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Posted: 08.17.05

MVNO a No No?

Rather than go for a meaty phone and service plan from one of the major U.S. network operators, you bought your teenagerís phone and plan from a smaller company called Virgin Mobile. Not only was your motivation based on cost, but also on image. Oh, wait; most parents donít care all that much about their teenís image. But I digress.
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By Eric M. Zeman




Whether or not you know it, you’ve just subscribed your teen to a mobile virtual network operator, or MVNO. An MVNO is a mobile operator that does not own its own spectrum and typically does not have any network infrastructure to speak of. Instead, MVNOs make arrangements with traditional network carriers to buy minutes on that carrier’s existing network, which the MVNOs then turn around and sell
to their own heavily-marketed-to customers.

How do these partnerships benefit the carriers and MVNOs? For the MVNO, there are no real start-up costs barring entry to the market. They don’t need to spend $100 million to build a wireless network across the country. Instead, they pay the carriers a fee of $1 million to $2 million and then several dollars per month per subscriber. The carriers then receive that monthly revenue with no cost for acquiring the subscribers.

Virgin Mobile, for example, partnered with Sprint PCS and did a brilliant job of marketing its service to teenagers in the U.K., Canada, Australia and the United States, to the benefit of both Virgin and Sprint. Virgin has 3 million subscribers and, based on this success, Sprint opened its network to dozens of MVNOs, many of which are set
to enter the U.S. market. Both Cingular and Verizon Wireless have similar partnerships in place with other MVNOs.

Yankee Group recently noted that the MVNO market will reach $10.7 billion in service revenue by 2010, and it will be broken into three tiers. Several large MVNOs (such as Virgin and Movida) will make up the first tier, accounting for the bulk with 24 million subscribers. The second tier of medium-size MVNOs will account for roughly 2.5 million subscribers. Finally, a dozen small MVNOs will make up the third market segment, accounting for the remaining 2.5 million subscribers. “The growth of the MVNO market has great potential to influence the long-term viability of the wireless industry,” says Marina Amoroso, Yankee Group research analyst in the Wireless/Mobile United States Decision Service.

Strengthening the Relationship

An MVNO’s relationship to the hosting carrier varies by market, but they generally work independently of the operator and set their own rate plans. “The partnership with the network is critically important,” notes Mark Howell, president of Brightpoint, a mobile virtual network enabler. “They have to establish a good relationship with the network carrier they are going to use as the backbone for their business.”

Nowadays, carriers typically don’t get a stake in the MVNOs they host (aside from the monthly revenue), as Sprint did with Virgin. Not only do they not share in the MVNOs’ success nearly as much, but they don’t have as much control over these ventures should they go haywire and start hurting a carrier’s brand.

David Bottoms, Sprint’s VP for strategic partners, works hard to prevent this scenario from unfolding. “I get enough control [over MVNOs] by virtue of how I structure the agreements with them. For instance, an MVNO that targets Hispanics can’t start catering to Koreans. Yet, most customer segments aren’t as clear-cut as that.”

The carriers’ strength lies in the contracts they sign with the MVNOs. For others, the segmentation of the MVNO market allows them to stay ahead in the race to particular niches. Cingular, for example, is releasing its own GoPhone prepaid service for kids, teens and small businesses. “Carriers need to be very smart about how they split their brand equities,” says Marc Lefar, Cingular’s chief marketing officer. “The idea of simply opening up a network is not doing any good to anybody.”

Filling the Enterprise Niche

Raja Narayanan, VP of mobility solutions for Toshiba Digital Products Division and the Toshiba MyConnect manager, believes MVNOs are good for the enterprise. “In Toshiba’s case, at least, it can offer a worldwide call center network as well as a Web management portal for enterprise administrators. Also, MVNOs are flexible. They can add services and applications quickly, according to the needs of the enterprise and the introduction of new technologies such as VoIP or 3G.”

Brightpoint’s Howell feels that MVNOs will benefit the enterprise because “MVNOs specialize in a particular customer segment with a specific offering. The device itself and the way it and the service all work together can be structured toward specific user segments. In the enterprise environment, a user may be after a high-end smartphone device with high data usage, so targeting applications and services to those users can be marketed and delivered as needed.”

There are other aspects to consider. Two-thirds of Americans work for small businesses that are far from making it onto the Fortune 1000 list. Many of these small businesses run on tight budgets that don’t have a lot of wiggle room between profitability and loss. For them, the option of having a pay-as-you-go cell phone for employees who must travel and remain in contact can make the most sense, given their more modest budgets. The low-cost devices and services provided by MVNOs can be the perfect means for avoiding multi-year contracts forced by the bigger networks, which are also inherently inflexible should the business model for that small company change suddenly.

The bottom line, as with all things, is to do the research. When considering supplying your mobile workers with cell phones, be sure to look at all the options and choose the operator and device based on their needs. Of course, when you have providers as cool as ESPN, Disney and others lining up to sell hip services and content, letting image slip into the decision-making process is not entirely unforgivable. •



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