A recent surge in MVNOs entering the market is likely to continue if the UK follows its European counterparts.
The emergence of mobile virtual network ‘aggregators’ or ‘enablers’ (MVNAs/MVNEs) will see operators lower acquisition costs even further. In fact, according to sources, this new model may help to propel the market from around 15 MVNOs, to between 60 and 80 within the next few months.
Meanwhile, a new online method of handling customer service, started in Denmark by companies Telmore and CCB, could cut costs further, making the MVNO an even more attractive prospect for operators.
Orange announced it had partnered with Transatel last week, effectively using it as an aggregator to allow niche MVNOs to be set up. Strategy Analytics analyst Phil Kendall says: ‘It’s a way for operators to handle small people who would bring around 30,000 connections to a network – it’s a logical path to take for an operator looking at its wholesale.’
3 did a similar deal with aggregator X-Mobility, and it is likely other operator partnerships will follow.
Strand Consult CEO John Strand says he expects this model to be taken up by other operators. He says: ‘With MVNEs, what is happening is, if you want to start an MVNO there are costs, if you go through aggregators it means the margins are smaller, so they hit profitability quicker and reduce set up costs.
‘Now Orange has decided to do it with a partner, you’ll see more people going into MVNOs. I wouldn’t be surprised if we end up with 60 to 80 brands.’
MVNOs reduce operational costs for operators, as well as helping to fight churn and grow ARPU by offering new tariffs.
Instead of operators going out and getting money through their dealers, they are going through MVNOs. Traffic is cheaper but there is no need to give commission. Strand tells Mobile: ‘It is a new distribution channel. There are lower margins.’
The first successful MVNO in the UK market was Virgin Mobile, launched in 1999, which now has four million customers. Initially, Virgin used a service provider model, so was effectively reselling T-Mobile capacity.
The Virgin Mobile model has been followed by similar offerings from supermarkets, including retail giant Tesco. However, Virgin Mobile has become more of a subsidiary of its parent, Virgin Media, than a standalone offering. So much so, that it has started to offer high-end contract deals bundled with services such as TV and fixed broadband.
Kendall says: ‘Part of the natural MVNO market is they end up getting bought by their operators, but at Virgin Mobile, they are very much concentrating on contract and decided there was no point maintaining their position in prepay.’
But for retail brands such as Tesco, the attraction is the low cost to put Sim cards on the shelves. Kendall says: ‘It’s got the distribution and brand to push into mobile.’
Meanwhile, niche and specifically targeted MVNOs have had great success – Lycamobile (which recently announced it has sold one million Sim cards) and Lebara being prime examples.
T-Mobile’s head of wholesale marketing, Kai Schmidt, says: ‘MVNOs are specific access to unique segments. The ethnic sector is growing massively and moving over to mobility.’
Kendall adds: ‘And then we have niche ethnic players changing to become the niche of the niche. There is the potential for players to segment and go for more areas of the market, but MVNO players often find they end up against other MVNOs rather than operators.
There may also be room for more youth or student-targeted MVNOs, says Kendall. Where ad-funded Blyk failed, a model has emerged that encourages its users to participate in a community, in return for free minutes or texts.
Giffgaff, which runs on O2’s network, is a prime example. Kendall says: ‘It taps into the flavour of the month with community-based social networking to offer services.’
MVNOs abroad have cut costs further. Instead of spending time and money on customer services staff, everything is done online. Although Giffgaff has done this, the model has not yet taken off in the UK.
However, MVNOs work like this in other countries in Europe, on razor sharp margins. Strand says: ‘If you don’t believe in that [the online model], then you don’t believe in Lastminute.com or Easyjet.’
For success in the market, sources agreed that distribution was a ‘key element’. Kendall says: ‘Tesco, Lyca and Lebara are the ones moving up – they are focused on distribution.’ Schmidt agrees, and adds: ‘At the moment MVNOs are popular for two reasons – because they provide access to revenue streams previously unavailable and they are a form of distribution.’
And MVNOs are popular because they are profitable not necessarily because of high volumes, but because they can create high customer loyalty and provide a constant revenue stream, says Schmidt. He adds: ‘The operators are looking at MVNOs because they are a way to grow and stabilise the business.’
There will be increased competition over the coming months, as operators gear up to take on more aggressive strategies. Strand says: ‘Some will live and some will die.’
The UK seems to be far behind its European counterparts but it is clear there will be more to come.
Vodafone’s MVNO success
Tim Stone – director of wholesale at Vodafone
When I joined in early 2006, we just had BT, but we looked at the market and determined a new strategic approach. We believe in this marketplace, but if we entered it, we had to do it in the right way and do it successfully.
Our strategy is that we want to be the partner of choice in the market. That’s not a cliché. We set up a distinct wholesale organisation to operate in a way that will enable the MVNO partner and Vodafone to be successful.
To succeed, we have to choose the right partners. We look for those that have the right capability and are most suited to Vodafone. We are not arms-length, we really partner with them, because we want them to win. We are looking for scale opportunities.
We believe we are unique, especially in making them successful. All of the partners we chose – BT, Asda, Talkmobile and Lebara – are trading today and have many thousands of subscribers.
Like most networks, what we are seeking to do is increment our revenue by working through wholesale channels, and that’s a very powerful place to be. Lebara has generated substantial incremental revenues for us and itself.
Where the challenge comes is in being really critical in choosing the partner. The risk for the operator is in not spending enough time in deciding who you work with.
The market is very busy at the moment and it is highly competitive, so each network is looking to see how they can increase revenue. Like any wholesale market, when you first get into it everyone is a bit nervous, so not a lot of business happens, but then as it evolves more people are willing to trade.