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Carriers and vendors must work together behind the scenes to build a private-label mobile phone service
When Virgin Mobile announced that it had closed a deal with Sprint PCS to become a mobile virtual network operator (MVNO) in October, American businesses paid attention. Suddenly, the promise of MVNOs seemed tangible: Companies can make extra revenue or increase customer loyalty by reselling airtime that they purchase from the traditional wireless carriers and rebrand under their own names.
But prospective MVNOs can't go it alone. They must weave a web of partners and vendors to support their efforts. Those pursuing the MVNO strategy need a connectivity partner, cash, a customer base, and a sales channel. Most important, they need unique and compelling data services.
The most indispensable partnership for U.S. MVNOs -- teaming with a network operator to carry voice and data traffic -- is also the most difficult one to set up. Striking deals with U.S. network operators is dicey for several reasons: Besides struggles over the wholesale price of network time, U.S. carriers want partial ownership of the new venture, says Patrick Boyle, head of the consultancy MobilePath. They don't want to simply rent out their networks and let someone else maximize their value. If the MVNO is successful, the carrier expects to share in the upside.
Carriers are also afraid that MVNOs will steal their customers. Kayvan Shahabi, a partner at consulting firm PRTM, says that it remains to be seen whether wireless network operators can simultaneously appeal to the broadest market possible and also target smaller segments. MVNOs, he says, should pitch potential carrier partners on their ability to focus on particular audience segments. Adventis analyst Andrew Cole says that the first U.S. MVNOs will target "underpenetrated portions of the market," such as low-income people and youth (research firm Yankee Group pegs wireless penetration among U.S. teens and young adults at 35%, slightly below the nation's overall penetration of 38%). Because the carriers haven't successfully reached these segments, Cole says, they shouldn't mind partnering with other businesses that can.
While U.S. carriers seem reluctant to work with companies that want to form MVNOs (Sprint and Virgin negotiated for nearly a year before reaching their October agreement), they may warm up to the idea. Forrester Research surveyed senior executives at 30 European mobile network operators and found that, despite some reluctance to deal with MVNOs, the average interviewee expects to host two MVNOs by 2004 and believes that MVNOs will contribute 6% of operating profits that year.
But U.S. carriers are mum about the prospects: For example, AT&T Wireless says any comments to the press could spoil future deal making. Neither would Cingular Wireless comment. But Kathryn Condello, vice president of industry operations for the trade organization Cellular Telecommunications and Internet Association (CTIA), says U.S. carriers will consider any viable business opportunity, including MVNOs, because they hope to defray the costs of their network upgrades with revenues from mobile data.
There's an advantage in firming up relationships with existing customers through an MVNO service, but actually turning a profit is far from a sure thing. MVNOs have three sources for actual revenue: handset and airtime sales, payments for value-added services such as games and music, and m-commerce sales. Because MVNOs need to buy airtime and resell it, their margins on basic voice services will be too narrow to draw any considerable revenue, says MobilePath's Boyle. To turn a profit, MVNOs have to establish and sell targeted, value-added services. Boyle says 100,000 subscribers could make a profitable MVNO if it could successfully bill each one from $3 to $5 a month for premium services beyond basic voice service.
Although the rewards of launching an MVNO remain uncertain, the costs are clearer. Cole estimates that it could cost more than $100 million for an MVNO that wants to own and operate everything except the network itself, including call centers, customer care services, and the mobile portal. On the other hand, an MVNO that outsources operations and pays content and service providers based on the number of subscribers served (those numbers include marketing costs), might spend as little as $5 million. Cole says that the upfront cash outlay depends on how much of the operation the MVNO wants to outsource. When the MVNO works with partners to handle customer service call centers, billing, and turning service on and off (a process known as provisioning), the deals usually are based on the number of customers served, he says. That means that the MVNO has to shell out less while it's new and small.
Virgin Mobile and Sprint PCS say their deal provided that Virgin would kick in $50 million in cash and that Sprint would contribute an equal amount in services. Richard Siber, head of the global wireless practice of consulting firm Accenture, notes that marketing can eat up a lion's share of the initial investment. "When you think about what it takes to create a brand," he says, "even five times that amount wouldn't be unreasonable [to extend the brand].”
Those marketing costs can be minimized if the MVNO has an existing customer base and a channel for promoting the new service. There are two different kinds of customer base that will work, Boyle says:
In either case, he says, MVNOs must have a way to sell the handsets and services, whether through existing stores or through partners.
Still, analysts agree that all the marketing in the world can't replace smart custom data services that really fit an MVNO's audience. MVNO wannabes should use their understanding of their customers to create unique services, rather than licensing existing applications from third parties, says Pyramid Research analyst Elizabeth Bramson. For example, in the U.K., Virgin Mobile created a service that lets customers use their handsets to listen to new songs from Virgin artists, then push a button to buy the CD. Boyle suggests that a sports team could sell branded phones and data services to fans; perks could include new faceplates at the beginning of each season, the opportunity to buy advance game tickets over the phone, and messages from the coach and team.
Application development partners should make it easy to turn various applications on and off for users, as well as to add new ones. That's because MVNOs and traditional wireless carriers will constantly compete with each other on the services they provide, says Bramson, just as they do now in the mobile voice market.
The need to focus on value-added services doesn't mean that MVNOs can ignore the basic, generic services that all users demand, she cautions: "A brand like MTV will always be a little more attractive to the 15-to-25 age group, but if it's not offering email or an instant messaging service, forget it."
Not every business is suited to launching a virtual mobile service. Forrester Research says a successful MVNO candidate needs four attributes:
According to Boyle, discount broker Charles Schwab is considering the MVNO strategy. With its strong brand, 7.6 million active accounts, a sharp focus on investing, desirable and timely stock market information, and the successful launch of an online brokerage in its arsenal, a Schwab-branded MVNO could certainly be a success. The key for Schwab or any other MVNO wannabe is to hone in on that intriguing, must-have mobile data service that only it can provide to its customers -- then market the heck out of it.
Copyright © 2002 CMP Media. Published in M-Business, March 2002 issue.