MVNO’s are generally classified as operators which do not have their own network equipments and they may not have the required licenses to use a frequency band. They simply lease or buy network usage time from the existing network operators and resell it. They however do it by adding value services to the end consumer. Their business model seeks to make profit through these value added services.
Some of the other probable definitions explain a MVN operators as providers of mobile and voice data services without actually owning the access right to the spectrum they use. Consequently MVNO’s can be described as sub-groups of Mobile Service Operators. The radio capacity used to provide these services is obtained through commercial agreements with the licensed mobile network operators. Another definition of MVNO’s differentiates them from MSO’s in terms of technology (network components owned) by the MVNO like the Mobile Switching Centre, Home Location Register (HLR), and Intelligent Network (IN).
Virgin Mobiles (UK) was the world’s first MVNO. It was actually the fastest growing Mobile operator at the time of launch adding a million customers in 19 months. MVNO’s market is basically being targeted by the already existing business houses having brand value in domains other than telecom, like ESPN mobile and Walt Disney, though the latter did not meet with much success.
Business Value Analysis:
As the telecom sector grows and more number of players enter the market, we observe the gradual reduction in rates due to increased competition. The race is always on to increase the average revenue per user (ARPU). Now we understand that setting up a telecom infrastructure is an expensive process moreover in emerging markets the roll out of infrastructure should be quick enough to achieve the desired market capitalization. We observe that major big telecom players shed huge amount of money to buy licenses to operate their services.
The main aim is always to make use of 100% capacity. But in ideal case we observe that resources are vastly underutilized. Now the existing network operators are losing out of revenue due to this. This is one reason why the incumbent operators give out some portion of their allotted airtime to these MVNO’s so that Network operators can get returns on everything they have invested. Thus say they have the capacity to provide facility to 10 users at a given time but only 5 users are actually using it. So they lose out on the revenue of 5 users and the resources are underutilized. So rather than going for unutilized sources they share it with MVNO’s so that the full utilization takes place and increase the ARPU.
Important Lesson:Let us first break up a telecom market into say the urban and rural sector. We observe that that mobile penetration is pretty good in urban areas and scarce in rural areas. Now we also know that call rates are almost the same for all operators in urban areas due to heavy competition and huge customer base they target. Now to achieve a higher ARPU in urban markets they have to come out with ways to achieve higher returns. For this they have to provide value added services. We generally observe that these big telecom network operators may not have the required expertise and workforce to work in these areas and may require huge investments. This can hamper their growth in some ways as investments are high. Moreover to setup such a unit is time consuming. These network operators having already invested heavily in setting up infra and buying spectrum look to MVNO’s to solve their problem. God Sent: MVNO’s suffer from the same problem, they must be eyeing the telecom market but they may not have the required capital to buy spectrum, moreover may not be patient enough to roll out the infrastructure. Now both the network operators and virtual network operators turn to each other to solve the problem. Generally the MVNO’s are business houses which may be huge names in other sectors. They tie up with these NO and provide these Value added services. The branding may generally be done in the name of the Virtual operator because that may create a buzz and generally attract a huge following. Thus in urban markets the MVNO’s create a niche. They target specific areas and age category. Like the Virgin Mobile provides ringtone features, music sharing among peers, caller tunes etc. and attracts lot of young population. Now these value added services attract customers to these new MVNO’s. End result: the MVNO’s profit by repackaging and selling talk times brought from the Network operator. Due to the saturated market and limited resources to invest in new innovative services, to create a brand and following out it among customers, to increase ARPU, and net utilization of its resources, the Network operator shares some part of its spectrum with the MVNO. This leads to achieve higher ARPU, indirect profit by utilizing the brand value of the MVNO and thus overall increased customer base. Thus it’s a win-win situation for both.
In rural markets the penetration is not that great. Moreover there are lesser number of players in the market. The rural markets may also not demand these value added services. Thus the MVNO’s may not be interested in delving into these areas; moreover the branding may not work. The NO may also not have a very high end, large user supporting infrastructure in these places unlike they have it in urban areas where spare facility is provided to avoid problems of congestion. Thus rural markets may not be a viable option for MVNO’s.
The major benefit to traditional mobile operators cooperating with MVNO’s is to broaden the customer base (sell additional MOU’s) at a zero cost of acquisition.
It is likely that incumbent mobile operators will continue to embrace MVNO’s as a means of deriving revenue to offset the enormous cost of building 3G networks.
As more MNVO’s expand in the marketplace, they are likely to first target prepaid customers as a means of low cost market entry themselves.
Most regulating bodies are in favor of MVNO’s as a means of encouraging competition, which would ultimately lead to greater choice and lower prices.
With the advent of the MVNO, many incumbent mobile operators will evaluate the opportunity to offer supplementary MVNO services of their own. To do so, exiting mobile operators will use their established branding, service knowledge, and supplier relationships to complete against independent MVNO’s.
In the case of Tata Teleservices and Virgin Mobile we see that Tata Teleservices is not a big name atleast compared to bigger players like Bharti Airtel and Vodafone so it has tied up with Virgin /mobile to promote Its own services by using Virgin’s Global strategy, brandname, and fresh value added services
In some countries like India where FDI in Telecom sector is limited, MVNO’s have to be a joint venture, mostly with a national network operator. Moreover the tax policy has to be reduced so that the MVNO’s can actually make significant profit to exist in the market and to companies to see it as an economic viable option.
The introduction of MVNO’s is resisted by incumbent operators in some countries which have a monopoly, or which have plans of introducing their own MVNO’s because of the existence of strong brand name, customer base, time and revenues to invest in future value added services that the customers will receive.
Moreover MVNO’s setup will be a problem in areas where mobile penetration is less and still there is scope for existing companies to increase their customer base by reaching out to these people rather than trying to pull customers from other mobile service providers by luring them through value added services. Countries like India and China are examples.
There are multitudes of other things which are associated with MVNO’s like regulatory issues etc.
These may be regulatory, governmental etc.