MVNO Explained

The original 'Brief', 'Concise' and 'Longer' explanation from the old blog below, as the blog is moved over to this new site some links may be broken, apologies for this but please do let me know in comments if you see any and I will try and fix them as soon as possible...

A three part Explanation: Brief; more detailed and as complete as possible in one page explanation on mobile virtual networks, the host operator relationship, through to the models MVNOs were built on and how they have evolved.

MVNO Explained - Brief:

An MVNO is a wholesale arrangement that allows the Mobile Network Operator (MNO) to sell excess capacity for resale by more diversified, specialised or other markets through hosting a service on its network to an MVNO. The two most important points here are: "excess capacity" and "other markets". At the simplest level this involves re-branding a SIM and maybe the phones (most large volume MVNOs have been or still are SIM-only), having your own sales channel and customer care, and maybe some value-add services and a billing engine to offer differentiated pricing if required.
One of the best and first examples of this is Virgin Mobile UK, and its following franchises; not only because it was one of the first, but also because it is one of the biggest, but also because of its success: Virgin took a pre-pay service, that the mobile network operators were trying to move away from as a supposedly low-revenue product, and returned better revenue per user than most of the operators subscribers on supposedly higher revenue contract services. Key to this was lower cost of acquisition. Virgin Mobile UK also did this with a very lean service, with the only real difference between the host operator and the Virgin SIM, being the brand, and a different customer care number. However, with just innovative pricing, some value-add services and a different customer care provision, Virgin managed to be voted twice "best network operator" whilst its host operator "worst mobile operator" despite the former not actually having a network, and the product, in terms of a network, were identical.

The key points to take away here are:
  • The MNO is selling excess capacity to markets it cannot address, each MNO varies in these aspects.
  • The MVNO must be able to do this either cheaper, more profitably or both
  • Owning a network is not important, Virgin UK as a "light" MVNO (no HLR, etc) was voted best mobile operator (sic) for the 10 years it has been operating so far, while its host has often been voted worst: its all about customer perception of service: by being niche or specialised you will serve them better
originally posted by Christian Borrman 14:45pm 21/09/05, updated by Christian Borrman 08:50am 30/11/11

Mvno explained - Concise

It is important to remember with the MVNO that it is in essence, nothing more and nothing less than a wholesale deal. Essentially an MVNO is the retailer and the MNO the manufacturer. At present all MNOs own and manage all parts of the production and supply chain of a mobile service, a situation that occurs in most new products and services initially, however, as the market matures and demand diversifies, then wholesale becomes the best way for a manufacturer to maximise ROI. This point usually happens soon after critical mass is reached. Mobile is therefore unusual in that critical mass has been reached in most markets already, yet MNOs, despite virtually all of them being subject to shareholder scrutiny, are still not leveraging the wholesale model to maximise their ROI; and a significant investment this has been in some cases. It is important to also remember at this point, that wholesale is one of the most established and mutually profitable business models in existence, and not to re-invent this model for mobile. Some earlier MVNOs and MVNO thinkers did just that, by both not looking at the MVNO as a mutually profitable exercise, and by assuming that the MVNO had to go deep into the mobile network in order to differentiate a service. This made the early MVNO models overly complicated and expensive; too expensive and with too much overlap to be mutually profitable. This is where next generation MVNOs are now realising a mutually beneficial and profitable MVNO model for both the MNO and MVNO. The three points and basic principles of any wholesale model, and from my experience of successful MVNOs are:
  • Mutually profitable wholesale model for both the MNO and MVNO form the start
  • As little overlap as possible if any.
  • sell what is in demand today, wholesale is about taking a surplus product in bulk, adding as much margin as the market will bear and selling with a shorter timeframe as as possible; today this means voice, SMS and maybe some data, at times, locations or in markets where the MVNO has excess capacity.
The best model to keep in mind is the most successful wholesale model today; the supermarket: so, just as supermarket will only buy and sell, for example; oranges if it can sell on those oranges quickly at a profit because there is immediate demand. Additionally in will negotiate with the supplier depending on market conditions at that time and the quality of the produce. Moreover, the supermarket never feels a strange compulsion to invest in orange plantations in order to do so! The only reason to invest in network infrastructure for the MVNO is if it can increase its margins by doing so. In the MVNO world there is little room for extra costs that are merely "strategic" or do not deliver a tangible increase in returns.

originally posted by Christian Borrman 14:45pm 21/09/05

Mvno Explained - More

From this basic understanding above, we can progress to the MVNO models, or more simply, how the MVNO and MNO. The original 5 models below were developed in 1999, and are understandably now quite outdated, but also driven from a network perspective rather than a business perspective.
They are the basis of first generation MVNOs but still pushed by MVNEs and consultancies that are more market followers than market leaders. I will cover them here so as to understand where the first generation MVNO thought leadership came from, as a foundation for explaining next generation MVNO models and where the thought leadership is today. These Next Generation models of fully explained in my report published by Pyramid: Next Generation MVNOs.
The key pitfalls and misconception of these 5 models, that were driven from a network perspective rather than business sustainability perspective, were;
  1. That the deeper the MVNO goes into the MNO the better. (now proven wrong by successful MVNOs such as Virgin Mobile UK, US, which were closer to the affinity model) .
  2. That the only way to differentiate your product was to go deep into the network and (proven wrong as above)
  3. That the best way to go about becoming an MVNO was to start at the bottom and work your way up, deeper into the network. (Just plain wrong; bad business planning, commercial suicide if not technically ridiculous project management nightmare)
Affinity Partner: This legacy MVNO model was to describe the "lowest" entry point. It would describe the sort of level that a "brand" would typically come in at, for example an entertainment company like Disney, a football club or similar, just look for attracting customers based on affinity with their brand. The product would come in the form of a branded SIM and phone provided by the host operator. The perceived problem with this model is that it was seen as to not be conducive to offering a differentiated product or service. This is true if we lead the product and service from a network perspective, however, there are many ways to differentiate the service with this model, from SIM applications, to 3rd party voice, data and IMS based services and of course content.
Service provider to Hybrid: These Legacy MVNO models offered an increasing level of "product differentiation" as the MVNO owned more an more elements of the mobile network. In hindsight, these should only ever be considered if either the host network does not have them or excess capacity of the individual element, if you use of them differs tremendously from that of the host MNO, or you can increase return. It has to be noted however, that the way MNOs provision customers often ties elements of the host networks operator's network, all of which usually attracts a either or both a one-off or an ongoing cost or licence fee, and therefore duplication not only of resource, but of costs.
Full MVNO: this legacy definition was the "purist" or "regulator" point of view, that saw the MVNO owning everything but the mobile spectrum, or at least its own HLR. Apart from the cost, duplication of resource and other reasons too many to discuss here why this should not be considered, there is also the issue of licensing; if the MVNO owns everything except the spectrum; is the MNO just sub-letting its mobile licence and spectrum?
It is important to always bear in mind that these 5 models were based on the very first MVNO model alone. The MVNO model has barely scraped the surface of its potential so far as a wholesale model in one of the biggest markets to have arisen since the automotive industry. As anecdotal evidence; I say this as I remember attending the due diligence of a very innovative MVNO proposal on behalf of a client, only to be confronted by an over-zealous "advisor", barely out of nappies, with my own previous matrix of what an MVNO should be, based on where the model was in its infancy. I was asked to credibly explain why this proposal did not fit into that now outdated matrix, to add to the irony, by somebody whose favourite buzz-words included "out-of-the-box thinking". Suffice to say this MVNO now has its own matrix model and the "advisor" did not make it through the following round of redundancies. Do not fall into the "Legacy" trap when planning next generation products and services.

originally posted by Christian Borrman 14:45pm 21/09/05

Longer Explanaition - Understanding the Mvno

The MVNO is a business, not a network, and should never be driven by the network. The whole point of wholesale is the resale of excess capacity, to create extra capacity is to completely misunderstand the underlying concepts of Virtual and Wholesale model, and to completely underestimate the complexity, expense and overheads required of running a mobile network. Those who fall quickest into this trap are existing fixed or other operators.
Wholesale mobile is vastly more complex than wholesale DSL, fixed or other telecoms models running an MVNO is also vastly different from running an MNO. To successfully pull of an MVNO you need to keep costs to a minimum, which means having staff that understand the whole end-to-end process of delivering a mobile service and a call.

Mobile and therefore MVNO is vastly different from other wholesale and even other telecoms models, in that and MNO or MVNO owns and/or manages the very complex and expensive customer equipment (handset and SIM). in the DSL world this would be the equivalent of the DSL provider not only providing a DSL line and a wireless modem/router, but also the first, second and third line support on behalf of the manufacturer, as well as the authentication, passwords and the process of the user being able to use anyone else's wireless modem router in the same way as they do at their own home or office. Mobile is never to be underestimated, and the MVNO requires a very different skill set than managing a fixed network, where you are only generally responsible for part of the end-user process, not all. It is also far different from running an MNO; with an MVNO you need a small group of people who understand the whole process and service, as the MVNO model cannot support delegation to masses of employees, and the host MNO cannot support the MVNO delegating this to its staff.

Finally, this brings us on to the most important fact of understanding wholesale and the MVNO. the model should bring value to both parties and be mutually profitable. A follow-on to the buzz-word "Brand MVNO" loved by those who aimlessly follow trends from the back-seat, now seems to be the "low-cost MVNO". The low-cost MVNO does not offer the host operator any value. an MNO can cut prices or launch a budget service whenever it likes. The only way a low-cost MVNO can offer value to an MNO is if the MVNO takes customers that are so low value that only the MVNO running a much leaner business model could make money from them. This is obviously a finite market and one which could fin itself in serious problems if and when the operators engage in a price war. Selling on cost also only acquires a customer with cost as the only value, which paves the way for someone else prepared to offer an even worse service even cheaper, and as Ruskin said, they are his lawful prey.
"There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this man's lawful prey. " John Ruskin.

originally posted by Christian Borrman 7:12am 15/09/05

Longer Explanation: Mvno and the Brand

A commonly held misconception of the MVNO is that it was all about the brand. This would imply that Virgin Mobile, for example, just had a brand and had sold millions of mobile subscriptions around the world just because it has a good brand. Apart from not being true, this concept was heavily promoted both by Mobile Network Operators of the reluctant variety, maybe in in order to discourage the evolution of the MVNO, and I dare say it may allegedly have been also played up by Virgin Mobile in order to discourage other MVNO competition while they gained traction in the UK as a platform for expansion abroad. It was also pursued as the essence of MVNOs by those who took little time to bother understanding or analysing the MVNO. What Virgin does have, is abrand that actuallymeans something and has clear values to its customers. This allows Virgin to acquire customers and keep customers more cheaply and effectively and is shown in this graphic.
One may argue the case of the Virgin Brand being the centre of the UK MVNO, but it does not explain the successes in other countries of the model, where the Virgin Brand is nowhere near as strong as in the UK. Virgin are where they are today by offering a good service and value, with good customer service, Value added service that the customers actually want, today, based on simple text and voice and arguably the only differentiated product, at least in the UK, in terms of price. All other mainstream operators offer pretty much the same package of; a more or less subsided phone, X amount of minutes, X amount of texts for X amount of money. Virgin Mobile UK allow you to call at a certain price for the first few minutes of the day, and a lower one the more calls you make.
What is a bitter twist of irony is the fact that, while some mobile operators now spend a lot of money promoting and protecting their brand, while they still combine this with multiple and random brandstrategies and target all sectors of every market, this brand means little to the customer and moreover delivers little in the way of brand equity. See this graphic, which isevolved from a BCG brand matrix

Does this mean the 'Brand MVNO' is dead? Well no, in fact the brand and MNOs and MVNOs are at the heart of the MVNO opportunity for both the MNO and MVNO. Presently mobile operators spend rather a large amount of money and effort in promoting the 'brand'. However, the whole point of a brand is exclusive, rather than inclusive; a brand targets a certain sector of the market with a product packaged in such a way to appeal to that market. In doing so however, and for that brand to mean anything to its audience, this brand has to be exclusive to that audience.. at the same time excluding others. The whole point being that while on the downside you exclude certain customers, you make the product more attractive to others who are therefore a) more likely to buy your product and b) stay with you for longer. This both reduces the cost of acquisition of the subscriber and reduces churn; which are coincidentally the way an MVNO can make money from a customer and a profit for its host MNO, where the MNO directly loses money with that customer.
This is obviously incompatible with the hitherto present market plan of all MNOs and indeed many MVNOs of still trying to sell more or less the same product as everybody else, to everybody, packaged in the same way as everybody else. While this is the case there is no brand value to the customer beyond maybe identifying the colour of the brand and what the brand money is spent on. While this is the case, there are many, many MVNO opportunities where the MVNO can target a certain market with an exclusive brand and service offering.

originally posted by Christian Borrman 7:02am 15/09/05

 Longer Expanation: Mvno and the Handset

The handset and the SIM are the key to the success of mobile and are therefore there is a view that it is key to the success of the MVNO. In 2002 I heard someone say in a conference: people ask about the handset and I need an answer... However the handset model sits badly with the MVNO model and the MVNO business plan, unless you have enterred the market like Tesco Mobile in the UK which sold 2/3 of the uk pre-pay mobiles at one point, then they are  a huge thorn in the side that need sourcing, shipping, warehousing, distributing, subsidising (whether up front or over the life of a contract), and worse of all they need planning for and are for want of a better word "perishable goods" that is, if you do not shift them they lose their value quite quickly...  

The main issue is that if you are successful handsets cost a fortune and break your business plan, turning you into a finance or a logistics company; if you are not they can bankrupt you... in short: handsets are more akin to the MNO model, where you have a depreciating asset that needs to be mobilised (forgive pun!) or an existing retail model, but as pure mobile they are an accessory, not a core service. As more and more devices and more fragmentation happens, more and more potential customers will have one, two or even three handsets in their drawer, what they want is a good service: Every month 100,000s of people chrun in major mobile markets - you can capture a good amount of them to make an MVNO model work with just the SIM, leave the handset to prospectors or people who know how to handle them! 

originally posted by Christian Borrman 6:52am 15/09/05

Longer Explanation: Mvno and the SIM

The SIM is the single most important part of the ownership of the customer. This is an often overlooked element of the MVNO that the MVNO will often try to neglect in preference to just taking the the MNO SIM and rebranding it. This is not necessarily wise, as there are many ways to differentiate a service via the SIM. The SIM buying model of the host MNO is often dictated by different parameters like and driven by issues such as volume and even the fluctuating and expensive nature of silicon at the time most MNOs set-up. Since then the market has moved on, with Java SIMS and Java toolkits being much more suitable and flexible for the MVNO and even cards with embedded flash memory on the horizon. 

The biggest issue with SIMs is getting them to the right customer and not squandering them. the biggest lesson in technology is "products sold, not products shipped" Many MVNOs make the critical mistake of shipping SIMs to distributors and thinking they are sold. I have audited a few MVNOs now and looked at how many SIMs are lost in channels and a) shown them the cost, and b) added that cost to the subscriber acquitition cost that was previously calculated for that channel... its always a shock!

Online is the way forward for MVNOs, in the meatime MVNOs need to slowly distribute and monitor SIMs into channels, never, ever, ever, give them away free (lots and lost of reasons... to many to list!) and work with thee channels to distribute only where necessary. I.e. you may have a very successful channel that pushing lots of SIMs, but that may only be through 20% of their stores... the other 80% are sitting on stock that has cost you a SIM, printing, packing a SIM pack, shipping, an HLR slot, etc, etc. and pushing up your subscriber acquisition costs (SAC). An MVNO lives and dies by its customer acquisition costs.

originally posted by Christian Borrman 8:12pm 23/09/05

Longer Explanation - Mvno and the Regulator

The universally held view on regulation of the MVNO is that it should be defined by commercial agreements and not regulatory intervention. Whilst this is wise on the one hand, on the other it has also been an excuse for some regulators to wipe their hands of the MVNO and any regulatory issues it may have. This is very unwise; as whilst the MVNO may reach a mutually beneficial commercial agreement with one MNO, it is still essentially or potentially even a competitor with it, and most certainly a competitor of the other MNOs it did not reach a commercial agreement with. To boot, this MVNO will almost certainly have shared important commercial and strategic information with these competing MNOs before reaching an agreement with its chosen host MNO. It goes without saying that the MVNO requires regulatory assistance and support from these MNOs and indeed even other MVNOs. Additionally there is the issue in the EC of an MVNO in one member state, like any other business within one EC member state, having the right to freely move goods and services and even set-up in other EC Member States... there are still large, practical barriers to this that need addressing and regulatory support, beyond reaching commercial agreements with a host operator in each member state. More Coming soon..

originally posted by Christian Borrman 8:48am 15/09/05