The Mobile Virtual Network Operator (MVNO) brings an innovative approach to consumer mobile internet services. As mobile voice services become more competitive and more of a commodity, re-selling these services using established brands has become an important marketing option. Changes in the market and the cost to acquire new clients have made the MVNOs with their loyal customers, established distribution and low costs an attractive new option for established networks.
The arrival of Virgin Mobile on the UK mobile communications scene in mid-1999 sparked a movement that could fundamentally alter the mobile communications industry. Just about everyone in the mobile business has in recent months, heard the acronym, MVNO… Mobile Virtual Network Operator. MVNOs are essentially service providers who do not own spectrum or network infrastructure, but who partner with a mobile network operator who does. The chief advantage of the MVNO is that it already has an established brand, as network operator or enterprise, and potentially brings a community of loyal customers. These communities can be defined along consumer demographics, industry segments, or enterprise organisations. The currently announced expansion of Virgin Mobile into Asia is expected to trigger numerous network operators and brands from the region itself and from other regions to move into Asia. But who are these new players who are entering the mobile communications field, just at the time when mobile Internet seems poised to take-off? Are they the insidious threat to incumbent operators, destined to reduce the mobile network operator to a bit transport pipe? Or are they the heralded saviours of the 2.5G and 3G world, bringing throngs of loyal customers, eager to use the mobile network in search of their brand's offerings? This paper will examine four market forces driving the emergence of the MVNO concept; identify five emerging success factors; and finally examine what the MVNO scenario should mean to incumbent network operators. Market Forces Driving MVNOs In a market-driven society, new businesses that develop out of opportunities created by market forces are preferred over those that are brought about via legislation. Either way, long-term viability depends upon satisfying market demands by providing value to the customer. Deregulation, or as some might say, re-regulation of the telecom industry will create new market dynamics, which will in turn create new opportunities. Increasing Market Segmentation The sign of any maturing market is the continual segmentation as service providers create new categories in which to claim leadership. Two examples of this continual process are print periodicals (magazines) and the music industry. There is virtually a magazine for every lifestyle, vocation and avocation on the planet. Music continues to create and combine categories in a quest to label new music styles and satisfy individual tastes. The telecommunications industry is not immune to this process. Initially, segmentation could be given lip service, as voice was adaptable over a wide range of customers. The advent of mobile internet surfaced the problem of transforming applications into tailored offerings that appeal to a specific user population. Offering packaged services to the right audience is a key differentiator herein. With a mobile penetration rate hovering around 70 per cent it is no wonder the UK is experiencing an explosion of brands entering the MVNO space. New categories of customers must continually be created to further increase penetration rates as well as retention. Need for Context in Mobile Internet Services While personalisation of mobile portals and terminals can go a long way to addressing increasing segmentation, there is a danger of going to the extreme and creating millions of 'markets of one'; where individuals fail to coalesce into a community of shared values and needs. With the ability to offer a near infinite amount of mobile internet services, there emerges the need to provide mobile internet offerings in a community context. A strong, established brand could bring such a community readily to the mobile market. With the emergence of the mobile Internet, communities defined by consumer brands, industries, or organisations can be brought into the mobile communications population quickly and easily. As market researchers delve more into user patterns and preferences, communities defined by demographic segments will demand that mobile internet services be offered in the context of their group's values and needs. Many consumer and industry brands have long ago developed these communities through sophisticated and expensive brand marketing programmes. They are therefore in the perfect position to bring mobile infotainment services to the communities defined by their brands. The high brand activities combined with the high brand awareness in Asia promises to be a strong enabler. Mainstreaming of Mobile Communications Mainstreaming refers to the population's acceptance of the technical complexity of any given service; sometimes referred by the author as the 'wow factor'. Once this wow factor dissipates, its impossible for an industry to charge a premium for the complexity or novelty of the technology. We have seen this in the airline industry. Passengers could care less about laminar flow wings, turbofan engines, or mach numbers. The mainstreaming of air travel by mass acceptance means the airlines can no longer charge a premium for the technology, (a seat is a seat is a seat) even though modern airplanes are growing more complex. In their case, Mobile network operators oversee a very sophisticated network combining RF, datacom, and internet technologies. However, as market acceptance grows, revenues and loyalty erode. The accept-ance of iMode in Japan has proved this for the telecommunications industry. The clear service pricing models and wide range of services for consumers was the basis for the success. MVNOs, with their established brand power, could provide the attraction to reduce acquisition costs and the loyalty to reduce churn. The Downturn of Equity Markets Downturn is a nice term for it. With the bursting of the internet bubble in early 2000, IT and Telecom companies have seen on average over 60 per cent of their market capitalisation evaporate. At the same time however, auctions for 3G licences in Europe and E/F block spectrum in the US have been won at considerable cost. In Asia however the market situation seems to have learned from these activities. The Hong Kong regulator took even an extra step and obliged 3G licence holders to open up their network for MVNOs. MNOs will need help in filling their spectrum with paying customers if they are to see an ROI within an acceptable timeframe. Partnerships with MVNOs can double, triple or quadruple the resources dedicated to filling a single network with traffic. The large potential volumes and entrepreneurial approach in Asia will bring an interesting battle for market shares. Critical Success Factors We have explored four market forces, which make the MVNO model attractive to incumbent operators, Brands, and users. But what are the critical success factors exhibited by the pioneering MVNOs already out there in Asia such as Virgin Mobile, and network operators expanding in other countries through the MVNO scenario? We will now turn our attention in defining five success factors. Established Brand We live in a brand-conscience world. The mobile network operator (MNO) must compete for customer attention and retention. According to the FCC, the MNOs in the US earmarked an average 28 per cent of its operating budget for marketing and sales in 2000. As mobile penetration increases, the law of diminishing returns will kick in; the next customer costs more to acquire than the last. What is needed are brands that bring an already defined customer base, that can leverage their 'brand pull' and acquire mobile subscribers at a fraction of the cost of the MNOs. This is important to keep in mind for start-up MVNOs. To take on the task of developing a new business while at the same time building a brand and customer base, is to have no advantage in the MVNO model. If the old economy has taught the new economy one thing, it's that it takes a lot of money and a lot of time to build a brand. Virgin Mobile has a super brand position in the UK. However, it's another story in Asia and Australia where take up has been slower and the brand less well known. Virgin Mobile will have to contend with lesser 'brand pull' compared to their UK brethren. An established brand whether in a consumer market or an industry niche is paramount. Low Cost of Acquisition and Retention As mentioned before, acquisition and retention costs must be lower for the MVNO if the business is to succeed. According to some operators and resellers, acquisition costs can and do run as high as US$375 million. Mean-while, retention is becoming a price play, as many subscribers jump to the cheapest package offered. Retention can be increased through strong brand loyalty and perceived value. Perceived value, because the brand is in a position to control more of the mobile internet environment for its customer than perhaps the MNO brands of today. After all, buying into the brand brings with it a tacit permission for some kind of control. This might be viewed as the 'walled garden' vs. the 'hedged garden'. Where the brands might be able to position their products/services prominently on the phone and might be expected to do so by their customer, the MNO brands are finding it difficult to even suggest any type of restrictions. While it is still very early in the MVNO development cycle, it appears that a consumer enterprise that can provide a family of related services is in an excellent position to be generate traffic within the circle of services. I refer to this as the 'pin-ball' revenue model. Virgin Mobile in the UK is a perfect example of this. Composed of some 200 companies, Virgin is a conglomerate of services united under one consumer brand and dedicated to unsurpassed customer service. Like a pin-ball game, users ping between services offered by the MVNO brand, effectively forming a hedged-garden type of portal. The user has the ability to leave the garden, to jump over the hedge, but decides mostly to stay within the garden, driven by convenience as much as brand loyalty. Affiliated partners could be accorded access to this hedged community, for a price, bringing a richer mix of content to the MVNO subscriber. It is vital that affiliate brands complement the MVNO brand and enhance the experience and utility for the user. In this example media companies such as AOL/Time Warner, Disney and Sony have the multiple product lines, services and distribution channels to make this model work. Established Distribution Channels To maintain minimum acquisition costs and take advantage of 'brand pull', there must be an established network of clicks and bricks distribution outlets which already touch the customer community. Virgin Mobile's Virgin Mega Stores and V Shops spotted throughout the UK, provide a network of high profile stores where customers are immersed in the Virgin attitude and experience. This is not the case in Asia or the US, where Virgin has only eleven Mega Stores. The distribution strategy will have to recognise and work around this limita-tion. The omnipresence of retail outlets, with a huge traffic volume, make for excellent distribution models for MVNO initiatives. Customer Intimacy The importance of customer intimacy was reinforced in recent years by the dot com mantra that the customer was 'one click away' from becoming an ex-customer. This holds true for the mobile internet world as well. Physical distribution outlets have helped develop and reinforce an intimacy with customers that give the bricks and mortar companies a clear advantage over pure-play B2C web stores. The same principal applies to the brands wanting to move into the MVNO space. It's not enough to have high brand recognition. Somewhere along the line, the MVNO brand must contact the customer directly, building an intimate relationship. For all the compliments bestowed upon Yahoo!, its now criticized as not having developed intimate relationships with its customers to the level enjoyed by AOL and others. A billing relationship is one way to determine if a brand has the requisite relationship with its customer. Tracking behavioural patterns and actions enough to bill for services rendered, often shows an intimate level of relationship. The more intimate the relationship (customer knows that you know a lot about them and is not upset) the better positioned is the brand to offer preferred mobile internet services. In one context, the MVNO concept can be seen as the fourth stage of ever increasing levels of customer intimacy in the mobile world. A Win-Win HNO Agreement Last, but certainly not least is the need for a workable, scaleable and mutually beneficial agreement between the MVNO and the Host Network Operator (HNO). The nature of the business arrangement can range from a long-term bulk buyer of minutes to a joint venture between the brand and the HNO. Whichever way the relationship develops, it is imperative that the MVNO business objectives be complementary and supportive to those of the HNO. Virgin Mobile has seen fit to insist that a joint venture with the HNO is the only way to align objectives and to ensure a long-term working relationship. To their credit, there is much merit in having both partners with skin in the game. Agreements must as a minimum provide for the 1.) growth of the MVNO in terms of independence from the host network and the ability to offer new mobile internet offerings in the future 2.) ability of the MVNO to take advantage of new network technologies and capabilities; 3.) transfer of lower costs to the MVNO as the cost of network operations decline. HNOs should see MVNOs as opportunities to extend into new segments through another brand (either operator or enterprise). Brands cannot be extended over all segments. The MNO should take a critical look at its brand strengths and weaknesses and formulate an HNO strategy that will result in enhancing its own brand's position while strengthening the network traffic and accompanying revenues. MVNOs and the MNO Today But which brands would make the best MVNOs? This is an important issue for incumbent MNOs who are entertaining partnering with one or several MVNOs. HNOs will face spending significant resources in developing agreements and launching partnerships; they don't want to waste time on MVNO wannabes who have a marginal chance for success. Formulating an effective HNO strategy is a good first step for all incumbent MNOs. The decision whether to embrace MVNOs or go it alone, should be made in light of an examination of spectral capacity and projections, brand position-ing, customer segmentation, acquisition costs, and churn. Only after a comprehensive review can an intelligent business decision be made on this important topic. Conclusion Market forces are at work within the mobile telecommunications market that make MVNOs attractive to operators, brands and customers. While the UK and portions of Europe are launching numerous MVNOs. Asia is starting to have MVNOs already, and is seen as the next large market expansion playground. It remains to be seen to what extent MVNOs will develop in the US. The need and attractiveness of providing mobile internet services in the context of a brand, makes MVNOs a compelling concept. Incumbent MNOs should be proactive and examine their network operations and markets and make an intelligent decision regarding their role with MVNOs.