An MVNO is a Mobile Virtual Network Operator. So what does that mean?

We’ve had the term Virtual ISP for some years to describe a company that extends its branding into the ISP space purely as a means of capturing new customer base. It does not own its IP network, it has an arrangement with another ISP who is responsible for all the technical aspects of ISP support – network, management, hardware. Tesco is the classic example. As such, though, it is basically a reseller of IP services using its own branding to address a particular market segment – its own customers. So is an MVNO just a reseller of mobile services? Well no, although the exact meaning of the term is being stretched by some beyond its original meaning.

Does it matter? For MNOs (Mobile Network Operators) yes it does, as MVNOs are likely to play an increasingly important role in the market especially for 3G services. Are they friend or foe? It all depends . . .

A question of ownership

The word 'virtual' in MVNO refers to the fact that they do not own radio spectrum, but lease it from existing mobile operators. Spectrum is the mobile equivalent of the last mile of the local loop in fixed networks, and the leasing of mobile spectrum to MVNOs is analogous to the leasing of unbundled local loop copper wire to competitive broadband providers in the fixed line market.

What distinguishes a virtual operator then? It is certainly not that they issue a SIM card – the small slot-in card that defines the unique identity of a mobile handset. Some companies issue a SIM card with the active support of a mobile operator, but all they gain from doing so is the ability to display their brand name on the mobile handset. No, the factor that makes an operator truly virtual is the ability to control both outbound and inbound calls. Essentially, this means at least owning its own switch. This means it then has control over the cost of calls coming in to and going out from its subscribers. It also means it controls its own service creation rather than relying on one operator to provide it with services. Although this is not a rigid definition, there has been some confusion caused by service providers referring to themselves as virtual operators when in fact they are really just resellers.

So what’s in it for Mobile Operators? Why should an operator provide its own bandwidth to another company competing with it for mobile users?

Mobile not so different

There are certainly regulatory issues, as yet unresolved, to ensure that competition in mobile markets is maximised – just like in the local loop unbundling saga in the fixed network.

In fact, from a competitive viewpoint it is not really any different to a fixed line network operator offering backbone services to ISPs competing against its own service provider – it sells minutes on the network and if one operator won’t do it, there are many others that will. As an operator, the MNO needs to utilise its spectrum and get some cashflow, which it gets from having MVNOs as paying customers.

This revenue element is especially pressing of course for those MNOs building out 3G networks. With the high level of debts they now have, they literally cannot afford not be doing everything they can to get revenues as soon as possible, especially with the financial markets applying pressure to make the most of their assets.

Different brands appeal to specific groups of users with different calling patterns throughout the day. A network operator who primarily has business customers should look for an MVNO with a focus on the youth market, for example. The network operator that has a mix of complementary MVNOs is therefore in a strong position, but there are clearly risks involved. The first and most obvious one is that the network operator may lose its direct relationship with the customer. The network will always make money, but the customer base can be even more valuable. Without a direct relationship, control over customer acquisition and customer relations becomes difficult and can ultimately have an impact on profits.

And the leading contenders are . . .

What sort of company is most likely to become a virtual operator, then?

One likely profile would be a company with fixed network licences in several countries and its own international backbone. Building on this would enable such companies to offer a degree of mobility to their fixed network customers and reduce their cost base for calls made from and between countries in which they operate. Also, this provides a basis to offer a common look and feel to their services. All those fixed network operators that failed to win 3G licences then, if they weren’t currently strapped for cash.

Another likely profile would clearly be a well-known company wishing to capitalise on its brand name and with a strong customer base. AOL would be a good example.

Another is Virgin. Virgin Mobile, a joint venture between Virgin and One 2 One in the UK, is probably the highest profile example of a company exploiting the value of its brand name. It launched its service in the UK in 1999, just in time for Christmas. In this case, One 2 One is happy to use the selling power of the Virgin name to increase the number of customers and call minutes on its network. It has also signed up about 900,000 customers since its launch, providing a significant boost for One 2 One’s overall market share. However it is not really a virtual operator, though – it does not own its own infrastructure and essentially acts as a mobile bandwidth reseller to its target audience. Of course One 2 One, being the smallest UK operator, is only too pleased to let it do so. It also has a 50% share in Virgin Mobile, so at a stretch it could be said that half of Virgin Mobile does indeed own its own infrastructure!

In fact Virgin has gone much further than this and is now aiming to create a global business based on the virtual model and using the network of a series of partners in different countries to host its well-known brand. This month it was reported to be close to finalising a deal with Sprint PCS in the US. Sprint, with just over 10 million mobile subscribers, is way behind the dominant players in the US market - Verizon Wireless (in which Vodafone has a 45% stake) has over 27 million, Cingular Wireless more than 20 million and AT&T Wireless over 15 million. Sprint does have a national network, though, and probably sees the Virgin deal as a way to maximize revenue from its network. Virgin has also created an alliance with US consumer electronics retail chain Best Buy, which will sell the Virgin Mobile service in its stores.

Further afield, it has also signed another 50-50 deal with Singapore operator SingTel to create a holding company Virgin Mobile (Asia). It also has other major plans. In a further announcement this month, the Virgin Group announced it plans to spend $550m on expanding its MVNO operations in 10 Asian regions over the next three to five years. These include Hong Kong, China, India, Indonesia, Malaysia, Philippines, South Korea and Thailand. Beats running an airline!

Regulations, regulations
There are arguments from both sides as to whether the MVNO model will bring otherwise unreachable revenue or unwelcome competition to the MNOs. For instance, the GSM Association, which represents more than 500 GSM operators and key mobile vendors around the world, is cautious about regulation surrounding the MVNO model. It is keen to see legislation that helps companies provide and take advantage of the financial potential of MVNOs, but it is equally keen that network operators should not be legally required to open their networks to anyone wanting access. At the same time, some UMTS licence-holders, particularly in Germany, are fighting the regulatory authorities for the right to share their spectrum.

No-one said this mobile business was going to be easy. It’s intriguing though . . .

© e-principles 2001

Robin Duke-Woolley

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