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OVERVIEW

Recent news about MVNOs has not been encouraging. The failures of Mobile ESPN and Amp’d Mobile in the US as well as easyMobile, Ten Mobile, and scores of others in Europe have raised some fresh questions about the viability of the MVNO business model.

This new report, Rethinking MVNO and MVNE Economics: The Future of Mobile Virtual Models, provides an in-depth examination of the economic factors behind the failure of many MVNO models and the successes of others. Indeed, the picture is not all negative: the gloom and doom predictions regarding the MVNO market fail to acknowledge that the global MVNO subscriber base grew by 24% in 2006, to reach 84m users. There are profitable MVNO operations, from Virgin Mobile and Tesco Mobile in the UK to TracFone in the US. Moreover, interest in becoming an MVNO has not faded away by any means; the list of the companies exploring the MVNO opportunity continues to include big names from a range of markets.

Nonetheless, the MVNO model does have some major, practical pitfalls. Building on an extensive analysis of MVNO profitability and overall performance to date, this report outlines what works and what does not work with today’s MVNO business models. The report deconstructs MVNO economics, provides insights into the MNO business case for hosting MVNOs, and reviews the MVNE model and its role in making the MVNO model work. Ultimately, Rethinking MVNO and MVNE Economics: The Future of Mobile Virtual Models provides a glimpse into who will succeed, and who will not.

KEY QUESTIONS ANSWERED

What are the economic realities of the MVNO business? How do the key margin indicators compare among the prepaid MVNOs, cost-heavy MVNOs, and traditional mobile players?
Can MVNOs make money? What have been the key drivers of profitability—or lack thereof?
Does the MVNO model make sense for content providers?
How should the MVNO model evolve to be successful?
What is the business case for an MNO to host MVNOs? How has the entry of MVNOs affected mobile markets?
What are the ingredients for successful MNO-MVNO partnerships?
How have MNOs prevented cannibalization of their revenues after partnering with MVNOs
Do MVNOs need MVNEs? How is the MVNE role evolving to make the MVNO model work?

EXECUTIVE SUMMARY

The MVNO business has never been as good an opportunity as the initial hype would have had you believe, but in our view, it is not as hopeless as the negative publicity of the past year suggests. A review of the performance of MVNOs over the past five years yields a number of salient lessons on the business model, and provides enough material to establish what work and what does not appear to work.

Key points from the research and analysis are as follows:

The MVNO model is not a bust. New players should learn from the mistakes of past players and flush out the excesses of the business model. Successful MVNO models are primarily built around cost-control. In a way, the MVNO model is coming full circle.
At the root of the failure of MVNOs lie an overly optimistic assessment of demand, an unrealistic revenue model, a demanding cost structure, a lack of preparedness in the back-office, and an absence of a meaningful service differentiation.
The cost-heavy MVNO model is not optimal for content providers; they have a better shot at success by pursuing a lighter model. We are also skeptical about ad-based models.
The MVNO impact on mobile markets has been significant to the degree of MVNOs leading to MNOs exiting the market. In building partnerships, MNOs should be wary of MVNOs that are looking to differentiate on the pricing front only.
A solid case can be made for MNOs hosting MVNOs: getting into non-core markets and optimizing network utilization are key advantages. In addition, the value of a wholesale subscriber is often higher than that of a retail customer.
The future of the niche branded MVNO will largely hinge on the ability of enablers to support it. The MVNE space will see its own shakeout. The model is evolving toward pure outsourcing, and we do expect that more MNOs will start offering services traditionally provided by MVNEs.

TABLE OF CONTENTS

Section 1: Operational models, market models, and MVNO profitability
1.1 Operational models: coming full circle?
1.2 Niche-focused market models: still struggling in the US, working elsewhere

Section 2: Breaking down operational models: The problem with MVNO CPGAs and CCPUs
2.1 Understanding MVNO economic levers
2.2 CCPU: The wholesale cost drag
2.3 Looking for net present value in MVNOs
2.4 The bottom line still looks bad, but the model can work
2.5 What works, what doesn’t
2.6 Mapping the risk of MVNO models
Case Study: On-device portals
2.7 The future of the MVNO: The next-generation model is an old model, and that’s just fine
Case Study: Amp’d Mobile-Telus—a blueprint for the media MVNO?
Case Study: Ad-based MVNOs—the doubtful cases of Blyk and Xero
Case Study: Comcast, Sprint, and Pivot—using the MVNO model to drive quad-play convergence

Section 3: The MNO conundrum: To host or not to host
3.1 The MNO business case for hosting MVNOs
- Drivers for developing a wholesale business
- The upside of the wholesale business: Market shares, revenues and NPVs
- The downside of the wholesale business: cannibalization, price wars, implications of failing
- MVNOs for MNO businesses
3.2 What types of MNOs should pursue the MVNO channel?
- Examples of wholesale business models

Section 4: MVNEs — The future of MVNOs?
4.1 Redefining MVNEs
4.2 Why MVNOs need MVNEs
4.3 MVNEs evolve: up-front fees, recurring fees, and reselling minutes
4.4 The future of the MVNE: back to a pure outsourcing model
Case Study: How MVNEs can affect MVNO growth—the case of the Netherlands 42

Section 5: MVNOs have market traction — They are here to stay

Exhibits

Exhibit 1: Snapshot of MVNO operational models
Exhibit 2: A map of MVNO market models
Exhibit 3: MVNO economic levers
Exhibit 4: MVNO vs MNO CPGA (US$)
Exhibit 5: MVNO vs MNO subsidies in the US (US$)
Exhibit 6: Subsidies, channel costs, and marketing costs—MVNOs vs. MNOs in the US market
Exhibit 7: Estimated MVNO CCPU vs. MNO CCPU in the US and UK markets
Exhibit 8: Net present value key assumptions for MNOs and MVNOs in the US and UK markets
Exhibit 9: Subscriber net present values of sample MNOs and MVNOs (US$)
Exhibit 10: A map of the risks of the MVNO model
Exhibit 11: Sprint Nextel: Wholesale subscribers and revenue
Exhibit 12: Sprint Nextel wholesale net subscriber additions
Exhibit 13: Telfort and market share evolution in the Netherlands
Exhibit 14: Virgin Mobile’s contribution to T-Mobile UK’s subscriber growth
Exhibit 15: NPV sensitivity analysis
Exhibit 16: TDC Mobil’s channel composition and profitability
Exhibit 17: E-Plus’ revenue and EBITDA growth is boosted by wholesale customer additions
Exhibit 18: MVNO market share in Belgium, Denmark, France, Germany, the Netherlands, the UK, and the US
Exhibit 19: MNO ARPUs in Denmark before and after consolidation
Exhibit 20: MVNE mapping
Exhibit 21: Historical and projected MVNO subscribers, 2004-2012
Exhibit 22: Regional breakdown of MVNO subscribers, 2004-2012
Exhibit 23: MVNO subscribers as percentage of regional subscribers, 2004-2012
Exhibit 24: MVNO service revenues by region, 2004-2012

For more information contact Matthew Tapson on +44 1494 771 734