Frost & Sullivan Market Insight MVNOs in Latin America - New Business through Mobile Phone We Accelerate Growth
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MVNO Concepts and Definitions 4
MVNO - Definition and Benefits An operator who provides mobile communications services to users without its own airtime and government-issued licenses ITU (2004) Benefits Obtained by Adopting an MVNO Scalability Small participants can generate revenues even with a limited base of clients. A mobile virtual network operator (MVNO) can increase its structure according to its revenue growth. Low Initial Investment An MVNO can be established with an initial investment ranging between $20 million and $200 million. For niche markets, this amount can be even lower. Low Operational Cost Focused Marketing In addition to lower capital expenditure (CAPEX), operating expense (OPEX) can be lowered if companies use their existing brand and distribution An MVNO can be sustainable offering lower prices to a small base of clients. The business model is decisive, especially to arrive at favorable agreements with operators. An MVNO can shift its focus with a different approach and leverage its pre-existing client base. It can have lower churn rate, as it offers more customized assistance and brand loyalty. 5
MVNO Business Model Reseller A reseller offers products and services of another operator (MNO mobile network operator) This model is adopted by companies with an existing brand name and a retail infrastructure. It focuses on branding, distribution, and sales. The model is simple to implement. Service Operator It offers innovative and own package of services. The objective is to differentiate services. Management of billing and CRM systems Unlike resellers, it can compete with MNOs in price. Complete MVNO A complete MVNO controls the total offer. It manages its own backhaul network. It partners with an MNO without network access. It has its own subscriber identity module (SIM) card, international mobile subscriber identity codes, numbering system, interconnection agreements, and responsibilities. MNO Network Access Core Network Application Platforms Subscriber Managment Billing and CRM Branding Sales Distribution Operators Reseller Complete MVNO MVNE Service Operator 6
Benefiting from the MVNO Model Three groups of companies benefit from this business model - telecom companies, companies from other market sectors, and investors. Telecom Companies Companies from Other Sectors Investors Serving segments where its original value proposition cannot attract new clients. Expand to areas where the operator has no network infrastructure. Operators without mobile networks are willing to provide quadruple-play services. Retailers, content producers, finance institutions, sport clubs and social groups, food and beverage manufacturers. They exploit the advantage of a known brand, client base, distribution channel, content, and so on. Explore a new business, incrementing client loyalty, and value proposition with clients. They invest in new areas and create value in the telecom segment. Possibility of management with a small head account structure. They focus on competitive strategy and non-operational issues. 7
Types of MVNO Cases 8
Types of MVNO LIFESTYLE MVNOs focused on niche markets Niche defined by demographic criteria, such as sex, age, behavior, and lifestyle Price not being the main selection criteria, despite its importance 9
Types of MVNO (Contd...) LIFESTYLE HELIO It was a joint venture between SK TELECOM (South Korea) and EarthLink (USA). It was launched in the USA in May 2006. Focused in the young segment (18-32 years), for affluent clients and high-tech profile. Value Propositions - Innovative handsets, advanced content, app stores, and direct MKT Alternative Media - verbal communication, sponsor, cable TV, and magazines MySpace Helio was the first operator in the USA to allow users to interface with MySpace. Revenues in 2007 -$171million, Loss - $327 million. ARPU (service) - Around $80.00 per month Helio was sold to Virgin Mobile USA in 2008 with 200,000 subscribers. Virgin Mobile USA sold it to Sprint-Nextel in November 2008. 10
Types of MVNO (Contd...) LIFESTYLE HELIO (Contd...) Five stores (Denver, NYC, Palo Alto, San Diego, and Santa Monica) were launched. Value proposition included an exceptional retail experience. 11
Types of MVNO (Contd...) LIFESTYLE HELIO (Contd...) WHAT WENT WRONG? Weak value proposition, as innovative handsets were obsolete in South Korea and USA. Low scale of clients, as there were other companies such as Boost Mobile, Amp d Mobile, and Virgin Mobile with the same focus. Difficulties to leverage the communication and marketing investments after negative financial results Lack of a wide distribution network (only 5 cities in 3 states) Content similar to cable TV offerings, with the only difference being the mobility appeal. The Small base of clients, resulting in low bargaining power with partners such as Verizon and Sprint, which resulted in less attractive plans 12
Types of MVNO (Contd...) ETHNIC MVNOs focused on niche consumers from foreign nationalities Main selection criteria - Price Differentiation Factors - Lower tariffs, native speaking language, and specific content 13
Types of MVNO (Contd...) ETHNIC MOVIDA It was established in 2005 in USA by Cisneros Group of Companies from Venezuela. It focused on cities with significant Hispanic population, such as Dallas, Houston, Austin, Miami, Los Angeles, San Antonio, and Phoenix. The target segment was 40 million Hispanics. Distribution network included the important centers of Hispanic circulation, such as Wal-Mart. Aggressive tariffs for local, SMS and international calls for Mexico and Caribe. Prepaid services were offered to consumers with low/ limited credit in USA. Spanish language in all communication, assistances and handsets systems. Special content, such as soup operas, news from Hispanic countries, and football news, was offered to Hispanics. 14
Types of MVNO (Contd...) ETHNIC MOVIDA (Contd...) WHAT WENT WRONG? Though it had a good value proposition (aggressive tariffs and Spanish language services), other strong competitors (such as Tracfone) and mobile network operators (MNOs) offered Spanish language services as well. It had a very low profit margin It had a limited offer of mobile plans, without unlimited minute plans, and varied tariffs for special hours, and small portfolio of handsets. Special content alone could not sustain its competitive advantage. 15
Types of MVNO (Contd...) DISCOUNT MVNOs focused on aggressive tariffs Most Decisive Factor - Price Differentiation Factors - Lower tariffs and basic and low-cost handsets 16
Types of MVNO (Contd...) DISCOUNT TESCO MOBILE Tesco is the third-largest retailer globally. It generated revenues of $38.1 billion 2008, with a net margin of 6.0 percent. Until February 2009, Tesco had 2,306 stores in the United Kingdom that were set up by six different BUs It operates in 15 countries (China, Japan, the United States, and so on) with more than 2,420 stores. Tesco held a share of 30.4 percent in the U.K. retail market in 2008. It has business in many other sectors such as gardening, bank, electronics, fuel, IT, and telecom. Tesco was the first retailer in the world to offer online shopping experience to its customers in 1984. It launched its mobile virtual network operator (MVNO) in July 2005. 17
Types of MVNO (Contd...) DISCOUNT TESCO MOBILE (Contd...) Tesco Mobile is a joint venture between Tesco and Telefónica O2 (50/50). 02 is Tesco s Mobile MNO network provider. In December 2008, Tesco Mobile s client base reached 1.7 million in England. It offers low tariffs for voice ( 10p/minute) and SMS ( 5p/message). It has a number of sales channels such as retail network, Internet, and call center. It expanded operations to the Republic of Ireland and Slovakia. Total Subscribers ( 000) CAGR - 47% 1,400 1,600 1,750 2,000 1,000 200 500 2003 2004 2005 2006 2007 2008 2009 18
Types of MVNO (Contd...) DISCOUNT TESCO MOBILE (Contd...) WHAT WENT RIGHT? Strong Value Proposition - Aggressive tariffs and quality, supported by brand reputation Experience in launching and managing products and services under its own brand name More Tangible Advantages - Free SIM card, tripled credit recharges, and unlimited plans Multiple Points of Interaction with Clients - Many retail outlets, Web site, call centers, and ATMs 19
Types of MVNO (Contd...) DISCOUNT TESCO MOBILE (Contd...) WHAT WENT RIGHT? (Contd...) Loyalty (Tesco Clubcard) - Handsets purchased and expenditures made through credit cards result in addition of loyalty points. Wide Range of Voice Services Offered - Prepaid, postpaid, pay-as-you-go, roaming and international calls Broad portfolio of handsets, including high-end models such as iphone Importance provided to number portability in its advertising campaigns Mobile marketing and advertising being considered strategic for the future. 20
Types of MVNO (Contd...) BUSINESS MVNOs focused on business (B2B) Main Selection Criteria Specialization (despite the importance provided by SMBs to price) Differentiation Factors - Special services for mobile data (M2M) and VAS. 21
Types of MVNO (Contd...) BUSINESS KORE TELEMATICS (Contd...) It was established in 2003 in the United States targeting the mobile data market. It provides services to 93 percent of the U.S., Canadian, and Caribbean population. It offers roaming services in 220 countries. It offers a broad portfolio of services, based on mobile data, which also include VAS such as surveillance and mobile voice. It is a complete MVNO, as it manages the entire chain ranging from the commercial and billing process to network monitoring with own NOC. Main services include vehicle tracking, payment systems, telemetry, VPN, local voice, national roaming and international calls. It has customized solutions for verticals such as healthcare, security, utilities, industry, government, finances, and environment. 22
Types of MVNO (Contd...) WHAT WENT RIGHT? BUSINESS KORE TELEMATICS (Contd...) Strong Value Proposition - Technical specialization in mobile data and great client assistance Products portfolio and a verticallized commercial approach reinforce its value proposition. Only a few competitors have witnessed success in this sector. Low service penetration results in rapid growth of the mobile data market. On-demand pricing of mobile data services (pay-as-you-use). 23
Types of MVNO (Contd...) SPONSORED BY ADVERTISING MVNOs based on publicity Price is not relevant, as traffic and data are free according the publicity received. Differentiation Factors - Contents and handsets offered to subscribers 24
Types of MVNO (Contd...) SPONSORED BY ADVERTISING BLYK It was established in Finland in January 2006. It operated in the United Kingdom from September 2007 to August 2009. Before February 2009, it offered 43 minutes and 217 free SMS monthly without cumulative credit. Additional minutes cost 24p/min (against 10p/min from Tesco), and additional SMSs cost 10p/msg (against 5p/msg from Tesco). From February 2009, tariffs were raised for voice calls ( 24p/min) and reduced for SMSs ( 8p/msg). From them on, credits are getting accumulated to the level of 15,00 per month, and they are being used not only for voice and SMS but also MMS and data. 25
Types of MVNO (Contd...) SPONSORED BY ADVERTISING BLYK (Contd...) Partners Sponsoring Blyk 26
Types of MVNOs (Contd...) SPONSORED BY ADVERTISING BLYK (Contd...) WHAT WENT WRONG? As of September 2008, it had 200,000 clients in the United Kingdom, which is considered insufficient for a direct communication. It had expensive additional tariffs, which stimulated clients to change SIM cards as the credit was near to finish. It had a very basic portfolio of handsets and services. Economic downturn in 2009 had a negative impact on sponsors, and the company decided to change its strategic orientation. Currently, Blyk has partnerships with operators worldwide to develop mobile advertising. 27
World Scenario for MVNO 28
World Scenario for MVNO North America 13 percent of the total mobile subscribers Joint venture failure - Comcast, Time Warner, Cox, and Sprint; recently, COX invested in spectrum acquisition. In August 2006, Vidéotron partnered with Rogers to offer bundles quadruple-play services. Cable TV - Strategic threat from VOD participants (such as Hulu and Netflix) Failed initiatives - Disney, ESPN, Movida, AMP d, and Helio Western Europe Concentrate 40 percent of MVNOs operations in the world MVNOs with outstanding growth in the first year of their business - Tesco, M6, Virgin Mobile France, and NRJ Mobile France In 2008, Debitel was the largest MVNO in Germany with 13 million subscribers. In 2008, Denmark and Germany had more than 20 MVNOs each and around 25 percent of the total subscriber base. In 2009, Holland had 47 MVNOs and 3.1 million subscribers. Asia 8 of the 19 largest mobile markets have MVNOs; with special mention to Hong Kong, where the number of MVNO subscribers achieve 834K, which represents 8% of the total market (2008). The Australian market had 25 MVNOs in 2008. Latin America Operations in Bolivia, Ecuador, Chile, and México Maxcom, in México, had 45,000 subscribers in 2008. MVNO regulation is expected in Brazil in 2010. Middle East Friendi was the 1ª MVNO to be launched in Oman (April 2009) Focus on the immigrants segment Other MVNOs in Oman - Renna (May 2009), Halafoni (October 2009), and Mazoon and Injaz (expected in 2010) Other markets - i2 Mobile (Jordanian) 29
World Scenario for MVNO Regulation Even countries from the same regions have varied MVNO regulations. Regulatory Position Obligate MNOs to share network Facilitate the launch of MVNOs Indifferent to MVNOs Does not encourage the launch of MVNOs Examples Relevant Rules Network Benchmark - Hong Kong 30 percent of the network capacity is dedicated to MVNOs. Has no limit for the number of MVNOs in the market. Wholesale price is uniform and independent from that set by MVNOs. Market Example - Australia Network division is obligatory to operators with a high market share. Wholesale price is defined according to the costs and with a regulated margin. Market Example - Japan Operators are not obligated to open networks to MVNOs. Operators are allowed to have varied prices based on their business goals. Ministry believes that MVNOs are not good for the market competition. Operators have low importance in the market. Average prices are lower when compared to other countries. 30
Brazilian Scenario for MVNO 31
Brazilian Mobile Market 191 million inhabitants ARPU - $14.3 Lines - 176,4 million Brazil accounted for 44.1 percent of the total Latin America mobile market revenues in 2009. Penetration - 92% Prepaid Lines - 80% Market Share (Units) Churn and Penetration ARPU (R$) 37% 23% 22% 15% 32% 31% 25% 26% 24% 25% 16% 17% 30% 30% 26% 26% 24% 24% 20% 21% 91% 79% 64% 47% 53% 45% 43% 42% 41% 33% 9% 12% 12% 13% 13% 80,95 71,65 28,87 27,32 78,33 81,25 85,83 30,30 31,21 31,73 14,33 14,85 16,72 17,05 16,92 2005 2006 2007 2008 2009 VIVO CLARO TIM Oi 2005 2006 2007 2008 2009 Penetração Churn (Pré) Churn (Pós) 2005 2006 2007 2008 2009 ARPU (Pré) ARPU (Pós) ARPU 32
C o m p a n i e s C o n s i d e r i n g t o O p e r a t e M V N O s i n B r a z i l Companies Willing to Adopt MVNO due to their Business Model, Brand, and Capillarity. GVT and BT are willing to expand their service portfolios and improve customer loyalty by offering bundled services. TV companies such as RBS are willing to adopt MVNO as it can provide exclusive contents. Retailers such as Carrefour (which has MVNO in Europe), Pão de Açúcar, and Casas Bahia are willing to adopt MVNO due to their extensive presence, possibility of cross-selling, and huge base of clients. Football clubs and associations show interest toward MVNO model, as they have a significant reputation for their brand name among the public. 33
Brazilian Regulatory Model Proposal The proposal was submitted to public consultation between 2009-2010, and there are many issues that have to be discussed in detail. Issues Requiring a Detailed Discussion Defining the activities that have to be practiced by he company by following the personal mobile system; checking the possibility of the existence of more than one model. Checking the company s ability to execute the billing activity; definition of the fiscal part. Currently, the proposal enables ANATEL to extinguish credentialed, if it seems to result in any injustice to the sector and clients. This leads to high uncertainty and causes reluctance among MVNOs to invest in it. Identify if any incentives will be provided by the regulator to promote MVNOs 34
For Additional Information Cristiano Zaroni ICT Consulting Manager Latin America 55 11 3065-8424 cristiano.zaroni@frost.com Gustavo Cury Sales Team Leader Brazil 55 11 3065 8443 Gustavo.cury@frost.com 35