| Introduction | | | | partnership of equals and as such bring mutually |
| Although a much coined phrase, MVNO's have | | | | beneficial contributions to their respective businesses. |
| remained in their infancy until only recently. This paper | | | | While there will be concerns, in particular from the |
| seeks to set out a better understanding of the | | | | network operator, regarding market disruption and |
| concept of a virtual operator, the rationale for its | | | | subscriber cannibalisation it is important to demonstrate |
| creation and the various forms a MVNO might take. | | | | an understanding of these concerns as well as |
| After setting out the some of the barriers facing a | | | | benefits that would accrue to the network as a direct |
| potential MVNO, the paper address some of the | | | | result of the MVNO relationship. |
| implications for the host, the key risks and areas that | | | | As a summary, the primary benefits for the network |
| need to be considered when creating a relationship. | | | | operator are as follows: |
| Understanding the MVNO Concept | | | | · More Traffic. MVNOs can help deliver more |
| There is much said about the concept of a Mobile | | | | traffic on the partner operator's network than the |
| Virtual Network Operator (MVNO), but very little | | | | operator could generate on its own. Given the |
| understanding of the practical implications of the | | | | significant and sunk costs in the network operators |
| concept. In its simplest form, an MVNO is a mobile | | | | business, they need to earn a return on both the |
| wireless service provider that doesn't own the | | | | incremental investment as well as the existing network |
| underlying spectrum or radio network. Rather, it uses | | | | investment; |
| the wireless communications network of a third-party | | | | · Cannibalisation vs Market Share. This will be a |
| carrier. By service provider, the direct provider of | | | | key concern of the network operator, but experience |
| service, not merely an entity that puts its content onto | | | | shows that the rate of loss of subscribers to the |
| the services offered by carriers. There are important | | | | MVNO business will at worse be in line with their |
| distinctions between an MVNO and the typical resale | | | | market share, but ultimately much lower, especially |
| model we have seen to date in the United Kingdom. | | | | where the MVNO seeks niche markets. It is likely that |
| This will change, materially, as MVNOs will change the | | | | the brand will attract a different customer base from |
| wireless industry as we know it today. | | | | that of the network operator as the Boost Mobile or |
| Key Market Developments | | | | Telmore models demonstrate; |
| There are some key points to consider in | | | | · Reduced Costs (SAC's and SRC's). The |
| understanding the facilitation of the emergence of the | | | | infrastructure costs to support an MVNOs customer |
| MVNO player as an alternative entrant in the mobile | | | | traffic will be reduced in line with the MVNOs |
| telecommunications market: | | | | investment in core infrastructure, services |
| · As the mobile networks evolve from 2G | | | | infrastructure, customer care and support as well as |
| voice services through 2.5G and 3G to broadband | | | | operational costs for sales and marketing. In particular |
| packet data, there will arise a fundamental split in | | | | the high SAC's typical of a network operator's |
| business models between customer facing services | | | | business will be reduced significantly for subscribers |
| and the underlying communications networks; | | | | acquired by the MVNO; |
| · There is likely to be some strong brand | | | | · Traffic Management. The MVNO allows |
| MVNOs to launch from major companies in retail, | | | | carriers to diversify mobile risks by allocating some of |
| media and entertainment, consumer products and | | | | their capacity and traffic to the MVNO, which can act |
| services, communications, and financial services. We | | | | as a safety net if the carrier's own services don't |
| have already seen the success of Virgin and Tesco in | | | | generate acceptable volumes and returns. Depending |
| this regard and Disney has announced its entry into the | | | | on the business of the MVNO, the MVNO traffic can |
| market; | | | | also fill the network between busy hours and ultimately |
| · The network operators have been keen to | | | | optimize the efficiency of the network operator's |
| hold onto their direct customer relationships and | | | | network; |
| avoidance of becoming a carrier only business. | | | | · Churn Reduction. In creating a virtual operator, |
| Network operators that concentrate on delivering the | | | | any subscribers that leave the network operator's |
| highest-quality network in terms of coverage, capacity, | | | | own business and subscribe to the business of the |
| technology evolution, billing capabilities, etc, will, in turn, be | | | | MVNO will ultimately benefit from retained revenues |
| best positioned to attract the most profitable MVNO | | | | without associated retention costs. MVNO brands are |
| traffic; | | | | likely to attract high degrees of loyalty as specialists in |
| · Given the duplicative network structure of the | | | | their business, which will ultimately mean lower churn |
| wireless industry and the emerging large scale capital | | | | levels or increased profitability from subscribers. |
| cost of third generation technology infrastructure | | | | Implications for the Host MVNO |
| buildout, the carriers that understand and welcome | | | | · While the Virgin Mobile experience suggests |
| MVNOs on their network will enhance their return on | | | | that the MSP model is flawed, this is more down to the |
| investment; | | | | limited scope of activity by Virgin. They focused on |
| · A business opportunity exists for an | | | | mobile voice only, and ignored leveraging the main |
| enterprise to en-able easy plug and play between | | | | customer on their own doorstep - the Virgin Group; |
| MVNOs and the wireless networks. | | | | The MSP model at launch, therefore, should be |
| What shape of MVNO | | | | discounted as an entry structure |
| There is no real definition of a MVNO, but ultimately it is | | | | · A strong contract will provide the flexibility to |
| an infrastructure model supported by a robust set of | | | | launch applications at speed in much same way as |
| agreements with a network operator that when taken | | | | 'buying' complete control over the infrastructure (but |
| together provide for the maximum independence of | | | | without the issues around maintenance and |
| the MVNO to be competitive in the market without | | | | obsolescence); |
| undue reliance or recourse to the host operator. The | | | | The contract terms must be negotiated with the need |
| are five main distinctions in the models that lead | | | | for flexibility in mind |
| ultimately to an MVNO, including: | | | | · The way that the MVNO is structured within |
| · Service Provider; | | | | the overall Host business, will to a great extent, dictate |
| · Indirect Access Operator; | | | | the ability to raise revenue from the business. |
| · Enhanced Service Provider; | | | | The MVNO business needs to be perceived as a |
| · Mobile Virtual Network Operator; and | | | | central element of the host company's business |
| · Network Operator | | | | structure and be positioned accordingly |
| Infrastructure Control varies according to the services | | | | Understanding the Risks |
| provided. | | | | Despite the opportunities for the MVNOs as set out in |
| · If the MVNO focussed only on developing a | | | | this paper, they do not come with out risk. The main |
| mobile communications brand there is potential to have | | | | areas of risk for the MVNO are: |
| greater control over telco infrastructure; | | | | · The window may close. While there are |
| · The less control the MVNO has over telco | | | | multiple network operators in any one market, huge |
| infrastructure, the less ability the MVNO has to be | | | | sunk costs, and network capacity there will be an |
| competitive with pricing, particularly with regard to | | | | opportunity for the MVNO. If operator consolidation |
| voice calls; | | | | occurs or multiple MVNOs launch, there will be limited |
| · The strength of the contract between the | | | | scope or motivation for the network operator to |
| MVNO and Telco will dictate the ability and speed with | | | | facilitate additional MVNOs; |
| which new services and pricing can be launched and | | | | · Capital Exposure. Depending on the level of |
| the general quality of service. | | | | independence achieved by the MVNO through |
| Customer Considerations. | | | | infrastructure investment, the capital outlay could be |
| · A typical MVNO could increase its profitability | | | | significant and in tens of millions; |
| by selling services across its business (both internally | | | | · Brand Risk. Extension of the host MVNOs |
| and externally); | | | | business into mobile, represents an exposure to the |
| · The MVNO should identify areas where | | | | brand in a new market, where failure could have |
| investment costs can be shared with other parts of | | | | ramification in its core business; |
| the business. | | | | · Regulatory Risk. The regulator in the UK has |
| Infrastructure routes. | | | | generally been supportive of businesses in mobile that |
| · A minimum level of influence is required | | | | support customer choice and reduction in prices for |
| across both the telco infrastructure and MVNO host | | | | the consumer. With the number of MVNO's already |
| business to enable the efficient launch of new | | | | established in the UK there is unlikely to be a regulated |
| services; both physically and politically; | | | | mandate for MNO's to be forced to host MVNO's. |
| · The greatest business benefit will be from | | | | While this makes it a difficult market to enter, once in |
| providing services to both the customer and the | | | | the risk of additional competition reduces. |
| MVNO host business; | | | | · Execution Risk. Execution risk can mitigated |
| · The more integration with the MVNOs core | | | | by gaining an understanding of the MVNO concept, the |
| infrastructure, the greater the potential for | | | | benefits and concerns of network operators, having a |
| differentiation of MVNO, both internally and externally; | | | | clearly defined package of requirements and business |
| · There are a number of transition routes to | | | | proposition before engaging in discussions with the |
| achieve these benefits. | | | | network operator, and gaining 'buy-in' from the most |
| Understanding the Mutual benefits | | | | senior members of the network operators organization |
| In succeeding in developing an MVNO, it is vitally | | | | before entering into the detail. |
| important that both parties view the relationship as a | | | | |