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Prospering in a new MVNO hype cycle

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About the author .................................................................................................................... 3

Lessons from the inglorious MVNOs .................................................................................... 5

Operating in a low-margin, fast-moving environment .......................................................... 6

What do you need to do? ........................................................................................................ 7

Monetize customer base with the right offers .....................................................................7

Stimulate revenue with the right timing ...............................................................................7

Tackle adjacent markets ......................................................................................................7

Anticipate churn ...................................................................................................................7

Conclusions, recommendations and action plan .................................................................. 8

Contents


Dario Talmesio

Principal Analyst

Areas of expertise: New Business models, Telco digital strategies, OTT strategies, wholesale & MVNOs, retail and customer management strategies, competitive monitoring.

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.

About the author


Launching a new MVNO has never been easier, but prospering in the MVNO world has never been so challenging. MVNO markets are rapidly climbing the slope of the “hype cycle,” but 2014 could hold a lethal combination of ease of launch and lack of readiness among firms.

Globally, MVNOs account for about 2% of mobile subscriptions, a figure set to reach 3.8% at end-2018, when MVNO subscriptions will number 270 million (see fig. 1). Most likely, these subscriptions will be shared among approximately 2,000 companies, with more than 4,000 MVNOs expected to try and fail to prosper in the next five years.

It has happened before. Looking at the past 15 years or so of MVNO activity, one thing is immediately obvious: Many companies have prospered, but many have gone bust. For the next couple of years, the risk is that we will see the same number of failed launches that we witnessed in 2006-2008.

Luckily, MVNO markets are now more mature businesses, and there is a huge amount of collective knowledge of best- and worst-practice case studies from which MVNOs and their partners can learn how to make a successful launch.

The risk of failure is an important – and fairly urgent – issue for mobile wholesale operators and MVNOs alike. Virtual operators are essentially B2B customers of mobile operators, which in turn incur a substantial amount of financial and opportunity cost when taking on an MVNO. These investments are usually highly profitable: Mobile wholesale profit margins are often twice those of retail operations for network operators. Operators that want to protect their highly profitable revenues need to look after their B2B MVNO customers by giving them the right set of tools with which to generate profit.

We are in the middle of a new MVNO hype cycle. This time MVNOs need to be equipped and

ready to quickly squeeze every revenue opportunity at low cost if they want to avoid falling out

the same way the “inglorious” MVNOs did in the years 2006-2009.

Dario Talmesio, Principal Analyst — Informa Telecoms & Media “ ”

Sub

scrip

tions

(mil.

)

0

50

100

150

200

250

300

Western EuropeEastern EuropeNorth AmericaLatin AmericaAsia PacificMiddle EastAfrica

2018201720162015201420132012

Fig. 1: Global MVNO-subscription forecast, 2012-2018

Source: Informa Telecoms & Media


Unluckily, today’s markets are much more aggressive than they used to be: Mobile penetration has dramatically increased, leaving virtually no low-hanging fruit in any country, not even in emerging economies; mobile operators are refining their acquisition and retention strategies, leaving fewer entry opportunities; and, most importantly, the telephony-related financial margins of MVNOs are becoming very thin.

Lessons from the inglorious MVNOs

It is difficult to generalize about why so many MVNOs have gone out of business over the years (see fig. 2). Many failures have been due to factors beyond MVNOs’ control – such as radical and rapid change of the overall retail market, or lack of support from their host operators and MVNE platforms – but other reasons, arguably some of the most common, are related to how MVNOs organize their customer engagement and how they manage their customer bases in general. Ultimately, MVNOs fail for financial reasons, rooted in an inability to retain customers or to monetize their base, or most likely a combination of the two.

Lack of focus has always been a major problem for MVNOs, at least those that have failed. Generally speaking, the most notable MVNO failures have been companies and brands that have focused almost solely on acquiring new customers, at the expense of being able to retain existing users.

The major common characteristic of failed MVNOs is a lack of customer monetization and retention. Despite having heavily invested in customer acquisition, they did not do enough to rapidly understand their subscribers or perform timely and tailor-made interactions aimed at retention and boosting customer value.

The MVNOs listed above are just some of the most high-profile failures, but the general disillusionment that they caused in the market by closing down raised serious concerns about the viability of the MVNO model globally, causing the market to shrink over 2006-2009 (see fig. 3).

The failures happened because of a lack of customer focus, and in today’s crowded market, there is a risk that new and old MVNOs will focus solely on acquiring new customers, repeating the mistakes made in 2006-2008. And today, the situation is exacerbated by the fact that markets are much more competitive.

Fig. 2: MVNO casualties

Name Launch date Closure date Target market

Disney Mobile US/UK 2006 in US 2007 Families and children

Easy Mobile 2006 2006 Price-conscious customers

Blyk 2007 2009 Teenagers (ad-funded)

Helio 2006 2007 Data- and messaging-savvy users

ESPN Mobile 2006 2006 Content-savvy users

Amp’d Mobile Late 2005 2007 Entertainment-hungry youth

Source: Informa Telecoms and Media


Operating in a low-margin, fast-moving

environment

MVNOs tend to work in markets that have not only high penetration – often well above 150% – but fairly low margins. For instance, the EBITDA margin of most Western European markets is about 30%, and that of those in North America is about 34%, compared to much lower margins recorded by most MVNOs.

MVNOs do not deploy infrastructure and often source their technology platforms from their host operator, which provides network access via technology enablers (MVNEs). As a result, margins for MVNOs are much lower than those of the host operators, often in the region of 10-15% (see fig. 4), more similar to the margin of a retailer than that of a telco business.

MVNOs’ thin margins make it that much more important to have a lean cost base that still enables them to build a healthy business. At the same time, retention becomes much more important than acquisition, and marketing efforts in general need to be finely calibrated.

Fig. 4: EBITDA margins of selected MVNOs

MVNO Area of operation MVNO type EBITDA margin and notes

GiffGaff UK Social network Negative: revenue of about £80 mil. and operating loss of £38 mil. for FY12

Poste Mobile Italy Postal services, banking Positive: 8% EBIT for FY12

JazzTel Spain Fixed-line operator Positive: marginal contribution to the overall business

Lebara Mobile Europe and Australia Ethnic Positive: 3.1% for FY11 (latest available)

EI Telecom ( NRJ ) France Multibrand (media, banking, retail)

Positive: 2.2% for FY12 (latest available)

Tele2 Netherlands Fixed-line operator Negative: revenue of SEK463 mil. and EBITDA of SEK-22 mil. for 3Q13

TracFone US Ethnic, Simplicity Positive: 10.5% for 2Q13 (based on EBITDA and revenue)

Source: Informa Telecoms and Media

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

MVN

O as

% o

f tot

al s

ubsc

riptio

ns

201820172016201520142013201220112010200920082007200620052004200320022001200019991998

Fig. 3 Global, MVNO subscriptions as % of mobile market

Source: Informa Telecoms & Media


In 2014, we will see a number of MVNOs launch in existing and new markets. As in the past, we can predict that many will not survive, for a simple reason: MVNOs need to be much faster than their hosting companies when it comes to rolling out new services, changing plans and otherwise respond to customers’ needs, mainly because their financial structure is much more sensitive to changes than that of network operators. The challenge for MVNOs is being able to combine the need to be fast with the ability to get the most from their customer base, despite the (usually) small size of their staff and overall budget constraints.

What do you need to do?

New and existing MVNOs face challenging market environments: Competition has intensified and will continue to do so, and customers are becoming more demanding in terms of personalized and flexible offers.

MVNOs need to be able to surgically dissect their subscriber bases to identify any new revenue opportunity by ensuring the best match of product and service for individual subscribers, while remaining mindful that mobile is a powerful channel not only for communicating with customers but also for selling, upselling and cross-selling.

Monetize customer base with the right offersThe most immediate opportunity for MVNOs is to sell existing customers telecoms, digital-entertainment and, eventually, cloud services: In-depth customer knowledge will reveal which segments are better targets for higher-level or different data plans, handset upgrades or, in the case of triple- and quad-play MVNOs, which customers could be sold fixed-line or TV services in a bundle with their mobile services.

Stimulate revenue with the right timingEqually, MVNOs should be in a position to understand not only what customers might need, but when they might need it. Timing is everything: MVNOs must offer the right products at the moment the subscriber needs them. In cases where customers might not be aware that they need a service or add-on bundle, the MVNO should be able to entice them to try it out, ultimately boosting ARPU.

Tackle adjacent markets MVNOs tend to generate the vast majority – if not all – of their revenues from telephony services, but some of the smartest MVNOs have started looking at how to generate revenues from adjacent services, addressing much of their customers’ budgets, not just the share that is spent on telephony. For instance, some have started selling cloud services, travel products, insurance and other non-telecoms-related services. Only a deep understanding of their customers will enable MVNOs to grow into areas outside of telephony.

Anticipate churn In addition to protecting and stimulating revenues, MVNOs need to engage in perpetual real-time scrutiny of each customer’s “mood,” in order to be able to anticipate and prevent customer losses. Once customers start churning, it is often too late for the operator to start trying to hold on to them. This is even more critical for MVNOs, given that they operate low-margin business and on a smaller scale.


Conclusions, recommendations and action plan

MVNOs (and their MNO and MVNE partners) need to be equipped and ready to operate in a permanently challenging market if they want to avoid failing in the way many big names did in 2006-2009. The MVNO segment is growing steadily across the world, but too many fail, which is expensive not only for the MVNOs themselves but in turn for their MNO and MVNE partners.

MVNOs need to arm themselves, and when they are too small to invest in what they need, MNOs must provide them with the right tools to help them stay truly relevant to their customer segment(s). MVNOs need to continue doing what they do best, which is the business of segmentation: They will have to implement microsegmentation and real-time marketing analytics, and support faster decision-making and more-proactive problem solving in their organization. In short, MVNOs need to think quickly, act fast and keep moving rapidly.

Introduce fine-grained customer-behavior-based segmentation: MVNOs are already in the business of segmentation, but even within a segmented base there is scope for microsegmentation, which in turn will enable them to better upsell services, such as by targeting communities likely to be interested in certain promotions.

Focus on speed: MVNOs need to be able to act in a timely manner. Targeted campaigns and upselling need to be performed when the customer needs it, even if the customer does not know what they need, as in the case of a data allowance that is about to be exhausted. When MVNOs have timely visibility of subscriber activities and behavior, they gain insight into the needs of individuals and subscriber microsegments. They then need the ability to respond to those needs in a timely fashion, to harness the subscriber’s moment of need.

Introduce more service differentiation through tailor-made offers: Selling data, voice and messaging is simply not enough in today’s market. Only by really knowing its customers can an MVNO implement a service portfolio that enables it to sell more and use mobile as a real commerce channel with accurately profiled, customer-matched offers.

Focus on customer-experience management: MVNOs should focus on delivering excellence in CEM. Price-arbitration opportunities are fading away in most parts of the world, especially in mature markets. As such, MVNOs need to focus on delighting customers, not only to avoid churn but to reduce the cost of servicing them, such as by pre-empting the need for customer-support calls.

Make it lean: Because of resource constraints, MVNOs need to focus on CEM through automated processes requiring a minimal level of human interaction. This does not mean that offers need to be standardized: MVNOs need to engineer mass-customized processes that are accurate and work in a low-labor-intensity fashion.

In most cases, MVNOs do not have access to capabilities that provide them with timely visibility of their subscriber needs and the ability to respond to those needs. These solutions need to be affordable and flexible to work within MVNOs’ budget and resource constrains. There is an opportunity for MNOs and MVNEs to add these capabilities to their hosted platforms if they want to assist their MVNOs customers in prospering in the new MVNO hype cycle.


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