Behind the mask

At the beginning of the millennium, with the fanfare from the 1999 launch of Virgin Mobile UK still ringing in the industry’s ears, it was widely anticipated that an MVNO stampede was imminent in the world’s leading mobile markets. A swathe of consumer-facing organisations, from soft drinks manufacturers and fashion labels to banks and football clubs, were expected to establish some variation on the reseller relationship with network operators, bringing every conceivable brand proposition to a population hungry for mobile services.

As Virgin grew in strength, subscriber base and geographical reach, though, the hoards of imitators failed to materialise. The network operators, it turns out, were not so keen on the idea. The rationale behind One-2-One’s (now T-Mobile) decision to establish a joint-venture MVNO with Virgin was clear enough; the carrier was dawdling in the UK market and 50 per cent of whatever subscribers Virgin could muster represented a relatively easy way to grow market share.

But for other operators in the UK, and other leading markets, core growth was more forthcoming. At that time carriers tended not to see the point in enabling further competition in a sector already defined by a land-grab mentality.

As the decade wore on, MVNO sceptics claimed their point was proven by what turned out to be a fairly slow burn in the model’s development. There were successes in certain markets – Denmark saw the rise of a rash of low-cost, no-frills players, some of which were eventually acquired by Danish carriers. But these particular MVNOs caused a violent price war, and not just in Denmark, which hardly served to build enthusiasm. More recently, a number of high profile MVNO failures – Amp’d Mobile, Disney and ESPN in the US, and easyMobile in the UK – have further dampened spirits.

But the reality is that the MVNO model has been gaining traction for some time. Andrew White is a founder partner of Piran Partners, a consultancy that specialises in helping aspirant MVNOs prepare their strategies and pitches: “Things have changed significantly in the last few years,” he says. “The mobile network operators came to a strategic decision that growth in their core markets had slowed down and they could see the value of bringing in some branded reseller partners. Specifically, Vodafone and Orange – certainly in Western Europe – have decided that supporting MVNOs is a good thing to do. So that’s refuelled interest in the last couple of years.”

The attraction for operators in saturated markets is clear. Growth is increasingly difficult to find once penetration gets towards or beyond 100 per cent. Carriers know that their best bet is to drill down into particular segments of the user base, segments likely to have particular requirements. But specialism can be costly, and logistically complicated. A well placed MVNO can provide the focus that carriers may lack and can shoulder a good portion of the risk and burden associated with targeted offerings.

Lebara Mobile is a pan-European MVNO that offers services to migrant communities in which demand for international calling is high. “We know how to target our segment profitably,” says Jon Fawcett, Lebara’s head of Group Marketing. “We know how to distribute, sell and market and how to build and sustain loyalty. It would take a lot of time, energy and money to learn how to achieve the goals that we’ve achieved. We’re not saying the operators couldn’t do it, but we are saying that the investment they would need to make to get themselves to the position that we’re at would be significantly more – and therefore the return on investment significantly less – than it would be if they were working with Lebara Mobile.”

Interest in the MVNO model may well be on the rise among network operators but it would be wrong to assume that this makes the path to success for MVNOs any easier. In fact, operators are more rigorous in their partner selection now than they have been at any time in the past, says Andrew White. He estimates that only one in ten prospective MVNOs make it as far as striking a deal with an operator. Even then, he says the commercial success rate of the chosen few is probably no higher than 30 per cent.

Any organisation looking to establish itself as an MVNO ought not to be dissuaded, though, according to Michael Lowry, a partner in the Technology and Outsourcing division of law firm Addleshaw Goddard. “I don’t think it’s necessarily right to suggest that the balance of power is with the network operators every time,” says Lowry, whose firm has worked on the deals that created MVNOs for UK supermarket Asda, and the ill-fated easyMobile no frills venture. “If you have a really strong, viable proposition then it’s almost a defensive play for the operator to take it on. Because if they don’t, someone else will.”

The strength of the proposition is everything for the MVNO. The original idea that any brand with a consumer following could carve out a degree of success for itself – an idea inspired by the performance of Virgin Mobile – has long since been laid to rest. “I don’t think brand is terribly important,” says Andrew White. “Just because Coca Cola, say, was to launch an MVNO, the strength of its brand wouldn’t necessarily make it successful. It might be, of course, but the brand alone is no guarantee.”

Public failures like Disney and ESPN have made the industry wary of what White calls the Big Bang approach that sees major brands pouring hundreds of millions of dollars into MVNO operations.

Virgin was an anomaly, says White. It launched at a time when prepaid was a relatively untapped market in the UK and rode the growth of that segment to the point where, he says: “It has now established itself as a mobile operator. And I don’t use the word ‘virtual’. I think it will be very difficult for another brand-based MVNO to copy that – I don’t think we’ll see another replication of Virgin.”

Michael Lowry suggests that there are four basic MVNO propositions. The first is the low cost, no frills model that had such impact in Denmark. The second is a portfolio expansion, where a communications player like BT might seek to offer mobile services as part of a bundle. Brand extension is the third option, which drove the likes of Asda and Tesco, he says, and the fourth is the kind of niche play favoured by Lebara Mobile, or Blyk, the ad-funded youth media player. And if you don’t have a decent play figured out for one of these areas, success will not be forthcoming.

Even when you think you have a strong proposition, carriers take a lot of convincing. One of the boldest plays in recent years has been that executed by Blyk. An MVNO that sits on Orange’s UK network – with a launch planned in the Netherlands later this year – Blyk targets the 16 – 24 year old market, subsidising the cost of usage by enabling brands to send text and multimedia messages to the end users, based on profiles and preferences. When the firm announced its plans, more than a few eyebrows were raised.

“Six months ago there were a lot of people doubting whether it would work,” says Blyk’s group COO, Leif Fagelstedt. “But now that has turned around. I don’t get the sense today that there are responses coming from operators saying that they don’t want Blyk on their network,” he says. Fagelstedt reports that Blyk is on schedule to beat its target of 100,000 users within the first year of operation in the UK market. He also reports that, with some 600 marketing campaigns from more than 65 advertisers having now been executed, response rates have stabilised at 29 per cent – a figure that might be helping Blyk’s discussions with potential hosts in other markets.

In Andrew White’s view – and he has a declared interest, since he consulted on the creation of the firm’s UK operation – Lebara Mobile is a “cast iron success story”. He goes so far as to suggest that every operator in relevant markets should be hosting an ethnic-based MVNO of one type or another. Nonetheless, says Jon Fawcett, operators are by no means universally persuaded by the firm’s strategy.

“To be fair we do get mixed responses from potential hosts,” he says. It varies from country to country, and also from group to group. Fawcett was previously employed in the Orange UK wholesale team and he says that aspiring MVNOs should seek out carriers that are serious about MVNO hosting as a strategic play. “The mobile operator in question needs to have gone through the strategic planning process of determining whether or not they feel that it’s right for them to partner with MVNOs before they engage in any form of commercial negotiations with a potential MVNO partner.”

MVNOs that target ethnic groups certainly appear to be among the more sustainable operations. In the US there are several organisations serving the nation’s large Hispanic population and Lebara Mobile – which runs international traffic over its own switch – seems to be performing well in its various markets. The firm was originally created to sell prepaid calling cards to migrant communities in 2001. But the founders soon identified the opportunities afforded by a SIM-based proposition. The first mobile operation launched in the Netherlands in 2004 and the firm now has MVNOs in Norway, Denmark, Switzerland, Spain and the UK. It’s total subscriber base numbers around 700,000, with active subscribers designated as anyone who has sent a text or made a call in the last 30 working days. Given the peripatetic nature of the firm’s target market, turnover can be high.

Lebara provides a useful example of the level of specialised activities that encourage operators to partner with niche MVNOs. The firm’s handbook is published in 13 languages. The website is in five languages and the call centres operate in “myriad” tongues, according to Jon Fawcett.

The firm does a lot of “street marketing” where sales agents will pitch their stall in a rented spot outside of public transport stations in parts of cities with high immigrant populations. They will then sell SIM cards and airtime to potential customers as they enter and leave the station. Beyond that, in the UK, Lebara maintains a presence at large cultural events; it was in London’s Trafalgar Square for the Chinese new year, and again for the Russian winter festival.

“We don’t have a big, branded retail presence,” says Fawcett, “we build relationships directly or indirectly with independent retailers. Our objective is not to subvert the channel and try and make sure that our product is widely available in the areas and in the types of retail outlets that our customers shop in. So there is a strong focus around the local community when it comes to sales and marketing, which is very different from the big advertising spend that you would normally associate with big mobile operators,” he says.

These are activities that are simply unrealistic for major network operators to embark upon. As Fawcett points out, 3UK recently cut its rate for calling Poland to £0.12/minute in a bid to capitalise on the influx of Polish immigrants to the UK. Lebara’s rate for calling Poland is £0.04/minute.

For an MVNO to be a success, and to be attractive to potential hosts, it has to offer the operator something that operator doesn’t already have. “I think it is tremendously important that there is no brand clash,” says Blyk’s Leif Fagelstedt. “If we partnered with an operator that is targeting the youth segment, it would not be productive because it would mean that you would be stealing customers from each other.”

Likewise, Jon Fawcett argues that Lebara brings different traffic profiles, with different peaks, so it does not drive incremental cost on its host network. And, he says, it brings in minutes that would otherwise be on the fixed line, as its customers would likely be using prepaid calling cards if they weren’t using Lebara Mobile.

Supermarket brand MVNOs, like Tesco Mobile and Asda Mobile provide host operators with an unrivalled distribution channel, with huge customer throughput. In the UK, 15 million households shop in Tesco each week.

If an MVNO does manage to convince a host operator that it has a viable proposition that will be net positive, a deal still has to be struck. There are a variety of ways to structure deals, ranging from full joint ventures, which is how Virgin started out, to airtime wholesale. MVNOs and host carriers share a reticence when it comes to discussing the nature of their deals, but Michael Lowry of Addleshaw Goddard reckons there is a trend shift in the types of deals being struck.

He suggests that there is a move towards the sharing of profit and risk. “This is probably because some of the operators are doing a lot more than just providing airtime,” he says. They might be providing the billing as well, for example. And, as a result, the operator is more tied in with the success or failure of the venture as a whole.” One of the key benefits for operators of some form of joint venture is that they usually get a seat on the board of the MVNO, affording them greater strategic influence.

But, says Andrew White, with great power comes great responsibility and operators may be put off joint ventures by their exposure to failure, as well as complex accounting rules. “We believe that most activity is going to be seen on the straight wholesale ‘cost plus’ arrangement because it tends to be suitable for more applications.”

Either way, Lowry reveals, the discussions that begin once an original agreement has been struck can see significant shifts in relationship definitions. “It can soon become apparent that deals aren’t quite as thrashed out as some people originally thought,” he says. “I’ve never seen changes as fundamental as a move from non-equity to equity, but I have seen the actual charging structure move quite substantially.”

And as MVNOs look to expand into multiple territories, they may strike different deals with different operators. Both Jon Fawcett and Leif Fagelstedt are insistent that each market must be approached on its own merits – one thing we are unlikely to see is an international partnership between carrier group and MVNO operation. As Fagelstedt says: “Every negotiation doesn’t have to start with Vodafone and Orange.”

And yet these are two operators that have made a clear commitment to MVNO hosting. If carriers are going to make MVNOs a plank of their strategy, they have to embrace the model fully. “Those carriers who are likely to be successful in the MVNO space are the ones that have set up separate reporting lines,” says Andrew White. “That’s very important because otherwise there can be a conflict between the core business and the incremental business.”

There is a risk, he says, that if the wholesale division isn’t given separate reporting lines, then core marketing and strategy teams could simply attempt to steal ideas proposed by MVNO partners. “Operators are beginning to conclude now that having 60 or 70 per cent of something is better than having none of it.”

In an industry that is all too often afflicted by hype, it’s interesting to see how the MVNO model has quietly matured into something that is genuinely workable. The rash of big brand MVNOs never appeared. In their place, are a gang of lean, niche specialists helping operators to mine hidden seams in their marketplaces.