Building a successful MVNO - Part 1

1.    Introduction

Many of the factors influencing an MVNO’s business success are the same as those you would encounter running any business: hiring, cost control, quality control, customer service, sales and marketing effectiveness, bad debt management and so on. We don’t intend to cover these more general questions in this series. Here we intend to look at some of the issues specific to MVNOs and provide some thoughts, based on years of experience, which might help you start your MVNO with the best chance of success.
We suggest you ask yourself 2 important questions:

  • why do you want an MVNO?
  • why would someone buy your product?

Your answers these two questions will provide you with a great deal of guidance for the implementation of your MVNO. Later we will look at some of the usual answers and how they influence plans regarding your:

  • wholesale deal
  • technology strategy
  • product
  • distribution and sales
  • brand strategy

But first we will introduce some basic concepts so that you have a framework to assist your understanding of the details of these plans.

2.    Basic MVNO concepts

a)    How does an MVNO work?

At its core, an MVNO is a simple business. It first enters into a contract known as a Wholesale Agreement with a Mobile Network Operator (i.e. one of the, usually three or so, companies in a country which have acquired mobile radio spectrum rights and which have installed mobile base stations to which subscribers’ mobile phones connect).
This Wholesale Agreement allows the MVNO to sell mobile connections to customers in return for paying certain charges to the MNO.
MNOs typically enter into these contracts in order to enhance their competitive position in the market by working with MVNOs to help acquire more subscribers onto their networks.

b)    How does an MVNO make money?

MVNOs make money by taking a margin of the amount that their customers spend through the MVNO for their mobile phone costs.
There are two ways this margin is made, these are referred to as: Cost-Plus and Retail-Minus.

  • Cost-Plus

On this model, the Wholesale Agreement stipulates a set of charges which the MVNO must pay the MNO for voice minutes, SMS messages and MBs of data. The MVNO then adds a margin to these wholesale costs and charges the marked-up cost to their subscriber base.

  • Retail-Minus

On this model, the Wholesale Agreement allows the MVNO to sell products at specified prices. In return the MVNO is given a set percentage of the total amount paid.

c)    Do all MVNOs require a lot of technology?

No, not necessarily. Aside from the obvious differences between the Cost-Plus and the Retail-Minus models, there are significant differences in the ways that MVNOs approach their technical operations.
Some MVNOs do not bother with a technical implementation at all. This can be achieved in one of three ways:

  • You resell SIMs obtained directly from the MNO. This is known as a Reseller approach and typically operates on a Retail-Minus model. Realistically, these MVNOs are little more than distributors, however, their low overheads can lead to worthwhile profits
  • You enter into your own Wholesale Agreement and work with a Mobile Virtual Network Enabler (MVNE) which manages the technology operation
  • You work with an Mobile Virtual Network Aggregator (MVNA) which manages both the Wholesale Agreement and the technology for your MVNO

Other MVNOs are distinguished by their commitment to managing their own technology. These can range from only a small amount of technical implementation (Light or Thin MVNOs), through more complete technical implementations (Heavy or Thick MVNOs) up to a complete network implementation operating essentially the same technology as an MNO, minus the radio base stations (Full MVNOs).

If you are not sure which approach will work best for you some MVNE/A companies can enable you to start working on a flexible model which can grow with your business. You can start on an MVNA basis which will give you access to the Wholesale Agreement and technology implementation of the MVNE/A company (this requires minimal investment at start-up). If this is successful you might like to negotiate your own Wholesale Agreement but then migrate to the MVNE/A’s MVNE platform, while using your own wholesale terms. If you then want to migrate to your own technical deployment this option may be open to you at a later date. If you are interested in taking this approach it is important to check that the MVNE/A will support this migration path.

d)    I need to offer the same (or better) tariffs than my competition – can I do this?

As with any product, the price you offer your products to your customers depends on two key inputs: (a) your Costs (wholesale + operating) and (b) your desired net margin.

Wholesale costs generally vary with the size of your business. If you are in a position to guarantee the MNO a very large wholesale revenue and you are prepared to back these up with minimum commitments (i.e. you will commit to pay the MNO whether or not you are successful in selling the full amount prescribed in your Wholesale Agreement) you have a good chance of obtaining a low wholesale price.

It is unrealistic, however, to think that an MNO will give you the same rates as their largest wholesale clients without a commitment to a similar overall expenditure.

In Building a successful MVNO - Part 2 we look at your overall objectives for your MVNO and in Building a successful MVNO - Part 3 we examine product considerations.