MVNOs: movers and money makers: mobile virtual operators see opportunity ahead

Telecommunications International, Sept, 2003 by Ouida Taaffe

Despite its capital-intensive nature, the telecom business has been a wonderful money-spinner--because everyone really does love to talk. Given this, the ideal moneymaking scenario would, surely, be a telecom business without those irritating network costs. This is just the model that some companies have striven to build by setting up an MVNO.

What is an MVNO?

MVNO stands for Mobile Virtual Network Operator, but it means different things to different people. "The key aspect is the company does not have a network. They buy airtime--often in bulk--and package it out," says Quentin Woodley, a director at McKinsey.

According to the UK regulator, Oftel, an MVNO is a company that "provides mobile telephony services to its customers, but does not have allocation of spectrum". However, there are a number of variations possible within this MVNO world. At one end of the range is a company that pays a mobile network operator for the use of its essential radio segment of the network, but, "beyond that minimum dependence on the MNO, either invest[s] in all the other facilities required to deliver the service to the customer, or re[lies] on some or all of the facilities of one or more MNO". At the other is an operation that controls only the SIM card and the Mobile Network Code (MNC). Oftel adds that "it is likely that even those MVNOs intent on minimising their risk would also want to control their own Home Location Register (HLR) and Authentication Centre (AUC) functions".

However, whatever the extent of their equipment, what all MVNOs strive to do is tap into customer wallets. "A true MVNO owns the customer. It has an independent customer relationship and provides its own bills. They do need some equipment, some form of interconnect, but they could rent that from the network operator," argues Brian Marshall, a consultant at AMS.

As the broadness of the term suggests, some service providers, such as Carphone Warehouse and OneTel, could be seen to function as MVNOs.

WHO'S lunching whom?

The obvious problem with such a customer-centric approach is that an MVNO can eat the revenue base of the operator that sells it capacity. "Cannibalisation is absolutely the key strategic question. In the UK, for example, the four networks, together with the MVNOs they support, have around 25 per cent market share each," points out Woodley.

Virgin Mobile, a UK-based MVNO that is joint-owned by T-Mobile and the Virgin Group, demonstrated the dangers in its recent Q2 results. Virgin Mobile added 231,554 new subscribers in Q2, 2003 taking it to a total of 2.87 million (Table 1). Virgin crowed that its net adds in Q2 were higher than all of the other UK networks put together. It generated a Q2 turnover of 102.2 m [pounds sterling] ([]145.2 m)

That sort of performance, particularly if it does come at the expense of the network operators, is hardly a spur to MVNO deals--and the market certainly appears to be tighter today than it was four years ago. There are suggestions, for example, that the deal Virgin has with T-Mobile would be impossible to set up today Whatever the truth of that, operators do have reason to consider such a step carefully. "Once you go down the MVNO route, you have a big proportion of your minutes where you can never talk to your end customer. If a network only supports MVNOs, it is effectively a wholesaler," says Woodley.

However, that does not mean that having an MVNO running on a network is necessarily a headache for an operator. "Network operators have high fixed-cost businesses. This means that each marginal minute does net add that much more to the cost base," adds Woodley.

This is why operator attitudes to MVNOs vary. "Some operators are distinctly anti MVNO, some are not," says Marshall. He believes that operators will take a purely pragmatic approach to striking deals. "With some MVNOs if you don't bring them onto your network they will go somewhere else. Agreeing to an MVNO deal, on the other hand, would give the network operator a unique relationship with that content provider. Having a relationship with someone, even at arm's length, is better than no relationship at all," he points out. He believes that draw for network operators will be deals with MVNOs that can offer 'sticky' applications.

If Vodafone's recent acquisition of Singlepoint (for US$649 m) and Project Telecom (a US$248 m price tag) is indicative, they certainly won't be cut out of the customer loop if they can avoid it. Singlepoint and Project Telecom were both independent service providers--a legacy of a regulatory quirk, long since ironed out, that required operators to approach customers through service providers--and, together, they were serving 90 per cent of Vodafone's contract customers. Following the acquisitions, Vodafone has--at least in theory--unhindered access to the full value of this subscriber base.

Singlepoint was the last independent service provider in the UK, and its continued existence was something of an anomaly. As things stand now, the number of companies that can broker capacity deals with network operators on a take-it-or-leave-it basis is small. Some of them, such as Disney, have traditionally kept tight reins on content, as Marshall points out. He believes that such premium content providers may see next-generation networks as an alternative channel to, say, cable TV and there have been rumours in the market that Disney will, indeed, launch as an MVNO. MTV, which has a similarly strong grip on its target market, is already making its MVNO mark in Sweden.