MVNO will pay airtime to route their content over 3G networks.
Here's some info in the MVNO
totaltele.com
Feature: Mobile Virtual Network Operators - Marking out their territory
Joanne Taaffe
05 March 2001
Three years ago, Sense Communications created a stir when it fought for interconnection to operators' mobile networks in Scandinavia. Established as a mobile virtual network operator (MVNO) under the name Netsystem International, the company wanted to create a market for lower-cost roaming throughout the region. Although it garnered press coverage and the support of regulators, before long it had teetered into bankruptcy. The harsh reality was that commercial success as a full-blown virtual network operator was out of reach.
Now back from bankruptcy, Sense Communications AS, of Oslo, Norway, is building up mobile subscribers as a service provider, but it's no longer pushing back regulatory frontiers. Instead, the company is knuckling down to devising and marketing value-added services, partnering with Sonofon in Denmark, Telenor in Norway and Telia in Sweden.
"We learned one lesson: we have to be in business. We will launch any possible service for getting into the market," says Detlef Stube, international relations director, Sense Communications International AS.
Compromises for new entrants
When MVNOs first set out to break into the European markets they had ambitions to own, at the very least, their own switching centers and provide SIM cards for their branded handsets. But faced with diminishing margins on per-minute voice calls, high infrastructure costs and wariness from network operators to new competition, to date they have settled for a branding approach just to get into the game.
"There might have been a good business proposition for MVNOs five years ago when (call) prices were high, but I now doubt the business case for the classical MVNO (with a mobile network code and its own SIM card).
The future is brand, service, customer base (and a) sophisticated billing system," says Klaus Lange, director, corporate development and strategy at Deutsche Telekom's mobile arm, T-Mobil.
But it's not just new entrants that are trying to squeeze into the MVNO space. Some established fixed-line and broadband network owners are looking at the MVNO route to complement their current services, and, at the same time, take advantage of these emerging services. According to Analysys Ltd., of Cambridge, England, Colt Telecom is considering using its fixed network to carry partners' mobile Internet traffic; U.K.'s Energis is partnering with Orange to provide converged fixed-mobile corporate services; and Sweden's Bredbandsbolaget (B2) is looking at mobile services to complement its fixed broadband offerings (see table, p. 24).
"There's a very clear change in the operator community perception. Last summer it was a walled-garden strategy. Now they have changed...(and) many operators have said they will be MVNOs," says Tomi Ahonen, the global head of the 3G business consultancy at Nokia Oyj, Helsinki, Finland.
An innovative example of how 3G license holders could structure MVNO agreements was born in Sweden out of necessity. When, in January, Telia became the first incumbent GSM operator to fail to secure a 3G license in its home country, it signed an MVNO agreement with Swedish 3G license holder, Tele2 AB, of Stockholm, (formerly NetCom AB). Telia and Tele2
will form a jointly-owned company to build and operate the network and will have equal access to capacity. As a result of the deal, Tele2 will halve its infrastructure costs and still have enough capacity to offer services, the company says.
The move could inspire other GSM operators to negotiate similar joint ventures to provide 3G coverage in countries where they do not hold licenses, according to analysts. Analysys says mobile license holders, including France Telecom's Orange group and Deutsche Telekom, are now looking at MVNO agreements to fill holes in their network coverage.
But even though the regulatory framework is starting to shift in MVNOs' favor in a handful of markets, there are still few requirements for mobile operators to provide access to their networks. As a result, many would-be virtual network operators are plumping for the more certain approach of negotiated commercial agreements with network operators.
For some observers the argument is clear: a non-combative approach will secure the smoothest deal for new service providers. As fixed-line local loop unbundling has proven across the continent, incumbents can always find inventive means to put a spanner in the works if they do not want to provide access to their networks.
"MVNOs should not be imposed by regulation," cautioned David Kirk, manager, Spectrum Strategy Consultants, of London, speaking at a recent conference on MVNOs in Rome. "I wouldn't want to be an MVNO on an operator's network if the operator doesn't want you to be there," said Kirk. In addition, network operators are likely to find themselves in a buyer's market, able to pick and choose from a number of mobile service providers.
"It's better to have the operator's agreement," says Andrew Cole, head, Wireless Practice, of Renaissance Strategy Worldwide Inc., of Waltham, Massachusetts. "Carriers will become increasingly selective. There should be a cultural win-win," he adds.
Not every mobile service provider is apt to agree with this assessment, however. "Win-win commercial agreements are a myth," argues Brian O'Donohoe, managing director of Dublin, Ireland-based Imagine Ltd., which is currently battling it out with GSM network operator Eircell Ltd. over the details of an agreement to resell mobile airtime (see box, p. 24).
Many MVNOs are finding it more profitable to follow the path of least operator resistance. Like Sense, Imagine is one of a small but growing list of mobile service providers in Europe - others include Virgin Mobile, Energis, Mint Telecom and Carphone Warehouse (operating as Value Telecom) in the United Kingdom; and Norway's Sense Communications and Tele1 Europe - that are being grouped under the banner "MVNO."
What is a "true" MVNO?
London-based Ovum Ltd. describes a true MVNO as a service provider that has its own mobile network code; issues its own SIM cards; operates its own mobile switching center; and has a pricing structure fully independent from the network operator, according to consultant Ines Respin.
More formally, the Irish regulator, the ODTR, defines an MVNO as: "An organization operating a physical network infrastructure comprising, as a minimum, a GSM mobile switching center, home location register and authentication center (or 3G mobile equivalents), having its own unique mobile network code with distinct number series (where applicable), and issuing its own branded SIM cards (or 3G mobile equivalent), but without a mobile radio access network."
As the ODTR implies, still more service providers are likely to spring up to provide data services and content with the arrival of GPRS and 3G networks. But, given the opportunity for a range of targeted mobile services that next-generation networks present, MVNO companies' approaches are likely to differ greatly, and none among them yet adheres fully to these definitions.
"The business case for a (pure) MVNO isn't very compelling. An enhanced service provider has lower risks and lower investments," says Ovum's Respin.
The flip-side, however, is that an enhanced service provider has narrower profits and margins, she adds.
Virgin Mobile is often held up as an example of an innovative and successful MVNO, but in the U.K. it is tightly tied to Deutsche Telekom-owned One2One, upon which it relies exclusively for its infrastructure. Virgin has similar arrangements with C&W Optus in Australia and Singapore Telecom Ltd. in Asia.
Indeed, many of those companies that have adopted the MVNO label fall into the reseller category, argues T-Mobil's Lange, with the term often applied to any mobile service provider that bills the customer directly.
"New entrants in the U.K. (and in the rest of Europe) have only a reselling arrangement," says Lange. "A few years ago they would have said (we want to) issue our own SIM cards and operate a mobile switching center."
According to Lange, MVNO service providers have been forced to cede control because there is little room for them to make money if they have to install their own equipment. This leaves current holders of 2G and 3G licenses in a strong position, controlling the network and choosing the service providers with which they strike agreements. Since network operators will have a considerable say in the financial terms of the deal, an MVNO is highly unlikely to secure an agreement that resembles cost-based access.
Show me the money
The question for the MVNO now becomes a pressing one of how to make money and where they should fit into the value chain in order to do so.
"It's substantially more expensive to run an MVNO than a service provider," says Alexander Hoegh, director, wireless services, Tele1 Europe, Copenhagen.
"The disadvantage of being an MVNO is that the access costs are too high.
There is no doubt that we are huge cash cows for operators. They make huge sums of money on us. We use switch and spectrum, and we pay for it...more than their own customers. (And) we have to run billing and distribution," he says.
Hoegh reckons the only advantage an MVNO has over a mobile service provider is that a true MVNO keeps termination charges both for incoming calls and calls terminated in voicemail boxes. Since revenue from these sources is not enough to warrant investment in switches, Tele1 Europe has steered what it describes as a middle course between being a full MVNO - which it describes as controlling everything except the masts, base stations and frequencies - and a service provider with no infrastructure.
Tele1, which calls itself an enhanced service provider, does not own switches, but it does have its own billing and intelligent network platform, a voicemail system and a unified messaging platform. "I'm not crying; we can still do business," Hoegh says.
Adding a link to the value chain
But Tele1 and other service providers have to add value, market wisely and manage their customers efficiently if they are to make the most out of what one analyst believes could be a limited opening in a cut-throat market. "MVNOs have a window of opportunity, but...they are reselling. They will get some discount, but that may not be enough to stay alive as the competition intensifies," says Annecy, France-based Nigel Deighton, research director of the Gartner Group Europe Ltd.
Network operators are already used to competition, but they will have to compete even more ferociously once they introduce 3G networks. As a consequence, MVNOs may see themselves squeezed in a low-margin business where they have little control over network costs.
MVNOs filling operators' gaps
For now, at least, mobile operators need MVNOs. An array of new and established companies want to ride on next-generation mobile networks to provide services; equally, operators will have a lot of 3G network capacity to fill and need to recoup their spend. In recent months large operators have started to view MVNOs as a potentially rich source of income. The high prices paid for 3G licenses has led some operators to include wholesale capacity on their business plans and list of future offerings, notes Deighton.
It doesn't end there. Not only are network operators facing up to the fact that selling minutes to MVNOs could be a way to finance their debt, but they are also reassessing their own ability to control the content value chain, with many realizing they cannot address every sector of the market.
"In 1998 and 1999 (network) operators didn't understand that MVNOs could be of benefit," says David McGrath, senior director, solutions engineering, Telecom Carrier Solutions Group (EMEA), Motorola Inc., of Schaumberg, Illinois. "Before the auctions they were cashed up and their share prices were high. They were positioning themselves to lock out the competition," says McGrath. "Now a number are no longer looking at being mega-portals.
They're looking at what they are good at."
At the moment, what operators are good at is running networks and voice services. Rather then posing a threat to mobile operators, MVNOs can become a means to reach new customers by providing innovative services as well as branding and marketing expertise.
"MVNOs can enhance distribution," points out Lars Hallegardh, manager of network provision at Telia Mobile. MVNOs can take over the costly tasks of devising, marketing and building services as well as winning and retaining customers in niche areas outside the network operator's expertise.
"We try to find MVNOs who address specific sectors," continues Hallegardh.
"As an incumbent, we have a very broad market. It's best for the MVNO to address a (niche)."
Telia has been encouraging MVNOs to piggy-back on its networks, although legal questions over changes in Swedish telecoms regulation have led it to put a hold on recruiting new service providers (see box, p.24). The Swedish operator has developed an off-the-peg MVNO business model and has also developed technical facilities that enable MVNOs to plug quickly into the network operator's existing back-end systems. It boasts a maximum set-up time of only six months for new service providers. In this way Telia can make money out of providing consultative services to new entrants.
MVNO needed, but how much?
Shaping the direction in which the MVNO goes, whether giving consultative advice or shaping the terms and means of access, may give network owners seem valuable breathing space.
Operators are beginning to understand that not only will they they need to sell as much capacity as they can in order to re-coup investment in 3G networks, but they will also have to attack the same value-added service market as the MVNOs they are helping to create.
"If (network operators) are just simple plumbers they have an enormous task ahead of them," says Deighton. And by clinging on to the luxury of negotiating commercial agreements, some operators may leave only the smallest of niches to MVNOs.
"Mobile operators have the upper hand; they have loads of applications," says Ovum's Respin.
The bottom line is that as those same mobile network operators are forced to gain more expertise in value-added services, some of the losers may well be the MVNOs.
Regulatory hurdles in the MVNO marketplace: balancing mandatory access and healthy competition
When the Hong Kong government last month published 3G licensing terms, it mandated that at least 30% of capacity in each 3G network must be reserved for use by mobile virtual network operators (MVNOs).
With this decision the Hong Kong telecoms regulator has given MVNOs unusually strong provisioning rights, but it may be opening a legal can of worms.
Already, Hong Kong-based mobile network operators are complaining that savvy MVNOs will be able to aggregate capacity across networks and end up with more mobile bandwidth than any single network operator.
Hong Kong's forthright approach to MVNO regulation is an unusual one.
The European Commission, in contrast, is treading a cautious line. "We don't want to take a strong regulatory position," says Leo Koolen, directorate general, Information Society, at the European Commission in Brussels.
But with no clear guideline from the EC, a patchwork of regulatory approaches has developed across Europe. So far, regulators in Sweden and Denmark are alone in having created market conditions that favor MVNOs in the current European mobile marketplace.
Last July, the Danish regulator made the ground-breaking move of putting mobile operators on the same regulatory terms as fixed operators, giving new entrants the right to national roaming across all networks and the right to interconnect on commercial terms with operators that have "significant market power" (CWI, 9 October 2000).
The Swedish government introduced similar, albeit less detailed, regulation last year, but this has ended up in the hands of lawyers because of a lack of clarity over operators' rights. This has led to Telia putting a hold on its MVNO offering.
"We've ceased our willingness to offer (MVNO capacity) to more partners right now," says Lars Hallegardh, manager of network provision at Telia Mobile. "The main reason is that the legal situation is very unclear." Telia, he says, will wait "until a legal process to determine what the telecoms act means in terms of selling capacity" is put in place.
In Ireland, meanwhile, another quite different legal struggle is underway, this time between operator Eircell Ltd. and new entrant Imagine. Imagine went into business by buying mobile minutes in bulk from Eircell, which it then sold on to consumers at a rate that undercut Eircell's offerings.
Claiming it has been misled over Imagine's plans for its airtime, the Irish GSM network operator now wants to cancel its commercial agreement with Imagine.
Incumbent operators like Eircell that have invested in infrastructure are reluctant to create direct competition on their own networks. Yet Imagine argues that its ability to carve out a business by purely reselling airtime means that the Irish mobile market is not yet fully competitive.
Customers, it suggests, will want access to alternative service providers with a choice of packages and price points.
"If an unknown operator can take 10% of the addressable market, there's something wrong with the addressable market," says Brian O'Donohoe, managing director of Imagine.
Before it can compete, Imagine says it needs better access terms and regulatory support to become more than a value-added reseller of minutes.
"Billing is the first semblance of independence. Where the real struggle starts...is when you get into network elements. Operators will not allow access until they are forced to," says O'Donohoe.
The Irish regulator, the Office of the Director of Telecom Regulation (ODTR), refuses to comment on the Imagine case, which is currently before the Irish high court. But it has given some support to MVNOs in its 3G licensing terms, published in December. Four 3G licenses will be awarded in Ireland - one class A license and three class B licenses - with the regulator allocating additional 900 MHz spectrum with the class A license should the winner agree to ensure MVNO access.
In almost half of Europe, however, the question of MVNOs has yet to make it onto the regulatory agenda. Regulators and governments in Austria, Belgium, Greece, France, Luxembourg and the Netherlands have yet to pronounce on MVNOs.
In countries such as the United Kingdom and Germany, where the cost of 3G licenses have been high, industry observers say regulators may now have difficulty enforcing rules in favor of MVNOs, particularly as these governments did not include an MVNO provision in their 3G licensing contracts.
"It makes sense at the stage of license requirements that the regulatory body defines the rules. It seems very unfair for governments to come later and say you need to open the network," says Tomi Ahonen, global head of the 3G business consultancy at Nokia Oyj, in Helsinki, Finland.
While other countries may be in a position to learn from these lessons, too much regulation may simply lessen the attractiveness of 3G licenses in some markets, holding back the onset of services. The trick now will be to find the balance between mandating access for alternative service providers and encouraging healthy market competition.
Carving a distinctive niche
Any mobile virtual network operator (MVNO) that strikes a commercial agreement with a mobile operator has already had its options limited when it comes to making money out of services.
For a start, the operator is only likely to let the new entrant onto its network if it believes the MVNO will not compete with it head-on, or if it can complement the network operator's offerings or extend its reach through a partnership arrangement. The advice to would-be MVNOs, then, is to find a niche not served by the host network and, preferably, start life with a strong brand.
Some enhanced service providers are choosing to provide voice as their principal offering, but as per-minute prices continue to fall they will find it harder to make margins according to some observers. "There is little point in entering mobile voice given the stage in its history," warns Andrew Cole, head, wireless practice, of Renaissance Strategy Worldwide Inc., of Waltham, Massachusetts.
Sense Communications AS, of Oslo, is attempting to differentiate itself by using a SIM tool kit to create mobile data services such as news, weather, games and finance applications, offering its mobile customers a SIM card with 32K memory.
"It's not so much what an (MVNO) should do. It's what sort of company it is," suggests David Wilkins, principal analyst at Analysys Research Ltd., Cambridge, England. Wilkins argues that companies already with strong customer bases, such as Internet service providers, businesses with instant distribution points and those that are household names, such as retailers, may find it easiest to build MVNO services.
U.K. company Virgin, for example, which has built a business out of consumer services that fit well with its brand, such as music retailing, is offering music downloads to mobile phones using MP3 technology.
Other MVNOs in with a chance include fixed operators that have set out to corner the mobile corporate market. Energis plc, of London, which has a three-year MVNO contract with Orange, plans to offer corporate services such as virtual private network access using short dial codes, IP VPNs, and the integration of its fixed-line voice and data services with mobile services. |
