Mobile Virtual Network Operators (MVNOs) have played much better in some geographic markets than others. But winds of change are now blowing through the whole industry, worldwide.

MVNOs are something of an answer to a maiden's prayer. That is, if the maiden in question is a telecoms regulator looking to increase wireless competition. Or a facilities-based operator looking to unload spare network capacity. Or a company - which may or may not be in the telecoms business - seeking a low cost doorway into wireless. Or a wireline-only operator aiming to shift into fixed-mobile convergence (FMC) mode. Or a end-user looking for a cheap service, or a service tailored for a particular community, or one offering brand identity.

To date MVNOs have probably made their biggest mark in Western Europe with, for example, as many as 20 such operations in The Netherlands alone. As a whole the region is a wireless market characterised by:

·   generally well-developed competition on the supply side;
·  a recent history of innovation in wireless service development and commercialisation;
· and notably high levels of penetration

As elsewhere, the initial focus of wireless network operators was to build coverage and capacity, and sign up as many paying customers as possible.  Describing the US market - although exactly the same applied in Europe - Telcordia vp for Telecom Services Doug Patterson notes that at the beginning of the wireless cycle there's little interest in wholesale. When markets mature, though, wholesale becomes much more important. Again looking at the USA , Patterson says that 17% of Sprint's customer base is now MVNO-based, and some 60% of 'new adds' are wholesale.

Does this mean that MVNOs won't fly in markets currently emerging. Not according to Pyramid Research, given a bit of creativity and planning. Pyramid argues that as developed markets worldwide are seeing increased MVNO competition - more than 40 existing and planned MVNOs in the USA alone at April 2005 - emerging markets are the next window of opportunity. The Pyramid Research report 'MVNOs in Emerging Markets', makes the case for MVNOs in developing markets such as India , Nigeria and others.

Report author Guy Zibi comments, "Emerging market MVNOs must be more cost-efficient than their developed market counterparts; they must also be more cost-efficient than emerging market mobile operators, most of whom are already fairly creative in keeping costs down". And to succeed in emerging markets, MVNO models will have to take into account the specificities of each market, and there is limited uniformity in the existing successful models.

Pyramid believes the 'affinity MVNO model' is most optimal for most emerging markets, since it extends the reach of the network without fully cannibalising existing subscriber bases. According to the report, the main challenge prospective emerging market MVNOs face is not necessarily low average revenue per user (ARPU), but network capacity and the extension of the addressable market. Zibi contends that an emerging market MVNO can potentially survive on US$4 to US$5 ARPU, but the MVNO model must be re-adjusted to make this possible, largely on the cost side. To accomplish this, MVNOs must find a so-called 'weakest link' incumbent willing to lease capacity as most operators are unlikely to open their networks.

Cost not the king it was
Discounted prepaid wireless voice and SMS were central to the original appeal and success of  MVNOs in Europe, and the ability to undercut the tariffs offered by MNOs and other MVNOs remains a selling point, if not quite unique selling point, of quite a few MVNOs today. It's also likely that there's still more fat to be removed out of the cost of running virtual operations. However, for a couple of obvious reasons the offer of low cost services is unlikely to continue to be the dominant MVNO marketplace driver that it once was.

One reason is that there's a limit to how low any service provider can peg tariffs and remain commercially viable in voice and 'vanilla' SMS markets that are already subject to on-going price erosion and shrinking margins. A second is that as MVNO numbers increase, the discount first-mover advantage and differentiation disappear.

Maybe Virgin Mobile, one of the original discounters, is ahead of the curve here. An Ovum commentary on the recently published JD Power and Associates UK mobile customer satisfaction makes interesting reading. The survey has Virgin Mobile topping the prepaid segment for the second year running, which gives it a 100% record as it has only been included in the survey for two years. T-Mobile is found to be somewhat lacking, ranking last in both the prepaid and postpaid segment. Orange also made a come back this year, snatching the top place for contract customers from Vodafone.

"So how has Virgin managed to rank above its host network (and everybody else?)", questions Ovum analyst Carrie Pawsey. "Interestingly the main factor effecting customer's satisfaction is call quality and coverage (29% for prepaid and 25% for postpaid)". However, since Virgin uses T-Mobile's network this cannot be the defining success factor for Virgin. "The next two factors are image and cost of the service and this is where we expect Virgin to have excelled. Virgin has a strong brand value within its target segment, and together with its degressive tariff and very cheap on-net SMS charges it will have scored well amongst its customer base. This was reflected in the fact that 50% of Virgin customers surveyed said they would recommend Virgin to their friends and family" comments Pawsey.

Here, notice, tariffs are only one of four factors contributing to customer satisfaction. Pawsey then wonders if the JD Power and Associates findings mean that MVNOs can serve customers better than their network hosts? "Virgin has shown that they can. Being a consumer champion has been one of Virgin's stated objectives since its launch and it regularly taps into customer dissatisfaction in its marketing campaigns. It's a good lesson for other MVNOs looking to enter already saturated markets. Focus on providing good customer service together with value for money in order to encourage subscribers to churn from the traditional MNOs" reasons Pawsey. "This of course doesn't fit with the no frills MVNO business model which offers very little or no customer service. Perhaps this model doesn't suit every market. This might explain the rumoured poor customer sales figures for EasyMobile." Launched in the UK , MVNO EasyMobile is understood to have expansion plans for 12 European markets starting in The Netherlands.

If not, so what then?
If bargain basement price is not the secret of success in future wholesale markets, what else other than the call quality, coverage and image mentioned by JD Power and Associates/Ovum might float the MVNO subscriber boat?

More rigorous market segregation and surgical targeting of niche opportunities is a possibility, but there are limits to how far you can go with this. As a recent report from Global Advertising Strategies of the USA points out, the greatest strength of MVNOs is their ability to identify and address audiences in need of their services, and as new entrants into the market MVNOs are typically the first to compete in their specific niche, giving them an edge. However, says the 'MVNO Marketing Effectiveness' document, in the future executing on this opportunity will be like hitting a moving target, since there will be more MVNOs addressing a declining number of 'virgin' niches, and the number of wholesalers will decrease because of tier one consolidation. Rather heretically, according to Max Smetannikov, vice president of business development and analysis at Global, one of the primary objectives for US MVNOs will be to formulate long-term ambitions with regard to transitioning to facilities-based operations.

There's probably some mileage to be had out of brand and image, although the brand itself can be clearly be weakened if it has to carry too many other products and services, or the if products are too remote from the original. Reports suggest that adult publisher Hustler, rap performer and entrepreneur P. Diddy, and the Disney entertainment conglomerate and its ESPN cable sports network are all among enterprises and individuals currently mulling MVNO businesses.

A number of experts argue that a radical change of focus is actually required, particularly for new entrants. An earlier Pyramid Research report - 'Next-Generation MVNOs' - predicts that market conditions for many aspiring mass-market MVNOs will get worse, not better. This study maintains that, as mobile subscriber bases across developed regions reach saturation levels and price pressure on core voice and SMS services mounts, service revenue for many MVNOs will undoubtedly get squeezed. It calculates that unless many of the predominantly prepaid, consumer-oriented and voice-centric brands do not offset the declines with new value-added services, they will face a difficult road ahead.

Report author Nicholas McQuire states: "The MVNO market is moving to its next stage of evolution. The new MVNO will be more sophisticated and differ from the many consumer-oriented, voice-centric and operationally 'light' MVNOs of today".

Pyramid believes next-generation MVNOs will come to market leveraging future technology drivers such as the proliferation of mobile broadband, IP-based multimedia data services and converging machine-to-machine (M2M) and biometric applications. They will capitalise on important mobile trends such as the growth of mobile wholesale, the need for greater customer segmentation in service offerings and the maturity of third-party MVNO enablers.

'Next-Generation MVNOs' asserts that in addition to a rise of smarter, technically-savvy, and segmented consumer MVNOs, the market will see a sharp increase of MVNO activity in vertical mobile markets such as telematics and supply chain logistics, the enterprise and mobile healthcare. "Vertical market MVNOs will exhibit higher ARPUs and be received with greater acceptance from their wholesale partner as they promise to increase market penetration and reduce spare capacity of high-end mobile data networks without cannibalising existing subscribers" ventures McQuire.

Either way, though, being successful as an MVNO is about to get a lot harder than in the past. The expectation is that not all start-ups and not all established companies will cut the mustard, and industry watchers are predicting consolidation among the MVNOs will follow that among the MNOs.
John Williamson