I wrote this back in 2013 and I think its still relevant today:
Virtual Operators and their position in the Mobile World
Back in the late 1980s at the dawn of the current mobile world, McKinsey, a consultancy, predicted that 900,000 Americans would have mobile phones by 2000; the actual figure was over 70m.….in the mid 1990s the GSM explosion had started and by 1999 one handset was being sold every 4 seconds in the UK alone (my calculation suggest that is about 8 million per year) and the early adopting countries were swiftly passing from low penetration through to 100%+ and the operators (MNOs or Mobile Network Operators) were revising their business plans. What had formerly been an exercise in ‘land grab’, encouraging as many non-mobile users to sign up to the great new world was now becoming a more sedate exercise in the saturated market trying to retain the better (higher paying) subscribers and also trying to tempt those from other networks to move (churn in telco terminology)
At the same time, the MNOs started to realise that the way to discourage churn out and to improve the churn into their network was to offer better and more flexible deals, moving away from the “one size fits all” offerings from the early years. The problem here was that the infrastructure deployed at many MNOs was geared to the lower subscriber numbers and feature sets, leaving few options for the operators to extend their solutions. Out of this problem was born two solutions; the first was to reinvest in more complex and capable platforms able to meet the current set of diverse features and the second was to offload the more niche feature sets (and hence subscribers) to separate, more quickly developed platforms.
Most of the original MNOs grew out of the fixed line world, often being a part of the incumbent operator (BT in the UK is a good example, owning one of the 2 initial operators in the UK, Cellnet) and bringing their often staid but equally technically advanced ideas built around the concept of permanent availability. Even today, the majority of mobile networks expect to have an availability of 99.999% – meaning an unexpected down-time of around 3.5 minutes per year. This brings its own problems of extreme complexity and redundant components ‘just in case’ ensuring that changes (such as were necessary for the niche markets) were lengthy if they happened at all.
Around this time there was a transfer of power within the networks from the engineering teams across to the marketing and commercial arms of the business, more concerned with business aspects and less with the nuts and bolts of the network. Furthermore the introduction of the concept of prepaid firstly in Portugal in 1995 followed by a wildly successful version launched in Italy in 1996 and subsequently across Europe drove mobile into the mass market. Handset subsidies which were an inherent part of this push made a considerable contribution to the take up. In those where subsidiaries were banned like Belgium, the mobile market grew very much more slowly.
These latter two points helped develop a new type of operator, the MVNO or Mobile Virtual Network Operator, living on the back of the radio network operated and maintained by the parent MNO but bringing some of their own technology to manage the subscribers.
These new MVNOs often came from the IT and software world rather than the engineering led telecoms world and their focus was more on the customer facing offers rather than on the network which they could leave to the MNO to look after. Some of them were separate entities having a commercial relationship with the MNO, others were offshoots of the MNO itself, but in both cases the MNO was focusing on the largest number of paying subscribers on their radio network, whether they were directly owned by them or whether they were owned by the MVNO. In both cases in a saturated market, this meant that the subscriber was not on another network and hence the status quo was maintained or perhaps the balance of subscribers tilted towards this MNO.
Since those early days in the early 2000’s, the MVNO market has gone through many stages and has settled into the following three areas:
- MNO second brands often aimed at the lower revenue (ARPU or Average Revenue Per User) subscribers who are not part of the MNO’s main (premium) offering.
- Separate MVNOs (often 2nd tier fixed operators or cable companies) aiming at the high volume turnover market, almost exclusively prepaid and usually tending towards the low disposable income groups, especially the ethnic populations with a need to make international calls. These can be summed up in the immortal words of the founder of Tesco as “Pile them high, sell them cheap”.
- MVNOs offering telco services as part of a greater offering such as chain stores.
- Separate MVNOs aiming at the opposite end of the market for low volume, high value subscribers, often in the corporate market associated with private networks and almost exclusively post paid
Many other models have been tried and have failed either because the perceived market did not actually exist or because the operational costs (including paying the MNO for use of their network) outweighed the revenues – even the likes of Virgin have failed to succeed along with many, many others.
Why do these four models seem to work whereas others have fallen by the wayside? The reasons differ for each model, looking at them each in turn:
The second brand of an MNO succeeds because it has to succeed! Generally these brands (Sosh in France, the second Orange brand is a good example) are extracting the lower level subscribers from the main brand and gaining some revenue rather than seeing the subscriber churn to another operator. The infrastructure is usually a subset of the main MNO’s and uses the economies of scale of the operator to ensure that the tighter margins and lower revenues still ensure a profit can be made. Thus the initial offering involves a SIM free migration from the main MNO if the subscriber is just moving across or a SIM delivered by post if they migrate from another network. All payments tend to be automated and managed over the internet thus keeping the cost of operations to a minimum. Price plans are tightly defined and customers generally heavily penalised for exceeding their allowed quota be it voice, data or SMS during the month or contractual period. The plans are subject to frequent changes helping to catch unwary subscribers into paying more than they expect but they are also tightly matched to competitors in the market such as the other MVNOs. In summary, they benefit from a reasonably captive market thanks to their parent MNO and from the vast economies of scale that they can achieve, leading to sufficient profit margins to operate.
The separate MVNOs aiming at the high volume markets are only able to survive by a constantly changing marketing message. Their target audience is by and large, the local ethnic population who are very cash sensitive, particularly for international calls back to usually family members in their countries of origin. For a MVNO to survive in this market, they need to capture the attention of the population with an ever changing offering that will offer the best of breed solution to one country one week and to another the following week. The subscribers will chase the best deal for their needs from week to week and will abandon one MVNO for another for an extra couple of minutes or a few cents less to their desired destination. This means that a subscriber may buy a SIM from one MVNO one week, use the voice or SMS bundle included with the SIM until it is exhausted, make a single recharge of the SIM and then replace it with a competitors. The entire lifecycle of the SIM card from initial use until the point where it is dead and out of use may be as little as 45 days. When the cost of a SIM is in the order of 50c to 1 Euro, this is a significant part of the cost of the service. The MVNO will have a contractual relationship with an MNO to supply the radio access as a minimum and potentially the rest of the IT infrastructure necessary to run a MVNO. As a rule, the greater the number of SIMs in the MVNO’s system, the greater the material investment necessary to operate since this means that they can keep their own costs under control and not rely on external 3rd parties. Conversely there is a point when their economies of scale are subsumed by those of the supplier of the MVNO platform (the MVNE or Mobile Virtual Network Enabler) which may be the MNO or a managed service contracted by the MNO. In this case, it is advantageous to the MVNO to relinquish their hold on the operational side of the business and focus on the commercial and marketing side.
This business model is often helped by the regulators forcing the MNOs to offer wholesale deals to MVNOs at commercially viable rates along with the near universal availability of MNP or number porting allowing a subscriber to move between networks whilst retaining their original phone number
In summary, high volume allows small margins and churn control is managed by continuous subscriber acquisition.
The third model is successful because it is used as more than just a revenue generator, in fact it may even be an overall loss to the business but it is seen as part of the package of elements attracting a subscriber to the store along with their store points card, special offers to the store members and other lock-in benefits such as fixed line and broadband solutions. A good example in the UK is Tesco who has been a successful MVNO for several years. Here the economies of scale are generated through the store and the main customer base and are locked into the highly developed FMCG (Fast Moving Consumer Goods) aspects of these vast organisations where a SIM and the rest of the mobile package is viewed in the same way as say a packet of breakfast cereal or a bottle of wine with the added benefit that it helps to improve the ‘stickiness’ of a customer.
The fourth successful style of MVNO aims almost exclusively at the corporate market and offers a service that is either not suitable or not available from the MNO. These are often operations such as secure private networks for senior members of the corporation and the like where security and quality are the key points although actual usage may be low. Since they are usually an integral part of a corporate solution, this is a long term operation with a low risk of churn. The fees are generally agreed at a high level and will be measured in overall terms, not focusing on individual accounts but often attracting contractual guarantees of security and service availability to the corporation. In summary, high value corporate customers with guaranteed payments permit lower volumes of subscribers, albeit demanding a top level service to the customer.
Where have all of the other MVNOs gone? Primarily to the wall, either folding or going back to their base business. Those that do not arrive on the scene with a guaranteed customer base in the low hundreds of thousands are going to have a very hard time in the short term since the setup costs of an MVNO are high whatever model is chosen. Even with a large customer base in tow, the new MVNO has to have a new or desirable reason for a subscriber to obtain their new SIM and to use this in preference to their current one and even this might not be enough if the marketing message or some part of the solution is not well received. Economies of scale are vital since the margins are pitifully thin and can be destroyed altogether by some unexpected change of the rules from the EU or within the MNO community.
Generally MVNOs are not welcomed into a market until it is saturated since the MNOs are keen to capture the maximum customer base without MVNOs confusing the situation. However once the market is saturated, the MNOs themselves become more competitive to aim to acquire the maximum market possible and it is often only when the regulator steps in that MVNOs make their first appearance.
For the new entrant MVNO, the future looks difficult but there are some bright spots on the horizon. The MNOs are still interested in retaining subscribers on their network and gaining some revenue from them even if they no longer appear under their direct control. They prefer that an MVNO should operate within their network than those subscribers migrate to another one thus the wholesale rates offered to MVNOs are intended to allow them to at least survive and to turn a reasonable profit at best.
Whither the future for MVNOs?
Technically, the near future will bring LTE or 4G to the MVNOs since this is now appearing at the mainstream MNOs. These pure data networks will change the dynamics again since the emphasis will be on content and not on voice and SMS, which is usually the ethnic focus. This may mean that a new breed of MVNOs will spring up offering 4G data services to the masses in more competition with the MNOs, but the same dynamics will still be in place – a need for low overheads and an acceptance of low margins. The other (linked) issue which is already an issue for the MNOs is that of the so called OTT services (Over the Top) meaning the likes of Skype and other services that use a data connection to bypass the MNO’s voice and SMS services at a fraction of the cost. MNOs will have to deal with these in a more effective manner than simply blocking them as is common today. Some have already invested in their own OTT solutions to try and retain control over their customer but this is also a compromise solution. For the MVNOs, unless they are happy to simply offer a data ‘pipe’ to the world, this will impact yet further on them given their thinner margins.
I believe that it is still a good opportunity for new MVNOs but it should not be seen as a simple money generating exercise; a careful analysis of the costs and the likely market share as well as looking at others who have failed are essential steps followed by careful choice in the MNO and their MVNE partner to ensure that they can offer the functionality and features necessary to meet the market requirements.