Mobile Virtual Network Operators and the U.S. Mobile Market
March 2002
The recent announcement that Virgin Mobile and Sprint have concluded a joint venture to permit Virgin access to Sprint’s cellular network has confirmed that Mobile Virtual Network Operators (MVNOs) seem set to emerge as a key feature of the U.S. cellular market.
MVNOs are said to offer corporations, including those who have not traditionally been active in the sector, the chance to exploit the lucrative cellular market without the expense and difficulty which comes with purchasing spectrum and building a network. This combination of low up front investment yet the chance to tap into the high customer spend prevailing amongst cellular phone users is increasingly regarded as an extremely alluring commercial opportunity. MVNOs also offer established cellular operators the chance to increase use of their network and acquire new revenues.
The particular features of the U.S. cellular market have led many to identify this model as particularly suited to this market¾ the preponderance of strong brands, the commercial possibilities of exploiting an easily segmented population and as a way of permitting new operators to enter an otherwise prohibitively expensive market.
In Europe the attractions of this model have meant that more than 20 MVNOs have already launched. Despite this success the area has been marked by controversy, given that the concept has a basic contradiction at its core. A cellular operator entering into an MVNO arrangement runs the risk of creating a competitor which could reduce its subscriber base and related profits. Entities wishing to use the MVNO route have, therefore, accused established cellular operators of blocking access to the market whilst cellular operators have accused MVNOs of trying to freeload their way onto their highly expensive and secure networks.
Given these issues and their relevance to the U.S. market, this article considers what MVNOs are, the advantages and disadvantages inherent in the model and what possible indications that the more established European market provides for the future success of this concept in the United States.
What Is an MVNO?
What exactly constitutes an MVNO? No single definition has yet emerged which is universally accepted and able to adequately encompass all possible variations of this model.
Taking each word in turn perhaps provides a clearer understanding of the concept. "Mobile" means the cellular market. "Virtual" means that the operator does not have its own spectrum allocation or licence which are, instead, acquired from established Mobile Network Operators (otherwise known as the Host Operator). "Network" means that the MVNO provides an element of the physical infrastructure required to operate as a cellular operator rather than using only the Host Operator’s network. "Operator" means that the MVNO appears to the customer as an independent operator in its own right rather than an entity using somebody else’s network.
Beyond these basic premises, the amount an MVNO does itself can vary widely. At one end of the spectrum, an MVNO may wish to control as much as possible. It may, therefore, control its own mobile switching centre, have an independent pricing structure and its own supply of handsets. At the other end of the scale, an MVNO is simply a different brand and dedicated customer care function with all other elements provided by the Host Operator. Whatever the differences in definition, the key point is that for customers the perception is that everything is being provided by the MVNO.
Therefore, an MVNO requires a distinct brand, so the customer feels as if he or she is using a completely separate network. This requires some control over handsets, separate customer service functions and billing platforms. The model is different from reseller models as traditionally resellers buy minutes in bulk and do not go much beyond delivering the same services as the one offered by the network operator.
Is the MVNO Model Suitable for the United States?
It would seem that the U.S. cellular market, with traffic volumes expected to overtake fixed by 2004, is particularly well placed to utilise the MVNO model. This belief is based not only on the view that the same factors which have driven its growth in Europe are present in that market but also because of certain distinct features which are unique to the United States.
Like Europe, U.S. cellular operators are facing massive costs associated with building new networks for their subscribers. There are similarly long lead times between constructing a proper network and subscribers
Providing much needed revenue. Therefore, any initiative which will lessen the financial burden for cellular operators should be extremely attractive to such entities.
There are, however, a number of features of the U.S. market which mean that MVNOs may have even more potential than has so far been the experience elsewhere in the world.
Firstly, the United States is home to some of the world’s most powerful brands. These brands attract the kind of nationwide loyalty and recognition which cellular operators cannot generally hope to match. Such brands are also likely to attract customers to the kind of value added multimedia services which are an essential prerequisite if the next generation of mobile services are to be a success.
Secondly, the U.S. market is also easy to segment, whether on a geographical, demographic or ethnic basis. It should, therefore, be much easier to persuade any Host Operator that there are potential markets which can only be tapped through the MVNO model.
Lastly, operators in the United States also benefit from the extensive experience of virtual operators as pure resellers purchasing wholesale capacity and then bundling these products to offer cheaper minutes to the mass market.
It, therefore, seems likely that the MVNO model will be a key consideration for all those interested in the future of the U.S. cellular market. Corporations which may want to enter this market should, therefore, be aware of the advantages and pitfalls that this market provides.
What Kind of Companies Are Attracted to the MVNO Model?
MVNOs are attractive to companies with strong brands, which usually have not been used previously in the cellular area. In particular, anyone that can offer innovative services and appeal to different demographic sections to target niche sectors and tailor services should be attracted to this market.
Some corporations already active in other areas of the telecoms sector are attracted to the model. In the United Kingdom, some established fixed line and broadband network operators are using the concept to offer customers bundled cellular services. European cellular companies that were unsuccessful in acquiring 3G licences and require a pan-European network are attracted to the concept as a cost-effective way of filling gaps in coverage. An example of this was seen in Sweden where the incumbent 2G operator Telia concluded an agreement in January 2001 with Swedish 3G Swedish licence holder Tele2 AB in order to access this new market.
Advantages of MVNO Model
Host Operators have traditionally struggled in understanding what their customers want. High "chum" rates (customers charging operators) is just one indication of a market where customers have little loyalty to their operator. Host Operators have also generally proved poor at understanding what content will attract new subscribers. Given the importance of such multimedia services to the future of the cellular market using established companies as MVNO may be a profitable way of exploiting the knowledge of others. An MVNO can, therefore, exploit factors such as a superior brand, customer service functions or content to attract new customers who would not necessarily be attracted to the existing Host Operator. The model can be used by cellular operators seeking to expand their geographic reach as well as by brands which are sufficiently strong to leverage consumer loyalty across markets (e.g., the UK supermarket chain Sainsburys has become an MVNO offering a branded cellular service to its customers). The concept also appeals to operators with fixed capacity as offering the opportunity to offer a combined fixed and cellular service with one tariff and one bill and discounted rates to customers who subscribe to both services.
For Host Operators, MVNOs offer the possibility that traffic on their network will be increased as they offer capacity on a wholesale basis. Given the importance of recouping high investment costs this is an increasingly important consideration. MVNOs offer a way of addressing areas of the market which would not be reached by Host Operators as well as providing innovative services, branding and marketing expertise.
Disadvantages of the MVNO Model
Despite the positive features outlined above, there are a number of recurring issues which have led many to conclude that this model has significant flaws. The most significant problem is the basic conflict which Host Operators face, that by permitting access to their network they are permitting the creation of a competitor which will lead to a reduction in their subscriber base.
There are also clear and understandable security concerns regarding giving an outsider access to the operator’s most important and expensive asset, its core network. There is also the fear that permitting MVNO "first mover" advantage in the provision of lucrative data services will mean the Host Operator will become a "dumb pipe" starved of these extra revenues. MVNOs, as a largely unregulated area of the market, will have all the benefits of being an operator without any balancing licensing obligations.
It is, therefore, a critical prerequisite to success that the Host Operator is convinced that the selling power of the MVNO name can be used to increase the number of customers on the Host Operator’s network by attracting new subscribers that the Host Operator would not have been likely to attract or by churning customers away from other networks.
MVNOs themselves face significant problems in constructing a coherent business case. Some have found that providing even a "virtual" network is prohibitive. Costs of equipment are high and may make the project uneconomical given that volume discounts may not be available to new entrants. MVNOs must also develop intelligent billing systems which can accurately charge subscribers and also split complex financial transactions between the MVNO itself, the Host Operator and any third-party content provider. The greater degree to which the MVNO relies on the Host Operator for these services the lesser the possibility for service differentiation to diminish as the MVNO increasingly resembles the operator whose network it uses.
Regulatory Background
Unlike virtually all other areas of cellular service, MVNOs have arisen without encouragement or protection from regulators. Although this attitude is changing due to the pressures of 3G, there is little regulatory incentives for Host Networks to provide access to their networks. Indeed the FCC does not currently acknowledge the MVNO concept.
The key issue relates to the terms on which the MVNO can utilise the services provided by the Host Operator. Indeed one of the first MVNOs, Sense Communications of Norway, went bankrupt because it could not secure access on commercially viable terms.
However, cellular licence holders, particularly those who have paid a premium to enter the 3G market, are keen to ensure that they are not required to provide access to MVNOs. Having paid billions in licence fees on the understanding that they would reap massive rewards, they feel that they should not now be forced to provide access to their networks. Successfully resolving this issue will be vital to ensuring that MVNOs can grow as part of the mobile market.
Key Issues
Despite the interest in this business model, there are regular reports of parties being unable to come to a satisfactory deal and instead abandoning negotiations with recriminations before any deal is agreed. However, the industry has identified a number of factors which should increase substantially the chances of success. Fundamentally, prospective MVNOs and Host Operators should recognise that this is almost entirely a commercial arrangement. This discretion is something of a unique factor in a market where so many commercial decisions are governed by regulatory considerations.
MVNOs must, therefore, recognise that without the support of the Host Operator no deal is likely to be possible. One consideration in persuading a Host Operator to grant an MVNO access is, therefore, to provide clear evidence that the MVNO’s services will be complementary rather than conflicting. In particular, MVNOs are unlikely to secure the kind of wholesale deal which will give them a substantive price advantage. MVNOs will have to look at other possibilities which provide a unique selling proposition, combining benefits for subscribers with benefits to the Host Operator.
Joint Venture arrangements should also be considered as a means for MVNOs to assuage the Host Operator’s concerns over giving access to a potential competitor. It is perhaps no coincidence that the most successful MVNO model is Virgin Mobile which is in fact a series of joint ventures with existing Host Operators in the United Kingdom (One2One), Australia (C&W Optus) and in Asia (Singapore Telecom). Such a joint approach provides the Host Operator with the comfort that access to the Host Network will be tightly controlled, and they will share in any profits the new venture makes.
Given the expense associated with this sector, potential MVNOs should also consider whether other routes into the mobile market would also lead to profit from this area. Providing branding support to established Host Operators, becoming an indirect access provider or entering into some kind of partnership agreement with those already active in the sector may provide a satisfactory return without the difficulties associated with the MVNO business model.
In addition to the U.S. announcement regarding Sprint and Virgin, so far around 20 MVNOs, in different forms, have emerged elsewhere in the world. It, therefore, seems clear that the mutual advantages this concept offers will make it an important part of the cellular market in the United States and beyond. It should also help cellular operators to raise revenues by the introduction of brands which engender greater customer loyalty. Companies with little or no previous experience of the telecoms sector should be attracted to MVNOs given the potential advantages of offering the chance to diversify into a risky market with far less up-front investment.
However, the success of MVNOs is far from certain. Without recourse to regulatory assistance the onus is on the MVNO to show the Host Operator the unambiguous advantages which would occur if they permit access to their network. Such advantages are unlikely to be apparent if MVNOs wish to offer similar services to those already offered by the Host Operator. To be successful MVNOs must identify niche markets and cater to their needs rather than try to undercut Host Networks.
The other key consideration in this flexible market is deciding exactly how much will be undertaken by the MVNO itself. Initially it was thought that such operators would attempt to build as much as possible of the backbone network themselves in order to try and create a cost advantage over the Host Networks. However, faced with diminishing returns and a more difficult environment, this has not happened. Instead, it is the approach to branding which now considered paramount. This more limited approach also reflects an uneven commercial reality where only a limited number of
Host Networks will support MVNOs, and there are largely no legal obligations to permit access. However, even with these problems it is not unrealistic to predict that this concept will become increasingly important in the U.S. market.
Corporations with existing telecoms interests, instant distribution points or strong consumer brands will increasingly be attracted to this model as a way of gaining additional revenue. The particular features of the U.S. market means this model may well become a feature of the cellular market.
