mvnos and mobile resellers - commercial and regulatory issues

MVNOs and mobile resellers

Commercial and regulatory issues

Dr Martyn Taylor

Partner

October 2016

Overview

1. Context – mobiles in the Asian region

2. The MVNO business model

3. The regulatory overlay on MVNOs

4. The commercial overlay on MVNOs

5. Questions and discussion

MVNOs and Mobile Resellers – Commercial and regulatory issues2

Dr Martyn TaylorPartner+61 45 777 4711 (mobile)[email protected]

mailto:[email protected]

3

1. Context – mobiles in the Asia-Pacific

0

200

400

600

800

1000

1200

1400

Ch

ina

India

Indon

esia

Pakis

tan

Bang

lad

esh

Japa

n

Phili

ppin

es

Vie

tnam

Tha

iland

South

Kore

a

Myan

ma

r

Ma

laysia

No

rth

Kore

a

Taiw

an

Austr

alia

Sri L

anka

Ca

mbo

dia

Ho

ng K

on

g

La

os

Sin

gapo

re

Ne

w Z

eala

nd

Population (millions)

Diverse mix of jurisdictions

0

200

400

Ch

ina

India

Pakis

tan

Bang

lad

esh

Myan

ma

r

Vie

tnam

Ca

mbo

dia

La

os

Sri L

anka

Population without mobiles

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Ch

ina

India

Japa

n

South

Kore

a

Indon

esia

Austr

alia

Taiw

an

Tha

iland

Pakis

tan

Ma

laysia

Phili

ppin

es

Ho

ng K

on

g

Sin

gapo

re

Vie

tnam

Bang

lad

esh

Sri L

anka

Ne

w Z

eala

nd

Myan

ma

r

No

rth

Kore

a

Ca

mbo

dia

La

os

Aggregate income (USD billions)

$0

$20,000

$40,000

$60,000

Sin

gapo

re

Ho

ng K

on

g

Austr

alia

Taiw

an

Japa

n

South

Kore

a

Ne

w Z

eala

nd

Ma

laysia

Tha

iland

Ch

ina

Indon

esia

Individual income (GDP per capita)

4

Higher reliance on mobile services

0%

20%

40%

60%

80%

100%

120%

140%

Mobile penetration(by population)

Fixed penetration(by household)

Jurisdictions that do not

yet have 100% fixed

network penetration by

household…

Very heavy reliance on

wireless telecoms

5

Higher levels of regulatory risk

New Zealand

Hong Kong

Australia

Singapore

Japan Malaysia Thailand

Indonesia

Vietnam

India

China

Philippines

Bangladesh

All of the following:

• Rules are clearly defined

• Well resourced regulators

• Low risk of policy reversals

• Decisions are predictable

Any of the following:

• Rules are not clearly defined

• Less resourced regulatory agencies

• High risk of policy reversals

• Decisions can be unpredictable

LOW REGULATORY RISK HIGH REGULATORY RISK

6

7

Axiata Hutchinson NTT Docomo Ooredoo SingTel Telenor Vodafone

Australia VHA (43.9%) Optus (100%) VHA (50%)

Bangladesh Robi (91.6%) Robi (8.4%) CityCell (44.5%)

Airtel Bangla (*32.3%)

Grameenph. (55.8%)

Bangalink (*17.1%)

Cambodia Smart (90%) Mfone (*12.3%)

India Idea (19.9%) Tata DoCoMo (26.5%) Bharti Airtel (32.3%) Uninor (45%) Vodafone (100%)

Indonesia XL Axiata (66.5%)

Axis (*42%)

3 Indonesia (65%) Indosat (65%) Telkomsel (35%)

Japan NTT DoCoMo (100%)

Hong Kong Hutchinson (65%)

3 Hong Kong (49.3%)

3 Hong Kong (24.1%)

Laos LTC (*6%) Beeline (*25.7%)

Macau 3 Macau (49.3%) 3 Macau (24.1%)

Malaysia Celcom (100%) Digi (49%)

Maldives Ooredoo (92.1%)

Mongolia Tel. Mongolia (*2.3%)

Myanmar Ooredoo (100%) Telenor (100%)

New Zealand Vodafone (100%)

Pakistan Wi-Tribe (86%) Telenor (100%)

Mobilink (*17.1%)

Philippines PLDT (14.5%) Liberty (26.8%) Globe (21.5%)

Singapore M1 (28.7%) StarHub (*14.1%) SingTel (100%)

South Korea KT (5.8%)

Sri Lanka Dialog (85%) Hutchison (100%) Airtel Lanka (*32.3%)

Taiwan FarEasTone (4.7%)

Thailand Samart (24%) AIS (23.3%) DTAC (65.5%)

Vietnam Vietnamobile (50%)

Presence of global telecoms conglomerates

* Indirect holding – effective economic interest

Current state of Singapore’s mobile market


MV

NO

s

SIN

GT

EL

47%

28%24%

STA

RH

UB

M1

Singapore mobile market

shares 2016

<1%

Several existing MVNOs, but they are niche

operators and have an aggregate market

share of less than 1%.

Example: PLDT offers prepaid SIM cards with

a broad range of value-added services

targeted at Filipinos.

Historically, Virgin Mobile attempted to enter the

Singapore market as an MVNO in 2001:

• Virgin Singapore was launched as a JV with Singtel.

The operations were closed down a year later after

failing to attract a significant number of customers.

• Failure of the joint venture was attributed to a

saturated mobile market and Virgin Mobile's

positioning as a "premium" brand.

M1 and Liberty Wireless announced an MVNO

agreement in July 2015, operating as Circles.Life

Singapore mobile market remains

highly saturated with a mobile

subscriber penetration at 150%.

2. The MVNO business model

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Mobile Virtual Network Operators


• A mobile virtual network operator (MVNO) provides mobile services but does not have its own spectrum, nor does it necessarily have all necessary network infrastructure.

• Rather, the MVNO uses the spectrum and network infrastructure of an existing mobile network operator (MNO).

• The MVNO enters into a wholesale arrangement with the MNO to obtain bulk access to the infrastructure of the MNO at wholesale rates. For example, it may buy airtime.

• The MVNO supplies independently of the MNO in the retail market, as a competitor of the MNO, and can set its own retail pricing structures.

• European mobile market share for MVNOs is around 45%, promoted by favourable regulatory conditions. Around two-thirds of the world’s MVNOs are based in Europe.

• Most jurisdictions remain in the single digits for MVNO market penetration, but this is changing… watch this space!

79

579

128

53 8

Number of MVNOs in 2014

Asia

Europe

Americas

Oceania

Africa

Why are MVNOs supported by MNOs ?


• As mobile market saturation has been reached and mobile markets have matured, MNOs have seen MVNOs as a means to target new areas of growth – essentially using a differentiated brand.

• MNOs may therefore often view MVNOs as an opportunity, rather than a threat. MVNOs are, in essence, a form of mobile infrastructure sharing:

• While existing mobile operators have typically targeted the mass market, MVNOs can focus on target niche market segments that are underserved or have a low incumbent penetration. MVNOs can complement the branding strategy of MNOs.

• An MVNO can also be viewed by an MNO as a way to bring traffic back onto the MNO’s network to drive network utilisation and revenues. The MNO will recover wholesale revenue that it would otherwise lose to a mobile network competitor.

• Strategically, the best commercial outcome for the MNO is to supply to MVNOs that have a complementary brand strategy – i.e., brands that are less appealing to the MNO’s own retail customers, but are highly appealing to the retail customers of the MNO’s competitors.

• For example, an MNO with a premium brand in the market may prefer to supply to an MVNO that is focussed on price sensitive consumers.

Market segments targeted by MVNOs


• MVNOs are most successful where they can target market segments that have unmet needs, in circumstances where an MNO is sufficiently receptive to the MVNO to provide competitive wholesale services.

• GSMA recognises several types of MVNO business models, based on the particular market segments that they have historically targeted:

• Discount MVNOs, targeted at price sensitive consumers;

• Lifestyle MVNOs, targeted at niche demographics, such as teenagers (eg Virgin);

• Migrant MVNOs, targeted at particular ethnic groups, supported by cheap calls to

the relevant home country (eg LycaMobile, Tracfone);

• Roaming MVNOs, targeted at consumers roaming from other countries;

• Business MVNOs, targeted at particular types of businesses;

• Media/entertainment MVNOs, leveraging from unique content (eg Disney Mobile);

• M2M MVNOs, targeted at machine to machine services (eg Stream).

• Creative business models are also emerging, including mobile supply by supermarket chains (eg Tesco Mobile). The growth in Internet of Things (IoT) and Machine to Machine (M2M) is also set to fuel the rise of MVNOs.

McKinsey – MVNO market shares in range 10–40%


Application to Asian markets…


• There are over 1,000 MVNOs in operation in the world today. Less than 10% of these are currently based in Asia and most markets have MVNO market shares in the single digits. Plenty of scope for growth…

• MNOs in the Asian region have to date been more supportive of MVNOs operating at the bottom end of the market (eg redONE in Malaysia, supported by Celcom as the host MNO).

• However, low average revenue per user (ARPU) is a major consideration in Asia’s emerging markets. MVNOs operating at the bottom end of the market will struggle to generate profitable businesses.

• Plenty of scope for MVNO market entry based on leveraging existing business relationships and brands (eg service bundling, loyalty schemes).

• However, not all jurisdictions yet have a regulatory environment that promotes market entry by MVNOs.

3. The regulatory overlay on MVNOs

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MVNOs require supportive regulatory environment


• Rebillers, resellers and MVNOs tend not to be subject to significant regulation. Mandated resale of mobile services is also less common, given existence of significant mobile competition in many jurisdictions

• However, the regulatory environment and existence of a mobile wholesale market are vital to market entry and long-term survival of MVNOs.

• MVNOs require a regulatory environment that is supportive of their initial licensing, typically via services-based licences (eg SBO licence in Singapore). In some jurisdictions, entry is still restricted (eg UAE) or subject to foreign ownership restrictions (eg Indonesia).

• MVNOs may also benefit from regimes that enable regulators to mediate commercial relationships in order to ensure that MVNOs have sufficient margin between wholesale and retail services in order to profitably compete on price (eg protections against vertical price squeezes)

• Complications for MVNOs can involve such matters as mobile number portability (MNP), access to regulated mobile termination rates (MTR), interconnection, and discrimination between on-net and off-net pricing.

Regulatory stance towards MVNOs


• The global trend is towards facilitating market entry by MVNOs.

• A number of countries that have historically have favoured market entry by MVNOs as a means to introduce greater mobile competition without issuing further MNO licences (eg China, Saudi Arabia).

• The stricter regimes require provision of access to an MVNO on request, potentially with regulatory oversight if negotiations fail. Singapore has now moved towards that approach (discussion later).

Regulatory stance Example jurisdictions

Require MNOs to share with MVNOs Hong Kong, Norway… and now Singapore

Facilitate launch of MVNOs Belgium, France, Denmark, UK, Ireland

Regime indifferent to MVNOs Australia, Canada, Japan, Portugal

Discourage or prohibit MVNOs Non-liberalised jurisdictions

Case study: Singapore – Historic view of iDA (2001)


Historically, the IDA preferred regulatory forbearance:

• iDA must balance the need for regulatory intervention to encourage healthy competition vis-à-vis the need to encourage investment in 3G networks and services

• Regulatory intervention, while seeming necessary and desirable to facilitate MVNOs’ entry into the Singapore market, could unduly distort the commercial decision-making of market players.

• While regulatory intervention helps to facilitate the entry of MVNOs, it does not create sustainable and cordial partnerships.

• MVNOs wishing to offer 3G services must commercially negotiate with MNOs for network access, with IDA intervening only in cases of “unduly restrictive or anti-competitive practices” under the Telecom Competition Code.

View of iDA expressed in 2014 discussion paper


• First of two rounds of public consultation by iDA.

• IDA explored possible approaches for facilitating the entry of MVNOs given that IDA’s 4G spectrum auction in 2013 did not attract new mobile market entry.

• IDA viewed MVNOs as introducing innovative pricing and services to consumers and stimulating competition.

• IDA included a general duty to negotiate in good faith with MVNOs as a condition of the 2013 4G auction.

• IDA sought to explore additional measures to encourage hosting of MVNOs by MNOs, particularly non-affiliated MVNOs.

• For example, re-allocation of 900MHz could include measure to promote hosting of MVNOs.

• Pricing of access to an MNO’s network was viewed by IDA as a key factor driving the business case of MVNOs.

View of iDA expressed in February 2016 decision


• IDA will leverage the 2016 Spectrum Auction to facilitate the entry of a new MNO, hence moving Singapore to a four-MNO market structure.

• IDA is requiring successful bidders (new and incumbent MNOs) to negotiate in good faith to provide wholesale 4G and/or IMT-Advanced network access to MVNOs on request from any MVNO.

• IDA has also published negotiation principles to facilitate the entry of MVNOs with a particular focus on ‘thick’ MVNOs (see next slide for discussion).

• In case of disputes, IDA may mediate between the MNO and the MVNO using the negotiation principles as the point of reference.

• IDA is generally not in favour of exclusivity – i.e., wholesale arrangements that prevent MVNOs from obtaining wholesale services from more than one MNO.

21

iDA principles

for group

discussion…

• Mandated supply.

• Not unreasonable.

• Minimal discrimination.

• Comparable quality.

• Good faith negotiations.

• No price squeezing.

• Reasonable suspension.

• Reasonable termination.

• No exclusivity.

4. The commercial overlay on MVNOs

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Medium MVNOs / Heavy MVNOs

• MVNO arrangements tend to be customised

and non-standard hence, hence are more

document-intensive and heavily negotiated.

They may have more of a flavour of an

interconnection agreement.

• A key focus will be on identifying each call

case (including video, SMS, MMS, data),

then documenting the routing treatment and

pricing of that call case.

• Another key focus will be on documenting

the intended scope and nature of mobile

infrastructure sharing and interconnection.

• MVNO arrangements may raise complex

interconnect issues, including identifying

intended arrangements for MVNO

interconnect with third party operators.

Commercial issues depend on the type of MVNO

Rebilling / resale / Light MVNOs

• Rebill and resale arrangements are

generally straightforward and can often

involve standardised resale agreements.

• Legally and conceptually, the MVNO is

contractually interposed between the MNO

and the customer.

• However, as a practical matter, the MNO is

supplying mobile services to the MVNO

customer as if the customer were a mobile

customer of the MNO.

• As a general principle, the wholesale

customer will acquire the retail service in a

wholesale format, less a wholesale discount.

• The wholesale discount is often based on

call airtime (eg minutes per month).

MVNOs and Mobile Resellers – Commercial and regulatory issues

Categorisation of MVNOs

RAN and

spectrumSwitching

& core

Subscriber-

specific services

External

interconnection

Interconnection

revenue

Service

differentiation

Own unique SIM

cards and

functionality

VAS &

Apps

Value added

services

Unique

applications

Rebrands SIM

cards of network

operator

Billing &

CRM

Customer

relationship

management

Customised

invoicing

Branding

& tariffs

Sales

channels

Mobile network operator (MNO)

Heavy MVNO / Thick MVNO / Full MVNO

Medium MVNO / Enhanced service provider

Light MVNO / Service provider

Rebiller

Branded reseller

Key differences between the categories


‘Skinny’ or ‘Light’ MVNO

Does not own any spectrum or RAN

infrastructure.

Does not own any core network elements.

Does not issue its own SIMs, but rebrands those of the MNO.

Responsible for its own billing and customer

care.

‘Hybrid’, ‘Thin’ or ‘Medium’ MVNO


infrastructure.

Owns part of the core network for value-added services.

Does not issue its own SIMs, but rebrands those of the MNO.

Responsible for its own billing and customer

care.

‘Thick’, ‘Full’ or ‘Heavy’ MVNO


infrastructure.

Has its own core network infrastructure.

Has its own IMSI and network code.

Issues own SIMs and is responsible for billing and customer care.

McKinsey – profitability of ‘light’ MVNOs


Common issues in resale arrangements


Issue Comment for discussion

Termination and suspension

rights

When will termination and suspension rights arise and

what will be the consequences (including cure period

and any ‘step-in’ rights)

Financial security and payment What level of financial security is required and what are

the incentives for timely payment

Customer treatment and

responsibility

Who is responsible for the customer interface and what

level of MNO interaction is required

Any restrictions on branding and

marketing

How is the use of the MNO’s network identified and how

is the MVNO’s brand differentiated

Allocation of risk and liability Appropriate allocation of risk to a reseller where

consumer contracts can mitigate risk

Wholesale pricing Level of wholesale discounting and scope and nature of

periodic price reviews

Non-discrimination MVNO will seek the same level of network quality and

service as provided to the MNO customers

Issues that may raise competition concerns


Issue Comment for discussion

MNO attempts to control retail strategy

of MVNO

MNO and MVNO are retail competitors, hence a market

division (cartel) risk may arise, as well as a vertical market

allocation risk.

MNO attempts to control retail pricing of

MVNO

The MNO and MVNO are retail competitors, hence a price

fixing (cartel) risk may arise, as well as a vertical ‘resale price

maintenance’ risk.

MNO attempts to secure exclusivity with

MVNO

iDA has expressed a view that it does not support exclusivity.

A boycott risk may also arise, as well as an exclusive dealing

risk.

MNO requires MVNO to acquire other

products from MNO

Treatment of forcing and bundling under the Telecoms

Competition Code

MNO seeks to impose post-termination

restraints on MVNO

Common law doctrine of restraint of trade, as well as testing

effect on competition

MNO sets a wholesale price that is too

high

MNO is at risk of a vertical price squeeze, depending on

imputation testing

MNO reduces its retail price, but does

not reduce its wholesale price

MNO is at risk of a vertical price squeeze, even if it is

responding to retail competition

Step in rights on termination, including

any first right of refusal

At what point do step in rights trigger the Singapore merger

control regime

Elements of a ‘heavy’ MVNO

• The more elements in the core network the MVNO itself owns, the greater the functionality that the MVNO

is able to offer that differentiates the MVNO’s services from the operator’s services.

• An MVNO typically has its own customer service and billing support systems and its own customer

relationship, marketing and sales personnel.

• The MVNO does not own any spectrum and does not seek to share any of the radio access network (RAN)

infrastructure (other than using the operator’s RAN).

• An MVNO normally obtain bulk access to RAN network services at wholesale rates.

MVNOs and Mobile Resellers – Commercial and regulatory issues

Example of arrangement for a ‘heavy MVNO’


• The MVNO will require its own mobile telephone number range, carrier access code

and its own SIM cards. The MVNO will also need to be compliant with mobile number

portability requirements and any international roaming requirements.

• The MVNO will need to establish a point of interconnection with the MNO in Singapore

for signalling and call traffic – and will need to enter into appropriate interconnection

arrangements.

• The MVNO will need to enter into arrangements with other Singapore MNOs that

involve the routing of calls to SingTel as the transit provider. SingTel would then

address call transit in its interconnection arrangements with those other Singapore

MNOs.

• The MNO will carry calls to and from the MVNO customers in Singapore, while the

MVNO will carry calls from Singapore to international destinations.

• The MVNO will:

• interconnect with the MNO to supply/acquire mobile call termination (as well as acquire transit to PSTN call

termination);

• acquire domestic Singapore voice and SMS transit and other conveyance services, so that the MNO will

provide a point of interconnection with other Singapore MNOs;

• acquire domestic mobile roaming services

Network elements in a 3G MVNO


Interconnection in a 3G MVNO


• Where the MVNO has its own network code, it has the ability to receive inbound calls at its gateway mobile switching centre.

• In this manner, a heavy MVNO can act as if it is a mobile network operator and negotiate interconnection arrangements separate from the MNO.

• However, an MNO may have concerns that the MVNO may undercut the mobile termination rates offered by the MNO and transit calls.

5. Questions and discussion

33

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Contact us

Dr Martyn Taylor

Partner / Head of Telecoms (Asia-Pacific)

Norton Rose Fulbright

+61 2 9330 8056

+61 45 777 4711 (Mobile)

[email protected]

Profile: http://www.nortonrosefulbright.com/people/56359/drmartyntaylor

nortonrosefulbright.com

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mvnos and mobile resellers - commercial and regulatory issues

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