The next big thing in mobile virtual network operators may not look much like the MVNOs that have been launching-and sometimes crashing-in the past couple of years. With the hype around the space settling into caution, observers see a new kind of MVNO-like partnership likely to evolve. One that looks more like the Apple Inc.’s iPhone than like Amp’d Mobile. And it may not get its own acronym.
Meanwhile, the fallout that many analysts predicted amidst the boom of “next-generation” MVNOs has set in, raising questions about whether the real problems are with the MVNO model itself, or with the execution.
“The market has definitely become more circumspect about MVNOs,” said Ranjan Mishra, director for Oliver Wyman.
MVNO shakeout
The highest-profile development in recent months was the demise of Amp’d Mobile, which crowed about its early customer successes and the astounding content consumption of its customers-only to admit this spring that almost half of its customers were not paying their bills, leading to a stand-off with network provider Verizon Wireless and other creditors that resulted in Amp’d Mobile declaring bankruptcy and ultimately folding. Following the shut-down of Mobile ESPN-which is now pursuing a licensing model and has its central application available to Verizon Wireless subscribers-the model of the high-flying postpaid MVNO has come into question. With the failure of those two MVNOs, the future of Helio L.L.C. has been the subject of debate.
“We knew the market was going to shake itself out, and it’s healthy,” said Helio spokesman Rick Heineman. “I think the cream rises to the top. . We’re more bullish now than ever.”
Heineman objected to comparisons between Helio, Amp’d Mobile and Mobile ESPN, calling the other two MVNOs a “content-only play that’s branded as a mobile service.”
“Content is not enough,” he said. “It’s what you can do with the content . and it’s the devices that aren’t off-the-shelf from any carriers.”
The company burned through $40 million per month in the second quarter, but has said that it recorded its best performance yet in August. Asked about concerns over Helio’s finances, Heineman pointed out the recent $100 million additional funding pledges from parents EarthLink Inc. and SK Telecom.
“There’s a long-term goal for Helio to be a major player in the U.S. by doing what we do well,” he said, and added that the company recently made moves to bring its costs in line by downsizing its workforce and concentrating on markets with the most potential.
VC interest remains
Meanwhile, established prepaid MVNOs have still been able to garner interest and investment from venture capitalists. Kajeet Inc., which focuses on the ‘tween market segment, recently announced that it has raised $36.8 million in venture-capital funding. Hispanic-focused MVNO Movida Communications Inc. announced last month that it gained $40 million in VC funding, which it plans to use to sustain its growth. Both of those MVNOs have taken the less-risky path of a pay-as-you-go model. Jitterbug, which has prepaid and hybrid payment options, also raised almost $40 million in a recent VC round.
Arlene Harris, founder and chairman of GreatCall Inc.’s Jitterbug MVNO, said she believes that that there still are opportunities for MVNOs, but that those who choose to compete directly with national carriers for desirable subscribers are taking a tough road.
“I just think going for the same subscribers without a lot of differentiation is really a hard, hard thing to do-whether it’s getting handset and service differentiation or some cost advantage,” Harris said. Both Harris and Helio’s Heineman emphasized that even though MVNOs don’t have the massive investments required for network buildouts, the business is still very capital intense. And the days of vague MVNO target markets and business plans easily finding financers are over.
“At some point, it really has to be a business,” Harris said. “It can’t just be, ‘we’ll build it and they’ll come.'”
New directions
But there may be a new direction for MVNO-like businesses. After Apple’s iPhone launched in June, the device rapidly sold more than a million units, and the company recently announced new carrier partnerships in the U.K., Germany and France. While the arrangement between Apple and its exclusive U.S. partner, AT&T Mobility, might not look much like AT&T Mobility’s relationship with MVNOs like Tracfone Wireless Inc., observers point out that the relationship is essentially that of a mobile virtual network operator: AT&T Mobility handles network-related aspects, Apple takes care of customer care and other details such as handset design and differentiation, and the two companies have agreed to a revenue share.
Mishra described possible MVNOs that take the form of a “partnership model” similar to the iPhone deal, where companies create a media or content service or a specific handset that, when put together, more or less result in a new player entering the mobile space. He said he expects to see more of those types of deals over the next two to three years. Apple, he added, has shown that if a device and service offering is compelling enough, customers are willing to pay top dollar for it. Carriers, he said, are going to look for MVNOs or partners that “bring value to the table. That benchmark is getting higher and higher, and it’s going to be tougher.”
Mishra also pointed out that new facilities-based players may emerge after the 700 MHz auction to enable new MVNOs, or the Sprint Nextel Corp./Clearwire Corp. WiMAX
partnership could provide new opportunities.
“I think the MVNO market is going through a transition phase where I think you’ll see more branded handset plays, with a device that is very specific,” said D.P. Venkatesh, CEO of mPortal Inc. He noted the example of Research In Motion Ltd. (“the best MVNO example that is not an MVNO”) which concentrated on a specific device and application/service and successfully built ubiquitous relationships with carriers. Venkatesh said the new business model may be more of a “private-label services” market.
“I think payments are a good example,” he added. “I don’t see any reason why you couldn’t have a Visa phone, and the majority of its functions are around payments and commerce. Visa doesn’t want to run an MVNO, but it clearly wants to be in the business of using the mobile phone as a payment tool.”
