During the past 15 months there has been growing interest in the United States around mobile virtual network operators, best known as MVNOs. The idea behind MVNOs is that companies with strong brands, powerful distribution or compelling content/applications (ideally all three) negotiate wholesale access to a mobile network and resell value-added mobile services directly to end users. The network operator benefits through incremental wholesale revenue, whereas its MVNO gains new revenue from its existing asset.
MVNOs are hot because people now realize that the big money in the mobile industry resides in operating voice networks. Today, most industry experts agree that even a small fraction of mobile voice revenue is substantially greater than a large share of the less developed mobile-commerce, location-based mobile commerce, or other still imaginary markets. There is also evidence from markets such as Germany, the United Kingdom, Norway and Australia that MVNOs can gain up to 30 percent of the moecome very popular and after the first major entry, all operators rush to sign comparable deals for fear of missing out. Under this scenario, MVNOs and resellers could grow to more than 10 to 15 percent of the market within three or four years. In the United Kingdom, this scenario was triggered by Virgin’s high-profile entry in mid-1999. In less than two years, more than 10 additional MVNO deals have been reached, involving some of the major U.K. retailers and media groups. MVNOs have grown by about two percentage points a year.
Alternatively, operators could opt for other ways of accessing the brand, distribution and content provided by their partners. One example of this scenario: sign distribution and co-branding deals in which MVNOs provide a cut to their partners, but still retain full control of commercializing the mobile service. This model would be appealing to both network operators and their potential partners. For operators, it allows them to access attractive new revenue sources without the risfour years. On the supply side, given a mobile market with six established national players, plus several large regional firms, it seems unlikely that they will all refrain from moving into the MVNO space. On the demand side, the United States boasts some of the leading brands in the world, many of which are strong candidates for MVNO or resale. The wireless industry could easily exceed $100 billion in revenues by 2004, with MVNOs then representing more than a $10 billion segment of the mobile market circa 2005. Obviously, a space well worth participating in if conditions are right.
Candidates
Despite the potential size of the market, companies should be careful in pursuing MVNO opportunities. It may be economically efficient for only four to five full MVNOs to be set up in the United States, with perhaps another 15 to 20 strong brands participating in the mobile market through resale or distribution models. The ideal candidates for MVNO fall into two categories:
1) Strong mobile operations outside thean 5 percent market share within two years. This example suggests that the major ISPs and portals have a similar opportunity in the United States.
Other product categories that naturally lend themselves to mobile MVNO and resale operations are: automotive (more than 50 percent of mobile traffic is generated from a car in the United States); banks and other financial service providers (strong cross-over with mobile banking); and mass-market brands such as Coca-Cola and Nike, which can leverage their recognition and distribution systems to create an additional revenue category. Companies with compelling products that can be delivered over a mobile network (e.g., Nintendo games, Kodak pictures) are also candidates, as are firms with large distribution channels, from Wal-Mart to Blockbuster.
MVNO alternatives
However, a full MVNO may require peak investment of $200 million to $300 million over three to four years, and the successful deployment of numerous skills in customer service, branding, distribution net effect is that the required investment to become a reseller at a national level is in the range of $10 million to $40 million, substantially lower than for MVNOs.
Distributors
Becoming a distributor may be attractive for firms that recognize they can leverage their assets to sell mobile services, but who do not view mobile as a core investment area for their business. Under this arrangement, the partner company would essentially offer the operator access to its distribution channels or customer base in exchange for a distribution payment, analogous to what carriers pay retailers today. There is in this a very limited required investment on the part of the partner company, since the operator assumes all of the costs of acquiring and servicing the target customers.
Risks vs. rewards
The rewards, of course, are also likely to vary in line with the risk undertaken. In our hypothetical models, the MVNO model could deliver a net present value of more than $800 million for an investment of $200 million.cent market share is also attractive (witness the recent deal with AOL), but its technology migration issues as it moves to W-CDMA have created some uncertainty. Finally, both Verizon and Cingular are less likely candidates for MVNOs given that they have the most established positions (note however, that Verizon does have a significant resale deal with GM OnStar). Although NextWave is apparently very keen to become host to several MVNOs, its lack of a national presence limits its attractiveness currently.
The impact of MVNOs
One of the biggest fears expressed by carriers is that MVNOs could hurt the industry by driving a price war that ultimately undermines profitability for all players. This is a valid fear, given the experience with long-distance resellers, and to some extent the experiences with some of the MVNOs in Europe. However, one dimension of pricing, price-per-minute, has been in steep decline for a long time in the U.S. wireless market. Its future path is unlikely to be influenced by MVNOs, whe and distribution arrangements, they will play an important role in introducing marketing innovations into a U.S. wireless market in which operators have been afraid to experiment. They will also usher in attractive applications in the areas of messaging, gaming and banking, increasing the overall diversity and richness of the wireless experience in the United States. The MVNOs will not fundamentally alter the economics for carriers but may be used by one or more carriers to leap ahead in market share. For most branded-goods companies, an MVNO will be the wrong idea, and a value-added resale or distribution deal will represent a far more effective way of “going wireless.”
Dominic Endicott is a partner at and heads DiamondCluster’s North American wireless practice. His wireless engagements have included 3G auctions, mobile virtual network operations, and mass market and wireless data. As the leader of this practice, he is responsible for strategy development as well as implementing projects that g
