Mobile Virtual Network Operators
America’s Latest Import
By Khali Henderson
In June, Virgin Mobile (www.virginmobile.com/mobile) announced that it had acquired its millionth customer in 19 months, making it the fastest-growing mobile startup in the United Kingdom and, according to data from EMC Corporation (www.emc.com), among the top two percent of performers in the world.By Khali Henderson
While these achievements are impressive by themselves, their significance is greater when considering that the company is not a mobile carrier; it’s a mobile virtual network operator (MVNO).
What’s that? Well, everyone agrees that it’s a brand new distribution model making its way to the United States after successes in Europe, Canada and Asia. But exactly what an MVNO is depends on to whom you pose the question.
“It is a term right now that does not have a clear definition,” says David Gusky, executive vice president of ASCENT (www.ascent.org) and former executive director of the National Wireless Resellers Association, which ASCENT acquired in fall 1997. “Let’s face it, I’ve been around wireless resellers as long as anybody, and it’s been tough for me to figure out what all this means. The thing that is clear to me: You better be big, you better have a strong brand [and] you’ve got to bring something to the table that these carriers would like in terms of distribution.”
In the simplest terms, MVNO describes a private-label resale agreement. But then there’s nothing new about that–wireless resale has been available–albeit not thriving–in the United States for years.
From an economic and competitive viewpoint, some distinct differences exist between MVNOs and resellers, says Charles Gildehaus, president of Mercator Partners (www.mercatorpartners.com), a strategy-consulting boutique specializing in emerging technologies and new business models.
“By contract, [resellers] are forced to sell exactly what [the underlying carrier] sells,” Gildehaus says. “They just slap a different label on it. But that is a really tough business to make work. In contrast, an MVNO has very few restrictions or limitations on how they use the capacity they bought. They can reformulate the offer from soup-to-nuts [and] add value-added services. What they are primarily buying is the transport capacity, not just the [underlying carrier’s] plan and re-labeling it.”
So, it’s more like a wholesale network services model akin to what has evolved in the wireline industry? Yes, but not necessarily.
According to analysts with The Strategis Group (www.strategisgroup.com), an MVNO traditionally has been seen as a service provider issuing its own SIM cards, operating its own mobile switching center, using a pricing plan fully independent from that of the host operator’s network and having its own unique network code with a distinct number series.
However, that model has not proved viable, at least not in Europe. Instead, the analysts report, the new breed of MVNOs operate without owning switching centers, although they may run their own billing engine, voice mail system and messaging platform. Further, they say MVNOs such as Virgin Mobile are effectively resellers of services and have no infrastructure of their own.
So an MVNO is a moving target? Yes, but more in the execution than the outcome, experts say.
“The whole philosophy [of an MVNO] is that it is mutually beneficial,” says Strategis Group senior analyst Adam Guy. “[MVNO arrangements] really make sense only if the virtual operator can deliver market segments or higher margin services that the incumbent hasn’t been able to.”
Given these expected results, MVNOs–at least the successful and desirable ones–now are considered to be existing entities that bring to the table a known brand and a community of interest as well as a distribution network and/or content. The exact structure of the deal beyond that seems to be negotiable.
Under the current U.S. regulatory regime, however, the structure of the deal can be important. If it is an arm’s length resale contract, wireless operators are required to offer the same service to other similarly situated entities.
Gusky does not expect the resale obligation to figure into the MVNO scenario for two reasons: One, the terms and volumes that a big brand company can commit to will be hard to match, especially by traditional telephony resellers, and two, wireless resale obligations sunset on Nov. 24, 2002.
Other industry observers expect that resale obligations won’t be an issue because the transactions will not follow the pure resale model, but will involve some of the same characteristics of the only successful alternative distribution models for mobile services–agency and affiliates.
“My personal belief is that if the [U.S.] carrier community is going to embrace another distribution model, it will do it in the context of joint ventures or some other model that gives them additional opportunities for revenue enhancement or additional opportunities for affiliated relationships than [does] a pure resale model,” says attorney Judith St. Ledger-Roty, a partner with Kelley, Drye and Warren (www.kelleydrye.com) and head of the firm’s telecommunications practice.
In fact, that may be what comes to pass with the first-ever MVNO deal in the United States. Virgin Group (www.virgin.com) and Sprint PCS (www.sprintpcs.com) signed a Memorandum of Understanding in late June. At press time, the agreement had not been finalized and was not guaranteed to go forward, but a spokesperson for the U.K. upstart said that it would be fair to say the contract is modeled after the company’s previous arrangements with carriers in the U.K., Australia and Singapore.
Virgin Mobile is a 50-50 venture between Virgin Group and Deutsche Telekom AG’s One2One (www.one2one.com). Virgin Mobile Australia is a partnership with Optus (www.optus.com.au), which opened for business in October. A similar joint venture between Virgin and Singapore Telecom (www.singtel.com) will launch Virgin Mobile Asia later this year.
“They have a vested interest in seeing their investment in our company thrive and succeed,” says Steven Day, director of corporate affairs for Virgin Mobile. “That relationship is fundamentally different from a wholesaler of minutes and a reseller of minutes who just packages them up and sells them on to the public. Basically it means we can offer much more dynamic services, very different services, and we get network aid and help in bringing to market some ideas that we have that may need technical support to execute.”
Whatever its structure, consummation of the Virgin Mobile-Sprint deal may have the effect of lifting the floodgates, says Gildehaus: “Just think about carrier behavior–most are old-line companies that have a lot of tradition and a lot of legacy. They don’t always move terribly nimbly, but when one of their big competitors moves, they tend to move.”
“It’s useful to note that Vodaphone
[www.vodaphone.co.uk], which is the mega global company, says, ‘MVNOs? Over my dead body,'” he adds. “Guess what? They are out actively courting MVNOs now. Why? I think it’s because the other guy [One2One] did it.”
It also may be because Vodaphone has lost 27 percent of its market share during the last year.
Gildehaus says a network operator is certain to improve its market share with an MVNO strategy. The reasoning is simple: It harnesses companies’ marketing muscle.
St. Ledger-Roty is less convinced the MVNO model will be a sweeping trend.
“Part of [the success of the model] depends on spectrum, the extent to which new spectrum is allocated and the timing for that,” she says. “Part of it depends on the success of the first one into the market. If the first one presents a compelling story, if people begin to use the device differently, not just for voice, but as a data-centric device … then I think there will be follow on.”
Is Virgin, a lesser-known import, going to be a good test case? Most industry experts give the company high marks for its entrepreneurial and branding skills, which they say will quickly overcome its lack of marquee status.
While admitting that Virgin Mobile has its work cut out for it in the United States, Day says the brand has reasonable name recognition with its airline, record stores and record label (now owned by Sony-BMI).
Its entertainment ties have most observers looking at Virgin Mobile to target the young adult market. However, Day insists the company uses a mass-market approach without appealing to one segment over another. In the United Kingdom it is considered by the consuming public to be the fifth carrier; its wares are sold along side those of the other four.
Day says Virgin does have the advantage of being what one New Yorker termed “funky”–a reputation, which he says has helped its mobile unit to attract 1 million customers in less than two years.
Like Virgin Mobile, good candidates for the MVNO model include big retailers with established distribution, services companies with strong customer relationships and media or content companies, says Gildehaus. In a hypothetical example, a company like American Express could brand a wireless service that also offers the ability for its customers to access their financial and travel-related services along with traditional voicemail and instant messaging functions.
Depending on how the deal is structured, St. Ledger-Roty says it is conceivable that the network operator might participate in revenue sharing for such data-centric services the MVNO offers, further increasing the value proposition and breaking down certain resistance from the underlying carriers.
The biggest perceived threat to the incumbent is becoming a dumb pipe, says Guy. “Nobody says, ‘This is great content, who is your provider?’ The customer is going to see the [MVNO] as the provider. So it further commoditizes the wireless networks.”
Gildehaus says that while that risk is present, he also is convinced of the potential upside: “For the network operator, there is the glass half empty and the glass half full. If you have an abundance mentality as an operator, then you see this as a wonderful strategic move.”
He takes it a step further by saying the MVNO emergence is part of the market’s evolution toward specialization. “Carriers can’t do it all in the world of data,” he explains. “It is difficult to have the brilliant marketers at one end, brilliant network operators in the middle and brilliant infrastructure owners as the bottom–all in one vertically integrated company.”
We’ve already seen the infrastructure portion break off with companies like American Tower (www.americantower.com) operating radio towers for network operators. Now we are seeing specialization on the marketing side.
Some say that may be overdue. Incumbent carriers are not known for their marketing savvy, and now some are suffering from branding challenges, says St. Ledger-Roty. “With the exception of AT&T Wireless or Sprint Spectrum, [and] less so Nextel, the regional companies don’t have a nationwide brand.”
She adds that even in their regions, a few have undergone rebranding: “BellSouth Cellular is now Cingular. PacTel Paging was AirTouch, now Verizon. I don’t think any of the existing carriers have so strong a brand that they could not be overcome [or helped by an MVNO].”
Khali Henderson is editor in chief
of PHONE+ Magazine. She can be reached at email@example.com.
Switch-based MVNO Aids Telephony Resellers
While most MVNOs are following a switchless model, Canada’s ASP Wirelessnet (www.aspwirelessnet.com) has collocated and interconnected switches in the central offices (COs) of its underlying carrier, wholesaler Microcell Connexions (www.microcell.com).
Using the programmable switches from partner Homisco/VoiceNet (www.homisco.com), ASP Wirelessnet can offer services to communities of one. For example, it can tailor a program for an association with different options for each member. In theory, if there were 10 million members, there would be 10 million plans (in contrast, a traditional MVNO would create a single offer for an entire community of interest).
Because of its flexibility, ASP Wirelessnet provides services to organizations that might, in turn, be considered MVNOs, including Canadian retailers, corporations and affinity groups.
In addition, it has found some creative ways to leverage its service for traditional telephony resellers.
By using its switches to build out its own long-distance network, it is able to offer wireless international long-distance pricing at a fraction of current retail rates. For example, its rate anywhere in North America, Australia, the United Kingdom and Hong Kong is just 9 cents per minute.
“As you can appreciate, our wholesale customers can make significant margins on postpaid and prepaid long distance in the wireless arena,” says David Mackereth, president of ASP Wirelessnet.
As an example, Mackereth cites a 10-10-XXX dial-around service provider that uses ASP Wirelessnet to offer its customers the same international long-distance rates from a wireless handset that they can receive from the landline phone. In addition, the caller does not have to dial an access code when using the wireless device.
In another example, a new local access provider in Canada wanted to add wireless services to assist in raising capital. ASP Wirelessnet allows them to provide a custom branded wireless service just like a Tier 1 carrier.
Similar opportunities exist for switched and switchless long-distance resellers to provide branded wireless services. In addition, ASP Wirelessnet can help prepaid phone card providers to offer a prepaid wireless services.
While all of these services are currently available only in Canada, Mackereth says ASP Wirelessnet is investigating opportunities to expand into the United States.