The Great MVNO Challenge

The growth of the Indian telecom industry is impressive and heading for a new
leap despite the global financial slowdown. With over 350 mn subscribers, the
Indian telecom market is today the second largest in the world. And the fabulous
growth still leaves us with plenty of scope to expand in uncharted segments like
rural India.

Realizing the need of strengthening the market further and to make it more
competitive, the Indian government has finally woken up to the potential of
mobile virtual network operators or MVNOs. It has recently accepted Trai's
proposal for the entry of MVNOs in the domestic market, the detailed guidelines
of which are expected to follow soon.

Looking at the current industry dynamics, Western Europe comprises around 40%
of the worldwide MVNO subscribers. And the total MVNO market is expected to
account for 3% of the total mobile market.

Beyond the traditional consumer market, there is a definitive space for
enterprise services as well. But this would require credibility of these players
and have strong credentials in areas like security and PBX.

Mixed Response

An MVNO provides mobile phone services without having any spectrum and other
telecom infrastructure. It purchases air time from an existing player and
resells them to the customer. Many foreign players are keenly following
development in India, and do not want to miss the opportunity, given its many
advantages. The business model is expected to open new vistas for players who
intend to offer mobile services, but do not have the UAS license to do so.

Across the globe, the MVNO concept has received a mixed bag of successes and
failures. While Western Europe has seen significant buoyancy in its
effectiveness, both from the execution and functional aspect, a thriving MVNO
model has become difficult to establish in Latin America. So far it has not been
able to execute the number portability regulation, which according to experts,
is crucial to create a gratis-enterprise environment, ideally suited for MVNO.

Trai's announcement though has raised a set of debates on the relevance of
the MVNO model in the country. On the face of it the belief is that the model,
having worked fairly well in the western world, would work in India too. But in
India it is the volume of services that drives growth rather than the high
profitability of services. Also, looking at perpetually reducing tariffs,
shrinking ARPUs and low margins of operators, the success of MVNO can strictly
be questioned.

“Players who intend to enter the market should have a clearly identified
strategy and appreciation of the market. They also have to realize that price
sensitivity of customers is very high-expectations have been set by low costs of
voice and data services by operators. Thus, the players have to have a medium to
long term holding plan for the market-there is no space for quick profits here,”
says Avi Basu, CEO, Connectiva Systems.

Focus on the basic infrastructure is missing; good quality of service still
seems to be an uphill task; and the market has still not opened up in rural
areas. It seems like the existing MVNO model is complicated for the domestic
market, and except in metros like Delhi and Mumbai, it is not going to deliver
the required results.

“It is fairly easy to build a base of 10 mn subscribers after which
sustaining the growth is going to be a challenge,” says Samvit Raina, VP,
telecom solutions, Patni Computers.

The scarcity of spectrum is yet another issue that needs to be addressed. The
situation may get better if the Ministry of Defense releases spectrum in the
near future, but it is quite unlikely that operators will charter it out to an
MVNO.

Expressing similar thoughts, CS Rao, chairman, WiMax Forum says, “At least
for the next three years, MVNO is not a business case in India. This model is
primarily suited for matured markets. India still needs to build the momentum
over basics.”

Also, if not evaluated properly such deals can prove to be a menace for
existing operators, especially those with limited capacity. This could result in
a drop in the number of customers, create oblique price pressure and build
demand of their own guarded spectrum and bandwidth.

Says Shankar Allimati, VP, next generation networks, Tech Mahindra, “If a
wrong deal is made, the impact can be serious. If no deal is made, then other
MNO/MVNO combinations can create a competitive threat.”

“One hypothesis suggests that by offering concierge services to the affluent
section, MVNOs can maintain a steady approach in the Indian market. Another
business model could be to focus on customers who make low-cost international
calls such as those that have family abroad. We are looking at the MVNO
possibilities in India and have a strategy to offer solutions and services,”
Allimati adds.

Chasing New Rules

In the current period of slowdown, MVNOs can help operators to expand.
Considering that MVNOs' strength is in core competencies like sales and
marketing, network operators can focus on managing the network, expanding
coverage and increasing capacity.

It would also encourage companies to bring forth a wide range of deals,
services and innovative technology frameworks to meet new business needs. “MVNO
definitely holds a good opportunity for operators. It means profit for any
service provider. We are only waiting for the government policy. Once it is
there it will definitely excite operators including us,” says TV Sriram, VP,
Bharti Airtel.

The unfolding of the Indian mobile market to MVNO will certainly draw the
attention of new entrants. Recently, Nokia and Ericsson were reportedly
contacted, the Indian regulator over virtual mobile services. However, both
denied the speculation later.

According to industry experts, if materialized MVNO can help regional MNOs to
enter other regions and thus eliminate the expense of investing in a new license
or acquiring a local MNO. But this could also build up a tough competition
between existing operators across the region.

“An MVNO will help to reduce the total cost of ownership. RoI will
significantly improve and the market will see strong competition. However,
hiccups like delay of policies and guidelines can create roadblocks in the
entire process,” says Kiran Pande, president, ECI Telecom.

To be successful in the Indian market, MVNOs would need to segment the market
and align their business goals with market volumes. They can learn from
experiences of global players and schematize the prospects as per the needs of
the domestic market.

“There is a traditional MVNO model according to which Virgin Mobile in India
is doing a good job. Further, it would be really interesting if we can have a
rural localized MVNO. Can we have a village entrepreneur who is a specialized
MVNO with information suitable for that village? My view is that India will see
a few different models than what is available elsewhere in the world. We will
experiment with some new models of MVNO,” says Vivek Mohan, president, Alcatel
Lucent India.

For an existing MNO, it would be a big challenge to put in meticulous
research on the impact of a new business model. In addition, creating a place
for itself and gaining a substantial market share is also not going to be a
cakewalk. While the urban parts of the country have already reached a level of
stagnation, capturing new customers in rural areas would also take a while.

“No longer is basic VAS considered to be the differentiator. Operators can
add these services as easily as an MVNO can. Hence, more value offerings are
needed,” says Raina of Patni.

Satya N Gupta, chief regulatory advisor, SAARC region, British Telecom says,
“Will this model add value to the existing market in India? I don't think so.
First, there is no scope on the tariff front. In India it is already among the
lowest in the world. Second, it would also not make the right business case as
many existing operators face a tough task of grabbing customers.”

On second thought, many industry experts feel that new entrants will stay
away of targeting subscribers in rural areas altogether to avoid direct
competition with Indian MNOs, who are aiming for a big pie of new consumers from
this segment.

But much would depend on the guidelines and key government regulations
related to MVNO, intra-circle roaming, and introduction of mobile number
portability in the country.

“Implementation of MNP is essential to create a competitive environment in
which an MVNO can work. The case in example is Latin America where the MVNO
model could not really pick-up, owing to non-implementation of MNP despite high
mobile penetration and even higher percentage of post-paid subscribers,” says
Vineet Sirpaul, executive director, Nu Tek India.

Newly established 3G/4G networks would be ideal for MVNOs to offer high-speed
data applications (like videoconferencing, banking and travel applications,
etc). And it is likely that mobile operators will grab this opportunity to
generate more revenue to compensate the enormous cost of building 3G networks.

More Bottlenecks

Experts have raised doubts on MVNOs getting a fair deal to initiate business
offerings in India. Since it is the non-telecom firms who would primarily adopt
the MVNO model, there should be a clear elucidation from the government over the
FDI limit. The MVNO would need to bank upon value added services in India;
reliability on margins will not serve the purpose.

“MVNOs in this country are going to face a tremendous challenge because they
will have to work by sharing bulk minutes. Since most operators have very small
spectrum, sharing bulk minutes at low cost is going to be a big challenge for
their own financial viability. Therefore each operator will see its own business
case and then work on it,” says Anil Sardana, MD, TTSL.

While in the UK MVNOs focusing on international immigrant population are
doing reasonably well, other markets such as the US are confronted with a lot of
pressure because of high subscriber addition cost due to handsets subsidies.

In the US market, though rolling out of branded handsets is still a common
phenomenon, MVNOs with subscriber base of around 5-8 mn have not been able to
get the same deal as that of AT&T or Verizon. According to experts, these
companies have a subscriber base of 80-100 mn and can easily approach a handset
manufacturer to drive the costs lower.

The Final Say

In India, where most operators are in the race to offer the cheapest
tariffs, it would be exciting to see if the MVNO model can prove to be a
different case altogether. Though we have seen moderate success through Virgin
Mobile, who claims to be a franchise model and not an MVNO, to get better RoI
MVNOs will initially be restricted to the upper-end segment.

If Virgin Mobile tries to retain its franchise association with Tata
Teleservices and do not go for an official MVNO license, Virgin Mobile will be
able to enjoy a number of benefits. If the company does not go for a license, it
will be free from paying license fee, free from mandatory QoS regulations, among
other things.

“In the past the Indian media has talked about MVNOs. However, in India there
is no definition under any telecom law or regulation that defines an MVNO
outfit. The most common definition is that an MVNO is a company that buys bulk
minutes from an operator. Virgin Mobile has been launched as a brand of Tata
Teleservices. We do not sell bulk minutes and, therefore, this arrangement is
not an MVNO,” says MA Madhusudan, CEO, Virgin Mobile India.

Similarly, understanding the challenge of a profitable subscriber acquisition
also plays a vital role. If we go by statistics, over 40% of MVNOs fail within a
year of their operation and 15% struggle for margins.

“There needs to be a mutually acceptable and beneficial partnership between
the MVNO and network operator. An MVNO is successful only when both parties
offer a value proposition exclusive to them, and these offerings can complement
each other in the form of a strong and compelling product,” says Raina of Patni.
The second aspect would be to settle on the degree of control that the MVNO
would have over the operator's existing customer base.

“In an ideal scenario, the MVNO should be in control of customer relationship
which includes access controlling subscriber calls for specific behavior,” Raina
adds.

In addition to large investment in advertising and handset subsidy, there
would be a huge cost involved in call control tools like an SCP, and
establishing relationships with third party service providers like payment
managers, retailers, value added service providers, etc.

We have seen both successful and failed examples of MVNOs across the world.
However, to grow in the Indian market, MVNOs would need to bank on a
comprehensive roadmap, policies that should be very promising for prospective
subscribers and new business models. At the end of the day, both the operator
and MVNO should believe in the model, otherwise it would be a tough task to make
the MVNO concept a success in India.

Jatinder Singh

jatinders@cybermedia.co.in