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MVNOs: Perceptions Versus Realities
By David Grigg |
One barometer of the attention being showered on the MVNO (Mobile Virtual Network Operator) channel is the proliferation of trade shows and conferences primarily focused on MVNOs. Five such shows were held in the U.S. in 2005, compared to zero in 2004. And at least six are scheduled for 2006.
This mounting momentum is taking on the feeling of a gold rush, creating a near delirium and sounding the message, ‘if others are cashing in on wireless, I should too!’ This frenzy understandably takes on a life of its own, fostering perceptions that may or may not have any relationship to real-world facts.
To better understand the trends and help separate fact from fiction, I polled numerous executives in the MVNO arena on their view of commonly voiced perceptions. These contacts come from a cross section of the industry and include major U.S. carriers, handset distributors, channel vendors, consulting firms, and executives from several MVNOs. Most were like-minded in their responses, so unless otherwise indicated, the specific responses have been aggregated into generalized statements to get a cross section of opinion about MVNO market development.
Perception: The MNOs (Mobile Network Operators) have a strong need to show continued growth and will therefore accept virtually any MVNO, as long as they can convince the network operator of their ability to scale to a healthy size.
Reality: Not only do MVNOs need to show they can scale, but they must also pass muster on several other levels, including sufficient financial backing, a marketing model that doesn’t compete with an existing carrier channel, and proven business acumen. Until November of 2002, U.S. regulators required wireless carriers to offer wholesale programs. Since then, MVNOs exist solely at the discretion of the carriers, so carriers have to be convinced each MVNO makes sense. Ironically, MVNOs have proliferated since the expiration of a formal mandate to offer wholesales services. Sprint is credited with embracing MVNOs earlier and more aggressively than other nationwide carriers, but the model has matured to the point where even carriers initially slow to warm to the channel are putting out a very friendly welcome mat to qualified prospects.
Perception: The U.S. MVNO landscape is still a wide-open frontier ripe with opportunity.
Reality: The consensus is the market is well past the stage of a full fledged land grab where timing and the lack of competition virtually assured success for new entrants. While not as evolved as the European MVNO market, the U.S. market has matured to the point where success is determined by traditional business prowess including factors such as brand strength, marketing, sales, distribution, and perceived value by the consumer. That said, MVNOs are primarily targeting niche markets and many such markets remain untapped or under served.
The reality is carriers still control the spigot for allowing new MVNOs and closely monitor overall sales and market penetration for the channel. Given the pace MVNOs are proliferating, there could conceivably come a saturation point, or as one carrier executive commented: “We want MVNOs. It’s just that we don’t want too many of them.”
Perception: Carriers require each new MVNO to reach 100,000 subscribers within a year.
Reality: Each carrier has its own subscriber growth requirement; one carrier executive voiced the opinion that he considers a MVNO reaching 50,000 subs within a year a success, 100,000 a grand success, and 150,000 a monumental success. However, according to more than one carrier exec, the actual growth for many MVNOs fall short of growth projections made during the MVNO’s initial presentation to the carrier.
Perception: Many of the new MVNOs will be data-centric.
Reality: Everyone agrees data will play an ever-increasing role in future MVNOs. But there are varying opinions on how the wireless data landscape is evolving and on the impact of existing and future technologies. It will take an entire article to fully explain all the opinions on this subject, but the salient high points follow. When it comes to wireless data, the U.S. market is relatively immature when compared to Europe, Japan, and Korea. Some U.S. carriers are still strategizing internally on how to best monetize their heavy investment in their respective data platforms, including the role of the MVNO channel. One respondent implied that ‘throttling,’ or the ability to block unapproved content, has yet to be fully worked out. There are some skeptics, but the majority of those interviewed were bullish on the future of data-centric MVNOs and expect data offerings to be much more commonplace and affordable, both for the consumer and the provider. Most MVNO execs feel some carriers are not opening their data platforms to them as fast as they’d like, and when they do, the infrastructure is very costly. To address this, several MVNEs either already have, or are in the process of, creating mobile data solutions, although to date, sales for these platforms have been disappointing.
Perception: The biggest threat facing MVNOs is the potential of falling retail rates.
Reality: There were mixed opinions on the likelihood of significantly lower cellular rates. One exec compared the threat to how Long Distance resellers flopped when rates dropped and margins thinned dramatically. But another said this was unlikely as carriers are under pressure from Wall Street to show a high ARPU (Average Revenue Per User) and are therefore loath to lower retail rates, nor are they interested in accepting MVNOs basing their business models on low cost pricing. Yet another executive felt 4G is a long-term threat to current cellular rate levels, drawing a comparison to how VoIP is threatening to overtake circuit switched telephony networks with very low pricing, and suggested WiMax had the potential for the same effect on cellular. Another acknowledged this possibility but felt any such technology disruption was several years away.
In addition to the potential for falling retail rates, MVNOs face several other risks. Some execs felt acquisition costs are frequently underestimated along with the need for continued infusion of capital to achieve growth potential. To this point, Disney was rumored to be spending well in excess of $500,000 per month during their two year effort to launch ESPN Mobile. Everyone agreed that unless you have unusually deep pockets, any single financial miscalculation including missing cost estimates or revenue projections could prove fatal.
Perception: With the advent of MVNEs - Mobile Virtual Network Enablers, an MVNO can focus on marketing, sales and distribution without the need to be overly concerned about back-office and infrastructure issues.
Reality: The MVNE industry is not particularly mature in the U.S.; many MVNEs are relatively new and their services are not as seasoned, as flexible, or as risk-free as they’d like you to believe. Even without the challenges of maintaining a wireless network, MVNO infrastructure is inherently complex. Ultimately the value of MVNEs is all about expertise; you don’t face all the issues or learn all the lessons with just one or two engagements. Even MVNOs committed to tackling their back-office with in-house resources can benefit from interviewing MVNEs to see what they can learn. The takeaway here is significant homework and due diligence are required when it comes to selecting either a MVNE or your own internal back office solution.
Perception: GSM handsets are more plentiful and less expensive than CDMA handsets.
Reality: According to Alex Paskoff, SVP Marketing and Business Development for Brightpoint North America, L.P., a basic GSM voice and SMS handset is approximately $20-$30 less than a comparable CDMA handset and this differential increases with more high-end handsets. Brightpoint has seen a surge in handset sales to MVNOs and availability has been generally plentiful for both GSM and CDMA. The only exceptions are the occasional initial shortage of a newer popular model or when a MVNO desires to use their own handset manufactured by an ODM. Even though a device is FCC approved, each carrier requires a new handset operating on their network to go through their testing lab - which can be a six to nine month process.
Perception: For MVNOs with smaller growth projections or more limited access to capital, a sub MVNO relationship is a good option.
Reality: There are MVNOs and MVNEs with aggregation programs that roll up multiple smaller individually branded MVNOs under a single carrier contract. In theory, this is designed for someone unable to meet the growth requirements for a standalone carrier contract. But so far, results for this model have been mixed. One carrier already discourages the practice.
Perception: Time Warner/Cox cable will be the next big MVNO.
Reality: Of those venturing a guess, most felt this large cable consortium will indeed be very successful MVNO, but some felt eBay/Skype, Vonage (after their IPO), and possibly Google, have the biggest potential.
Parting thoughts: Everyone agrees the MVNO channel in the U.S. has yet to reach its full potential; plenty of upside remains. But in the same breath, many of these same executives hedge their bets, predicting the window of opportunity may begin closing in the near future for smaller players, remaining open only for those that can scale to several hundred thousand subscribers. Regardless of the size, risks for MVNOs are not insignificant, but can be overcome by thorough planning and accurate forecasting. As always, excellent homework is key.
David Grigg has over 16 years experience in numerous IT consulting and management roles within a variety of communication industry environments. He’s currently the Solution Manager of the MVNE, Qualution Systems, Inc., and can be reached at dgrigg@qualution.com.
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