MVNO strategic play - Winning formula includes servicing a niche without crowding the carrier

by: Bruce Hallinan - Intele-Card News, December, 2004

It seems every time I pick up an industry newspaper or magazine, another company is launching a prepaid MVNO, reselling a wireless carrier's airtime under a private brand. My informal observations show there are more than 33 MVNOs in some stage of their product life cycle.

According to research by FastTrack Wireless, MVNOs will control 58 percent of the prepaid wireless market by 2007. This would make you think that a lot of people are confident of finding a niche in the wireless market that will appeal to a select segment.

However, there are many reasons why these "wireless carrier wannabes" should look around and assess the market from all angles. If you think that the "MVNO rush" is because margins are as high as wireline reseller rates five years ago, think again. Wireless retail rates for the major carriers average around 13 percent.

Each successful MVNO must find a differentiator or unique selling point that separates it from the crowd. Some companies do this by adding value such as mobile content, while the big players will spend huge amounts on advertising to penetrate niche markets. Most offer a variety of pay-as-you-go plans and subsidized handsets. Two of the largest players are targeting the youth market. It appears there is a lack of imagination among MVNO startups in reaching out to target segments.

Deep pockets required

The barriers to entry for becoming an MVNO are fairly large with most carriers requiring at least $1 million in accessible funds. The technology to access a carrier's network and develop a billing platform is complex. Dedicated and secure servers are needed to connect directly with the carrier to provide real-time billing.

Competition is already well established from existing regional carriers. US Cellular in the Midwest, for example, offers 900 anytime minutes for $20 a month, and Metro PCS in Florida and the San Francisco Bay area provides unlimited minutes for $40 a month. Competition will increase as new players fill neglected market segments and, of course, there's the supplier of the airtime – the carriers. The predominant feeling among the executives of the major wireless carriers is that MVNOs are a nuisance – like a bouncy puppy nipping at the ears of the older pack dog.

Carrier score card

T-Mobile has been the least supportive of the MVNO models in the United States. Verizon Wireless has limited its alliances to a few regional operators using older technology. The company has stated that it will only pursue relationships where the partner would "create something new and something different." Verizon also has lost millions of dollars on its prepaid program due to fraud and would not want to repeat this through inexperienced and under-funded operators. Cingular Wireless is starting to stick its toe into the MVNO waters by striking relationships with enablers such as Ztar Mobile, the creators of the 7-Eleven "Speak Out" program.

Sprint is by far the most supportive wireless carrier with over a dozen operators coming out of its shop. Their best-known partner is Virgin Mobile, which is 50-percent owned by Sprint. In the first quarter of 2004, more than half of Sprint's 972,000 new subscribers were added by MVNOs.

Nextel has only one MVNO partner, Boost Mobile, over which Nextel now exercises total control.

Playing the game

This leads us to the largest risk in starting an MVNO – the carriers own the show. They can turn your customers off in a heartbeat and sell them to the highest bidder. The wireless carrier is also your competitor.

While the senior executive vice president in the carrier's Partnership Alliance Development Group (PADG) may have seemed genuinely interested in your success, especially after you paid the $1 million deposit and passed the vigorous technology integration tests, just wait until you sign (take) one of their direct customers.

What's ahead

Now, let's start to think long term. Let's head five years down the track of the U.S. MVNO industry. The first couple of years were tough – funding, finding a handset supplier, building a customer base, ironing out bugs in the carrier billing interface, maximizing customer care, developing the brand and competing against the 57 fly-by-nighters who decided to get into this game. As the overall wireless penetration grows from 50 percent to 80 percent, the market grows and so does your income.

But what happens when the market becomes saturated and everyone is scrambling for the last 5 percent? The growth rates cannot be maintained even if and when the carrier decides to share the introduction of new technology. Look at camera phones, for example. Only one carrier offers its MVNOs a prepaid option for camera phones – yet this is the fastest-selling electronic consumer good to the youth segment, which is the target market for the two largest MVNOs.

The increasing pressure on MVNOs to compete on price will squeeze profit margins, and it will continue to be a race of who is going to offer the latest phone at the lowest price. But what about content to build a loyal following? Won't the successful MVNOs offer varieties of mobile content to appeal to their market segments? Yes, they will, but as soon as the carrier senses a lack of market control, they will start a similar offer.

Large, well-funded operators like Virgin and Boost will continue to ride an uneasy alliance with their carrier masters. The larger, branded players like Earthlink and Qwest can play hardball with the big boys, but the smaller, privately funded MVNOs with less of a product differentiator are going to find it tough to break into a market niche without crowding the carrier.

Exit strategy

In the worst-case scenario the carrier will put you out of business, and, make no mistake, this is usually the fault of the fledgling MVNO not meeting payment schedules. But in the best-case scenario the carrier will offer to buy out a successful MVNO. At some stage the customer base becomes big enough for carriers to start worrying about their level of control. Carriers cannot handle not being in control. That's how governments made so much money from Spectrum auctions. That's why Cingular Wireless paid $41 billion for AT&T Wireless.

Last year, Vodafone, the largest carrier in the U.K., purchased its fastest-growing MVNO, Singlepoint, for US$649 million and another, Project Telecom, for a US$248 million price tag. So the secret to building a successful MVNO is to be well funded, have top-rate technology and customer service and attack that niche customer base quickly without appearing to be cannibalizing the carriers' base.

I hope that carriers eventually make an offer to purchase every small MVNO because I can assure you that it will be an offer too good to refuse.

The author is the director of prepaid services at American Wireless in Campbell, Calif. He can be contacted via e-mail at  bhallinan@americanwireless.com.