Masterclassing Connect

Let the MVNO Battle Commence

David Murphy

John Strand, CEO of Strand Consult, looks at the growing importance of Mobile Virtual Network Operators (MVNOs), and considers which UK operator has the best MVNO strategy

John Strand Strand Consult

After the merger between Orange and T-Mobile was approved, the UK mobile market is facing a paradigm shift, and its one in which MVNOs will play a central role in the battle to attract and retain the highest number of customers, in the most cost efficient manner.
Up to now, the English mobile market has been divided between the four main operators (Orange, T-Mobile, Vodafone and O2), with a smaller share of the market going to the 3. In reality, the market has had four players that have battled over having the dominant market share - but without success. Almost everything has been tried, including acquiring shops, launching more shops, launching mobile phone models that one operator has had exclusive rights to market and sell etc. None of the above strategies, however, has resulted in any one of the four operators having a dominant share of the market.
Both Orange and T Mobile have admitted that in a market with decreasing prices and increasing costs of building and running future mobile networks, they need to have a market share of more than 25% to create a business large enough to give shareholders a sensible future return on their investments. The merger between Orange and T-Mobile in the UK proves that the price development on mobile broadband, combined with the general price development will be one of the driving forces behind the market consolidation we expect to sweep across Europe during the coming years.

Dangerous game

Future mobile operators need to focus on two things: reducing acquisition costs and being able to build and run a factory large enough to ensure that they will have the most cost efficient factory for manufacturing voice, SMS and data. Operators that believe that they can charge more for their services based on a premium brand are naive and are playing a dangerous game with their shareholders money. Telephony is becoming increasingly commoditised.
Strand Consult knows that the most successful European operators today are those with the most aggressive MVNO strategy, and we know that a number of mobile operators have used MVNOs in combination with effective cost-reducing programs to increase their profitability. One of the best examples is how Stan Miller from KPN Mobile international, together with his team at E-Plus in Germany, reduced the companys mixed SAC (Sales Acquisition Cost) by 56% and increased its EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) from 22% to 37% in just 12 months. Today, three years later, it has passed an EBITDA margin of 40% and Vodafone and T Mobile's margin in Germany has decreased from more than 40% to around 30%. You can read more about this here.
MVNO strategy
In the UK, there is no doubt that the changes in the market after the merger between Orange and T Mobile will result in all the other operators needing to examine how they can use MVNOs as an active part of their distribution strategy, and as an efficient tool to reduce their SAC. The big question is how each individual operator will implement its MVNO strategy, and the significance this will have on the UK market in the short, medium and long term.
In practice, we often see operators use one of two strategies; a segmentation strategy where they only sign deals with MVNOs doing business in market areas where the operator is not strongly represented (MVNOs as a supplement); or a strategy like E-Plus, where the operator welcomes everyone on its network and combines its MVNO strategy with a number of MVNEs (Mobile Virtual Network Enablers) as an efficient tool to quickly launch even more MVNOs.
We believe that the UK will experience an explosion in the number and types of MVNOs on the market, and we believe that the market will come under pressure from a combination of the existing large MVNOs (Virgin, Tesco, Lyca, Labara etc) and a number of new market players - a scenario we have already experienced in Denmark, Norway, Germany, Belgium and the Netherlands. Simply put, the UK is the next battlefield, and the merger between Orange and T-Mobile is the fuse that will ignite competition and fuel the role of MVNOs in the future.