The multifaceted world of MVNOs: Growth and challenges ahead

The multifaceted world of MVNOs: Growth and challenges ahead

Contents About the author... 3 Executive summary: Explosive growth, in a minefield... 4 Growing strongly...5 Huge and tiny...5 Why do MNO like and need MVNOs?...6 MVNO business developments and challenges...7 Success... 7 and failure... 7 The fundamental role of aggregators: MVNEs and MVNAs...8 Conclusions, recommendations and action plans... 10 Informa UK Limited 2013. All rights reserved. The contents of this publication are protected by international copyright laws, database rights and other intellectual property rights. The owner of these rights is Informa UK Limited, our affiliates or other third party licensors. All product and company names and logos contained within or appearing on this publication are the trade marks, service marks or trading names of their respective owners, including Informa UK Limited. This publication may not be:- (a) copied or reproduced; or (b) lent, resold, hired out or otherwise circulated in any way or form without the prior permission of Informa UK Limited. Whilst reasonable efforts have been made to ensure that the information and content of this publication was correct as at the date of first publication, neither Informa UK Limited nor any person engaged or employed by Informa UK Limited accepts any liability for any errors, omissions or other inaccuracies. Readers should independently verify any facts and figures as no liability can be accepted in this regard - readers assume full responsibility and risk accordingly for their use of such information and content. Any views and/or opinions expressed in this publication by individual authors or contributors are their personal views and/or opinions and do not necessarily reflect the views and/or opinions of Informa UK Limited. 2

About the author Dario Talmesio Principal Analyst Areas of expertise: New Business models, Telco digital strategies, OTT strategies, wholesale & MVNOs, retail and customer management strategies, competitive monitoring. In 2013 and beyond, operators will look more like internet and digital players than Telco dinosaurs. The fight for inclusion in adjacent market will continue to be a recurring theme while protecting profitable core broadband access, voice and messaging remains a C-level priority. Dario Talmesio is a Principal Analyst with Informa Telecoms & Media. He leads the fixed and mobile Telecoms European team and has a key focus on the market developments and competitive dynamics of the European markets. In his role Dario advises fixed and mobile operators, in key areas of their business including competitive issues, OTT strategies, New business models, MVNO and retail strategies. He began his Analyst career at the Economist Intelligence Unit of the Economist Group where he analyzed Energy and Telecom markets in Western European countries. Prior to working at Informa, Dario worked for the Yankee Group as an EMEA Mobile Consumer analyst based in London. Dario holds a degree in Business and Economics from the Universita Cattolica of Milan and an MA in Applied Social and Market Research from the Westminster University in London. 3

Executive summary: Explosive growth, in a minefield In any country there will always be customers that can be better or more cost-effectively served by a brand other than the main MNOs. Informa Telecoms & Media Informa Telecoms & Media is forecasting the mobile virtual network operator (MVNO) market to reach 270 million subscriptions by the end of 2018, a significant increase on the MVNO subscription base of approximately 117 million at the end of 2012. By the end of 2018, MVNOs will be serving over 3% of the world s subscriptions (see fig. 1). Fig. 1: Global MVNO subscriptions, 2012 and 2018 2012 MVNOs 1.9% 2018 MVNOs 3.1% Operators 98.1% Operators 96.9% Note: Figures refer to year-end Geographically, Europe represents the largest MVNO market while the US, the second-largest geography, is experiencing a buoyant period of renaissance after the misfortunes of 2006-2008. Both markets will continue to provide the largest base of MVNO customers for many years but Asia Pacific region is starting to emerge as the third pole of global MVNO activities. The ethnic segment, which is made up of both tiny and huge companies specializing in international communications services for the communities of people living outside their own countries, represents by far the largest MVNO segment. Retailers and alternative fixed-line telecoms operators, such as fixed-line incumbents and cable operators, account for the bulk of MVNO subscribers today. Business models are incredibly different across the range of MVNO markets, which are made up of a myriad of large, medium, small and tiny companies with disparate identities and business models. Today there are close to 1,000 MVNOs, branded resellers, sub-brands with business models varying from brand licensing, brand resellers, full MVNOs, light MVNOs, and operator-owned second brands acting as virtual operators. 4

There is virtually only one common element when it comes to MVNO identity the quest to grab mobile-related revenue streams. To sum up, MVNO is the business of (better) segmentation. Of course, segmentation can be done by an independent brand or by a sub-brand owned by a mobile network operator (MNO), but it is likely that any country will always have a segment of the mobile customer base (large or small) that can be served better or more cost-effectively by a brand other than the main MNOs. Failures are frequent. Although Informa Telecoms & Media strongly believes that MVNO opportunities are still expanding, creating a sustainable MVNO business is far from easy and many MVNOs have not been able to do so. Historically, one in every four MVNOs has gone out of business. Even the most solid business proposition will need to be able to adapt rapidly to customer and market changes. Growing strongly Globally, there will be approximately an additional 150 million MVNOs customers up for grabs over the next five years. In the more immediate future, revenues from MVNO activities are expected to continue growing and market sentiment remains positive: 82% of the respondents to Informa Telecoms & Media s MVNO Business Development Survey are anticipating moderate or strong revenue growth in 2014 (see fig. 2). Fig. 2: MVNO revenue growth expectations Grow significantly 31.7 Grow slightly 50.7 Stay the same 13.5 Shrink slightly 2.9 Shrink significantly 1.2 0 5 10 15 20 25 30 35 40 45 50 55 n=341 Respondents (%) Growth patterns will differ substantially on a company-by-company basis but also on market-by-market basis. While Europe and North America will continue to be the largest MVNO regions globally, the fastest uptake will be recorded in Asia Pacific, Latin America, Middle East and Africa, albeit from a much smaller base. In mature MVNO markets, MVNOs can account for as much as 10% to 15% of the country s mobile customer base; very exceptionally, MVNOs and second brands operated by MNOs can gain a share as high as 30% of subscriptions. Huge and tiny There are three prominent MVNO segments (see also fig. 3): Ethnic MVNOs: For example, US-based Tracfone, which caters for the international communities based in the US, and UK-based Lyca Mobile, which offers low-cost international calls in 15 markets around the world. Retailers: For example, grocery retailers like Tesco Mobile, which operate an MVNO in many of the countries in which they have outlets, and post offices, such as the Italian post office, which sell telecom services in their retail outlets. 5

Telecoms operators: These include Virgin Media, one of the most successful MVNOs in the UK that is now aiming to expand its mobile-branded business globally, and the cable company UPC-Media, which is in the process of launching mobile services in every market in which it operates fixed-broadband services. Fig. 3: Large and small MVNOs MVNO MVNO type Geography Factoids Tracfone Ethnic segment Multibrand, US-based ethnic communities 23 million subscribers US$19 ARPU http://www.tracfone.com LycaMobile Ethnic segment Multiple countries E1 billion revenues 30 million subscribers http://www.lycamobile.com/index.html Tesco Mobile Retailer Multiple countries ~4 million mobile subscribers http://phone-shop.tesco.com/tesco-mobile Poste Mobile Postal services, financial services Italy 2.5 million subscribers E350 million revenues http://www.postemobile.it Virgin Youth Multiple countries 554 million revenues in UK 3 million subscribers http://www.virgin.com/gateways/mobile UPC Fixed-line / TV, cable Multiple countries Aiming at MVNO operations in each country in which it operates cable / TV http://www.upc-cablecom.ch/en Stream Communication M2M UK Digital Broadcasting, Digital Signage, Metering, Remote Monitoring, Security, Asset management www.stream-communications.com Mobile Vikings Social / data Belgium, Netherlands More than 150K subscribers E19 ARPU https://mobilevikings.com/choose/country Beside a small group of large-sized MVNOs, there are hundreds of very small MVNOs often employing a very small number of employees and servicing fewer than 1,000 mobile subscribers. Why do MNO like and need MVNOs? Put simply, MNOs like the MVNO business because it is profitable (see fig. 4) and MVNOs help them to reach segments of the market which they cannot profitably serve themselves. Fig. 4: Retail vs. wholesale: MNOs financials Financials Wholesale Retail Revenues 100 100 EBITDA margin (%) 45-60 25-35 Capex to sale ratio (%) Negligible 10-15 Competition plays a role too: MNOs often decide to embrace the wholesale business model simply because they are eager to grow their market share and acquire a slice of the wholesale revenues. In markets where the national 6

mobile wholesale business is highly developed, MNOs are more likely to embrace MVNO business models simply because there is an existing revenue opportunity but, generally speaking, MVNO business development tends to be used by those operators with a relatively smaller share of the retail market. MVNO business developments and challenges Although there are huge MVNO players with multimillion-subscriber businesses, there are also many small and micro-sized operators. However, the size of the operations alone is not guarantee of either success or failure. Success To be the global leader in telecommunications, financial services, travel & entertainment products and services to the international ethnic community... Milind Kangle, Group CEO, LycaMobile Today, MVNO activities are mushrooming. Some very different companies and showing an interest in launching an MVNO: Post offices, football clubs, social-media start-ups, OTT players, multilevel marketing groups, banks, digital-entertainment providers, utilities, IT solution providers, non-for-profit associations, consumer-electronics manufacturers are all evaluating business development plans that includes an MVNO-based mobile strategy. At the same time, existing MVNOs are looking to differentiate their services. Alongside the most traditional customer proposition (calls, messaging, data), many existing MVNOs are looking to diversify their business and enter adjacent markets (entertainment, travel services, financial services, advertising) by adding new service bundles. However, according to the respondents to Informa s MVNO Business Development Survey, the most-preferred way of expanding an existing MVNO business is still for the MVNO to launch operations in new geographies (see fig. 5). Fig. 5: MVNOs need to enter adjacent services and launch in new geographies Enter a new geography 2.66 Address new segments of the market 1.63 Add innovative products/ services bundles 1.58 Enter adjacent markets (e.g. travel, insurance, advertising) 2.35 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Ranking average* n=341. *Ranked on a scale of 1-5 where 1 = most important opportunity and 5 = least important opportunity and failure Despite a consistent overall market growth, the MVNO market is still a risky business for many companies: Many MVNOs have already closed down and many MVNOs will fail presumably in the same ways as they have done over the past decade. Even solid companies such as Disney Mobile in the US, ESPN and the Easy Group have failed to to succeed as they expected to as MVNOs. Informa Telecoms & Media estimates that one in four MVNOs don t reach a second year of operations and we expect that MVNO market will continue to see many new launches but also many closures. 7

While there is no secret business model for a healthy MVNO, successful MVNOs tend to have certain key characteristics. Over the years, Informa Telecoms & Media has observed that there are nine key stipulations for an MVNO to be successful (see fig. 6). Fig. 6: Informa Telecoms & Media s key stipulations for successful MVNOs Brand Lean cost base Flexibility (commercial and technical) Differentiation Distribution Existing customer base Committed management Access to funding Complementarities Existing strong brands that have the potential of expanding their brands into the mobile business The vast majority of MVNOs have low-cost operations (both capex and opex) Ability to change business agreements and IT /network-related adjustments both cost-effectively and in a timely fashion Pricing and CEM represent the most successful ways for MVNOs to innovatively differentiate themselves This is the single most important factor; it is the most common feature of the large and successful MVNOs Not all MVNOs have an existing customer base at launch but the majority of the successful ones have entered the telecoms market by taking advantage of existing customer relations MVNOs often belong to larger non-telecom groups; management buy-in is indispensable for their success given that MVNO is often the non-core, smaller activity Financial agility is one of the least discussed but most important requirements for MVNO to be able to launch and, especially, to remain in operation While MVNOs will always attract some of the customers of their own host operators, complementing the business of the hosting network makes it more possible to start and maintain a mutually-supportive business partnership The fundamental role of aggregators: MVNEs and MVNAs Historically, the bottlenecks for MVNO markets have always been the timing and the cost (both opex and capex) of connecting to a mobile network and implementing the specifications that are needed to address market niches. Today, according to the respondents to Informa s MVNO Business Development Survey, managing and understanding technology remains one of the fundamental challenges for both new and old MVNOs, especially for those that do not have a telecom background. However, for the existing MVNOs, some of the most important business challenges are still related to flexibility (see fig. 7). Fig. 7: Top business challenges for MVNOs Understanding and managing technology 2.57 Price competition 1.78 Competition from MNOs (win-back strategies) 2.06 Service diversification 2.00 Customer segmentation 2.13 Retail, distribution and logistics 2.29 Billing & cash management 2.57 Device management 2.78 Wholesale contract terms 2.16 0.0 0.5 1.0 1.5 2.0 2.5 3.0 n=341. *Ranked on a scale of 1-5 where 1 = very challenging and 5 = not challenging Ranking average* Commercial negotiations between MNO and MVNOs, even when the main elements of the agreement are established, can take several months to be concluded. But the most onerous and lengthy part of launching an MVNO is related to network and IT integration between the operator and the MVNOs. 8

Issues related to technology complexity and cost are now largely addressed by MVNEs (mobile virtual network enablers) and MVNAs (mobile virtual network aggregators) acting as facilitators between MNOs and MVNOs. The business of aggregators is rapidly expanding. They are either established internally by the MNO as a business sitting alongside the main infrastructure or contracted externally to companies that are tasked to manage all technology-related aspects of integrating and running the MVNO. These MVNEs are effectively outsourcing specialists and network-management companies focusing on the MVNO business and their background is, in most cases, IT/billing and CRM software vendors or integrators. The technology and commercial aggregators do face a number of technology- and business-related challenges. If it is true that MVNOs need to understand and respond rapidly to changes in their markets, it is equally important that MVNOs can also implement changes rapidly. The respondents to Informa s MVNO Business Development Survey believe that one of the most important business- and technology-related issues affecting aggregators is their ability to meet the demand for new requests from their MVNO customers (see fig. 8). Fig. 8: MVNEs top business and technology challenges Provide secure environment to multiple MVNO customers 45.5 Guarantee security levels to hosting operator 30.2 Ability to scale up the business 46.0 Meeting demand for new requests (e.g. bundles, changes in pricing plans) 69.5 Other (please specify) 8.8 0 10 20 30 40 50 60 70 n=341. Respondents (%) 9

Conclusions, recommendations and action plans The MVNO business is expanding rapidly but is increasingly challenging for newcomers. Informa Telecoms & Media forecast that there are an additional 150 million MVNOs customers up for grabs. Revenue-generating, profitable opportunities are there in many segments: The ethnic market, youth-oriented, fixed-line operators, retailers, data-only and M2M all provide growth prospects. MNVOs have plenty of new markets to look for: Only approximately 70 out of 227 mobile markets are hosting MVNOs today. Existing MVNO markets need to look for new ways to differentiate services, often entering adjacent markets and new regions. Flexibility in both technology and business processes remains one of the most important characteristics for MVNOs if they are to launch, prosper and remain profitable in these very rapidly transforming markets. A focus on cost (both capex and opex) remains a critical factor, as well as the ability to implement changes rapidly. Aggregators should consider positioning themselves somewhere between fully-bespoke and out-of-the box in order to both launch and also continue to assist their MVNO customers over their lifetime period. Operators can t ignore the MVNO trend. However, it is important to remember that serving the MVNO sector as a network operator means working with firms that are inexperienced in mobile so the role of aggregators is becoming virtually indispensable. 10

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