Is the MVNO Model Doomed?

AT THE END OF SEPTEMBER, Walt Disney Co. announced it is shutting its mobile ESPN wireless telephone service and licensing it to existing mobile providers. This development spotlights the complexities of the market for branded cell phone services offered by MVNOs and has raised a series of questions. Some industry observers argue ESPN Mobile is the first MVNO failure of many more to come, while others question the business model for MVNOs and call for increased regulatory protection for MVNOs.

To answer these and other questions surrounding the financial outlook for MVNOs, one needs to understand the relationship between MVNOs and their critical partners, mobile network operators (MNOs) the established, facilities-based companies that provide the wireless services that MVNOs rent and resell to consumers.

MVNOs differ from ordinary resellers of mobile services in two respects. First, they frequently do not have any prior telecommunications experience. Second and more importantly they rely on brand appeal and reputation acquired in other lines of business to cross-sell mobile phone services. In the case of ESPN Mobile, the sports conglomerate attempted to leverage its expertise and brand name to deliver its content on ESPN-branded mobile phones to sports fans. MVNOs frequently target customers in particular niche market segments for instance, teens, children or budget-conscious consumers. In the United States, many MVNOs also focus on the prepaid market segment.

There are now more than 250 MVNOs worldwide. By 2005, more than 50 MVNOs were operating in the European Union while about 42 providers were operating in the United States. Total MVNO revenue in the United States is expected to rise from $9.6 billion this year to $29.6 billion by 2010.

MVNOs provide various benefits to MNO partners. They include, among others, established access to market segments, such as prepaid cellular phone service users, where MNOs have not succeeded traditionally. However, MVNOs can go after the same customers as an MNO, thus leading to the potential cannibalization of the MNOs customer base. This threat has led a number of regulators in Europe and Asia to force MNOs to open their networks to MVNOs. Thus, rather than being able to freely accept or reject an MVNO proposal, MNOs in these countries are forced to provide access to all MVNOs, frequently at regulated rates. In light of ESPN Mobiles struggles, some industry observers note that regulated access might have prevented ESPNs failure.

The economic justification for open wireless access, however, is very weak. The dramatic growth of MVNOs in a few short years in both the United States and Europe indicates prevailing mobile market circumstances favor spontaneous emergence of voluntary MVNO-MNO relationships. Based on surveys of the U.S. and E.U. member states, the empirical evidence strongly suggests the case for regulatory intervention is all but nonexistent. Moreover, ESPN Mobile clearly obtained wholesale access to an MNOs (Sprint Nextel Corp.) network. Thus, it failed on the retail market, meaning it did not add sufficient value over other existing competitors in the industry.

Will ESPN be the first of many failures? The long-term prospects of MVNOs will depend on how effectively the industry can move beyond a cost-based market strategy and exploit opportunities with mobile commerce, global positioning system applications, personal databases and other offerings. With prices at or near marginal cost, future MVNO success stories will not be based on further discounting but rather on value-added positioning. Some MVNOs will achieve this by relying on their brand value (Disney), innovative marketing (Ampd Mobile Inc.), or expansive distribution channels (7-Eleven). Other MVNOs or prepaid operators will succeed in this market by targeting the needs of substantial and well-defined groups, such as ethnic groups, travelers and youths. The greatest survival challenge for MVNOs, as well as the greatest source of growth, is the ongoing process of convergence and the opportunity to offer a combination of voice, video and data over any one of several alternative platforms. The challenge for MVNOs is to continually introduce new features and services in order to stay ahead of the game.

Disneys failure with ESPN underscores the importance of providing mobile phone service to consumers offering more than simply a different brand name. In order to succeed, MVNOs must target a niche market more efficiently than the established players and provide some kind of added value. Much like any other line of business, if an MVNO cannot add value to consumers beyond the current offerings, it will join the ranks of ESPN Mobile. In this respect, there is the possibility of a shake-out where MVNOs with a weak value proposition or an unsound business plan will be forced to exit the market. Such a shake-out, however, should not be misinterpreted as a failure of the MVNO business model, as demand and potential for sound MVNOs remains strong.

Christian Dippon is a vice president in NERA Economic Consultings Communications and Intellectual Property Practices and co-author of a new book, Mobile Virtual Network Operators: Blessing or Curse? which was published this fall.

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