manager for wireless marketing solutions. “Companies like Disney or Nike will tailor to segments, putting bundles out and seeing how they do; they have to adapt quickly. While some vendors do a lot of customization to make changes, in the MVNO model it will be more advantageous to have systems that enable the client to do the customization on the fly, but with the same scalability as is possible when the vendor does it.”

Portal is strengthening its position in the MVNO market by enhancing Infranet with MVNO-specific capabilities. For example, its “branding” is a core capability that enables carriers to create brands within brands. Marwitz explains that in its database, all brands and associated data are segmented for billing, cross-selling and marketing.

Additionally, MVNOs’ systems must be able to interface to different content providers.

Billing and Customer Care

As more wireless users begin to delve into wireless data services through their handsets, billing will have to handle such issues as real-time rating and QoS. Data streams will have to be closely gauged to ensure that SLA expectations are met.

Scalability also will be a key factor for MVNOs that expect back-office infrastructure to support millions of subscribers. Also, EBPP, Web self-care and call center support will be at the core of customer care functionality that will set MVNOs apart from competitors. Billing and OSS challenges revolve around unique MVNO requirements, such as time to market, partner management, revenue-sharing, innovative pricing models, convergent prepaid services, robust customer care and scalability.

Most emerging MVNOs will not have much wireless product experience with rate plans and services, or handset selection, service procurement and distribution challenges. Nor will they have experience with networks and host carrier selection and local number provisioning, roaming and interconnect. Nor will they have experience with billing and customer care in wireless, so identifying all the interfaces needed to work in this environment will be challenging, as they must work with fulfillment houses, credit scoring houses, credit card clearing houses, bank interfaces, handset insurance providers, bill printers, call centers (if they outsource that function) and host carrier interfaces. “They will struggle with how to deploy a customer management platform, implement workflow, manage provisioning and mediation and customer care, rating and billing,” says Dague at Sentori.

Because of that complexity, most MVNOs will outsource the billing platform to competitive billing providers, or work with a billing vendor that can rapidly upgrade existing systems by dropping pre-developed system components into existing systems.

The costs of outsourcing versus keeping billing and customer care have to be measured. Initially, outsourcing is more cost-effective, but as MVNOs grow, the billing and customer care functions are going to be brought in-house. Yankee Group predicts the “build-operate-transfer” model will prevail, as more outsourced systems are being made flexible enough to migrate in-house.

Much of the billing industry has already bolstered its offerings to handle voice, data and convergent platforms, and many are enhancing systems to handle the MVNO model of business. According to PwC, the customer care solutions in the MVNO model far surpass those of their host carrier, lending to the success of the model in Europe for the past couple of years.

As MVNOs proliferate, host carriers also will need to implement the necessary billing and OSS infrastructure to reap the many benefits of hosting MVNOs, and they will have to create wholesale business models to accommodate new distribution channels. Key technical functionalities, according to PWC, will be hierarchical billing, event repudiation and convergent prepaid event monitoring, with postpaid settlement between partners.

Hosts will require a comprehensive, end-to-end billing and customer care system to support both their retail and wholesale (MVNO) requirements. Additionally, a robust architecture is required to provide the scalability to handle rapidly expanding subscriber bases. In addition, they need to ensure sufficient spectrum and bandwidth to support an MVNO’s current and future growth needs. Those will include network quality that meets stringent SLAs; accurate usage information provided to MVNOs to reconcile billing errors; and secure access by MVNOs to their OSS for billing, provisioning and mediation.