Jumping On The MVNO Brandwagon - KPMG

INFORMATION, COMMUNICATIONS & ENTERTAINMENT

Jumping on the MVNO brandwagon:How niche can you get?Australia’s next wave MVNO Op

“The boom in MVNO relationships is the means by which wireless operators

can achieve a competitive edge by capitalising on market differentiation

and segmentation in the industry rather than competing on price.”

www.3G.co.uk

Foreword 2

Executive summary 3

What is an MVNO? 8

Why MVNOs make sense 12

What’s going on internationally? 20

What factors will determine the successof the next-wave integrated MVNO? 26

The potential next-wave MVNO opportunities in Australia 30

Conclusion 33

About the authors 34

Glossary of terms 35

Contents

2 Jumping on the MVNO brandwagon

Mobile Virtual Network Operators (MVNOs) are suddenly receiving a greatdeal of focus in the telco world.

KPMG defines an MVNO as an enhanced service provider that independentlybrands and markets its wireless service, usually targeted at specific marketniches and supported by an existing customer base holding some affinity withthe brand. So therein lies the basic recipe to the MVNO – branding, marketing,customers. Or does it? And the basic MVNO premise is not a new phenomenonso why the renewed focus on it now?

In this white paper, KPMG in Australia explores some of the key strategicissues, critical success factors and prospective opportunities for consumerbrand and distribution leaders, media and content owners, entrepreneurs and incumbent network operators in the Australian mobile market. The paperis focused on the high-level case and opportunity for the next-wave integratedMVNO, and explores the evolutionary tiering or segmentation of MVNOmodels which may broadly be termed ‘brand-stamping’, ‘co-hosting’ and‘integrated MVNO’.

KPMG believes that there are latent opportunities in the Australian mobiletelecom services market for integrated MVNOs, and that this is the time Australiawill see these gain momentum and materialise.

Malcolm Alder

Head of National ICE AdvisoryInformation, Communications & EntertainmentKPMG in Australia

Foreword

Jumping on the MVNO brandwagon 3

MVNOs have largely proven to be a successful lean business model for a number of innovative marketeers over the past five years or so around the world.

In particular, there has been a surge over the past two years, with theemergence of brand leader, distribution leader and plain cut-price, internet-based ventures. The MVNO segment itself is experiencing an evolutionarytiering or segmentation of business models, which may broadly be termed‘brand-stamping’, ‘co-hosting’ and ‘integrated MVNO’ as illustrated below.Each of these strategies presents differing opportunities, costs and benefits,not the least of which being the level of customer relationship intimacy (CRI)which may be achieved.

Figure 1.1 – MVNO Models vs Customer Relationship Intimacy

Nearly every leading mobile market has seen some significant activity in theMVNO space in the past 18 months. Australia is no exception with the realisationof new ‘lite MVNOs’ through the elevation up the value chain of former serviceproviders such as AAPT and Macquarie Telecom. Telstra’s largest independentreseller – Crazy John’s – has also recently announced that it is going downthe MVNO path. Despite these developments, Australia is far from havingfully capitalised on the MVNO market opportunity.

Executive summary

The MVNO business model is a flexible entry point to themobile sector for establishedbrand leaders.

Ownership

Affinity

Source: KPMG

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IntegratedCo-hostingBrand-stamping

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Association

MVNO business models


The evolution of the MVNO model has itself spawned a new sub-segment in the industry with the rise of the Mobile Virtual Network Enabler (MVNE).The primary focus of MVNEs to date has essentially been on the supply ofthe necessary back-office systems, that sit between the host network andan MVNO, to facilitate the launch and operation of the MVNO business. As aresult, implementing the core systems to launch an MVNO has never beenmore attainable for non-telecom businesses.

So what is an MVNO? To the customer, it’s just another mobile operator; the real difference is that MVNOs do not own telecom network infrastructureand are far leaner. They limit their technology systems to billing and customercare, prepaid IN, SMS-MMS-content delivery management and businesssupport systems. MVNOs own their customers but use the telecom networkand radio spectrum of a Host Network Operator (HNO) under a commercialwholesale arrangement. The most often cited example of a successful MVNOis Virgin Mobile (Australia, UK, US, Canada), a company which KPMG directlyadvised during its pre and immediate post-launch phases.

This value chain is summarised in figure 1.2 below.

Figure 1.2 – MVNO value chain

An increasing number ofAustralian consumers aregoing purely mobile – attractedby capped and bundled plans,convenient infotainmentservices, cool multi-functionaldevices and affinity-groupmarketing campaigns.

Full service, integrated MVNO

Co-hosting

Brand – stamping

Host network(wholesale) agreement

HNO

Mobilenetworkinfrastructure

Radiospectrum

MVNOsubscriber management,BSS/OSSplatforms

MVNOcustomermanagement,products andservices

MVNObranding,marketingpropositions

MVNO/MVNE MVNO

MVNE-MVNO servicesagreement (optional)

Source: KPMG

MVNOmodel

complexity


The Australian mobile market continues to mature. It has surpassed 90 percentpenetration, has increasing take-up of new multi-functional wireless devicesfacilitating voice, text, pictures, video, music and gaming, all within aninfrastructure-rich environment with a choice of three GSM, two CDMA, two3G commercial mobile network infrastructures, and at least three wirelessbroadband networks. There is also a recognised migration from fixed (PSTN)to mobile voice services, meaning that the wireless wallet share will continueto increase. All of this points to much change and opportunity for innovationin both retail and wholesale sectors – paving the way for the next-waveintegrated MVNO(s), beyond the ‘brand-stamping’ and ‘co-branding’ modelswhich have been predominant so far.

Figure 1.3 – MVNO opportunity: supply and demand drivers in Australia

KPMG believes that the MVNO business model is one relatively low-risk,low-investment tactic to capitalise directly on the burgeoning mobile sector for:

• consumer brand and distribution leaders

• media and content owners

• incumbent network operators.

“There is a recognisedmigration from fixed (PSTN)to mobile voice services,meaning that the wirelesswallet share will continue to increase.”

Supply drivers

• Substantial investments have been made in mobile telecom

infrastructure in Australia:

– 3 GSM networks

– 2 CDMA networks

– 2 3G networks

– 3 plus wireless broadband providers.

• Over-capacity in host networks exists: geography, spectrum, time

of day, new technologies, slower than expected growth of non-voice on 2.5G.

• The Australian mobile market is mature:

– incumbents realise that they can’t be all things to all people and now see the value of wholesale.

– 90% penetration and each next 1% is harder.

• The economics of launching an MVNO is more attractive today than 5 years ago:

– technology efficiency

– emergence of specialist MVNEs.

Demand drivers

• Consumer market is mature and highly segmented; opportunities in niche/segmented markets require unique and integrated offerings.

• Increased wireless time & wallet share due to Fixed to Mobile (F2M) migration and attractive capped / bundled plans.

• With higher bandwidth availability from 2.5G/ 3G networks consumers are seeking convergent ëlifestyle’ applications and content.

• Wireless devices are increasingly equipped to accommodate more applications and data usage

(eg: MP3, MPEG and gaming).

Integrated MVNO

opportunity in Australia

Source: KPMG


Key benefits for players in the next-wave growth of this industry segmentwill include:

• financial – new revenue, higher margins

• strategic – defensive, niche tapping

• operational – network utilisation

• customer – lower churn, grow market, cross-sell.

These benefits are real and quantifiable. Both the HNO and the MVNO will enjoy a mix of these, though the mix will differ for 2G and 3G HNOs and MVNOs depending on the ultimate go-to-market strategy and customervalue proposition (CVP).

The US, UK, Europe and Asia have already seen the rise of brand-led,niche-focused MVNOs. These include value brand and distribution leaderssuch as Tesco in the UK and 7-Eleven in the US, media and content ownersDisney and ESPN, and ethnic-population-centred Movida Communications in the US and Philippine Long Distance Telephone in Hong Kong – to namejust a few.

It’s also important to note that the inherent scalability of the MVNO businessmodel means that small players with low up-front capital can be profitablewith a low customer base. An investment of less than $25 million for anintegrated MVNO can yield profitable returns with the right partner(s) andcommercial model. For example, one successful Scandinavian MVNOmanages over half a million customers with fewer than 100 employees.

KPMG believes that there are latent opportunities in the Australian mobileservices market for some of Australia’s leading and aspiring companies withstrong brand and distribution, media and content, affinity group associations, or an established, loyal customer (or membership) base.

Opportunities exist in thewholesale mobile telecomarena for non-telecom brandleaders and incumbentoperators alike.


“Pulling together an MVNO and the amount of focus… frankly, it’s just a completely new

business opportunity for us.”

Larry Shapiro

VP, Walt Disney Interactive

(Commenting on Disney’s decision to enter the telecom business via

an ESPN-branded MVNO)


To the customer, an MVNO is just another mobileoperator. The real difference is that MVNOs do notown any telecom network infrastructure and are farleaner, limiting their technology systems to billingand customer care, prepaid IN, SMS-MMS-contentdelivery management and business support systems.

MVNOs own their customers and brand, but use the telecom network and radio spectrum of an HNO under a commercial wholesale arrangement. Such agreements generally can be modelled on the basis of long rangeaverage incremental costs (LRAIC), retail-minus, bulk airtime and so forth.

The most often cited example of a successful MVNO is Virgin Mobile (Australia,UK, US, Canada), a company which KPMG directly advised during its pre andimmediate post-launch phases.

What is an MVNO?


Figure 2.1 – MVNO Models vs Customer Relationship Intimacy

As indicated in figure 2.1 above and figure 2.2 following, MVNOs can differ in their degree of control over their products, services and systems. The strategy employed in turn has a direct impact on the level of investmentrequired and the achievable level of CRI.

KPMG identifies three models of modern MVNOs.

Brand-stampingThis tier of MVNO is more like a service provider, where standard servicesare provided based on an HNO’s or MVNE’s systems and the MVNO itselfmerely ‘stamps’ their brand on the end product or may also be co-brandedwith the host operator. Services provided are predominantly prepaid voiceand SMS. The ability to achieve personalisation of the customer experience is limited and the value proposition is primarily based on association with thebrand. The MVNO is highly coupled to the HNO.

Co-hostingThis tier of MVNO offers a greater level of customer relationship affinity. The MVNO implements some of its own systems, enabling differentiatedproducts and services rather than relying on a ‘vanilla’ host-enabled offering.The MVNO may provide its own prepaid platform and post-pay billing, as wellas non-voice services. The level of up-front investment is greater, howeverso is the achievable level of customer affinity.

“The wireless game isn’t just for cell phone carriersanymore. Companies thatdeal with everything fromconvenience to comedy arefinding money in mobile.”A.T. Kearney Executive Agenda,

Fourth Quarter 2004

Ownership

Affinity

Source: KPMG

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IntegratedCo-hostingBrand-stamping

Inve

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$

Association

MVNO business models


Integrated MVNOThis is an MVNO in the truest sense. All non-network systems are implementedby the MVNO to de-couple it from the HNO. In doing so, the MVNO is able tooffer a far more personalised customer experience, ranging from numberingthrough to tariffs, services, bundling and devices. The level of CRI is highestand hence the ability to own loyal niches is superior. Virgin Mobile in Australiaoperates this model with Optus as its HNO.

How does an MVNO differ from a ‘real’ telecomoperator?To the customer, an MVNO is a ‘real’ telecom operator. Many customers donot, and should not, know or care that their mobile service is being providedby a virtual operator rather than one which owns its own network.

The entire premise of an MVNO is that it provides a mobile telecom service tocustomers completely transparently, so that the customer perceives the serviceto be equivalent to – or better than – the MVNO’s infrastructure-based peers.

Aside: in fact, there have been consumer studies conducted in the pastwhich have produced some interesting results about the improved perceptionof MVNOs by their customers. One such study conducted following thelaunch of Virgin Mobile in one of its markets indicated that some customersactually perceived the quality of the telecom service provided by Virgin to besuperior to that of the HNO – even though they shared the same physicalnetwork. Such improved perception is due to the increased affinity customersshare with a niche focused brand, resulting in less customer churn.

The reality is that an MVNO shares the same core telecom infrastructure of the HNO – and the customers’ calls travel over the HNO’s infrastructure.Put simply, transport or carriage is provided by the HNO but under the MVNO’sbrand. It is similar in principle to staying in a boutique hotel where the customeris attracted to and buys a branded, personalised experience yet the buildingis actually owned by someone else.

The key point of differentiation between an MVNO and HNO is generally in the products and services offered by the MVNO, whereby its content,customer management and billing systems will be packaged for a targetedniche customer segment.


Figure 2.2 – MVNO value chain

Model of a typical MVNOThe essential difference between an MVNO and HNO is that the MVNOdoes not have radio network infrastructure, transmission networks or radiofrequency spectrum licences. The core elements associated with networkoperation are also not required. Those elements – including business functionsand staff – that are required, are not of the same scale of investment as theirinfrastructure-based peers.

Below is a simplified representation of the difference between aninfrastructure-based mobile operator and a typical integrated MVNO.

Figure 2.3 – Simplified typical integrated MVNO model vs HNO

Full service, integrated MVNO

Co-hosting

Brand – stamping

Host network(wholesale) agreement

HNO

Mobilenetworkinfrastructure

Radiospectrum

MVNOsubscriber management,BSS/OSSplatforms

MVNOcustomermanagement,products andservices

MVNObranding,marketingpropositions

MVNO/MVNE MVNO

MVNE-MVNO servicesagreement (optional)

Source: KPMG

MVNOmodel

complexity

HNO MVNO

HLR/VLR VMS/UMS

MSC SMSC/MMSC

BSC GPRS/data

P&S/contentmanagement

Customer care andbilling

IN OSS BSS IN OSS BSS

Radionetwork

RF spectrum

Transmissionnetwork

HLR/VLR

Gateway MSC

VMS/UMS

SMSC/MMSC

P&S/contentmanagement

GPRS/datagetaway

Customer care andbilling

Bus

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Bus

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* MVNOs differ in desired degree of systems control; some elements may be further outsourced to an MVNE

Source: KPMG


Why MVNOs make senseNiche MVNOs are not new, but the opportunity for the next-wave of MVNOs has never beengreater. Why?


The reasons lie on both the supply and demand sides of the mobile market.The key drivers are increased technology efficiency through to network capacityon the supply side, and market maturity giving clearer understanding/formationof customer niches and convergence on the demand side.

Incumbent operators will never be able to efficiently penetrate all marketniches. Being the pioneers who have been required to sink massive investmentsinto spectrum, network infrastructure and site acquisition – and to subsidisethe market to spur the initial growth cycle – their business models necessitatecasting their marketing net wide in order to reach mass consumer adoptionto earn the necessary return on their capital, i.e. the antithesis of a niche.

From the demand side, faster data speeds for multimedia content deliveryand lower costs are spurring consumer demand and hence interest fromnon-telecom businesses who previously may have considered the venturebeyond their capability or inclination.

Critically also, the convergence and integration of devices now offering voice,video, music and gaming are changing the playing field for consumer mobileservices. They are truly making mobile a viable media content channel.

Add to these factors the commoditisation of mobile voice, migration fromfixed to mobile services (F2M), greater customer segmentation and affinitygroup associations and the stage is set for the next-wave of innovative andintegrated-media MVNOs.

“Device and service integrationwill provide the opportunityto drive incremental revenue”IDC


Figure 3.1 below summarises both supply and demand drivers for furtherMVNOs in Australia.

Figure 3.1 – Supply and demand factors driving MVNO opportunities

Simple examples of leveraging overcapacity into a businessopportunity.• Let’s say operator A is an HNO targeting business users, and brand owner

B is a potential MVNO trying to target the youth market. Operator A’straffic will be very heavy 9am to 5pm, and B’s target market traffic will be heavy 5pm to 10pm and on the weekends. That takes advantage ofthe over-capacity on the host network.

or

• Let’s say operator C is an HNO with a strong presence in the cities butunder-utilised infrastructure in regional Australia, and brand owner D is a potential MVNO with a strong regional affinity group/brand name. D can market its service as an independent business and generate trafficon C’s network in its region. Operator C wins by gaining new (wholesale)customers and earning additional revenue with no extra customer acquisitioncosts, and D wins by operating a viable niche business in its core customersegment for modest capital outlay.

Supply drivers

• Substantial investments have been made in mobile telecom

infrastructure in Australia:

– 3 GSM networks

– 2 CDMA networks

– 2 3G networks

– 3 plus wireless broadband providers.

• Over-capacity in host networks exists: geography, spectrum, time

of day, new technologies, slower than expected growth of non-voice on 2.5G.

• The Australian mobile market is mature:

– incumbents realise that they can’t be all things to all people and now see the value of wholesale.

– 90% penetration and each next 1% is harder.

• The economics of launching an MVNO is more attractive today than 5 years ago:

– technology efficiency

– emergence of specialist MVNEs.

Demand drivers

• Consumer market is mature and highly segmented; opportunities in niche/segmented markets require unique and integrated offerings.

• Increased wireless time & wallet share due to Fixed to Mobile (F2M) migration and attractive capped / bundled plans.

• With higher bandwidth availability from 2.5G/ 3G networks consumers are seeking convergent ‘lifestyle’ applications and content.

• Wireless devices are increasingly equipped to accommodate more applications and data usage

(eg: MP3, MPEG and gaming).

Integrated MVNO

opportunity in Australia

Source: KPMG

Whether the number isthree, seven or 10 plus niche sustainable MVNOs in Australia over the comingtwo-to-five year period isopen to conjecture, howeverthe fact that the supply anddemand side factors in thedomestic mobile markethave evolved to the pointthey are now at, is not.


Despite the Australian mobile market being at over 90 percent penetration,integrated MVNOs do have the potential to penetrate further niches andincrease customer growth beyond the natural threshold level which hasalready been reached.

Figure 3.2 below illustrates the potential effect of introducing new integratedMVNOs on penetration in the Australian mobile market.

Figure 3.2 – Integrated MVNOs driving new market growth

The benefits for HNOs and MVNOs alike will include:

• financial – new revenue, higher margins from lower costs and higher networkROI (return on investment)

• strategic – defensive, niche tapping

• operational – network utilisation

• customer – lower churn, grow market, cross-sell.

These benefits are real and quantifiable for both the HNO and the MVNO.They will differ for 2G and 3G HNOs and MVNOs depending on the go-to-marketstrategy and market proposition.

In the following section these benefits are explored in further detail from theperspective of MVNO investors, customers and HNOs.

Mar

ket

size

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Niche market growththrough integrated MVNOs / affinity services

Positive ‘hockey-stick’effect of competition onmarket development

(Mass market/infrastructure) (MVNO)

In some marketsup to 20% of thecustomer base iswith a MVNO

Max

0 2+1

Number of operators

Not to scale

Threshold%

Source: KPMG


Benefits – dollars and senseFor the MVNO investor(s)Scalability – start small, think big One of the attractions of the MVNOmodel for aspiring businesses is the inherent scalability of the MVNObusiness model. Small players, or those only wanting to commit low up-frontcapital, can be profitable even with a low customer base, but also grow thebusiness more rapidly than their infrastructure peers in line with customergrowth and revenue.

Low capital outlay Launching a national MVNO business can be achievedfor less than A$25M*, whereas one would need to add another zero for asimilar infrastructure-based venture. Launching a more targeted regional oraffinity group MVNO could be even less capital intensive.

Lower operating costs With minimal Capex and an order of magnituderelative lower operating expenditure, an MVNO can achieve sustainablemargins with genuinely lower retail tariffs and far fewer customers.However, developing the appropriate business model really is paramount,particularly negotiating a favourable HNO agreement.

Focussed marketing The MVNO can focus more narrowly and differentiatevia affinity marketing and other integrated services (content, customermanagement, devices), leveraging their pre-existing brand/customer base. In return, the MVNO should enjoy lower customer churn through servicepersonalisation/affinity and greater/more certain Customer Lifetime Value(CLTV) on which to plan business expansion.

The table below summarises some of the high-level benefits of pursuing anMVNO venture, to investors with a pre-existing brand and distribution.

Figure 3.3 – Benefits of becoming an MVNO

Benefits to the investor(s) Brand stamping

Co-hosting Integrated MVNO

Further leverage the strength of the brand into an integrated mobile experience

Create a new revenue stream and channel from existing brand, content and services

Own the new customers and the intimate customer relationship with them

Realise the full potential of mobility by controlling the development and proposition of new integrated products and services

Provide a low cost model of direct entry into the branded mobility services space

Leverage existing distribution channels to lower costs and create cross-promotion and bundling opportunities

Dependent upon MVNE agreement

Dependent upon MVNE agreement

¸

¸

¸ ¸ ¸

¸ ¸ ¸

¸ ¸ ¸

¸ ¸ ¸

The positive ‘hockey-stickeffect’ of competition onprovoking customer adoptionof mobile has been welldocumented over the pastdecade; 3G operators havean opportunity to leveragethese learnings to accelerate3G take-up through MVNOs.

* KPMG estimate depending on business model and go to market strategy.


For consumersCustomers most certainly benefit from the entry into the market of an MVNO.To the consumer, as mentioned previously, the quality of service offered by anMVNO is generally perceived to be at least equal to, or better than, that of theHNO telco. As well as stronger brand affinity, increased personalisation ofservices which are offered by integrated MVNOs also helps.

Further, MVNOs generally offer lower prices for equivalent services to theincumbents, enabled by their lower operating cost base. They may offer furthervalue to consumers by bundling and cross-selling products within their existingbrand portfolio and distribution channels.

For the HNOFor current infrastructure owners, attracting MVNOs to their network willaccrue substantial benefits, as long as the HNO attracts a complementaryMVNO partner:

• For 2G (GSM, CDMA) operators, it will bring a new, guaranteed wholesalerevenue stream and hence lower their unit cost of carriage. Furthermore, itwill deliver revenue from excess capacity or under-employed assets such as regional networks and data infrastructure which has seen slower thananticipated growth.

• For 3G operators, it will provide all of the above benefits plus act tostimulate the 3G retail market much faster than otherwise would likely be the case to attain critical mass – this should in turn benefit the HNO’sprimary (retail) business which will grow more rapidly in line with theHNO’s retail strategy.

Example: Unison MobileUnison Mobile is an MVNO start-up in Australia which over the past year hasbeen working to cultivate its target market and exclusive distribution channelsunder-the-radar. With moderate investment it has now established itself asthe exclusive co-branded MVNO partner to some of the largest trade unionsin Australia, and has successfully begun to tap this particularly strong affinitygroup which numbers over 2.5 million Australian workers.

“Adding MVNOs to thenetwork makes sense foroperators because it allows a wireless carrier to load itsnetwork with customerswhile keeping its acquisitioncosts to a minimum.” Wireless Week, MVNOs: Master Stroke

Or Menace? Sue Marek, 1 August 2004


Benefits – self defenceAdding the right MVNO to a host network is an effective defensive strategyand a near certainty for reducing net customer churn (when considered froma retained revenue flow standpoint).

Today’s mobile market – particularly in highly developed markets like Australia –is a churn market, costing operators millions of dollars per month in customeracquisition and retention activities. By adding the right kind of MVNO (i.e. itdoes not directly cannibalise core customers) there will be another operator inthe market for customers to churn to, boosting inbound gains to the HNO.

Consider a theoretical example in a market of three incumbent mobile operators1, 2 and 3 who are experiencing customer churn between them.

• In the current market, if a customer, (Customer A), churns from 1, he willonly go to 2 or 3. However, if operator 1 introduces an MVNO – called 1a– now Customer A has an extra choice. If he chooses 1a, then operator 1keeps Customer A as a wholesale revenue generating customer.

• Conversely, a customer of operator 2 who is thinking of churning,Customer B, now has a choice of 1, 3 or 1a – i.e. operator 1 has greatly enhanced prospects of winning Customer B revenue.

Such defensive strategic benefits from opening a host network to an MVNOwill be realised and optimised only by selecting the right MVNO and HNOpairing. Some ill-conceived MVNO marriages end in divorce when either theHNO begins to see core customer cannibalisation (and starts to go sour on therelationship) or the MVNO begins to feel its host is lacking in operational support.

Example: MVNO boosting Optus numbersAn example of the benefit of having an MVNO on your host network is seenin the recent customer figures released in the Australian market by SingTelOptus for the full financial year 2004-5.

• As reported in its full financial year results, Optus’ subscriber numbersrose by 6.6 percent, or 370,000.

• At least 30,000 – approximately 10 percent – of Optus’ new customers arereported to have come from its Virgin Mobile MVNO venture. The reason thisis possible is that Optus counts Virgin’s 500,000 customers as contractcustomers – even though they are primarily prepaid customers – due to thenature of the MVNO contract and model in place.

Source: The Australian, Optus Clears Out Customers,

Michael Sainsbury, 4 May 2005



MVNOs are on the rise acrossalmost all categories, from valuebrand and distribution leaders, suchas Tesco in the UK and 7-Eleven inthe US, to media and content ownersDisney and ESPN, to niche andethnic-population-centred MovidaCommunications in the US and PLDT in Hong Kong.

Even the US, a market whichtraditionally has lagged in mobiledevelopment, now enjoys around 20 MVNOs in various forms, withvarying strategic focuses, including:

• MVNOs targeting ethnic groups

• retailers looking to extend their existing core brands

• incumbent telecom operators extending their service offering by creating their own MVNOs

• low-cost international long-distanceprovision and

• customer profile, eg. low credit or youth.

What’s going on internationally?

Internationally, there has been significant movement and growth in the MVNOarena over the past five years. This is accelerating and there are numerousnew and impending MVNO launches around the globe at the time of writing.


One of the attractions of the MVNO model for non-telecom businesses isthe inherent scalability of the business model. Small players or those onlywanting to commit low up-front capital can be profitable with a low base and subsequently upscale the business in line with customer growth morerapidly than their infrastructure-based peers. In fact, investments of less than $25 million can yield profitable returns with the right partner(s) andcommercial model.

For example, a successful Scandinavian MVNO, Telmore, manages over halfa million customers with less than 100 employees.

Telmore and CBB Mobil of Denmark both launched in the second half of 2000.Between then and 2003 they collectively acquired 43.7 percent of all newmobile customers in Denmark. Today, around 20 percent of the total mobilecustomer base in Denmark is with an MVNO.1

In its quest for rapid low cost customer growth in the fiercely competitiveDanish market, Telmore pursued an internet-based channel model and acquiredover half a million customers (12 percent market share). They now have areputation for having the best customer care in Denmark.2

In the UK, there has been much publicity around the success of Virgin Mobile,one of the most successful global MVNOs. They have gained an eight percentplus share of the market (>4M customers) in five years by leveraging theiryouth-oriented brand to target customers who already purchased entertainmentfrom Virgin Megastores and associate with the trendiness and strong affinityof ‘being a Virgin’. Virgin’s expertise is in developing propositions specificallyto attract and retain youth segment customers.

However, whilst this was the beginning of the previous MVNO wave and aproven pioneering success story in its own right there are new developmentsdeserving of attention. This ‘next-wave’ aims to create a lifestyle experiencefor affinity customers, and in doing so increase CLTV.

“You have a change in theindustry right now.”Paul O’Sullivan, SingTel Optus CEO,

The Australian, 16 May 2005

1Source: Strand Consult.2Source: Noble House Media Ltd.


Below are a series of mini case studies exploring these MVNOs leading thedrive into the next-wave.

Mini case study – Movida (US)Movida is a local MVNO targeting the Hispanic ethnic population in the US. This ethnic group numbers in excess of 40 million and has been found togenerate 10 percent higher Average Revenue Per Unit (ARPU) than other groupsand use more data/content services. Movida is an MVNO operating off theSprint network.

Movida operates its mobile business and services in Spanish as the primarylanguage and programs the handsets it sells to operate in Spanish as the default.

Movida’s value proposition is providing personalised language and value-addedservices to Hispanics including:

• low-cost flat fees of 20 cents per minute

• calls to Mexico at only five cents per minute and attractive fees to otherLatin American countries

• outgoing SMS at only 10 cents per message

• prepaid offerings for customers who cannot obtain credit approval

• distribution channels convenient for Hispanic communities.


Mini case study – Tesco MobileTesco Mobile is the MVNO of the dominant UK retail chain, targeting their loyal and price conscious customers.

It leverages its competitive advantage of distribution and strong brandassociations to create affinity through a strong family value proposition.

Therefore, Tesco is positioning itself to capitalise on its ‘value’ and ‘trusted’brand associations, which has made it a success to date. It gained 500,000customers in its first year of operation.

Regarding its distribution efficiencies, Tesco has the potential to tie mobilespend with rebates and discounts on other products within their stores tocreate value driven bundles for their customers across groceries and mobile.Tesco Mobile is now being treated essentially like another commodity groceryitem: ‘Pick up a top up card whilst doing the grocery shopping’.

Aside: In Australia, Coles and Woolworths have already successfully bundledanother commodity item – petrol – with their brand and offer rebates on fuelpurchases from purchase receipts made by customers in-store. Translatingthis into mobile – say with a commodity voice/text 2G offering – would be a similar proposition.

Mini case study - Mobile ESPNDisney’s ‘Mobile ESPN’ is an example of the emerging next-wave MVNO to which this paper refers. It is a brand, and distribution-led model similar to others, however, it adds another two key dimensions to the mix: content and a custom device.

US-based ESPN (owned by Disney) is set to launch its MVNO in February2006. It will build on ESPN’s television channels, websites and the ESPNmagazine, to offer sports news, highlights and scores to customers, inaddition to voice and basic text services. Hosted on the Sprint network, theMVNO will offer a unique, custom ‘Sanyo MVP’ device complete with brandcompliant ‘ESPN red buttons’, i.e. one-touch content access (which showssports facts while applications are loading), an MP3 player, 1.3 mega pixelcamera, miniSD memory slot and a stereo headset. (Total Telecom, 28/9/05)


This proposition is particularly compelling as the affinity group associated withsports fans is one of the strongest known. ESPN will seek to tap its existingloyal following - predominantly male and reportedly 97 million in size – to rapidlyramp up its customer base. Once this segment is tapped, its retentionprospects are very high, as long as the MVNO can successfully bundle andcross-promote exclusive offerings not available through other channels.

This exclusivity issue in content owners entering the MVNO space does,however, raise a potential point of conflict. If they are perceived to behoarding valuable content for their own MVNO customers whilst supplyingcontent of lesser value through their wholesale content channels to othermobile operators, major issues could arise. This is one area yet to bestrongly tested.

“Never underestimate the power of a passionate sports fan.”George W. Bodenheimer, Co-Chairman Disney Media Networks, President ESPN, Inc.

Mini case study – PLDT ‘1528 Smart’Smart, the mobile subsidiary of The Philippine Long Distance Telephone Company(PLDT), launched an MVNO in Hong Kong in August 2004 to specifically targetthe ethnic/affinity group that is the overseas Filipino worker. The service isoperating on the TelstraCSL GSM network in Hong Kong.

Smart and PLDT Global’s MVNO is called ‘1528 Smart’, and provides Filipinosin Hong Kong with access to the same Smart mobile services and contentthey can use in the Philippines.

The suite of services offered to customers of 1528 Smart include:

• Smart Money, Smart Load, Smart Pasaload, Smart Padala (the world’s firsttext-based money remittance service) and Bible verses

• 24-hour customer service from fellow Filipinos

• Filipino customers in Hong Kong can also make long-distance calls to thePhilippines and send text messages for around 50 percent less than theywould otherwise pay on a local Hong Kong network.


The Filipino ethnic group living and working in Hong Kong reportedly numbersaround 180,000 people. In a span of six months since launching ‘1528 Smart’,they captured 14 percent of the target market. By the end of 2005, they expectto attract 50 percent of the target market, or around 90,000 customers. It isestimated that 87 percent of Filipinos in Hong Kong own a mobile phone and alarge proportion of them send prepaid recharges to family back in the Philippines.

In this type of next-wave MVNO venture PLDT is a true pioneer. Buildingupon this initial success it plans to launch similar services in Singapore andthe US by the end of 2005.

"It effectively establishes a virtual presence for Smart andPLDT Global in Hong Kong, a historic OFW (overseas Filipino worker) bastion." PLDT and Smart Chairman Manuel Pangilinan

Potential market entrantsThe following organisations are also reportedly considering launchingMVNOs in the US:

• Disney Mobile

• Wal-Mart

• Target

• Exxon

• American Association for Retired People.


What factors will determinethe success of the next-waveintegrated MVNO?


Brand? Distribution? Content? Affinity Group? What factors will make some MVNOs moresuccessful than others and what combination will provide sustainable competitive advantage?

The ‘ideal MVNO’ – the focus here being on the next-wave integrated MVNO –consists of a number of core elements, which interdependently provide a soundfoundation upon which to build a sustainable business. MVNOs that enter themarket on price competition alone will likely have little sustainable advantage.

That’s not to say that MVNOs without all of these ingredients – see Figure 4.1below – are slated to endure a bleak future, but the chance of success issubstantially increased through a core subset of the following elements,thereby creating an integrated MVNO.

Below is an illustration of the key strategic considerations for any companyconsidering entering the MVNO business.

Figure 4.1 – Strategic composition of the next-wave integrated MVNO

5. Business model

/structure

4. Technology

strategy: devices & network

2. Distribution

channels

3. Market/affinity

group proposition6.

Financier

1.2 Content supply

1.1. Customer base

1. Brand/affinity

owner

7. Host network

operator

Integrated MVNO

Source: KPMG


Checklist for the aspiring MVNOSome of the more relevant upfront focusing questions aspiring MVNOproponents may consider:

1 Do we have a recognised and trusted brand, and can it be leveraged into selling mobile services?

2 What is the unique market proposition and what would be the marketingstrategy, brand positioning and target customer segment(s)?

3 Do we have existing loyal customers and distribution to leverage for rapid take-up, and can we achieve channel efficiency, complementarity and cross-sell economies through the new venture?

4 Where will the revenue streams, both direct (call charges, data usage) and indirect (interconnect, advertising, bundling and cross-promotion across other groups), come from?

5 Do we have the capability to do this alone or should we engage partners?

6 Should we approach a GSM, CDMA, 3G or Mobile/Wireless Broadband operator as the HNO?

7 Who is the right HNO to approach to ensure the strategy, marketing, customer base and technology is complementary to the MVNO plans?

8 What are the key strategic, commercial and operational issues to be addressed in the Host Network Agreement (HNA), and how do we knowwe are getting a good deal?

9 Does our strategy and business model leverage the available capabilities(e.g. 2G/3G, Devices and Content, existing Media technologies)?

10 Who could be the Partners for content, distribution, devices, applications?

11 What benefits will the MVNO create in the existing business and are there any negatives?

12 How much funding will the venture require, who should we approach, and how should it be structured?

13 Have we considered how to inter-weave a unique self-branded device into the integrated target segment proposition?

Leveraging the technologyA holistic MVNO strategy will incorporate a technology strategy aimed atappropriately selecting and leveraging available devices and network technologies.

With regard to devices, the market is only now starting to see the truerealisation of Personal Mobile Gateway (PMG) and low cost dedicatedsegment devices from companies such as IXI Mobile (the inventor of PMGtechnology) and Sanyo, which are set to revolutionise the way the marketperceives a mobile phone.

“Successful large MVNOplayers… will continue toexperience growth and fuelthe industry by segmentingthe … target subscriber baseand distribution channels.”www.3G.co.uk

Imagine being able to go in and buy a basic PMG node (say, a matchbox size‘black box’ which you may keep in your pocket) and then customise it as desiredwith various wireless (Bluetooth) credit card size ‘lite attachments’ such as:

• voice phone

• messaging pad

• MP3 player

• wireless headset

• game console

• camera.

This is now a reality, with an example of some innovative devices featuringapplications including IM, SMS, and Email illustrated below:

Figure 4.2 – MVNO propositions enabled by innovative devices

With regard to networks, as outlined in the checklist, an aspiring MVNO’sstrategy should consider the appropriate host network in line with itsintended customer value proposition.

A summary of such technology and associated value proposition options isillustrated in the figure below.

Figure 4.3 – MVNO Proposition by Technology


• Integrated entertainment proposition – voice and rich multimedia content• Brand-led niche segments, verticals• Music, video, gaming, info• E.g. Media company with content through CD’s, DVD’s, movies, radio, magazine, TV, internet leverages an MVNO business as new channel to market – with huge cross-sell opportunities

• Low cost value proposition – voice and simple data• Regional/community focus• Niche/minority segments

3G

2G

Source: www.IXI.com (IXI Mobile)


Incumbent operators now accept thatthere are niches which they are notbest suited to tap, and that there arereal financial, strategic, operationaland customer benefits to be had insetting up new wholesale revenuestreams. Some pioneering operatorsin the Australian mobile market areactively pursuing more wholesaleand MVNO opportunities.

This is particularly relevant in theemerging 3G arena where there are two competing 3G networkinfrastructures. Rapid customer take-up will be realised only as more customers are convinced ofthe incremental benefits of movingto a 3G service. By encouragingsmaller businesses whose specialtyis not building networks but creatinginnovative multimedia experiences in their niches, 3G infrastructureowners can only stand to benefitfrom attracting niche MVNOs to their networks.

The positive ‘hockey-stick effect’ of competition on customer interest andadoption in the mobile market has been well documented over the past decadein all 2G mobile markets; 3G operators know this and should now build uponthese learnings to accelerate 3G take-up through MVNOs.

The potential next-wave MVNOopportunities in Australia

There is most certainly scope for increased activity in the wholesale and retailmobile telecom market in Australia. There is money to be made, and it’s notrestricted to flowing to the incumbent operators.


“There is now universal agreement that wireless has evolveddramatically from a generic voice market to one that is highlysegmented. Every single carrier is strong in certain segmentsand weak in others. That’s taken some carriers a lot of timeto come to terms with and to agree with.”Andrew Cole, A.T. Kearney US communications and media practice leader

However, even in the 2G mobile segment genuine opportunities remain openfor MVNOs to compete and be successful with lower cost value propositionsand bundled offerings to niche segments including the corporate market andethnic or affinity groups.

The following are some of the categories of next-wave MVNO opportunitywhich are evident today.

1 Brand and distribution leaders, including consumer brand leaders, retailersand existing telecom service resellers with a loyal customer base.

2 Media and content owners, such as internet companies, broadcasters,publishers and entertainment providers.

3 Affinity groups – for example, ethnic, geographic/demographic, religiousand social.

Recently Australia has seen some former service providers such as AAPTand Macquarie Telecom move up the value chain into MVNOs under a brand-stamping or co-branding model – in the GSM space this has equatedto providing SIM cards with their own brand to their customers. By movingup the value chain these providers are seeking to ‘own’ their own customersand provide more flexibility to bundle other offered products and services toincrease wallet share and customer stickiness.

This is most definitely a step in the right direction for existing telecom players,but substantial scope exists for even more innovation to be realised throughthe true integration of telecom, media and technology – the ‘next-waveintegrated MVNO’.


Consider the compelling nature of an existing company, with interests insome or all of the following, leveraging its current strengths and assets into an MVNO business model:

• broadcasting and media content

• internet portal(s), email and IM

• newspaper and magazine publishing

• movie distribution and content (cinema, DVD)

• music and recording artists (CD, DVD)

• gaming and entertainment.

By leveraging existing brand, media content, distribution channels and targetedpropositions with, say, a lifestyle device, organisations can produce a compellingand low-risk investment proposition that will take advantage of the continuinghigh growth in the mobile arena as an effective channel to reach high-valuecustomer segments.

On the supply side, in terms of host network sentiment and innovation inAustralia, the wholesale/MVNO mobile market segment is active and willingto support and/or partner on innovative initiatives.

Example: opportunity for ethnic/affinity group MVNO There are an estimated 300,000 Muslims in Australia according to the 2001 census (plus an estimated one million Australians of Arabic descent).Being a particularly strong affinity group and also having specific opportunitiesfor tailoring customer care and content/application services makes this oneopportunity which may constitute a compelling business case.

Entrepreneurs might wish to consider the fact that a target 40 percentpenetration of this affinity group would represent a potential investment cost of under $175 per customer.

(Based on a potential investment of $20 million; business plan dependent.)


KPMG believes that the MVNO business model is one key, and relatively low investment, strategy by which to capitalise directly on the innovativeopportunities and supply side factors coming into play in the Australian mobiletelecom market. There are real prospects for consumer brand and distributionleaders, media and content owners, and incumbent network operators.

Benefits ranging from financial (new revenue, higher margins) and strategic(defensive, niche tapping), to operational (network utilisation) and customer(lower churn, grow market, cross-sell) are real and quantifiable for both theHNO and the MVNO. They will differ for 2G and 3G HNOs and MVNOsdepending on the go-to-market strategy and market proposition.

There are numerous successful examples from around the world that can be learnt from. We believe the Australian wireless telecommunicationslandscape could look quite different in a relatively short period of time withthe advent of new niche-focused integrated MVNOs.

Aside: As one popular culture entertainer – rap artist Shaun “P. Diddy” Coombs,who is himself jumping on the MVNO brandwagon – puts it:

“I don’t have the spectrum, I don’t own the networkinfrastructure, I don’t make customer service calls, but I dohave subscribers. I have tens of millions of … subscribers,who spent billions of dollars every year on music, on fast foods,on cosmetics, on soda, and yes, on consumer electronicsand wireless communications technology. I know wherethey live, what they like, what they eat and what they drink, I know what they wear, and more importantly for you, I knowhow to communicate to them, I know how to talk to them.The reason why they’re mine, … my subscribers, is becauseI know how to listen to them… (and will)… take advantageof the power of the latest 3G technologies that allow customersto easily use and virally spread the content.”

Now how can you argue with that!

Conclusion

34 Jumping on the MVNO Bandwagon

Malcolm Alder

+61 2 9335 [email protected]

Malcolm Alder is the national head of KPMG’s Information, Communications& Entertainment advisory practice in Australia. For the past 14 years Malcolmhas focused on the information, communications and entertainment industries,working with operators, regulators, investors and customers in Australasia,North America and Asia. He has previously managed engagements for MVNOlaunches in Australia and Asia and has been instrumental in the successfulcreation of new ventures in both the telecom and media segments.

Dominic P Arena

+61 2 9335 [email protected]

Dominic Arena is an Associate Director with KPMG’s Information,Communications & Entertainment advisory practice in Australia. Over the past 10 years he has focused on the telecom and technologyindustries, primarily in the wireless segment, working across Australia,Europe and Asia. Dominic has held local and international appointments with global telecom operators and professional services firms, particularly in strategy and new markets, commercial and regulatory, operationsimprovement and technology innovation.

About the authors

Jumping on the MVNO Bandwagon 35

Glossary of terms

BSS Business Support Sub-SystemsThe systems responsible for managing business support functions and front-of-house enterprise operations.

CLTV Customer Lifetime ValueThe dollar value/contribution of a customer over the life of their retention. Enables quantification of the value of a customer or segment for analytical retention initiatives.

CRI Customer Relationship IntimacyThe degree to which a service provider is engaged with its customers through its brand, from the lowest level of ‘Association’, through to ‘Affinity’ and the most intimate state of ‘Ownership’.

HNO Host Network OperatorThe incumbent operator owning the physical network infrastructure and radio spectrum.

HLR Home Location RegisterThe telecom network element responsible for storing registered customer and numbering information.

IN Intelligent Network/NodePrepaid subscriber management platforms responsible for real-time debiting of customer balances and other customer account management functions.

MMS Multimedia Messaging ServiceEnhanced messaging service enabling pictures, audio and video to be transmitted between mobile customers.

MMSC Multimedia Messaging Service CentreThe store and forward system enabling the transmission of MMS in the network.

MVNE Mobile Virtual Network EnablerCompanies that provide infrastructure and related services to MVNOs to enable their business to operate.

MVNO Mobile Virtual Network OperatorA telecom service provider which owns the customer relationship, provides its own services, billing and customer care, but does not own its own telecom network infrastructure or radio spectrum.

OSS Operational Support Sub-SystemsThe systems responsible for managing networks, customers, products/services and billing operations.

PMG Personal Mobile GatewayPersonal Mobile Gateway technology (PMG®) combines cellular and short distance wireless (e.g. Bluetooth or WiFi), with micro-router and micro-server functionalities. The PMG can be a stand-alone device the size of a small mint box, or integrated into a cellular phone, and can be remotely managed by the mobile operator. (Source: IXI Mobile, www.ixi.com)

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© 2006 KPMG, an Australian partnership, is part of the KPMG International network. KPMGInternational is a Swiss cooperative. All rightsreserved. Printed in Australia. The KPMG logoand name are trademarks of KPMG. January 2006. NSW9266ICE.

The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavour to provide accurate andtimely information, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation.

Jumping On The MVNO Brandwagon - KPMG

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