Do we need MVNOs?

What is common to supermarket firm Tesco, coffee shop Tchibo, hamburger chain Hesburger, periodical Cosmo Girl, broadcasters MTV, ESPN and Disney, airline Easyjet and music bands the Twins, Nelly, and Kiss? All of them have tried to get into the telecom business as a Mobile Virtual Network Operator (MVNO).
What started in 1999, when Richard Branson’s Virgin brand started using T-Mobile’s network and spectrum to offer cellular services in the UK, has now become a global phenomenon with more than 350 MVNOs around the globe. MVNOs are a category of service providers who take bandwidth and infrastructure on wholesale rates from existing mobile operators and then resell them in the market with their own branding and tariff plans.
Indian telecom consumers will also get their own set of MVNOs soon. The Department of Telecom, in consultation with the Telecom Regulatory Authority of India (TRAI), is working on a policy framework to allow Mobile Virtual Network Operators to start cellular services in the country. This could potentially bring in another five-ten more new players into the Indian cellular segment, which is now the world’s fastest growing market.
But with as many nine-ten players already offering the lowest tariffs in the world, is there a business case for MVNOs? While incumbent operators believe that there is not much scope for MVNOs in India, virtual operators could be in vogue. Most of the existing operators currently have price as their differentiator. There needs to be a better value proposition than just voice and text bundles. MVNOs will play a key role in bringing about this paradigm shift with differentiated services and accessing untapped market segments. The partnership between Tata Teleservices and Virgin Mobile is an example in the Indian context. Virgin Mobile started the ‘Get paid for your incoming calls’ plan specifically targeted at the youth segment. Within five months of launching the service, Virgin has managed to get over 3 lakh subscribers.
The MVNO platform also provides global telecom majors an easy foray into the booming Indian mobile market. Since acquiring a new telecom licence in the country has become a daunting task, global telecom majors, including BT, Verizon and France Telecom, are all betting on entering through the Mobile Virtual Network Operators route.
As an MVNO, these telecom companies will be able to get into the mobile space quicker without owning any infrastructure or spectrum and at much lower costs compared to existing telecom operators. MVNOs will not only provide customers with a wider bouquet of services and value-added service but they will also serve to introduce greater competition, which should, in turn, bring down telecom prices. MVNOs also enable non-telecom companies to enter the mobile world. Their specialties, such as brand, content and distribution, are strong assets to create an attractive business proposition. Apart from customer acquisition, the benefits of non-telecom players becoming an MVNO are an enhanced customer relationship and more direct and easy access to the customer through mobile devices. An MVNO, such as a bank or a retail chain, is in a better position to afford razor-thin margins, leveraging the shared overhead costs by other lines of business, says a new report called Asia Calling: Taking on the rising MVNO wave in Asia from Ernst & Young.Issue of Sharing spectrum
But some of the incumbent operators, who are not in favour of opening the market for MVNOs, argue that the Government should first make sure that there is enough spectrum for existing players. But the fact is that the spectrum crunch is limited to metros and larger towns. It is not an India-wide issue. In the international market, MVNOs have so far evoked mixed reactions. Globally, there are about 350 virtual operators of which some have found success, including operators in Denmark who have captured nearly 25 per cent of the market from existing players. But others in the US, such as Walt Disney, have not found too much success. MVNOs have been successful only if they offer a ‘low frill’, ‘low cost’, ‘SIM only service’ to customers, and if they offer a differentiated service offering to a target segment and create a niche e.g. Carphone Warehouse in the UK has almost 1,700 stores which gives it the capacity to reach out to a large chunk of UK subscribers.

However, fearing erosion in their market share, existing mobile players including Bharti Airtel, Reliance Communications and BSNL have taken a stand that MVNOs may be irrelevant to the Indian market.
Reluctance from existing players could wilt the MVNO story because they may find it difficult to find an operator who would be willing to share infrastructure. Moreover, existing operators’ wish to protect their own brand name could result in a turf battle in case any of the MVNOs succeed.
But like it happened in other countries slowly and steadily, the operators will come around once they realise the value an MVNO brings to the partnership. Prospective MVNO companies have sought TRAI’s intervention to make it mandatory for the existing operators to share infrastructure.
There could be other challenges too. According to Ernst & Young, MVNOs have to compete with well-entrenched players where they usually have a strong brand presence. This could mean higher marketing and distribution costs for MVNOs as they rely heavily on branding.
MVNOs also are completely dependent on the host carriers’ network coverage and reliability, and depend on them for service upgrades. They will have to risk their brands for inferior service quality from the operators.
The necessity for MVNOs to compete on price in the short term, particularly in the low Average Revenue Per User (ARPU) Indian environment, exerts pressure on MVNO profit margins. As more players enter the market, they will drive down ARPU further, making the financial proposition less attractive. But Indian mobile services market is moving towards one that will be conducive for the entry of MVNOs, especially with a number of new licensed operators planning to launch GSM mobile services by the end of the year. New players such as Unitech and Datacom will have significant excess capacity available on their Networks. These operators will not be able to roll out their services to all parts of the country. This is where an MVNO can help them in competing with the existing national players. Some of the existing players, who are not in the top 2 or 3 in terms of subscriber base, will also have excess spectrum that can be shared with an MVNO. The other major catalyst for the emergence of MVNOs is the rollout of third generation (3G) technology based networks. As customers are migrated to 3G, the 2G network capacity becomes more readily available and the generally low 3G adoption also implies surplus 3G capacity. That’s an open invitation to desi brands such as coffee chain Barista, airline Kingfisher, broadcaster NDTV, supermarket Reliance Retail and banks such as ICICI to foray into the Indian telecom space as an MVNO.