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Strategic Operational and IT Challenges
and Opportunities of
Mobile Virtual Network Operators:
The Experience Of Successful Players
By Dr. Raul L. KatzMarch 2011
TELECOM ADVISORY SERVICES, LLC182 STISSIng ROAD STAnfORDVILLE, nEw YORk 12581 UnITED STATESTELEphOnE +1 (845) 868-1653 fAx: +1 (845) 868-1426URL: www.TELEADVS.COM
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Contents
Executive Summary
1. The state of development of the MVNO sector
2. Business imperatives of successful MVNOs
3. Effortel Technologies: high performance as an enabler of MVNOs
(Europe and Middle East)
4. TracFone: relying on an MVNO to target under-served markets (United States)
5. Virgin Mobile: an MVNO as a powerful brand enhancer in a convergent offer
(United Kingdom)
6. Common key success factors in the MVNO sector
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2The MVNO sector has become a
permanent fixture of the wireless space.
Affected by an intense pressure to
consolidate and rationalize the network
provider side of the industry, MVNOs
represent an appropriate way to lower
the barriers to entry while enjoying
economies of scale. This is why
regulators around the world also look
at MVNOs as service-based players
capable of building competition by
offering consumers choice of offers and
lower prices. This imperative explains the
growth of virtual mobile carriers around
the world to close to 700 operators.
MVNOs initially followed business models ranging
from marketing channels through which mobile
network operators reach specific market seg-
ments (e.g. prepaid) to platforms of entry for
retailers, affinity brands or cable TV operators. At
this time, we are witnessing virtual mobile carriers
further refining their market position by target-
ing prepaid or postpaid convergent markets. On
the other hand, the value chain of virtual carriers
appears to have reached a somewhat stable con-
figuration with network wholesalers and mobile
virtual network enablers (MVNEs) assuming pre-
established roles1.
Despite its recent development, the dynamic
MVNO arena has already generated a wealth of
experience in terms of successes and challenges
that enable the identification of four critical suc-
cess factors for a virtual mobile carrier:
Economies of scale, which based on asset-light business models, would typically require
approximately 300,000 subscribers to break-
even, although there are many mini-MVNOs that
run profitable business with as little as 50,000
subscribers
Brand that is widely recognized in the mar-ketplace and conveys a differentiated value
proposition
Well deployed channels with economics that keep the acquisition costs in line with customer
life-time value
Operational expertise and capabilities in areas such as pricing, product quality, devices and
data services
In addition, the case studies of Tracfone (U.S.),
Virgin Mobile (U.K.) and Effortel (Europe and
Middle East) included in this study identified a
number of specific imperatives yielding competi-
tive advantage in the MVNO space. Keeping a
strong lid on controllable costs (e.g. distribution,
care), relying on flexible IT architectures which
allow to constantly deploy innovative offers, and
creating an infrastructure that can rapidly allow
the virtual carrier to scale up remain the key fac-
tors to creating value in this sector. In particular,
Executive Summary
1 In some cases, these two roles can be assumed by a single player.
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3systems solutions tailored to MVNOs require
convergent real-time rating and charging func-
tionality capable of supporting both prepaid
and postpaid subscribers, seamless integration
with wholesale network providers.
In order to rapidly achieve economies of scale
and break-even volumes, speed is of the essence.
Therefore, whether relying on an MVNE or in-
sourcing launch activities, virtual carriers need to
accelerate the initial set up of the business. Once
launched, flexibility remains critical. In particu-
lar, attention should be put in implementing the
enablers of new product development and modi-
fication. For those virtual carriers that develop
a systems capability in-house, a packaged
solution that comprises an integrated suite of
components (CRM, Billing, SDP, etc.) that sim-
plifies interfaces and, therefore, streamlines
product development is critical. For those that
rely on an MVNE, they need to select a provider
that entails a multi-tenant architecture capable
of providing a scale-driven platform that allows
customization, while preserving security and
operational control. For on MVNE the ability to
support several virtual carriers through a multi-
tenancy architecture is critical.
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41. ThE STaTE OF DEVELOPMENT OF
ThE MVNO SEcTOr
As of 2011, there are close to 700 Mobile Virtual
Network Operators (MVNO) active around the
world. Their geographical distribution is related
to the willingness of regulators to stimulate
service-based competition in the wireless sector
(see figure 1).
In an industry that is gradually consolidating
with the intent of leveraging economies of scale
in infrastructure, MVNOs represent a powerful
instrument to stimulate competition that ben-
efits consumers, while recognizing the natural
scale and scope of a capital-intensive industry.
At the same time, however, MVNOs embody a
good approach for entering the telecommunica-
tions sector for new entrants that want to limit
the investment risk. As a result, it is not surpris-
ing that the MVNO population continues growing.
Furthermore, we witness that the sector is also
developing in new regions of the world, prompted
by the enactment of new regulatory frameworks2.
MVNO players generally fall into four categories,
each bringing different attributes to the service
offering:
Telecommunications carriers, cable TV opera-tors, and Internet Service Providers: players
already active in the sector may launch an
MVNO as an extension of their core business
either for targeting a specific market segment
while preserving the integrity of the existing
brand or entering into a new geography while
reducing the entry investment and risk. A typi-
cal example of the first approach comprises a
youth oriented MVNO3 or offers targeting the
under-penetrated and expanding age groups
over 55 years of age.
Ger
man
y
Net
herla
nds
US
Den
mar
kUK
Fran
ce
Belg
ium
Spain
Poland
Nor
way
Cana
daIta
ly
Switz
erland
Japa
n
Swed
en
250
200
150
100
50
0
E. Europe5%
N. America12%
MEA2%
Latam1%
Asia8%
W. Europe72%
Figure 1. Countries with Largest Number of MVNOs and MVNO geographic distribution
2 As of writing of this paper, the sector is undergoing regulatory consideration in countries as diverse as Brazil, Argentina and Israel.3 Boost in the United States is owned by Sprint Nextel but targets a specific youth prepaid market
Source: Wireless Intelligence; Telecom Advisory Services analysis
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5Alternatively, cable TV operators may be
inclined to launch a virtual operator in order to
match a bundled offer of broadband, wireless,
and content services offered by a telco com-
petitor. In another case, an ISP could consider
launching an MVNO to develop an additional
revenue generating business, while leveraging
an existing distribution channel.
Applications and content providers: in this case, companies that own or have the right to
various types of content and/or applications
might consider launching a virtual network offer
as a way to develop another channel to distrib-
ute exclusive content to target segments. These
companies consider the wireless platform as an
additional way to reach their customers.
Branded/affinity companies: affinity compa-nies with an extensive customer loyalty (e.g.
Virgin Mobile) might be inclined to launch an
MVNO to enhance brand equity and further their
marketing clout. Generally, these companies
have detailed information on their customers
(e.g. age, gender, lifestyle information, customer
behavior), enabling them to directly market to
them. Business development can be driven by
providing tailored offerings to one of the count-
less lifestyle or affinity sub-segments that cross
demographic lines.
Retailers: in this case, companies that have a well-developed distribution network, reach-
ing one or multiple customer groups, consider
entering the wireless arena to establish an
ongoing relationship with its customers, poten-
tially creating a new communication channel.
This category comprises well-known consumer
brands, typically supermarket chains, discount-
ers or warehouse networks.
Examples of these four groups can be found in
several countries around the globe (see figure 2).
Figure 2. Examples of MVNO by Category
Telcos, cable TV, ISPs Applications and Content Providers
Branded/affinity companies
Retailers
Western Europe TDC Mobile (Finland) MTV Mobile (Malta) FNAC (France)
Eastern Europe Debitel (Slovenia) MyAvon Mobile (Romania) Auchan mobile (Russia)
North America Fido (Canada) BRATZ Mobile (United States) Tracfone (United States) 7-Eleven Speakout (Canada)
Latin America Algar Telecom (Brazil)
Asia/Pacific CM Mobile (Hong Kong) Disney Mobile (Japan) Virgin Mobile 7-Connect (Singapore)
Middle East and Africa Kirene Mobile (Senegal) Virgin Mobile (Qatar)
Source: Wireless Intelligences; Telecom Advisory Services analysis
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6An examination of the current MVNO opera-
tions that have been launched over the past years
indicate an important industry trend: network
operators tend to launch MVNOs themselves in
order to target unserved markets without facing
the risk of brand dilution or to enter geographies
where they do not have a network infrastructure
without having to incur start-up capital costs. As a
result, MVNOs are not only a vehicle to enable out-
of-sector players entering the wireless arena, but
also a convenient way for network operators to
expand their market reach and/or coverage.
MVNO business models are of three different
types. (see figure 3).
MVNO business models range from simple licens-
ing deals to full value-chain deployment. Under
the licensing deal, the virtual operator licenses its
brand in exchange for a share of ongoing revenue
streams. According to this model, the wholesale
network operator not only provides transport
capacity but also supports all other value chain
functions from billing, service activation, and
customer care to distribution and marketing. The
second business model is generally referred to as
resale, whereby the partner brands service and
acquires customers, but provides limited custom-
ization of the value proposition. In this case, the
virtual operator may assume responsibility for
marketing and distribution. Under the third busi-
ness model, denominated full MVNO, the virtual
operator assumes responsibility for all value chain
functions, except for network transport. This last
model is particularly suited for network operators
desiring to enter a new market. They tend to lever
their existing capabilities along the value chain
while purchasing the only component they lack
in the target geography: network access. On the
other hand, out-of-sector entrants tend to con-
sider either the licensing or resale model. Even if
they chose a conventional MVNO approach they
CoreNetwork
Bill ing,ActivationCare
ServicePlatforms
HandsetMgmt
ValueProposition
Channel &Marketing
Brand &Content
Simple Licensing
Resale
Full-MVNO
Operator Operator or MVNE Partner
Operator Operator or MVNE Partner or MVNE Partner
Operator Operator or MVNE
Partner or MVNE Partner
Figure 3. MVNO Business Models
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7tend to seek the services of another third party:
the Mobile Virtual Network Enabler (MVNE).
Launching an MVNO is a complex undertaking. As
a result, MVNEs assist virtual operators with exe-
cuting back office processes to serve end-users.
MVNEs offer turnkey technology and service
platforms for launching MVNOs. They link wireless
carriers with the virtual entrant offering product
(service offering, product design and packaging,
handset customization, procurement and distri-
bution), services (provisioning, care, rating and
billing, and value-added services) and network
(access, local numbering, data delivery, long dis-
tance and interconnect) support. As an enabler,
MVNEs can typically take responsibility for the
service platform, billing and customer care func-
tions (see figure 4).
Service Platform Applications management Portal platform Gateway proxy Voicemail/web servers Infrastructure (IP, SAN &
NAS, testing & develop-ment, back upserver, SNMS)
Billing/Rendering Rating Calculating Collecting Revenue settlement Taxing Invoicing
Billing Mediation CDR/UDR Collection Data Conversion
Network Operator
Network Mediation Performance monitoring
and reporting SLA management
Web Portal Self-service tools Electronic bill presentment
Call Center/CEC Inbound and outbound
customer service Email and web-based
custormer service interface
IN Network Management SCP, IP
MVNE
Service Platform Billing Customer Care
Bill Presentment
CRM
Figure 4. MVNE Support Model
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82. BUSINESS IMPEraTIVES OF
SUcccESSFUL MVNOs:
A successful MVNO needs to meet several key
criteria impacting all management levers. First
and foremost, a virtual operator needs to rapidly
grow its subscriber base in order to reach a finan-
cial breakeven point4. In that sense, a short time
to market remains absolutely critical to reduce
the financial strain that an under-leveraged asset
would represent. In addition, in order to achieve
the necessary scale level, the MVNO brand needs
to be widely recognized in the target market. For
this purpose, the brand needs to be supported by
a differentiated value proposition. Additionally,
the marketing launch campaign needs to reflect
a customized approach to the targeted segment.
This will drive a well established distribution
channel and the corresponding acquisition eco-
nomics being in line with customer value. For this
purpose, the virtual operator needs to have an
in-depth knowledge of customer needs, con-
tinuously fed by regular market contact. This will
require the ability to provide 360 degree cus-
tomer view including services purchased and
device utilized. An understanding of customer
preferences will result in the need to develop
and maybe modify quickly services, plans and
bundles. From an IT standpoint, these business
imperatives will require a convergent real-time
rating and charging platform, capable of sup-
porting both pre-paid and postpaid subscribers,
a customer view anchored around a SIM card, a
seamless integration with an intelligent network
platform, and all the necessary applications to
support cashier and distribution functionality.
In addition, a prospective virtual operator needs
to understand that, despite the virtual busi-
ness concept, all MVNOs (regardless of business
model) require some level of initial investment in
product development and business launch. Along
these lines, particularly in the case of entrants
from other industries, MVNO management needs
to have a solid understanding of the mobile mar-
ket, and have capabilities in pricing, product
development, handset customization, and net-
work technology.
This is where the MVNE becomes a key support
of virtual operators. MVNE services typically
entail the MVNO ceding control of all back office
systems, leaving the virtual operator to focus
solely on sales and marketing. An MVNE should
have the technology platform capable of easily
plugging-in new MVNOs, and scaling up sub-
scribers quickly. Similarly, MVNEs could assist
new entrants at client segmentation and offer
proposition development. MVNEs should have
partnership agreements with retail channels to
help prospective MVNOs quickly build distri-
bution channels. Likewise, MVNEs can reduce
the entrants capital investment by providing
MVNO in a box solutions which lower start-up
investment. Finally, MVNEs can provide systems
integration expertise and program manage-
ment complementing the MVNO expertise. The
following case studies further illustrate these
imperatives. They focus on a cross-border MVNE
based in Europe but serving also Asian markets
(Effortel), a virtual carrier initially targeting an eth-
nic market in the US (Tracfone), and another one
focused on enhancing a retailing brand around a
convergent offer in the UK (Virgin Mobile).
4 Depending of asset-intensity, an MVNO can reach a break-even at 50,000 subscribers (light infrastructure, limited product range, inexpensive devices)
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93. EFFOrTEL TEchNOLOGIES:
hIGh PErFOrMaNcE aS aN ENaBLEr
OF MVNOS:
Effortel Technologies, launched in 2005, is an
MVNE also operating as an MVNO in joint ven-
ture with the French retailer Carrefour. Either as
an MVNO or supporting other virtual operators,
Effortel is active in six countries through a central-
ized platform operating in Brussels, Belgium
(see figure 5).
The MVNOs supported by Effortel comprise a
subscriber base of approximately 1,000,000. The
virtual operators belong to two of the four catego-
ries described in section 1 above (see figure 6).
Effortel Technologies provides back office
services (application platform, subscriber man-
agement, billing and Top-up management, and
customer care) from a centralized location, based
in Brussels. The Brussels facility is linked to net-
work operators in support of specific country
operations through optical links. The central
location offers a common AMDOCS platform,
complemented with some home-grown BSS and
OSS systems, which can be adapted to support
specific feature sets and languages.
In addition to the conventional value-add of an
MVNE in terms of substantial reduction of entry
capex and ongoing opex , Effortel has the eco-
nomic advantage of central operations. The
Country Own MVNOs Other MVNOs Carrier Integration
Belgium Carrefour Mobile KPN Base
France Bouygues
Italy Carrefour Uno Mobile Daily Telecom Vodafone
Oman Samatel Nawras
Poland Carrefour Mova FM Group Mobile Free M
Plus
Taiwan Carrefour Telecom Chunghwa Telecom
Category MVNO Description
Branded / affinity companies FM Group Mobile Largest cosmetics network in Poland
Samatel Ethnic Indian/Pakistan/Bangladeshi MVNO in Oman
Retailers Carrefour Retailer in Italy, Taiwan, Belgium and Poland
Daily Telecom Ethnic Chinese MVNO in Italy
Figure 5. Effortel Technologies Deployment
Figure 6. MVNOs supported by Effortel
Source: Effortel Technologies
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10
benefit of the centralized facility is multi-fold. In
the first place, the ability to support a new entrant
from a central running location results in extremely
short time to market. For example, in case a new
network operator needs to be integrated to launch
the MVNO, it will require Effortel between three
and six months. If the MVNE is already linked to the
required network operator, the time to market will
shorten to one to two months.
Secondly, the central location allows the MVNE
to build economies of scale in infrastructure and
operations, which translate in lower costs to start-
ing MVNOs. In particular, this results in lower
set-up fees and a 40% price differential with other
MVNEs in a country where Effortel is already
operating. If the required country is a new one, the
cost advantage amounts to 15%. These differences
in economics can be translated to MVNO pricing,
allowing the new entrants to introduce highly dis-
ruptive offers, benefiting consumers and enabling
the capture of enough subscribers to rapidly
break-even.
Thirdly, by centralizing services and support staff,
the MVNE can provide a full range of services to
support the virtual operator from launch to ongo-
ing operations. For example, given the level of
expertise achieved in launching their own opera-
tions, the MVNE provides a complete portfolio
of planning services (legal compliance, market
research, offer definition, business planning, mar-
keting plan, technology implementation plan, and
network operator contract negotiation). These
services match very well the required capabili-
ties outlined in section 1 above as being one of the
MVNO critical success factors. In addition, Effortel
provides other tactical services required for
launch, such as service implementation (roaming,
activation, care, reloads and payments), promo-
tions, organization of sales channels, and supply
chain. Finally, the customary ongoing operations
support is also provided, from daily technical sup-
port to logistics and care. In this sense, the new
entrant coming from a different industry, whether
it is content distribution or retailing, can focus on
its own business and rely on the MVNE for all the
much needed telecom capabilities.
In addition to conventional economies of scale
derived from centralization, their reliance of a
best of suite systems architecture allows them
to reduce the time to market (driven by the need
to integrate the different system modules) and
decrease entry costs.
Based on the study of the Effortel experience,
it can be concluded that it is critical for these
providers to be organized around a centralized
facility that yields economies of scale of opera-
tions yielding lower entry costs to MVNOs. In this
context, multi tenancy platforms, defined as the
ability to manage several MVNOs independently
on a single platform, are critical to shorten time
to market and reduce costs, both at entry and
over the company life-cycle. Along these lines, a
best of suite systems architecture is extremely
convenient for MVNEs since it allows them to
reduce entry costs and speed time to market by
avoiding the need to integrate different BSS/
OSS components (CRM, Billing, SDP, etc).
5 For example, Daily Telecom, the ethnic Chinese MVNO in Italy supports 200,000 subscribers with only 2 local employees.
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11
4. TracFONE: rELYING ON aN MVNO
TO TarGET UNDErSErVED MarKETS
(UNITED STaTES)
The environment in the wireless industry in the
United States is highly competitive, with increas-
ing pressure on prices as prepaid providers
expand their coverage to underserved markets
in an effort to seek growth. Wireless penetra-
tion rates in the United States are high (about
95 %), with 73 % of existing customers on post-
paid plans. The prepaid segment remained, until
recently, largely underserved and has become a
major source of growth for wireless carriers. As
a result, we have seen the larger national carriers
such as Verizon, AT&T, and Sprint launch brands to
compete in the prepaid segment. In the last three
years, prepaid has become the dominant source
of industry growth (see figure 7).
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09
Postpaid Prepaid
Figure 7. United States: Share of Gross Adds
Source: Hudson Square Research
6 The countrys second largest MVNO, Virgin Mobile, had 5.38mn mobile subscribers at the end of 2008 after merging with SK Telecoms Helio, an MVNO aimed at the Korean market in the US. Virgin Mobile retained many of the features that set Helio apart, including exclusive handsets such as the Ocean 2 smartphone. Virgin Mobile, unlike TracFone, offered postpaid services on a rolling contract basis, meaning subscribers did not have to sign up to a minimum term. In November 2009, Sprint Nextel completed the acquisition of Virgin Mobile USA for US$483mn. The acquisition enabled Sprint Nextel to double its subscriber base in the US prepaid mobile phone market. The deal also helped Virgin Mobile in retiring its US$223mn debt. Other MVNOs include Beyond Mobile, 9278 Mobile, Liberty Wireless, O Mobile, Jitterbug Wireless and Global Talk PCS, the majority of which operate over Sprints network and have been the only growth that the operator has seen. AT&T does not record MVNO subscribers separately and has Locus Communications, JusTalk, Airvoice Wireless, DBS Communications, Voce and 7-Eleven Speak Out Wireless subscribers operating over its network.
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12
The US prepaid market is amply catered to by over
70 MVNOs. The largest of these is Amrica Mvils
TracFone, with a subscriber base of 15,912,000
at the end of Q2106. Tracfone has 38% of existing
prepaid market share. Prepaid wireless penetra-
tion is estimated to be 14% in the United States,
but is projected to grow to over 30%.
TracFone has been aggressively growing since
launch. During the second quarter of 2010,
TracFone gained 460,000 net subscribers, and
finished the quarter up 27.4% year-over-year. Over
the past seven years, the carrier has succeeded in
continuously increasing its subscriber base while
decreasing or stabilizing churn (see figure 8).
Part of the companys successful growth has
been the result of a continuous brand and prod-
uct renewal. Launched in 1996, the company
introduced three different brands: Net10 in 2005,
SafeLink in 2008, and Straight Talk in 2009.
TracFone launched Straight Talk services in more
than 3,000 Wal-Mart stores during 2009. The
Straight Talk brand offers five different value-
based rate plans: a $30 limited text, Web, and
voice plan for 30 days; a $45 unlimited plan for
30 days (targeted to middle income custom-
ers); a $135 three-month unlimited plan; a $270
six-month unlimited plan; and a $540 one-year
unlimited plan. Straight Talk indicates the MVNO
18,000,000 6%
5%
4%
3%
2%
1%
0%2003 2004 2005 2006 2007 2008 2009 2010
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
Subscribers
Subscribers Churn
Churn
0
Figure 8: Tracfone Subscribers and Churn (2003-2010)
Source: Company reports; Telecom Advisory Services analysis
-
13
intention to move upstream from the character-
istically low-priced ethnic segment into a higher
ARPU mid-market.
Revenues of $684 million increased 72.7% year-
over-year in the quarter. Data revenues grew
nearly 400% year-over-year and total service
revenues grew 60.4% year-over-year. On the
other hand, EBITDA decreased 8.0% year-over-
year to $73 million as a result of the fast pace of
subscriber growth and represents 11.6% of rev-
enue. ARPU increased 24.1%, to $12, from $10 one
year earlier. The growth was driven by increased
adoption of data and Straight Talk plans. MOUs
increased 172.8% for the quarter, to 210 from 77
the year prior.
The reasons for Tracfones success lie on its
streamlined full MVNO business model and low
cost structure, which allow them to cater to the
prepaid segment. In the first place, the com-
pany does not own any wireless facilities or hold
licenses. TracFone uses the networks of several of
the US mobile network operators, including AT&T
and Verizon, rather than the traditional MVNO
model where subscribers operate over a single
network (see figure 9).
Additionally, by leveraging its economies of scale
and relying on a streamlined operating model,
Tracfone has been capable of reducing its cost
structure. Tracfones blended operating expenses
per subscriber per month is $11.977, the lowest in
a sample of nationally deployed carriers, which
results in a significant cost advantage in addition
to allowing the MVNO to play a disruptive pricing
role in the industry (see figure 10 on page 14).
Its low cost structure is a result of the informa-
tion technology economies of scale yielded
by the large subscriber base. The operator has
internalized all subscriber systems, relying on an
in-house BSS architecture capable of processing
approximately 1 billion transactions per month.
Beyond lower operating expenses per subscriber,
Tracfone is able to rely on less expensive hand-
sets which reduce its customer acquisition costs.
Part of this advantage is driven by their ability to
piggyback on America Movils handset bulk pur-
chasing agreements. More than half of handsets
are subsidized. Three years ago Net10 plan was
launched with all traffic priced at 10 cent and no
handset subsidy.
In summary, Tracfone is an extremely success-
ful virtual carrier targeting the prepaid segment
in the United States, exhibiting an ability to con-
stantly innovate in terms of offers, thereby
allowing the player to gradually move up-market
Source: Wireless Intelligence
Product MNO Contract Date Signed
Tracfone ATT Dec 1996
US Cellular
Verizon Wireless
Net 10 ATT July 2005
US Cellular
Verizon Wireless
SafeLink ATT August 2008
US Cellular
Verizon Wireless
StraightTalk ATT June 2009
US Cellular
Verizon Wireless
T-Mobile
Figure 9. Tracfone MNO Contracts signed
7 Calculated from Wireless Intelligence data
-
14
within the pre-paid space, while having a strong
control on service economics. Along these lines,
Tracfone is able to leverage the parent (America
Movil) expertise in emerging markets to serve low
ARPU markets with a streamlined business model,
which combines seamless integration with multi-
ple mobile network operators, at-scale in-house
information systems infrastructure with fully vari-
able network economics, and a low cost device
line-up to reduce customer acquisition costs.
$60
(Reve
nu
e-E
BIT
DA
)/S
ub
scri
be
rs p
er
mo
nth
$50
$40
$30
$20
$10
$0
Regional Players
National Scale Players
ScaleDifferential
Sprint (2010)
Sprint (2006)
T-Mo
ATTVZ
Regional Carrier
USC
Metro
Leap
Tracfone
Low Cost Players
0 20,000
Subscribers
40,000 60,000 80,000 100,000
Figure 10. United States: Economies of Scale in the Wireless Industry
Source: Bank of America Merrill Lynch; Company Reports Telecom Advisory Services analysis
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15
5. VIrGIN MOBILE:
aN MVNO aS a POWErFUL BraND
ENhaNcEr IN a cONVErGENT OFFEr
(UNITED KINGDOM)
Virgin Mobile UK was the worlds first Mobile
Virtual Network Operator, launched in 1999 as
a private joint venture between One2One (later
T-Mobile) and the Virgin Group. Since launch,
Virgin Mobile had been one of the most success-
ful stories of the UK mobile phone sector. With an
initial focus on the 18 to 35 year old prepaid seg-
ment, the virtual carrier has built a base of active
subscribers reaching over one million.
However, the profound transformations that
underwent the mobile sector around 2005 raised
a set of different challenges for the carrier. In
addition to regulatory changes, the carrier has
witnessed increased competition in the prepaid
segment by aggressive players like Tesco and 3,
which limited its capability to continue growing.
This resulted in a process that led to a redefini-
tion of Virgins strategy. In April 2006, Virgin
Mobile was bought by NTL Telewest before join-
ing the quad-play of Virgin Media services when
NTL Telewest re-branded into Virgin Media in
2007. As a result of this, Virgin Mobile found
itself as an MVNO operating in the context of
Postpaid Prepaid
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
Q1 200
8
Q2 20
08
Q3 20
08
Q4 20
08
Q1 200
9
Q2 20
09
Q3 20
09
Q4 20
09Q1
2010
Q2 20
10Q3
2010
Q4 20
100
Figure 11. Virgin Mobile (UK): Evolution of Subscriber Base
Source: RBS; Wireless Intelligence
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16
the convergence of communications and media
(broadband, telephony, and cable TV), and serv-
ing a relatively high-end subscriber base offering
cross-selling opportunities.
At this point, the companys strategy shifted to
grow its post-paid customer base, by cross-selling
mobile services to cable TV and broadband cus-
tomers. Between 2009 and 2010, while the total
number of subscribers has declined, the com-
pany has seen the number of post-paid customers
double (see figure 11 on page 15)
This has helped increase ARPU in an environment
when most mobile operators have seen service
revenues and ARPU decline (see figure 12).
Analysts expect Virgins ARPU to reach 13.10 GBP
by 2013 and 18.98 GBP by 2015. This dramatic shift
in business model has enabled the carrier to sus-
tain quarterly revenues while reducing the number
of subscribers (see figure 13 on page 17).
Furthermore, quad-play penetration has increased
to 15 % of the customer base following focused
marketing to its existing cable and broadband
subscriber base. As of January of 2011, 536,000
of its 4,000,000 cable TV households had one or
more mobile postpaid contracts, while another
185,000 households had at least one prepaid
phone. By increasing the penetration of its broad-
band and cable subscriber base with wireless
Virgin Mobile UK Market
25
20
15
10
5
0
3Q06
4Q04 1Q0
72Q0
73Q0
74Q07 1Q0
82Q0
83Q0
84Q08 1Q0
92Q0
93Q0
94Q09 1Q1
02Q10
3Q10
4Q10 1Q1
12Q11e
3Q11e
4Q11e
Figure 12. ARPU Evolution: Virgin Mobile versus UK Market
Sources: BofA Merrill Lynch; Wireless Intelligence; TAS analysis
-
17
services, Virgin Mobile signals the success of a
convergence strategy anchored around an MVNO
business model. Cross-selling to the remaining
85% of broadband and cable customers repre-
sents a significant growth opportunity. Following
implementation of its convergent trategy, Virgin
Mobile will start running TiVO DVR applications
on mobile devices including an iPhone app that
will access TiVO remotely. In order to reinforce
its post-paid focus, the carrier has been offer-
ing a broad range of smartphones as part of its
device line-up, ranging from Blackberry models
to HTC Desire HD, to Samsung Omnia 7, featuring
Microsofts new operating system.
However, while enhancing the value proposition
and emphasizing cross-selling, the carrier contin-
ued paying attention to its cost structure. From
the beginning of operations in 1999, the joint
venture between Virgin and T-Mobile involved
leasing network bandwidth from One2One and
re-selling it under the Virgin Mobile brand. This
resulted in a very low cost base: for example, in
2005, the wholesale agreement was estimated to
be priced at 2.9 pence per minute, while CAPEX
as a percentage of earnings was estimated to be
2.1%. After the merger of T-Mobile and Orange
in the UK, Virgin Mobile transferred its long term
contract to use the existing network of Everything
Everywhere, the merged entity.
Revenues Subscribers
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09 1Q10
2Q10
3Q10
4Q10 1Q11
2Q11e
3Q11e
4Q11e
$180,000,000
$160,000,000
$140,000,000
$120,000,000
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$0
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
Figure 13 Virgin Mobile (UK): Subscribers versus Total Revenues
Sources: BofA Merrill Lynch; Wunderlich Securities; Wireless Intelligence
-
18
Under this model, assuming constant service
gross margins, the key controllable cost factor
remains acquisition cost. This is the reason why
the carrier has been focused in deploying low cost
distribution channels For example, Virgin Mobile
(UK) has been extremely successful in promot-
ing the web channel for distribution purposes. Of
all major mobile carriers in the United Kingdom,
Virgin Mobile has the highest proportion of activa-
tions online (see figure 14).
A reduction in subscriber acquisition, driven by an
emphasis on online sales, has enabled the company
to improve its profitability. Online sales were sup-
ported by a convergent customer care platform.
To sum up, Virgin Mobile has successfully
responded to changes in industry dynamics in the
United Kingdom, transitioning from a pre-paid
youth-oriented positioning to a post-paid focus
within a convergent broadband, cable TV, and
fixed telephony quad-play context. In this case,
the specific success factors include brand, cross-
selling capability enabled by high capacity CRM
systems, and web-based channel deployment to
control for acquisition costs.
70%
60%
50%
40%
30%
20%
10%
0%
T-Mobile
Orange 3
Virgin
Tesco O
2
Vodafone
TalkMobile
Online SiteCompany RetailDealerIn-bound marketingOther
Figure 14. Percentage of Subscribers Acquired by Channel
Note: Other includes online via another retailer website, on the phone to another retailer and dontknow/cant recallSource: YouGov/uSwitch Survey Results, May 2010
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19
6. cOMMON KEY SUccESS FacTOrS IN
ThE MVNO SEcTOr
In summary, the case studies of Effortel, TracFone,
and Virgin Mobile (U.K.) provide a good under-
standing of the key success factors for MVNOs and
MVNEs. Keeping a strong lid on controllable costs
(e.g. distribution, care), relying on flexible IT archi-
tectures which allow to constantly deploy innovative
offers, and creating an infrastructure that can rapidly
allow the virtual carrier to scale up remain the key
levers to creating value in this sector.
In order to rapidly achieve economies of scale
and break-even volumes, speed is of the essence.
Therefore, whether relying on an MVNE or in-
sourcing launch activities, virtual carriers need to
accelerate the initial set up of the business. Once
launched, flexibility remains critical. In particular,
attention should be put in implementing the enablers
of new product development and modification. For
those virtual carriers that develop a systems capa-
bility in-house, a packaged solution that comprises
an integrated suite of components (CRM, Billing,
SDP, etc.) that simplifies interfaces and, therefore,
changes to product delivery is critical.
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20
About the author
Dr. Raul Katz is President of Telecom Advisory
Services, LLC. He has over thirty years of
consulting experience in the telecommunications
industry in the areas of strategy, operations,
and information technologies. He is also
Adjunct Professor in the Division of Finance and
Economics at Columbia Business School, and
Director of Business Strategy Research at the
Columbia Institute for Tele-Information.
