The MSP model at launch, therefore, should be discounted as an entry structure

· A strong contract will provide the flexibility to launch applications at speed in much same way as ‘buying’ complete control over the infrastructure (but without the issues around maintenance and obsolescence);

The contract terms must be negotiated with the need for flexibility in mind

· The way that the MVNO is structured within the overall Host business, will to a great extent, dictate the ability to raise revenue from the business.

The MVNO business needs to be perceived as a central element of the host company’s business structure and be positioned accordingly

Understanding the Risks

Despite the opportunities for the MVNOs as set out in this paper, they do not come with out risk. The main areas of risk for the MVNO are:

· The window may close. While there are multiple network operators in any one market, huge sunk costs, and network capacity there will be an opportunity for the MVNO. If operator consolidation occurs or multiple MVNOs launch, there will be limited scope or motivation for the network operator to facilitate additional MVNOs;

· Capital Exposure. Depending on the level of independence achieved by the MVNO through infrastructure investment, the capital outlay could be significant and in tens of millions;

· Brand Risk. Extension of the host MVNOs business into mobile, represents an exposure to the brand in a new market, where failure could have ramification in its core business;

· Regulatory Risk. The regulator in the UK has generally been supportive of

Although a much coined phrase, MVNO’s have remained in their infancy until only recently. This paper seeks to set out a better understanding of the concept of a virtual operator, the rationale for its creation and the various forms a MVNO might take. After setting out the some of the barriers facing a potential MVNO, the paper address some of the implications for the host, the key risks and areas that need to be considered when creating a relationship.

Understanding the MVNO Concept

There is much said about the concept of a Mobile Virtual Network Operator (MVNO), but very little understanding of the practical implications of the concept. In its simplest form, an MVNO is a mobile wireless service provider that doesn’t own the underlying spectrum or radio network. Rather, it uses the wireless communications network of a third-party carrier. By service provider, the direct provider of service, not merely an entity that puts its content onto the services offered by carriers. There are important distinctions between an MVNO and the typical resale model we have seen to date in the United Kingdom. This will change, materially, as MVNOs will change the wireless industry as we know it today.

Key Market Developments

There are some key points to consider in understanding the facilitation of the emergence of the MVNO player as an alternative entrant in the mobile telecommunications market:

· As the mobile networks evolve from 2G voice services through 2.5G and 3G to broadband packet data, there will arise a fundamental split in business models between customer facing services and the underlying communications networks;

· There is likely to be some strong brand MVNOs to launch from major companies in retail, media and entertainment, consumer products and services, communications, and financial services. We have already seen the success of Virgin and Tesco in this regard and Disney has announced its entry into the market;

· The network operators have been keen to hold onto their direct customer relationships and avoidance of becoming a carrier only business. Network operators that concentrate on delivering the highest-quality network in terms of coverage, capacity, technology evolution, billing capabilities, etc, will, in turn, be best positioned to attract the most profitable MVNO traffic;

· Given the duplicative network structure of the wireless industry and the emerging large scale capital cost of third generation technology infrastructure buildout, the carriers that understand and welcome MVNOs on their network will enhance their return on investment;

· A business opportunity exists for an enterprise to en-able easy plug and play between MVNOs and the wireless networks.

What shape of MVNO

There is no real definition of a MVNO, but ultimately it is an infrastructure model supported by a robust set of agreements with a network operator that when taken together provide for the maximum independence of the MVNO to be competitive in the market without undue reliance or recourse to the host operator. The are five main distinctions in the models that lead ultimately to an MVNO, including:

· Service Provider;
· Indirect Access Operator;
· Enhanced Service Provider;
· Mobile Virtual Network Operator; and
· Network Operator

Infrastructure Control varies according to the services provided.

· If the MVNO focussed only on developing a mobile communications brand there is potential to have greater control over telco infrastructure;

· The less control the MVNO has over telco infrastructure, the less ability the MVNO has to be competitive with pricing, particularly with regard to voice calls;

· The strength of the contract between the MVNO and Telco will dictate the ability and speed with which new services and pricing can be launched and the general quality of service.

Customer Considerations.

· A typical MVNO could increase its profitability by selling services across its business (both internally and externally);

· The MVNO should identify areas where investment costs can be shared with other parts of the business.

Infrastructure routes.

· A minimum level of influence is required across both the telco infrastructure and MVNO host business to enable the efficient launch of new services; both physically and politically;

· The greatest business benefit will be from providing services to both the customer and the MVNO host business;

· The more integration with the MVNOs core infrastructure, the greater the potential for differentiation of MVNO, both internally and externally;

· There are a number of transition routes to achieve these benefits.

Understanding the Mutual benefits

In succeeding in developing an MVNO, it is vitally important that both parties view the relationship as a partnership of equals and as such bring mutually beneficial contributions to their respective businesses. While there will be concerns, in particular from the network operator, regarding market disruption and subscriber cannibalisation it is important to demonstrate an understanding of these concerns as well as benefits that would accrue to the network as a direct result of the MVNO relationship.

As a summary, the primary benefits for the network operator are as follows:

· More Traffic. MVNOs can help deliver more traffic on the partner operator’s network than the operator could generate on its own. Given the significant and sunk costs in the network operators business, they need to earn a return on both the incremental investment as well as the existing network investment;

· Cannibalisation vs Market Share. This will be a key concern of the network operator, but experience shows that the rate of loss of subscribers to the MVNO business will at worse be in line with their market share, but ultimately much lower, especially where the MVNO seeks niche markets. It is likely that the brand will attract a different customer base from that of the network operator as the Boost Mobile or Telmore models demonstrate;

· Reduced Costs (SAC’s and SRC’s). The infrastructure costs to support an MVNOs customer traffic will be reduced in line with the MVNOs investment in core infrastructure, services infrastructure, customer care and support as well as operational costs for sales and marketing. In particular the high SAC’s typical of a network operator’s business will be reduced significantly for subscribers acquired by the MVNO;

· Traffic Management. The MVNO allows carriers to diversify mobile risks by allocating some of their capacity and traffic to the MVNO, which can act as a safety net if the carrier’s own services don’t generate acceptable volumes and returns. Depending on the business of the MVNO, the MVNO traffic can also fill the network between busy hours and ultimately optimize the efficiency of the network operator’s network;

· Churn Reduction. In creating a virtual operator, any subscribers that leave the network operator’s own business and subscribe to the business of the MVNO will ultimately benefit from retained revenues without associated retention costs. MVNO brands are likely to attract high degrees of loyalty as specialists in their business, which will ultimately mean lower churn levels or increased profitability from subscribers.

Implications for the Host MVNO

· While the Virgin Mobile experience suggests that the MSP model is flawed, this is more down to the limited scope of activity by Virgin. They focused on mobile voice only, and ignored leveraging the main customer on their own doorstep – the Virgin Group;

The MSP model at launch, therefore, should be discounted as an entry structure

· A strong contract will provide the flexibility to launch applications at speed in much same way as ‘buying’ complete control over the infrastructure (but without the issues around maintenance and obsolescence);

The contract terms must be negotiated with the need for flexibility in mind

· The way that the MVNO is structured within the overall Host business, will to a great extent, dictate the ability to raise revenue from the business.

The MVNO business needs to be perceived as a central element of the host company’s business structure and be positioned accordingly

Understanding the Risks

Despite the opportunities for the MVNOs as set out in this paper, they do not come with out risk. The main areas of risk for the MVNO are:

· The window may close. While there are multiple network operators in any one market, huge sunk costs, and network capacity there will be an opportunity for the MVNO. If operator consolidation occurs or multiple MVNOs launch, there will be limited scope or motivation for the network operator to facilitate additional MVNOs;

· Capital Exposure. Depending on the level of independence achieved by the MVNO through infrastructure investment, the capital outlay could be significant and in tens of millions;

· Brand Risk. Extension of the host MVNOs business into mobile, represents an exposure to the brand in a new market, where failure could have ramification in its core business;

· Regulatory Risk. The regulator in the UK has generally been supportive of

· The network operators have been keen to hold onto their direct customer relationships and avoidance of becoming a carrier only business. Network operators that concentrate on delivering the highest-quality network in terms of coverage, capacity, technology evolution, billing capabilities, etc, will, in turn, be best positioned to attract the most profitable MVNO traffic;

· Given the duplicative network structure of the wireless industry and the emerging large scale capital cost of third generation technology infrastructure buildout, the carriers that understand and welcome MVNOs on their network will enhance their return on investment;

· A business opportunity exists for an enterprise to en-able easy plug and play between MVNOs and the wireless networks.

What shape of MVNO

There is no real definition of a MVNO, but ultimately it is an infrastructure model supported by a robust set of agreements with a network operator that when taken together provide for the maximum independence of the MVNO to be competitive in the market without undue reliance or recourse to the host operator. The are five main distinctions in the models that lead ultimately to an MVNO, including:

· Service Provider;
· Indirect Access Operator;
· Enhanced Service Provider;
· Mobile Virtual Network Operator; and
· Network Operator

Infrastructure Control varies according to the services provided.

· If the MVNO focussed only on developing a mobile communications brand there is potential to have greater control over telco infrastructure;

· The less control the MVNO has over telco infrastructure, the less ability the MVNO has to be competitive with pricing, particularly with regard to voice calls;

· The strength of the contract between the MVNO and Telco will dictate the ability and speed with which new services and pricing can be launched and the general quality of service.

Customer Considerations.

· A typical MVNO could increase its profitability by selling services across its business (both internally and externally);

· The MVNO should identify areas where investment costs can be shared with other parts of the business.

Infrastructure routes.

· A minimum level of influence is required across both the telco infrastructure and MVNO host business to enable the efficient launch of new services; both physically and politically;

· The greatest business benefit will be from providing services to both the customer and the MVNO host business;

· The more integration with the MVNOs core infrastructure, the greater the potential for differentiation of MVNO, both internally and externally;

· There are a number of transition routes to achieve these benefits.

Understanding the Mutual benefits

In succeeding in developing an MVNO, it is vitally important that both parties view the relationship as a partnership of equals and as such bring mutually beneficial contributions to their respective businesses. While there will be concerns, in particular from the network operator, regarding market disruption and subscriber cannibalisation it is important to demonstrate an understanding of these concerns as well as benefits that would accrue to the network as a direct result of the MVNO relationship.

As a summary, the primary benefits for the network operator are as follows:

· More Traffic. MVNOs can help deliver more traffic on the partner operator’s network than the operator could generate on its own. Given the significant and sunk costs in the network operators business, they need to earn a return on both the incremental investment as well as the existing network investment;

· Cannibalisation vs Market Share. This will be a key concern of the network operator, but experience shows that the rate of loss of subscribers to the MVNO business will at worse be in line with their market share, but ultimately much lower, especially where the MVNO seeks niche markets. It is likely that the brand will attract a different customer base from that of the network operator as the Boost Mobile or Telmore models demonstrate;

· Reduced Costs (SAC’s and SRC’s). The infrastructure costs to support an MVNOs customer traffic will be reduced in line with the MVNOs investment in core infrastructure, services infrastructure, customer care and support as well as operational costs for sales and marketing. In particular the high SAC’s typical of a network operator’s business will be reduced significantly for subscribers acquired by the MVNO;

· Traffic Management. The MVNO allows carriers to diversify mobile risks by allocating some of their capacity and traffic to the MVNO, which can act as a safety net if the carrier’s own services don’t generate acceptable volumes and returns. Depending on the business of the MVNO, the MVNO traffic can also fill the network between busy hours and ultimately optimize the efficiency of the network operator’s network;

· Churn Reduction. In creating a virtual operator, any subscribers that leave the network operator’s own business and subscribe to the business of the MVNO will ultimately benefit from retained revenues without associated retention costs. MVNO brands are likely to attract high degrees of loyalty as specialists in their business, which will ultimately mean lower churn levels or increased profitability from subscribers.

Implications for the Host MVNO

· While the Virgin Mobile experience suggests that the MSP model is flawed, this is more down to the limited scope of activity by Virgin. They focused on mobile voice only, and ignored leveraging the main customer on their own doorstep – the Virgin Group;

The MSP model at launch, therefore, should be discounted as an entry structure

· A strong contract will provide the flexibility to launch applications at speed in much same way as ‘buying’ complete control over the infrastructure (but without the issues around maintenance and obsolescence);

The contract terms must be negotiated with the need for flexibility in mind

· The way that the MVNO is structured within the overall Host business, will to a great extent, dictate the ability to raise revenue from the business.

The MVNO business needs to be perceived as a central element of the host company’s business structure and be positioned accordingly

Understanding the Risks

Despite the opportunities for the MVNOs as set out in this paper, they do not come with out risk. The main areas of risk for the MVNO are:

· The window may close. While there are multiple network operators in any one market, huge sunk costs, and network capacity there will be an opportunity for the MVNO. If operator consolidation occurs or multiple MVNOs launch, there will be limited scope or motivation for the network operator to facilitate additional MVNOs;

· Capital Exposure. Depending on the level of independence achieved by the MVNO through infrastructure investment, the capital outlay could be significant and in tens of millions;

· Brand Risk. Extension of the host MVNOs business into mobile, represents an exposure to the brand in a new market, where failure could have ramification in its core business;

· Regulatory Risk. The regulator in the UK has generally been supportive of

· The strength of the contract between the MVNO and Telco will dictate the ability and speed with which new services and pricing can be launched and the general quality of service.

Customer Considerations.

· A typical MVNO could increase its profitability by selling services across its business (both internally and externally);

· The MVNO should identify areas where investment costs can be shared with other parts of the business.

Infrastructure routes.

· A minimum level of influence is required across both the telco infrastructure and MVNO host business to enable the efficient launch of new services; both physically and politically;

· The greatest business benefit will be from providing services to both the customer and the MVNO host business;

· The more integration with the MVNOs core infrastructure, the greater the potential for differentiation of MVNO, both internally and externally;

· There are a number of transition routes to achieve these benefits.

Understanding the Mutual benefits

In succeeding in developing an MVNO, it is vitally important that both parties view the relationship as a partnership of equals and as such bring mutually beneficial contributions to their respective businesses. While there will be concerns, in particular from the network operator, regarding market disruption and subscriber cannibalisation it is important to demonstrate an understanding of these concerns as well as benefits that would accrue to the network as a direct result of the MVNO relationship.

As a summary, the primary benefits for the network operator are as follows:

· More Traffic. MVNOs can help deliver more traffic on the partner operator’s network than the operator could generate on its own. Given the significant and sunk costs in the network operators business, they need to earn a return on both the incremental investment as well as the existing network investment;

· Cannibalisation vs Market Share. This will be a key concern of the network operator, but experience shows that the rate of loss of subscribers to the MVNO business will at worse be in line with their market share, but ultimately much lower, especially where the MVNO seeks niche markets. It is likely that the brand will attract a different customer base from that of the network operator as the Boost Mobile or Telmore models demonstrate;

· Reduced Costs (SAC’s and SRC’s). The infrastructure costs to support an MVNOs customer traffic will be reduced in line with the MVNOs investment in core infrastructure, services infrastructure, customer care and support as well as operational costs for sales and marketing. In particular the high SAC’s typical of a network operator’s business will be reduced significantly for subscribers acquired by the MVNO;

· Traffic Management. The MVNO allows carriers to diversify mobile risks by allocating some of their capacity and traffic to the MVNO, which can act as a safety net if the carrier’s own services don’t generate acceptable volumes and returns. Depending on the business of the MVNO, the MVNO traffic can also fill the network between busy hours and ultimately optimize the efficiency of the network operator’s network;

· Churn Reduction. In creating a virtual operator, any subscribers that leave the network operator’s own business and subscribe to the business of the MVNO will ultimately benefit from retained revenues without associated retention costs. MVNO brands are likely to attract high degrees of loyalty as specialists in their business, which will ultimately mean lower churn levels or increased profitability from subscribers.

Implications for the Host MVNO

· While the Virgin Mobile experience suggests that the MSP model is flawed, this is more down to the limited scope of activity by Virgin. They focused on mobile voice only, and ignored leveraging the main customer on their own doorstep – the Virgin Group;

The MSP model at launch, therefore, should be discounted as an entry structure

· A strong contract will provide the flexibility to launch applications at speed in much same way as ‘buying’ complete control over the infrastructure (but without the issues around maintenance and obsolescence);

The contract terms must be negotiated with the need for flexibility in mind

· The way that the MVNO is structured within the overall Host business, will to a great extent, dictate the ability to raise revenue from the business.

The MVNO business needs to be perceived as a central element of the host company’s business structure and be positioned accordingly

Understanding the Risks

Despite the opportunities for the MVNOs as set out in this paper, they do not come with out risk. The main areas of risk for the MVNO are:

· The window may close. While there are multiple network operators in any one market, huge sunk costs, and network capacity there will be an opportunity for the MVNO. If operator consolidation occurs or multiple MVNOs launch, there will be limited scope or motivation for the network operator to facilitate additional MVNOs;

· Capital Exposure. Depending on the level of independence achieved by the MVNO through infrastructure investment, the capital outlay could be significant and in tens of millions;

· Brand Risk. Extension of the host MVNOs business into mobile, represents an exposure to the brand in a new market, where failure could have ramification in its core business;

· Regulatory Risk. The regulator in the UK has generally been supportive of

· Cannibalisation vs Market Share. This will be a key concern of the network operator, but experience shows that the rate of loss of subscribers to the MVNO business will at worse be in line with their market share, but ultimately much lower, especially where the MVNO seeks niche markets. It is likely that the brand will attract a different customer base from that of the network operator as the Boost Mobile or Telmore models demonstrate;

· Reduced Costs (SAC’s and SRC’s). The infrastructure costs to support an MVNOs customer traffic will be reduced in line with the MVNOs investment in core infrastructure, services infrastructure, customer care and support as well as operational costs for sales and marketing. In particular the high SAC’s typical of a network operator’s business will be reduced significantly for subscribers acquired by the MVNO;

· Traffic Management. The MVNO allows carriers to diversify mobile risks by allocating some of their capacity and traffic to the MVNO, which can act as a safety net if the carrier’s own services don’t generate acceptable volumes and returns. Depending on the business of the MVNO, the MVNO traffic can also fill the network between busy hours and ultimately optimize the efficiency of the network operator’s network;

· Churn Reduction. In creating a virtual operator, any subscribers that leave the network operator’s own business and subscribe to the business of the MVNO will ultimately benefit from retained revenues without associated retention costs. MVNO brands are likely to attract high degrees of loyalty as specialists in their business, which will ultimately mean lower churn levels or increased profitability from subscribers.

Implications for the Host MVNO

· While the Virgin Mobile experience suggests that the MSP model is flawed, this is more down to the limited scope of activity by Virgin. They focused on mobile voice only, and ignored leveraging the main customer on their own doorstep – the Virgin Group;

The MSP model at launch, therefore, should be discounted as an entry structure

· A strong contract will provide the flexibility to launch applications at speed in much same way as ‘buying’ complete control over the infrastructure (but without the issues around maintenance and obsolescence);

The contract terms must be negotiated with the need for flexibility in mind

· The way that the MVNO is structured within the overall Host business, will to a great extent, dictate the ability to raise revenue from the business.

The MVNO business needs to be perceived as a central element of the host company’s business structure and be positioned accordingly

Understanding the Risks

Despite the opportunities for the MVNOs as set out in this paper, they do not come with out risk. The main areas of risk for the MVNO are:

· The window may close. While there are multiple network operators in any one market, huge sunk costs, and network capacity there will be an opportunity for the MVNO. If operator consolidation occurs or multiple MVNOs launch, there will be limited scope or motivation for the network operator to facilitate additional MVNOs;

· Capital Exposure. Depending on the level of independence achieved by the MVNO through infrastructure investment, the capital outlay could be significant and in tens of millions;

· Brand Risk. Extension of the host MVNOs business into mobile, represents an exposure to the brand in a new market, where failure could have ramification in its core business;

· Regulatory Risk. The regulator in the UK has generally been supportive of

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