The Tale of MVNOs
By Wendy M. Grossman, Thu May 03 00:00:00 GMT 2001

Throw a contract for mobile phone service into your shopping cart alongside the bags of flour and kitty litter at your local supermarket? Folks like Sainsbury?s and Virgin are hoping you will.

Mobile virtual network operators (MVNO) - operators that sell you mobile phone service by branding someone else's service - seem to have begun in the UK. In November 1999, Virgin joined with One2One, the smallest of the four UK network operators, and launched Virgin Mobile to use Virgin's strength of brand to attract customers One2One couldn't get on its own.

In a market filled with complex contracts and mystifying tariffs, Virgin opted for simplicity and innovative services, like top music hits over the phone and a shopping assistant that checks for better prices. Virgin intends to expand into a number of other countries including the US, and is already operational in Australia and Singapore.

The operation has been widely praised as successful, and supermarket chains Sainsbury's and Tesco, mobile phone retailer Carphone Warehouse (Value Telecom), and telecomms companies like Kingston and Energis are all either running or have announced services, and that's just in the UK. Telecomms specialist Analysis lists stacks of others: Deutsche Telekom, looking at France and Italy as an alternative to bidding on 3g licenses; France Telecom looking at Spain; Hutchison thinking about Germany; and OneTel and KPN considering a partnership in the Netherlands.

However, Virgin Mobile's goal was 1 million users 15 months after its launch in November 1999. By April 2001 it had 800,000, representing 10 percent of One2One's traffic. Not quite what they'd hoped - and the Virgin image ought to be a perfect match with mobile phones: young, stylish, a bit different.

The idea sounds good. Retail companies like Virgin, Sainsburys, and Tesco "understand the consumer" and have existing audiences. At least theoretically, they know how to present products so they are understandable to the mass market - witness Virgin's simplified tariff. Telcos and ISPs may be able to offer bundled services including everything from broadband to mobile email. Many of these companies have other, strong businesses to fund their expansion into new fields - if they can find unique selling points.

Sainsbury's, for example, promises that you will always be billed at the best tariff, so you don't need to know who's offering the best deal. In other words, they calculate each month's bill comparatively and charge you the cheapest rate you could have gotten from the four mobile network operators - Vodafone, Cellnet, One2One, and Orange. The comparison doesn't include other MVNOs, however.

The strategy

For network operators, the appeal is the same as that of selling bulk discount tickets to consolidators is for airlines - unused capacity produces no revenue. They hope MVNOs with strong consumer loyalty will reduce churn - customers switching from one network to another seeking the best deal.

But Ajay Gambhir, a consultant in Ovum's wireless group, says in fact the mobile networks are highly overloaded at the moment, as the economic slow-down has halted investment. "Every pan-European operator is sitting back holding its breath," he says. Yet Ovum projects that by 2003 the world's MVNOs will take in revenues of close to $2.5 billion.

Branding and reselling telecommunications service is not new. Swiftcall and OneTel do exactly that in the long distance voice market; the discount appeals to the heaviest long distance users. In Internet service provision, Freeserve pioneered branding, buying in its bandwidth from Planet, which it later acquired.

Freeserve's success spawned hordes of imitators, from supermarkets such as Tesco to computer manufacturers Tiny and Gateway, who bundled online access with their computers. Arguably, it was a fad. The only branded ISP other than first-mover advantaged Freeserve listed in ISPReview's April list of top ten ISPs by subscriber numbers is Tiny, with 700,000 subscribers.

One problem for MVNOs, however, is that when Freeserve launched, the Internet access market was much less mature than the mobile market now. Even so, Lars Godell, a telecoms analyst with Forrester Research, says, "We predict that the number of mobile phone subscribers will grow from 54 percent of all Europeans to 76 percent in 2005, leveling off after that. There's a lot more fat in the mobile industry, so it will be an easier life than virtual ISPs had."

But it's arguable that the audience that has resisted getting mobile phones this long is the hardest to reach and the least likely to be profitable. If MVNOs merely succeed in drawing their customers from existing operators (which seems to be what Sainsbury's is doing with its tariff), then they simply cost the network operators revenues. The exception is the successive waves of young people who come onto the market each year, and it's this market that Virgin has targeted.

As Gambhir points out, however, MVNOs do not have to target consumers; a number of large corporations may elect to buy bulk minutes and provide their own mobile service, just as many run their own fixed-line telecommunications networks. In the UK, General Motors is planning an MVNO to extend its cars' capabilities and compete better with Ford. Similarly, ISPs selling broadband services might want to be able to bundle mobile phones pre-configured for email access.

But the prospects for MVNOs to sell ordinary service to individuals seem to me limited. Because calls to other mobile phones on the same network tend to be priced more favorably than calls to other networks, heavy non-business users, especially young people, tend to stick to the network their friends are on. Heavy business users have other considerations than price or branding: network coverage, number portability, reliability.

Light users don't have much motivation to change unless the MVNO can offer unique features they really want. I personally have a strong bias against changing the number everyone already knows, and my bills aren't high enough to make it worth spending much time comparing prices. In the US, my pre-pay phone was selected on the basis of location (I needed it to work in Harrisburg, PA), national coverage, and strong preference for a duplicate of my European phone so they'd work the same way. Pricing was the last consideration.

3G's impact

The situation changes when you look at 3G. Many hope that big brands can help mobile operators, saddled with the crushing costs of license fees and network build-out, to gain subscribers at the fastest possible rate while sharing the marketing and other costs involved. As operators of both types become able to offer their customers value-added mobile services, theoretically the pot of revenues should grow, with both winning.

In the US, there should be even more scope, particularly for Virgin, as mobile phones have not yet penetrated so far into the youth market. Pre-pay is only starting there now.

Even so, Godell says that network operators are being flooded with inquiries from would-be MVNOs, and he believes, as he wrote in his December report, "Europe's UMTS Meltdown," that mobile operators who don't sign up MVNOs are condemning themselves to a quick and painful death by financial squeeze.

Several problems persist, however. One is the reluctance of some network operators to partner with MVNOs. Godell believes that this reluctance will give way in the face of financial pressures. Second is the general absence of a regulatory environment, outside of Italy, where protection against MVNOs is written into network operators' licenses.

But MVNOs may also represent a slow and painful death by financial squeeze. Says Godell, "Already popping up in some countries are services that use voice as a loss-leader, which will kill the collective rationality of the industry and its cash cow." Sweden's Mobyson, for example, which targets the youth and entertainment market, regards voice as a necessity but not a revenue driver.

For network operators, voice was 95 percent of revenues last year. MVNOs, with no legacy revenues to protect and competing on voice charges to focus on pulling in revenues from more profitable data, represent both an opportunity and a threat.

Wendy M. Grossman is a freelance writer based in London, and author of net.wars .