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Developing Your MVNO Business
Case
By David Grigg
A mountain of information is available on business case preparation,
most of it prepared by people much smarter than this author. I have,
however, had a hand in launching and supporting over a dozen MVNOs.
This real world experience has shaped my opinions and is the basis
for some basic tips and suggestions for budding MVNOs as they plan
and develop their business case.
In the first article titled ‘MNVO – The Next Big Reseller
Opportunity’ (March 15 issue), I heralded the handsome ROI
of Mobile Virtual Network Operators. In this second installment
in the series I’ll step through a sample MVNO business model
to see if it pays off as purported. In the process I’ll offer
some tools for crafting your own business model.
Begin at the end
What’s your ultimate goal? Do you plan to grow your MVNO then
cash out by selling or being acquired? Or do you plan to create
a self-sustaining, cash generating business to be held either as
a standalone enterprise or as profit center within an existing company?
The answer, along with the amount of capital required, will likely
influence what type of funding you pursue, be it equity, debt, or
self-funding.
Depending on the amount of money involved and how much initial legwork
you’ve done, venture capitalists will likely require majority
interest in your company. They’ll also expect rapid growth,
intending to sell the MVNO as soon as feasible. This may or may
not fit your plan, but before deciding on equity investors, examine
your potential upside to see how much you might be giving up.
‘I understand it isn’t cheap to launch an MVNO.
How much money are we talking about?‘
Great question. The short answer is you need enough money to cover
costs until you become cash-flow positive, or in other words, until
you can sustain growth and operations solely on generated revenues
without the need for outside funds. To find out what this means
in hard dollars, let’s create a hypothetical MNVO and run
some numbers.
For our MVNO we’ll assume a simple prepaid offering consisting
of a basic voice/SMS handset bundled with 20 minutes of initial
usage for a suggested retail price of $50. Our first task is to
determine acquisition costs. Chart A lists some typical cost categories
with sample values.
This is one way to look at acquisition costs and is not meant as
definitive accounting methodology. You’ll obviously arrive
at your own number, but ours comes in at $76.20. How realistic is
this? We’re using a GSM handset since they enjoy approximately
a $35 lower cost advantage over comparable handsets for other network
technologies. (Cingular and T-Mobile are the U.S. GSM carriers with
a nationwide footprint.) I know of MNVOs with acquisition costs
as low as $25 and others with costs in excess of $200, thus mid
$70s falls somewhere in the middle. Keep in mind, the higher your
acquisition costs, (1) the longer you need to keep each subscriber
before they contribute to your profit, (2) the longer it will take
to achieve positive cash-flow, and (3) the more money you’ll
need to sustain your business until it can be self-supporting. The
lower your acquisition costs, the more attractive you’ll be
to venture capitalists and other investors. Acquisition costs above
$150 will be met with a cool reception from the lending community.
Our next task is to estimate revenues and cash flow, and for that
we’ll use the spreadsheet format in Chart B. Estimates were
used for values requiring assumptions. Your numbers will obviously
differ. An interactive version of this spreadsheet can be viewed
at www.prepaid-press.com/mvnotools, or go to www.prepaid-press.com
and click the MVNO Tools link. By plugging in different values for
acquisition cost, ARPU, churn, and maintenance cost, you can see
the effects each change has on capital requirements and ROI. This
is not intended as authoritative accounting methodology; use your
own accounting experts for your modeling.
Keeping the spreadsheet definitions in mind, look at our ‘CUMM
Net Revenue’ in Month 3. It indicates we’ll need almost
$500,000 just to make it through our first three months. This is
a big number considering we only have 8,700 subscribers. But we
won’t despair; things do get better. Let’s look ahead
at months 6 through 8 (Chart C).
Notice how Net Revenue changes between months 7 and 8 from negative
$30,000 to a positive $19,000. Congratulations are in order because
our model is no longer losing money, and in only 8 months. What’s
more, the CUMM Net Revenue bottoms out in month 7 at negative $941,00;
it begins to turn around in month 7 thanks to the positive revenue
in the row above. In broad terms, this $941,000 indicates the capital
required until our cash flow turns positive. As noted in the sidebar,
this does not factor in start-up costs, G&A costs, or cash reserve
requirements.
When substituting your own numbers, if at some point your negative
CUMM Net Revenue doesn’t turn positive, your model doesn’t
work -- you will never be profitable.
Now lets jump ahead to months 13 and 14 in our model (Chart D).
This is where things begin to get interesting. Between month 13
and 14 the CUMM Net Revenue goes from negative $190,400 to positive
$66,200. Without factoring in G&A and other start-up cost, our
business is now in the black, and in only 14 months. This calls
for popping the champagne cork. And it only gets better. Look at
the Net Revenues and CUMM Net Revenue in months 17, 24 and 36 in
Chart E.
With initial capitalization of around $1,000,000, our monthly net
revenue has accelerated to over $500,000 with cumulative net revenue
reaching $4 million in two years and exceeding $11 million in three
years. How’s that for a healthy ROI! Now you can understand
why some insiders are so bullish on MVNOs. They’ve done the
math.
Time to revisit your funding options
By plugging your numbers into the spreadsheet tool, you can now
estimate what you might be giving up by using equity investors.
If your model shows strong potential, you may want to structure
your funding so you don’t give away too much of your upside
unless you have no other choice. If you don’t want to sell,
you may be better served by debt financing.
‘Now that I know how to estimate my capital requirements and
ROI, what other tips do you have for me?’
Profit Killer #1 - Churn
Want to improve your bottom line? Easy, lower your churn. Churn
directly impacts your profitability. A subscriber’s service
life is finite and is shorter for prepaid than postpaid services.
The 6% churn used in our example is quite low for prepaid, but is
achievable.
To see the effect of churn on growth, use the Churn Calculator on
www.prepaid-press.com/mvnotools.
Inducing your subscribers to remain on your service certainly pays
off, but there’s no shortcut –- you need to stay close
to the consumer, understanding their wants and needs better than
they understand them, proactively staying ahead of the curve.
Churn Fighters:
- Hybrid plans – plans where a low balance automatically
triggers an electronic payment and top-up -- are effective because
they preclude then need for the user to take any action.
- Loyalty programs can be effective if they’re not overly
expensive.
- Mobile coupons offering customized discounts or special offers
redeemable at POS improves subscriber retention.
- Stored value cards appear to be a hot item for some MVNOs and
can build loyalty.
- Most MVNOs recognize that the prepaid market is very relationship
driven where good customer care and convenient, easy access to
top-ups is critical. A positive POS experience helps cement your
relationship with the prepaid consumer.
- Premium or custom content is a differentiator and a great anti-churn
measure, but requires additional integration and capital investment.
Exploring what’s involved in enabling proprietary WAP, MMS
(Multimedia Messaging Service), or similar type content is subject
matter for another article or two.
- Although challenging for prepaid, by capturing user information
you at least have a chance of winning them back should they leave.
One way to achieve this is through the use of rebate forms that
require consumers to provide contact information.
Profit Killer #2 – Complicated Pricing
Nothing hurts profit like a couple of lengthy calls to customer
care from an account returning a few dollars a month in margin.
There’s a direct relationship between price complexity and
the number of calls to customer care. This doesn’t mean creative
service offerings aren’t a good thing -- they can attract
customers who stay on your service longer. Just realize the additional
handholding and overhead required if these offerings are not easily
understood.
Carrier focus, or lack thereof, equals opportunity
Carriers continue to focus on postpaid subscribers, leaving much
of the prepaid market to MVNOs. I doubt this will continue forever
and advise anyone considering offering prepaid wireless to go for
it before you find yourself competing with the carriers and other
MNVOs for the same customer.
Download Excel spreadsheet
Visit
MVNO tools page
This is the second of a three part series on how to become an
MVNO. There is more to come. This article, as well as Part I can
be found on The Prepaid Press website, www.prepaid-press.com. Our
series on MVNOs concludes next month with ‘What’s a
MVNE, and what can it do for me?’
David Grigg has over 15 years experience in numerous IT consulting
and management roles within a variety of communication industry
environments. He’s currently the Solution Manager of the MVNE,
Qualution Systems, Inc. He can be reached at dgrigg@qualution.com.
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