Mobile virtual network operators (MVNOs) have been a talking point in Asian markets for a while now and Sequoia’s recent series C investment into Circles.Life has put it under spotlight again.
But are they a viable business model and will they be able to sustain the traction it has been receiving?
First, a little background.
So what are MVNOs?
MVNO is a telecom network service provider that does not own the wireless network infrastructure over which it provides services. Traditionally, the idea of an MVNO business is to offer general telecom services via non-bundled, low cost, and flexible packages. This is based on discounted bulk volume purchases it makes from host mobile network operators (MNOs) in the market.
This way MNOs can make a small profit out of unused extra capacity instead of letting it run into a loss.
MVNOs can afford to offer reduced retail prices because they don’t have to shell out money for licenses and build or maintain the network infrastructure. This way they can focus on marketing to customers and build their own brand.
How did they start?
The origin of MVNOs dates back to Europe in early 1990s. Although Nordic countries (especially Denmark) were pioneers in seeing the potential in MVNOs as a cost effective model, Virgin mobile in the UK was the first ever MVNO launched in 1999.
Europe is now the biggest and most mature market with Germany being one of the largest domestic MVNO markets and UK being one of the most crowded with more than 100 MVNO operators.
A number of factors led to Europe being a more conducive market early on. In 1990s market liberalisation opened up the telecom market to competition which was earlier monopolised by government services. They have had almost 20 years to grow and develop helped by highly supportive and regulatory frameworks. European markets now enjoy high mobile penetration rates (85% of the total population) and the mobile industry contributes to nearly 600 billion euros to GDP – great incentives for MVNOs to operate.
However, the MVNO business in Europe is not free of its own challenges. It has now become extremely competitive, saturated with difficult growth prospects, and reduced ARPUs from voice and data.
Will MVNOs work in Asia?
The MVNO business has seen a lot of back and forth in Asia in the last 20 years. More recently, there has been a new wave of MVNO investments since 2017, with new companies announcing services in Korea, Japan, Singapore, and India.
Frequent travellers would have noticed roaming devices sold or put on rent at airports with unlimited local data to avoid high roaming charges.
Although operators realised the issue of losing revenues from roaming services, there will still be some room to play with due to multiple product packages and operational efficiency. Also, with the new e-sim technology and IP calls, users might be able to shift from one network to another without switching sim cards or devices, just like roaming services on MNO networks.
The issue of customer retention will become a long term concern since it will be easily affected by the cost of data acquisition, incentives, and regulations. One recent example is South Korea where operators once lost customers to low-cost MVNOs after their launch. However, users came back to the three major operators within the first nine months after MNOs brought down the prices of unlimited plans. According to Korea Telecommunications Operators Association (KTOA), SK Telecom, KT and LG Uplus gained 52,000 net new users from January to September of 2018.
However, with the blessing of high-speed connection and enormous bandwidth brought by 4G infrastructure, the new generation MVNO has started to shift their attention to data based services with capacity to support features such as OTT for travellers, IoT connections for platform and SMS for Enterprises. Most of these new players come with background of digital services, ICT hardware and enterprise solutions as Rakuten, iflix, Snail, Lenovo, Xiaomi, Redtea Mobile, Tesco, Yongyou etc.
Although the business model still needs some time to solidify since operators are also exploring it, the potential is definitely there especially with the new wave of 5G network which will provide a more enterprise-friendly network structure.
The whole of Southeast Asia is currently experiencing a digital transformation from consumer market to enterprise services. However it is quite challenging as growth demand for digital payment, social networks, cloud services, entertainment content, e-commerce, logistics etc each represent a fragmented market from country to country and sometimes from city to city.
Most importantly the foundation of digital technology is quite weak in general and operators do call for external support to monetise from the infrastructure investment of 4G and future 5G. Encouraging MVNO seems a good way to digest the redundant capacity and reducing the financial risk.
Will MVNO be able to carry this task and bring new disruptive innovation for a business operated on top of data capacity? It is still hard to tell, but Sequoia may have found their own answer. At least Taiwan is a market where all major players offer unlimited data package at low rates. You need to find your own value to customer since general telecom services may not be a good business model on its own.