The MVNO wave is building strength as a growing number of companies have announced plans to enter the wireless space using established operators’ mobile networks. Analysts’ note that while the wave is gaining momentum, an even stronger surge is expected in the next 12 months.
“It’s a boom time in MVNO land,” said Andrew Cole, vice president of A.T. Kearney’s wireless practice. “A lot of companies are getting into the market and rightfully so.”
Cole said he expects the mobile virtual network operator market will someday support 20 percent of the wireless industry’s customer base, and the market eventually will be able to sustain between 10 and 15 MVNOs. Other analyst firms have forecast that MVNO revenues will increase from $1 billion in 2003 to nearly $19 billion by 2009.
The MVNO space already has seen a handful of new entrants this year. SK-Earthlink announced plans targeting high-tech business users; Amp’d Mobile Inc. said it will target the youth and extreme sports crowd; InPhonic Inc. and Movida Communications Inc. plan to target the Hispanic market; and MobilePro Corp. is looking to tie together prepaid MVNO services with its Wi-Fi/WiMAX deployment plans.
Several companies, such as Vonage Holdings Corp. and numerous cable operators, including Time Warner Cable, have also hinted at potential MVNO plans.
The recent announcements join previously announced plans by ESPN and AT&T Corp., as well as the more than a dozen established players led by Virgin Mobile USA L.L.C., Nextel Communications Inc. subsidiary Boost Mobile USA L.L.C. and regional telecommunications provider Qwest Communications International Inc.
“It’s the `in’ thing in wireless right now,” said Michael Grossi, principal at consulting firm Adventis Corp. “Only MVNOs are getting any sort of attention.”
Grossi added that the boom in MVNO announcements also has coincided with more support from traditional wireless operators that are seeing benefits from such partnerships. Sprint Corp. is still seen as the leading MVNO partner-supporting Virgin Mobile, Qwest and ESPN-but a pair of recent deals announced by Verizon Wireless with Amp’d and MobilePro have brought some much-needed diversity to the market.
“It’s good to have at least two carriers supporting MVNOs, not just Sprint,” Grossi explained. “The move makes sense for Verizon, which is still focused on catching Cingular [Wireless L.L.C.] and does not want to spend marketing dollars on a niche market.”
The increasing number of carriers supporting MVNOs also is expected to draw bigger names into the space. Both Grossi and Cole said they expect more established brand names to announce MVNO plans during the next year, which could lead to some of the smaller players being weeded out. Industry observers still predict large content-heavy companies like Disney will enter the MVNO space before too long.
Cole said that while companies entering the MVNO space will have a time-to-market advantage over those still formulating their plans, those companies targeting the prepaid market need to quickly scale their customer bases if they want to remain viable players.
“An MVNO needs at least 1 million subscribers to support the typical prepaid ARPU of $16 to $17,” Cole predicted. “Their only other alternative is to target postpaid customers, which requires a different business model.”
One company that appears to be successful driving sustainable prepaid ARPU is Nextel’s Boost Mobile, which reported $41 in monthly ARPU during the first quarter of this year.
Cole predicted that the second wave of MVNO announcements will include more postpaid offerings, which in addition to generating more revenue per user than prepaid models and a more stable customer base, will target more data-intensive users. Amp’d Mobile, ESPN and SK-Earthlink already have said they plan to offer postpaid plans as part of their MVNO services.
“Relying on prepaid voice services will be a tough sale for companies,” Cole said. “MVNOs will need to target higher-spending postpaid customers with a strong combination of voice and unique data services.”
Analysts also warned that the new MVNO entrants need to bring sufficient funding to the table if they expect to ride the MVNO wave.
“Funding is still more important than time to market,” Grossi said. “It’s still a capital-intensive business. [Cost per gross addition] is still CPGA no matter if you are a traditional carrier or MVNO, and carriers are still going to have to subsidize handsets.”
In addition to the proper funding and service offering, analysts noted that long-term MVNO viability depends on having a strong brand name that can separate a company’s offering from its rivals. This will likely favor the yet-to-enter larger entities biding their time in announcing MVNO plans.
“The smart ones have a capital base supported by a branded entity and are not going to give away all of their trade secrets until they are ready to launch,” Grossi said.
Others are not so sure a strong brand name is a requirement. Amp’d Mobile founder Peter Adderton, who also founded Boost Mobile, said he thinks a strong brand name could limit an MVNO’s potential.
“Strong brand names are worse for an MVNO as people already have an idea of what you are supposed to offer,” Adderton claimed. “Amp’d will not be pigeonholed with preconceived notions.”
Of course, companies that have already established their MVNO identities are moving quickly to the next phase of the evolution. Virgin Mobile USA is reportedly finishing up plans for an initial public offering that could generate up to $2 billion for the company.
Virgin Group Chief Executive Richard Branson said last week the company is working with a pair of investment firms on IPO plans for Virgin’s U.S. mobile operations that could take place as early as this summer.
Analysts claim the market is ready for such a move, and it would further strengthen the MVNO’s position in the wireless space.
“I think it’s a smart move by Virgin,” Cole said. “They have reached a critical mass of customers and can offer real value to shareholders.”
The IPO plans could also provide Sprint with a way to divest its interest in Virgin Mobile USA ahead of its acquisition of Nextel and its Boost subsidiary, which targets a similar youth market. Sprint initially invested $150 million of subsidized network access to Virgin Mobile USA and could see a substantial return on that investment through the IPO if it wanted to sever ties.
“Sprint is not strategic to Virgin anymore,” Grossi explained. “Virgin has established its name and would be welcome by almost any other wireless operator.”
Grossi added that for small MVNOs that fail to reach a sustainable customer base, the alternatives will be limited to shutting their doors or hoping their targeted efforts garner interest from larger carriers. “Their only chance is if a carrier comes in and scoops them up, as Nextel did with Boost Mobile,” Grossi said. “Otherwise, it’s lights out.”
