The virtual wireless future

As new MVNO entrants accelerate, concerns have been raised about the danger of excess competition and resultant price commoditization. These worries are simply unfounded. Wireless is entering a new paradigm in which end user telecom and entertainment wallets first merge, then expand to create a far larger and more profitable market. There will be casualties, but the virtual and network carriers will rarely be among them. MVNOs will have the dual benefit of making the market more efficient on the cost side and turbocharging the uptake of services on the revenue side. While individual performance will vary markedly, A.T. Kearney believes that as a group, MVNO impact will be profound. Their presence will change the structure, economic flows and culture of the wireless industry for years to come.

The U.S. wireless market is experiencing the single biggest supply-side shock since the PCS auctions of 1996. Those auctions ultimately created a number of new wireless brands including Sprint PCS, AirTouch Communications and VoiceStream--key challengers to the then-dominant analog cellular incumbents such as Bell Atlantic Mobile. These new PCS players had a significant and positive impact on service innovation, pricing structure and overall wireless market growth. Today’s batch of new wireless entrants is different. They operate no network, but their impact will be no less significant.

New MVNO brands, such as Virgin Mobile and Disney, are indicative of a profound shift in wireless market drivers: from a voice-only market to one dominated by a proliferation of non-voice, value-added services. This new breadth of service--overlapping into the media and entertainment sectors, among others--is driving a paradigm change in which the depth of customer revenue streams through one provider becomes more important than the traditional focus on the shear number of voice customers. As customers use a mobile device to leverage multiple services they begin to select their service provider brand based on their lifestyle or industry. They develop an affinity with a meaningful brand.

On the consumer side, these services are often highly personal and unlike voice, their mix, usage and desirability will vary by user. In time, the supply-side of the market will be restructured from several generic wireless voice carriers to dozens of segment-focused ‘life services’ carriers who generate meaningful revenue from a smaller number of dedicated, high-usage customers. We will begin to see not one homogenous mass market but several groupings revolving around a compelling brand and service mix. These new brand-based ecosystems have the virtuous advantages of low churn, customer intimacy and high revenue per user -- a good thing for all market participants.

Based on our MVNO work, A.T. Kearney believes we are currently at the tipping point of this shift, one exemplified by the accelerating revenue and usage of data and other non-voice services. New segment-focused brands will have profound customer affinity and stickiness, strong marketing and expertly targeted services. Their growing ranks will speed value-added service growth and stabilize overall market churn.

Market evolution plays to the MVNOs’ strengths. Network quality will become a ‘table stakes’ element as wireless companies place more emphasis on segmentation and marketing prowess. New MVNO brands are in a strong position to appeal to their existing customer base. They will often lead the way in service innovation--just as Virgin Mobile has done in wireless pricing structure innovation--enabling rapid customer acquisition.

Not all MVNOs are created equal, but many wholesalers will also fundamentally alter the economics of the wireless business in a positive way. Retailers like Target, for instance, are able to sell to Target customers through existing Target stores more cost effectively than ‘generic’ wireless network operators. As such, they create more margin to be shared between both the carrier and the MVNO brand. In this sense MVNOs make the wireless market more efficient and will help bring the cost of acquisition down for the entire industry.

In addition, when one considers the synergies of cross-selling other MVNO brand services through the mobile unit and the compelling price per minute and per megabyte currently being offered by wireless carriers such as Sprint, MVNO margins can reach a high of over 40%. Average margins will vary, depending on the MVNO in question, from 20% to 40%. That range is highly attractive to many MVNO entrants. It is a far cry from the old days of wholesaling the identical generic wireless voice minute at a discount. Today’s MVNOs will create a unique value proposition to allow for robust pricing and will have little commoditizing effect on overall wireless pricing or revenues.

MVNOs are seeking to enter the wireless market because of its revenue growth potential, the large pool of churn customers, new emerging broadband wireless technologies and compelling MVNO economics. Indeed, work by A.T. Kearney in the MVNO field has identified over 10 new MVNOs that will enter the U.S. market within 12 months chiefly because of the value creation potential in wireless. By 2010 we forecast a steady-state of over fifteen MVNO brands made up of three large-scale entities, several others in mid-tier positions and a handful of small, highly niche brands. In aggregate by 2010 the MVNO market is forecast to account for over 15% of the wireless market, or more than 25 million subscribers. Large-scale players such as ESPN likely will be joined by medium-sized players such as EarthLink Wireless and followed by niche brands focused on segments such as ethnic minority groups. All will be selling compelling entertainment and other ‘life services’ in addition to advanced communication-centric offers.

At the same time, as seen in the UK market, all U.S. network operators will ultimately embrace MVNO wholesale business as they seek to both market their branded services and optimize their core network economics. Today A.T. Kearney observes three network operators that remain uncomfortable with MVNO support, although their position is changing rapidly. Four, including Sprint and Cingular, are now aggressively pursuing MVNO opportunities in a race to capture the best brands. Once an MVNO has partnered with a network operator and loaded a certain amount of customers, it becomes difficult to move these subscribers and helps lock the MVNO customer to the network. To separate from the carrier is not impossible, but doing so is, at the very least, a painful exercise. This highlights the importance of crafting a world-class MVNO contract through the support of an experienced consultant who can help negotiate margin protection to reduce business risk for the MVNO. If not undertaken correctly, this contract can become the Achilles heel of the MVNO model. Done well it can power a strong value-creating business.

Carrier choice will ultimately vary by MVNO, as a decision will be made based on variables such as network protocol, network quality, wholesale price and MVNO operational support capabilities. Each carrier will be strong in some categories and weak in others. An intimate understanding of these elements is essential for MVNOs. For instance, the fact that certain carriers currently have problems sending customer data records to MVNO’s in a timely manner needs to be understood.

Aside from carrier selection and deal negotiation, new MVNOs will need to craft a winning value proposition for their target customers--the core users of its existing brand--and supported by a business case built on assumptions rooted in fact and based on deep wireless expertise. This expertise is readily available and can be hired or rented. The same is true of ‘back end’ support structure--notably care and billing--where expertise is often available in abundance to help determine what course of action to take. The key here is the decision to ‘do-it-yourself’ or to leverage third party Mobile Virtual Network Enablers (MVNEs). These decisions will, to some degree, determine the risk-reward profile of the venture. MVNEs such as CSG Systems, Martin Dawes and Inphonic offer a variety of services to help bring an MVNO to market. Some carriers will also offer their platforms and existing billing systems for use by the MVNO.

These realities reinforce how much the US market has improved since consultants like me began to encourage Sprint to embrace wireless wholesale some five years ago. A new MVNO can now expect to find a welcome mat at the carrier doorstep and will be impressed with the availability of high quality vendors hoping to support their wireless entry needs.

While many financial analysts may be unnerved by MVNO entry, we believe the movement toward greater brand proliferation will improve overall market efficiency and help pay for expensive wireless broadband network buildouts required for next generation service delivery. As long as end users continue to expand their purchases of wireless services from simply voice to a whole host of other non-communications services, wireless will continue its growth and become one of the largest and most diverse industries in the world. An industry that can support many players. The trend toward ownership of customers that buy and receive a breadth of mobile services through the same company will serve to improve industry economics and allow MVNO companies to play to their strengths. MVNOs are good for wireless customers, good for mobile operators and ultimately good for America.

Andrew J. Cole is the wireless practice leader for A.T. Kearney.