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Article | Leadership Inspires

MVNO: Is it worth going in?

A good leader isn’t afraid to take risks if he or she believes an endeavor is worth pursuing. For example, as consumer use of mobile devices grows rapidly, many companies are considering taking a leap into the telecom space as mobile virtual network operators (MVNOs). Before making that decision, however, it’s important to gather as much information as possible to mitigate the risks.

An MVNO is a company that does not have its own mobile network, so it leases the excess capacity of another operator in order to offer mobile services. This enriches the breadth of services available to consumers, and allows smaller firms to offer differentiated value propositions to niche market segments. It’s a good option for companies looking to expand communication and interaction with current customers, or woo new customers. 

The popularity of MVNOs continues to rise. Currently there are more than 1,200 MVNOs in the world, half of which are in Europe. The number of MVNO customers is expected to increase from today’s 135 million to more than 300 million in 2019. 

Why do it? There are a number of reasons. Here are six common market entry strategies:

Low price: These companies offer frugal plans, often with only simple voice and SMS services, limited data, and inexpensive devices. MVNOs selecting this strategy target price-conscious customer segments with a limited marketing budget, utilizing traditional sales channels such as physical stores rather than alternative channels.

Content and applications: The focus here is on exclusive content offerings, such as music, videos, games, or certain sports content bundled with mobile plans or devices. They target customers who are active in digital channels and interested in specific content. The main differentiation point among these MVNOs is the ability to provide content and applications that are not available from other operators.

Convergent services: Some MVNOs offer all-in-one services encompassing service lines such as fixed Internet or pay TV, along with mobile service. They are also referred to as XVNOs, stressing the variety of their service lines. Customers receive one combined bill for all the different services provided by the XVNO, which has a positive effect on the customer satisfaction level.

Segment-focused: These MVNOs serve very specific segments, such as expats, youth, business customers, migrants, or others. The main differentiation point among segment-focused providers is their narrow focus on customers who may not be covered by other operators in the market.

Retail presence: These operators have retail background and rely on strong distribution channels offering cheaper plans and easy accessibility. They focus on customers who are already part of a retail network, so marketing efforts mainly consist of in-store activities.

Service differentiation: Looking beyond products, these MVNOs integrate telecom products and services with loyalty programs, financial services, or other services related to a company’s or group’s assets and resources. For example, a technology retailer integrating its customer loyalty program with a group’s MVNO can allow customers to earn points as they talk on their mobile phones and use these points in the stores to upgrade their phones. MVNOs selecting this strategy tend to create a closed loop network with group-level synergies offering customers a unique proposition.

MVNO success factors

With a sharp look at the industry, we have identified four main ingredients to the success of an MVNO model. First, we see that the most successful MVNOs around the world have a powerful sales and distribution network that enables them to act quickly based on market demands and meet customer expectations effectively. The bigger this sales network gets, the easier for the customer to access MVNO services. New entrants can take advantage of already established networks, such as if the MVNO is an extension of a retailer or entertainment brand.

Another success factor is to have a differentiated value proposition tailored to a segment, compared to traditional network operators who mostly focus on mass markets. While most operators do customer segmentation, there are still many sub-segments that are not covered—travelers, specific professions, ethnic, or religious groups—because they do not generate the desired profit. MVNOs may choose to go after one of these niche segments and offer competitive plans with the operator. This is great for the operators since MVNOs overtake important cost items in the value chain such as customer acquisition, cost of sales personnel, etc. 

The third among key success factors is the ability to create a fair partnership with an operator that creates a balanced revenue-sharing model and supports the business and operating model of the MVNO. It is important for the companies and their investors to fully understand the details of the value chain of an operator so that they can stand strong throughout the negotiation process with the operator to lease the “pipes.”

Last but not least, an existing customer base is very important to MVNO success. A majority of successful MVNOs have entered the telecom market by utilizing the existing customer bases of their partners.

Business models and revenue generators

Compared to traditional mobile operators, MVNOs work with smaller customer groups. As a result, their income is usually limited to specific segments. However, companies that engage in MVNO business can take advantages of other income sources, which can become a big opportunity when it aligns with the company’s core business.

For example, with a branded reseller model, the legacy network operator provides technical services, including radio access, customer activation, network functionality, billing, and customer service. That leaves the MVNO to focus on marketing, sales and distribution, branding, and communication. This model creates a new face and value proposition for customers using an existing network.

On the other hand, a full MVNO handles all of the functions except for radio access, since it does not have the license to provide radio access.

These different models also mean that revenue is shared differently. There is no one definite revenue sharing structure based on different models. Many can be used interchangeably throughout an MVNO’s lifetime, as it may switch from a branded reseller to a full MVNO or vice versa. 

Some MVNOs use a revenue-sharing model based on percentage of earnings. In this case, the operator shares a certain percentage of its earnings after tax, paid by MVNO customers. The percentage usually increases as the functions performed by the MVNO increase. Another option is to create a wholesale agreement with the legacy operator, where the MVNO purchases voice minutes, data, and SMS wholesale, then resells them to customers. Others work with a constant revenue-per-subscriber model, where the MVNO is paid by the legacy operator a certain amount for each subscriber it brings to the network. 

Finally, some companies create agreements using lump sum calculations. In this instance, some MVNOs prefer to receive lump sum payments from operators at certain intervals to back up its marketing communications, acquisition campaigns, or just to have an idea of its future cash flows. While this type of revenue sharing may be embedded in other models, such as a percentage sharing model that includes lump sum amounts, it may also work in situations where the number of subscribers will never go above a certain level—i.e., when an MVNO is able to sign a big corporate customer with special tariffs and side benefits.

MVNOs that are subsidiaries of retailers may get to enjoy additional revenues when subscribers visit their stores with plan questions, want to sign a new deal, or top-up their accounts. Once in the store, they may make impulsive or planned-but-postponed purchases (see example in sidebar). 

Also, as a result of knowing their customers better through newly available subscriber data, retailer MVNOs can offer more relevant products to customers and provide them incentives based on their shopping and telecommunication usage patterns, therefore contributing to higher lead to sales conversions. 

What are the costs of MVNO business?

Just as revenues may differ based on the business model, operational expenses will also differ as the functions undertaken by the MVNO increase. Typical expenses include:

Marketing expenses: Just like every other product, a new MVNO needs to be marketed to its target segments. Marketing, a function usually undertaken by the MVNO unless it is a subsidiary of the legacy operator, is very important, especially in the roll-out phase, when people will be hearing about a new service from an existing or a new name. However, as the business continues, marketing should be kept mostly below the line to avoid huge bills from agencies.
 
General administration and personnel expenses: The telecom market requires players to be agile and create new offerings and value propositions for customers. To tailor winning solutions according to the needs of its customers, a lean and small management organization is necessary. On the other hand, sales happen in the field. Therefore, salespeople must be rewarded to boost their willingness to sell the service and its products. 

IT expenses: These are very much parallel to the selected business model. For example, if the MVNO decides to handle the complete operations of the business, IT costs will be high. On the other hand, if it only maintains a website and leaves most other processes to the legacy operator, non-significant IT expenses will occur.

Cost of goods sold: Not all MVNOs are willing to sell devices, but the ones that do have to bear the cost of goods sold (COGS). In order to maintain COGS at a controllable level, MVNOs with big subscriber numbers or existing negotiation powers (i.e., retailers) should engage in device bundles or sales. 

The final decision

So, is an MVNO the right decision for your company? The answer is yes, under the following conditions: 

• Value propositions are tailored to the specific needs of a group.

• The parent company’s (if there is one) main business can support and grow the MVNO and vice versa.

• Expenses are kept at a minimum level and the organization is agile and efficient.

• The revenue-sharing model is meaningful to both the MVNO and the operator.

When these conditions are met, most MVNOs return their investment and start making profits within the first two years, or sooner in some cases. On top of that, if managed correctly, they boost cross-sell for parent companies, increase customer lifetime value, and build a better and more recognized brand.