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The Future of MVNOs
Is The Bloom Off The Rose?
By David Grigg |
What a difference a year makes. Early in 2005 Virgin Mobile USA passed the million subscriber milestone. Their success began inspiring numerous copycats with its example of how a more focused MVNO can do a better job targeting and serving specific subscriber segments than could a large carrier. During a conference I attended at that time, a noted research firm predicted the channel would experience such significant growth that in a few short years more new wireless subscribers would be added by MVNOs than by the direct channels of wireless carriers. By midyear a steady string of press releases ensued, announcing one new MVNO after another. MVNOs were hot; if you had a recognized brand or an established distribution channel you too could cash in on the wireless bandwagon. One began to wonder if the ‘O’ in MVNO stood for ‘Over-saturation.’
Many interpreted the surge in ringtones, which also crested early in 2005, as an indication that custom data offerings would have a high acceptance rate from mobile users, and MVNOs would be a perfect distribution channel for such. This thinking was obviously behind ESPN Mobile when it launched its multi-million dollar marketing campaign with splashy Super Bowl ads in January of this year with high hopes. But in talking about Disney’s ESPN Mobile division during its recent third quarter earnings call, CEO Bob Iger said, “The results, at least initially, even though it’s only been six months, were disappointing and we’re monitoring this carefully.” That comment is sure to give pause to potential new entrants into the market. If Disney got it wrong after performing a very exhaustive and expensive pre-launch investigation of the MVNO market, how can new MVNOs and MVNO wannabes with more limited resources get it right?
If ESPN Mobile is the poster child for diminished optimism on the MVNO model, industry analysts and other MVNO insiders knew for some time that things weren’t as rosy in the MVNO world as the press releases would lead you to believe. The industry was never without its detractors and naysaysers. Public speculation that the bloom had fallen from the rose for new MVNOs actually began at CTIA in April of this year when Sprint- Nextel’s chief operating officer at the time, Len Lauer, announced they turn down a lot of MVNO applicants and will wait three to four quarters before judging the performance of those recently launched. Implying they were tightening the spigot on new MVNOs was significant because Sprint-Nextel is the MVNO channel leader, having launched the most of any U.S. carrier. (Lauer has subsequently left Sprint.)
Underperforming MVNOs are having an effect on U.S. wireless operators; those slower to fully embrace the channel are now more wary than ever, and the pro-MVNO operators have become more selective. Both Sprint and Cingular, the operators most bullish on the channel, admit to accepting fewer than 5 percent of all the MVNO applications that cross their desk. Although some of their MVNOs may be underperforming, they are quick to add they do not have a moratorium on new MVNOs and have a few in the pipeline. Without naming names, the latest crop of newcomers includes telcos wanting to offer wireless to their existing wireline customers.
The very successful Cingular GoPhone prepaid brand has also made it tougher for MVNO prepaid models to get Cingular’s attention. Why would they want to add a prepaid MVNO that would compete with its own popular brand?
What do MVNO newcomers face? For starters, competition for the wireless subscriber has never been more fierce, and it’s increasingly difficult to achieve significant differentiation. Niche markets, the target of many MVNOs and once looked upon as being a land-grab, are becoming crowded. High subscriber acquisition costs, fueled in part by handsets, selling for $39.00 or less at retail, cost the MVNO $100 or more, meaning it’s increasingly difficult to find a winning formula for a sustainable model. And if ESPN’s early experience is any indication, two additional trends are emerging: (1) strong brand recognition no longer guarantees success, and (2) consumers appear unwilling to pay a premium for content they can obtain for no additional costs through other media such as broadband or television.
Another gating factor is the high cost of building the necessary MVNO infrastructure. While helping drive down the overall start-up costs and shorten the time to launch, the MVNE (Mobile Virtual Network Enabler) industry, which was spawned to provide MVNO back-office infrastructure, hasn’t made it as turnkey or as affordable as many hoped.
Replicating the success of the solidly established MVNOs Virgin Mobile and Tracfone is proving elusive; there’s no denying a significant majority of newer MVNOs are finding it difficult to meet their subscriber growth projections, and the reasons are varied. Some newcomers inflated their projections under the pressure to impress the carriers with a big number to improve their chances of securing a contract. Others with a newer business model didn’t have the advantage of a rear-view mirror, hence required more guesswork in their modeling, and some prepaid MVNOs simply underestimated their churn and its devastating effect on growth. There’s still time for the latest crop to turn around their underwhelming results by adjusting their model or lowering expectations.
While it’s more difficult to get into the game, there is still room for an inspired vision that can capture both the imagination of a wireless carrier and ultimately the consumer. There’s no magic formula or shortcut, rather success is based on excellent homework, rock-solid planning, access to capital, communication skills, and first-rate management. One shortcoming in a single discipline can jeopardize everything; you need to be good across the board.
So what does the future hold for the U.S. MVNO channel? Will it live up to its potential and catch on as strongly as they have in Europe? The current mixed reviews have spawned uncertainty. Carriers are less motivated to do more with the channel as long as they continue to meet Wall Street’s expectation for growth. Consequently, many in the industry feel its future is ultimately tied to two criteria: network capacity and growth. Many predict wireless carriers will begin losing subscribers to emerging technologies such as WiMax, IMS (IP Multimedia Subsystems) and Fixed Mobile Convergence (FMC). If the U.S. carriers are reluctant to fully embrace MVNOs at the moment, it’s reasonable to think they’ll put out the welcome mat when faced with excess network capacity and competition from disruptive technologies. Until then, the spigot on new MVNOs will likely be set to a modest trickle.
David Grigg has over 16 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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