Telecommunications, Media, and Technology Economics

Hot Topics in the Economics of MVNOs

Mobile virtual network operators (MVNOs) are companies that buy network capacity from at least one mobile network operator (MNO) in order to offer their own branded mobile subscriptions and value-added services. MVNOs present a number of interesting economic questions ranging from how to encourage MVNO entry to valuation, antitrust, and strategy questions.

Below is a list of current MVNO issues that I frequently encounter not only in the US but also abroad. Please check my blog for additional MVNO discussion.

Got MVNO?

Originating in Japan and the US, MVNOs have become an international phenomenon. Consequently, governments and regulators in countries without MVNOs have been studying why MVNOs have not entered their country, whether MVNOs would thrive in their mobile sector, and what they can do, if anything, to motivate MVNO entry.

In order to answer these complex questions, it is important to (a) have a complete understanding of the economic and competitive impact of MVNOs in countries where they entered, (b) analyze and understand the competitive conditions in the mobile sector in the study country, and (c) examine whether there is a viable business case for MVNOs in the study country. Only then can regulators decide on the proper incentives to encourage MVNO entry. Based on the review of over a dozen countries, I do find that unless there is evidence of market failure, regulators should refrain from intervening in the MNO-­MVNO relationship.

I have conducted a number of MVNO entry studies such as the one outlined above, most recently for the State of Israel. To download a copy of the executive summary of the findings of this study, please click on the link below:

Israel MVNO -Executive Summary (Hebrew / English)

MVNO Business Case

MVNOs can expect to generate revenues and profits by targeting unserved market segments and adding value in the form of brand appeal, distribution channels, and other items to the resale of mobile services. In the US, in contrast to services offered by most MNOs, MVNOs focus mostly on the prepaid market segment, providing conveniently priced services that do not involve long-term contracts, credit checks, or early termination fees. Moreover, prepaid services are not subject to regulatory surcharges or additional fees for activation, E911, and mobile number portability. Most MVNOs also add innovative nonvoice services, such as unique ring tones and games, to their service offerings. MVNOs in the US largely redefined the prepaid market segment and enjoyed initial success in the process.

Brand appeal is one of the major components of an MVNO’s business model. As stated by Virgin Mobile CEO Tom Alexander: "If you could put the spirit that exists throughout the whole of the Virgin Group into bottles to sell, you’d be a multimillionaire …. The brand is also our biggest asset because it symbolises the great customer experience that Virgin stands far [sic]."

In addition to capitalizing on brand appeal, MVNOs generate revenues and profits by selecting appropriate corporate structures and strategic partners. For instance, in its UK operations, Virgin Mobile formed a 50-percent-owned joint venture between the Virgin Group and MNO T‑Mobile. Virgin finds it “vital to have an agreement that is beneficial to both parties.” As further elaborated by CEO Alexander: "There is a network operator fear that MVNOs are going to steal a slice of their customer base and openly compete with them but what we actually do is provide T‑Mobile with greater channels to market under another brand name, while the Virgin Group obtains an already built network."

Other business models involving MVNOs having more control over their own fate. MVNOs can opt to become full or extended MVNOs. While this requires more startup capital, it provides companies with additional leverage to compete in the long run. Essentially, for each type of MVNO there exists a business model. In addition, each of these general types of business models can be customized in many different ways yielding a great many MVNO business models. For instance, in developing their business model, MVNOs must not ignore the importance of revenue management and billing systems (as evidenced by the recent bankruptcy of amp’ mobile). Whether to outsource such functions or keep them in-house along with determining which systems to select are strategic decisions that can affect an MVNO’s growth and profitability. Other aspects of a sound business model include flexible pricing, multiple payment options, revenue sharing with MNOs, and the total cost of ownership. In addition, MVNOs frequently offer customers simplified prepaid service plans marked by the absence of long-term obligations or contracts, early termination fees, monthly bills, credit checks, age limits, activation costs and other hidden costs. MVNOs offer lower prices to low-income customers, thus giving them more control over how much they spend on telecommunications. In accessing an MVNOs business model, the following metrics must be evaluated: (1) access to infrastructure, (2) value proposition, (3) customer relations, (4) finances.

Competitive Impact of MVNOs

MVNOs are often heralded as bringing competition and innovation. However, this is generally not true. While there are a number of countries where such claim might be marginally true, generally MVNOs do not compete as independent market players. Rather they serve as a strategic tool for the host MNO. The rationale behind this is simple; most MVNOs in the world have been formed voluntarily. MNOs seeking to maximize their profit would not agree to allow an MVNO access to their networks if the MVNO was not able to either deepen or widen the host MNO’s market. While all MVNOs probably cannibalize the host MNO’s network to some extent, a voluntary relationship will only form if the network of the MVNO brings value to the MNO. Furthermore, the reach of independent MVNOs is limited, having grasped less than 10 percent market share anywhere they have entered. I am not saying that MVNOs have no value; to the contrary, they can be a valuable strategic tool for an MNO that decides not to serve a certain market segment. Rather, I am claiming that MVNOs are primarily complements to host MNOs, rather than substitutes.

If you are interested in learning more about the economics of MVNOs, click on the following link to download a recent MVNO publication of mine, or request the book on MVNO economics that I have coauthored with a former colleague of mine:

The Economics of MVNOs (Newsletter)

Mobile Virtual Network Operators -Blessing or Curse

Understanding the Recent Failures of some MVNOs

The US MVNO industry has been making headlines for a number of high profile MVNO failures and bankruptcies. For instance, Walt Disney Corporation pulled the plug on both of its MVNOs, ESPN Mobile, and Disney Mobile. Similarly, Boost founder Peter Adderton filed for bankruptcy of his MVNO amp’d mobile. Even MVNO darling Virgin Mobile USA still has yet to make a profit, and its IPO has largely been viewed as a disappointment. During the same time, companies such as Apple and Google announced that they would not enter as an MVNO. These moves have raised the question of whether there is truly a sustainable MVNO business model or if these high profile failures are simply the beginning of a larger trend. As I discuss in the article below, I agree that more MVNOs will bite the dust. However, I do not think this necessarily invalidates the MVNO business plan. As long as an MVNO offers value to both customers and its host MNO, it has a solid business plan.

To learn more about the recent MVNO failures, click on the two links below:

Pulling the Plug on ESPN Mobile -Is the Business Model for Wireless Resellers Doomed for Failure?

Mobile Phone Resellers Forced to Take Stock, Financial Times, October 3, 2007

Understanding the MNO-MVNO Relationship

There is much debate about the economic premise of the existence of a voluntary MNO-MVNO relationship. Why do they exist? What are the strategic advantages gained by the host MNO? In light of the many advantages and disadvantages associated with MVNOs, the answers to questions about why they exist and why they seek strategic partnerships with MVNOs are not immediately obvious. However, those answers are important because the relationship being examined is spontaneous and voluntary rather than one mandated by public policy. Since an MNO that sells wholesale services to an MVNO potentially forfeits some of its own sales in a downstream retail market, a voluntary relationship can plausibly exist only if the MVNO adds value to that relationship in ways that mere resellers cannot, such as by widening and/or deepening the MNO-served market. This can help to boost the combined profits of MNOs from both retail and wholesale services beyond what they could earn from retail operations alone. This must also leave the MNO with no particularly incentive to discriminate against an aspiring MVNO, even if it has the ability to do so.

Valuing an MVNO

It takes about US$25 million and about 24 months to launch an MVNO. To convince investors to put their money behind an MVNO requires a thorough evaluation of the MVNO business model and value potential. Such analysis must be conducted with an understanding of the mobile sector as well as the potential of MVNOs. Disputes about MVNO valuation are common because shareholders often think that money was spent frivolously or the founders think that they have not been paid compensation reflective of the value of the MVNO.

The 13 MVNO Lessons Learned from Other Countries

Competitive conditions, consumer demand, technological progress, and approaches to regulatory intervention around the world differ, sometimes drastically. Nevertheless, there are a number of commonalities among the countries that I benchmarked which provide valuable lessons about MVNOs:

Lesson 1: MVNOs tend to serve previously unserved or underserved market segments rather than competing with MNOs,
                and they deepen and widen the market for host MVNOs.

Lesson 2: MVNOs appear in both fragmented and unfragmented wireless markets.

Lesson 3: Typically two to three MVNOs serve the majority of MVNO subscribers.

Lesson 4: Independent MVNOs serve less than 10 percent of the wireless market, and forecasts place combined MVNO
                market shares at less than 20 percent.

Lesson 5: There are no established 3G MVNOs because all larger MVNOs are 2G providers.

Lesson 6: Generally, national regulatory agencies have not intervened in MNO-MVNO. The decision in Spain is currently under
                appeal; moreover, in Hong Kong, regulation produced no MVNO entry and the regulator is currently considering
                lifting all MVNO-related regulation.

Lesson 7: Most regulators have maintained a “watchdog” position; that is, they are carefully continuing to monitor the
                interactions between MNOs and MVNOs.

Lesson 8: Regulators’ decisions to intervene are typically based on a competitive review of the relevant market. The guiding
                principle is market failure, as observed through market power or anticompetitive behavior.

Lesson 9: Generally, regulation has not directly led to MVNO entry, although threats of regulation might have encouraged
                MNOs to negotiate with potential MVNOs, with the exception being Spain.

Lesson 10: Most MVNO business models are built on brand appeal, niche market targeting, existing distribution channels,
                  discount offerings, and prepaid plans and are complementing, rather than competing with, the MNOs offerings.

Lesson 11: Most MVNOs are competitive tools used by MNOs rather than competitors of MNOs.

Lesson 12: The consumer-welfare impact of MVNOs is in extended and innovative service offerings and not in lower prices.

Lesson 13: The most successful MVNOs are frequently acquired by MNOs.

Want to discuss any of these topics? 

Please let me know if you would like to discuss any of these or other topics that affect the economics of MVNOs. Most of these topics are related and a thorough understanding of the entire communications industry is crucial in correctly analyzing strategy questions or legal and regulatory claims.

Interested in another topic? 

Yes, there are many other issues that affect MVNOs, but I hope that I have listed the most important above. Please feel free to send me an email if you think I have missed a current hot topic or would like me to comment on another.