Telefonica O2 and e-Plus merger: MVNO access strengthens competition and wholesale and retail levels

Last week’s approval by the European Commission of the acquisition of e-Plus by Telefonica Deutschland (O2) became possible through concessions at wholesale level. Telefonica committed “to enter into capacity based wholesale agreements with one or several (up to three) Upfront Mobile Bitstream Access MVNOs (“Upfront MBA MVNOs”) in Germany prior to the closing of the merger.” This broadly follows the capacity based MVNO deal offered by Hutchison in Ireland to gain approval for its takeover of O2 Ireland.

Germany already has a vibrant MVNO market, not least as a result of the e-Plus multi-brand wholesale strategy. In regards to the wholesale markets, the Commission is satisfied that these MVNOs will not be harmed by reduced competition at network level. The existence of competitive MVNOs also acts as an insurance against unwarranted retail price hikes and hence alleviates the Commission’s concerns in the retail market.

The merger will take costs out of the mobile industry in Germany so shareholders will benefit. Telefonica Deutschland further committed to “make the following offers: (a) a spectrum offer consisting of the lease of 2×10 MHz in the 2.1 GHz band and of 2×10 MHz in the 2.6 GHz band; (b) a national roaming offer; (c) a divestiture of sites offer; (d) a passive radio network sharing offer; and (e) a sale of shops offer.” An Upfront MBA MVNOs might buy some spectrum. However, the Mobile Bitstream Access effectively provides access to capacity. There is little point in owning spectrum; indeed such a limited spectrum holding would make little sense without immediately entering into a spectrum sharing agreement with Telefónica Deutschland. There is little differences between this and the MBA MVNO arrangement.

Passive infrastructure sharing had been a feature of the German market for some time. Perhaps Vodafone Germany and T-Mobile will also look to increase the sharing of network resources, active and passive with each other and also with the merged Telefonica Deutschland and e-plus. Are we seeing the first steps of an evolution towards a national neutral host network with regulated wholesale prices?

With return of capital employed in the European mobile industry below that of some regulated utilities such as water and gas, investors may be better off by effectively pulling capital out of the mobile industry by means of outright consolidation or through sharing networks including spectrum, i.e. a “merger lite” strategy, becoming regulated utilities.

Noteworthy is that e-Plus was one of the four operators bidding for the 2x30MHz of digital dividend 800MHz spectrum in Germany which did not obtain any block. The outcome of the spectrum auction is likely to have been a factor in KPN’s decision to put e-Plus up for sale. In the next German spectrum auction only three operators will compete for spectrum, probably resulting in auction prices close to reserve prices. This is another reason for investors to be cheerful about the trend towards consolidation in the European mobile industry.

By Stefan Zehle, CEO, Coleago Consulting

Hutch – O2 Ireland acquisition approval: Hutch plays it well, the “Connected Continent” loses out

The conditions attached by the Competition Commission to the clearance of the acquisition of Telefónica Ireland by Hutchison 3G shows that the Commission is still desperate to maintain network based competition. H3G offered a package facilitating the market entry of two mobile virtual network operators (MVNOs), with an option for one MVNO to morph into a mobile network operator by subsequently purchasing spectrum from the merged entity. “H3G committed to sell up to 30% of the merged company’s network capacity to two MVNOs in Ireland at fixed payments. The capacity is measured in terms of bandwidth and the MVNO entrants will obtain a dedicated “pipe” from the merged entity’s network for voice and data traffic.”

H3G probably has the first MVNO customer lined up, or else the acquisition cannot go ahead. The likely candidate is UPC. UPC is one of the few telecoms providers in Ireland with a large enough customer base to be comfortable to take on the fixed cost associated with becoming an MVNO under these terms. With that, UPC would become a quad play company. This means that at retail level competition will remain vigorous while costs are taken out of the mobile industry. So far, so good.

However, it is highly unlikely that the MVNO would want to become an MNO with all the cost implications as well as the daunting prospect of participating in future spectrum auctions to stay competitive. Therefore, just like in Austria, Hutch played it well by making a spectrum divestment offer that is unlikely to be taken up. The Commission does not get it: In mature markets new network based market entry does not make sense. Consolidation is the name of the game for the European mobile industry.

MNOs are dominated by fixed costs. Because around 75% of their costs are fixed, profitability comes through scale. In contrast MVNOs are dominated by variable costs with the proportions of fixed to variable costs roughly reversed compared to an MNO. This means an MVNO is not operationally geared, has a lower risk of not achieving break even, and can operate profitably at a lower scale. Hence an MVNO can play in niche markets. The fixed cost deal offered by Hutch Ireland is clever from Hutch’s perspective because it offsets Hutch’s fixed costs with a fixed revenue stream, and is probably betting on a limited impact because only one player in Ireland is likely to have the ability to commit to a five year fixed cost deal.

The Commission missed an opportunity. In addition to the fixed cost MVNO condition, it could have requested a similar variable wholesale price undertaking as in the approval of Hutch’s acquisition of Orange Austria. A low wholesale price (€0.002 per Mbyte for data) not only serves as an insurance against unwarranted retail price rises, but creates the opportunity for players who are not MVNOs in the traditional sense. Innovative business models would use mobile access as part of a service, such as smart metering, automotive services, home security, M-Health, etc. and might even include handset manufacturers such as Apple or Samsung as well as OTT players. If innovators could find the same wholesale price and access conditions across the EU, we would be well on the way to overcoming the disadvantages associated with the fragmentation of the EU mobile industry and truly leverage the value of LTE mobile broadband.

By adopting a country by country approach to set conditions to clear consolidation among mobile network operators, the Competition Commission might address country specific competition concerns but does nothing to advance the “Connected Continent” agenda. Next up is the proposed acquisition of E-Plus by O2 Germany. Let’s hope for a better set of conditions which signals a harmonised, fast track merger approvals mechanism with the aim of advancing mobile industry consolidation in the EU for the benefit of consumers and investors.

 

By Stefan Zehle, CEO, Coleago Consulting

Telefonica O2 and e-Plus merger: a new 4th network operator makes little sense

Today the FT reported that in order to overcome objections to the proposed take-over of E-Plus “Telefónica has offered to equip a new German mobile competitor with spectrum”.  This is similar to the offer by Hutchinson 3 in the context of its take-over of Orange Austria. In the event there was of course no new network based entrant in Austria, the aim of the Telefonica O2 and E-Plus tie up is to take costs out of the industry by reducing the number of mobile network operators. At this stage of the industry life cycle consolidation at network level is expected. This is driven by high prices paid for spectrum and continuing high LTE capex while revenues remain flat or in decline. When free cash flow declines, capital has to be taken out of the industry simply to get back to returns that are not below the cost of capital.

The FT also reports that Telefónica promised concessions for MVNOs. Competition remedies at wholesale level in the form of a reference wholesale access price offer – similar to what was agreed to by Hutchison in Austria – are a much more effective remedy. This is particularly true for Germany which already has a vibrant MVNO market. Indeed E-Plus pioneered the multi-band MVNO strategy and hence concessions at wholesale level are likely to be impactful. Given the competitive MVNO market in Germany, regulating wholesale prices provides an effective insurance against retail price increases, which might otherwise result from the tie-up.

If indeed wholesale price regulation ends up as the key remedy, and this in Europe’s largest mobile market, we are one step closer to the structural separation of the European mobile industry into NetCos and ServiceCos.

Written by Stefan Zehle, CEO, Coleago Consulting

Consolidation in the European mobile industry is inevitable, but what path will it take?

It has been pointed out many times that the EU with around 100 mobile operators, serving a roughly similar size population as the USA, is hugely fragmented compared to the mobile industry in the USA. The historic reason is easy to understand, but the fight put up by Directorate-General for Competition of the European Commission to halt in-country consolidation is harder to understand.

In the model used to analyse the impact of mergers on retail prices, the Competition Directorate, assumes that retail prices will always go up as a result of a merger between two MNOs in the same country. It does not assume that the efficiencies brought about by a merger would, at least in part, be passed on to consumers in form of lower prices or better service in terms of coverage or access speeds.

Network sharing is encouraged under EU rules as long as it is limited to the Node B and RNC and excludes spectrum and the core. A great deal of cost sits in the RAN, and hence RAN sharing could be termed “merger lite”. With LTE, it is efficient to deploy the technology in as wide a band as possible. Hence significant additional savings could be brought about if spectrum is shared.  This reduces competition at network level, but also delivers consumer benefits in form of higher access speeds.

The transactions now awaiting approval by the Competition Directorate are the O2 and Eplus tie-up in Germany, Hutchison’s takeover of O2 in Ireland and, if the acquisition of SFR by Altice fails, then also the Bouygues – SFR take-over in France.  The conditions the European Commission attached to the Hutchison 3 take-over of Orange Austria may serve as an indicator as to the conditions that might be imposed to allow these deals to go ahead. Among other conditions, Hutchison Austria had to publish a wholesale access price reference offer for MVNOs. By regulating wholesale prices, the Commission in effect bought insurance against sharp increases in retail prices because it would allow MVNOs to undercut these.

The conditions imposed on Hutchison Austria may be a first step towards the structural separation of the mobile industry into Netcos and Retailcos. In a world where mobile network operators share much of their network and perhaps spectrum, these mobile operators start to look more like MVNOs on a shared network. Structural separation may not be a “horror scenario” for mobile operators if returns on invested capital can increase as a result.

Looking at what business mobile operators are actually in, it seems that they are to a large extent hire purchase phone vendors. Comparing SIM only postpaid tariffs with postpaid plans that include a “free” smartphone, it appears that the price for SIM only deals is 50% below plans with a bundled handset. Therefore roughly 50% of a mobile network operator’s business is not about running a network but about selling phones on credit. Other than marketing and selling phones and SIMs, customer care and billing are a big cost bucket attributable to the retail activity of an MNO.

Retail activities are scalable, i.e. can be done profitably at different volumes. In contrast the Netco activity is not scalable because costs are fixed. Netco returns are a function of network utilisation. By structurally separating retail and wholesale activities in exchange for being allowed to merge networks including spectrum, MNOs might see lower costs and as a result higher returns, all the while prices at retail level may not move or even decline.

Barriers to entry and exit in the Mobile Netco activity are extremely high. We are now in the maturity stage of the industry life cycle, and it is normal for consolidation to take place. Furthermore, regulators have hastened the need for consolidation because they took billions of Euros out of the industry through spectrum auctions. This had the effect of dramatically reducing returns to investors. And yet, the Directorate responsible for telecoms, DG Connect, ceaselessly points out the benefit to European industry of increased investment in mobile broadband networks. How can the policy objectives of DG Connect and DG Competition be delivered simultaneously?

From the industry perspective, if structural separation allows returns to increase despite increased competition at retail level, then structural separation might be the way forward. Competition might drive down margins in the retail activity, but this is not problematic because in contrast to the Netco activity reducing capital or even exiting the retail activity is possible.

The proposed consolidation in Germany is most interesting in this regard. Eplus pioneered a multi-brand wholesale and MVNO strategy precisely because E-Plus was sub-scale. As can be seen by leafing through some older KPN investor presentations (KPN E-Plus Seminar, Delivering profitable growth, Sep 2006), this resulted in lower subscriber acquisition costs and higher EBITDA. The strategy brought about a flourishing MVNO and reseller activity, thus increasing consumer choice. This means within Eplus the set-up exists to take the concept forward to full structural separation.

From the mobile industry perspective a further benefit of consolidation at network level would be that governments can no longer pit competing operators against each other in spectrum auctions, such as the forthcoming second digital dividend. High spectrum reserve prices would finally be seen for what they are: a tax on the mobile industry that ultimately has to be paid for by the consumer. Furthermore it may be better to be in a regulated industry with reasonable returns rather than in an industry with wafer thin returns, high investment needs and continued technology risk.

Written by Stefan Zehle, CEO Coleago Consulting

What conditions will be attached to O2 Germany’s acquisition of E-Plus?

In my blog post on Monday the 29^th of July “EU in a muddle over roaming rules”, I pointed to the conditions imposed on H3G Austria to allow its acquisition of Orange Austria (Case M.6497 “Hutchison 3G Austria Holdings GmbH / Orange Austria Telecommunications GmbH), notably to publish a Reference Wholesale Access Offer for MVNOs with a data price of €0.002 per Mbyte.

The pending acquisition of E-Plus Germany by Telefonica O2 Germany will also require approval by the European Commission. It is unlikely that that it can be argued that the mobile market in Germany is more competitive than that in Austria. In fact there are indications that it is less competitive and the acquisition would leave Germany with only three Mobile Network Operators.  If therefore the Commission imposes the same or similar conditions on the E-Plus / Telefonica O2 Germany deal, we will see a Reference Wholesale Access Offer, also with a per Mbyte rate of €0.002 per Mbyte, in Germany which is the EU’s biggest mobile market.

Effectively the conditions imposed in the context of industry consolidation may eventually lead to EU-wide mandated wholesale prices.  This is a backdoor way of starting to regulate the European mobile industry and effectively create a regulatory difference between mobile access providers (MNOs) and mobile retailers (MVNOs). What may follow is an Accounting Separation requirement being imposed on EU mobile network operators.

Written by Stefan Zehle, CEO, Coleago

EU in a muddle over roaming rules

The FT commented on the effect of profitability the proposed EU roaming rules may have on EU mobile operators, not least because mandated wholesale prices open up the possibility of arbitrage.  It is evident from the Case M.6497 “Hutchison 3G Austria Holdings GmbH / Orange Austria Telecommunications GmbH, Commitments to the European Commission 11 November 2012”, that the European Commission is well aware of this issue.

As part of the Commission’s approval to acquire One Austria, Hutchison Austria entered into certain commitments, notably to publish a Reference Wholesale Access Offer and host up to sixteen MVNOs.  The interesting bit is the data pricing stated on page 29 of €0.002 per Mbyte. This sets an extremely low benchmark.

In order to prevent this low rate from being used by operators outside Austria, clause 36(l) on page 25 of the Reference Wholesale Access Offer states that the MVNO, “The MVNO shall not seek to sell MVNO services to any customer whose residence or place of business is outside Austria.”

Here the European Commission has contradicted its avowed aim to create a single telecoms market. Effectively the consumer who lives in Austria could buy a service from an MVNO, but not for example a customer in Germany. A German MVNO might also wish to buy services from Hutchison Austria at these rates to offer a seamless service that covers both Germany and Austria.  This would be a very practical benefit of the single market in telecoms. However, the Commission put rules in place which prevents this from happening.

This is an extraordinary contradiction which shows that the Commission is in a muddle over the issue. At the core is that the part of the commission dealing with competition appears to be out of step with that part that works on telecoms.  It also highlights that the fears voiced by EU mobile operators are real.

I wonder what would happen if a customer of an Austrian MVNO using the Hutchison Network moved from Austria to Germany. If the MVNO does not disconnect the customer Hutchison Austria would complain.  The MVNO might then sponsor that customer to bring a test case that on the grounds of single market provisions, the MVNO does not have the right to disconnect the customer.

Neelie Kroes has made the roaming proposals without having thought through the full impact on the mobile industry.  This deserves much greater consultation.

Written by Stefan Zehle, CEO, Coleago Consulting

Challenges for EU mobile operators

The European mobile telecoms industry is now at the maturity stage of the industry life cycle.  While the introduction of LTE is still a relatively recent event, there is limited revenue growth and consolidation is starting to set in. Rather than being challengers, in some ways mobile operators themselves have started to look like the old fixed line operators at the start of the telecoms market liberalisation in the 1980s.  National fixed line incumbents (PTTs) went into defensive mode as the EU’s Customer Premises Equipment directive ended their monopoly on the supply of telephones and PABX and the opening to competition of long distance and international calls forced operators into rebalancing and cost orientated pricing.  The European Commission predicted significant contributions of market growth and benefits to consumers and businesses and there is no doubt that the policy delivered this. Indeed, without the EU’s effort to push for liberalisation of telecoms markets we would not have today’s innovative mobile telecoms markets with multiple mobile operators.

Now these very mobile operators are on the defensive as the EU increases pressure to create a single telecoms market and puts its weight behind wholesale price transparency and net neutrality. Three of the statements made by Neelie Kroes, VP of the European Commission responsible for the Digital Agenda in her speech of the 9^th of July 2013 impact significantly on operators:

• —  “Blocking or throttling services isn’t just unfair and annoying for users – it’s a death sentence for innovators too. So I will guarantee net neutrality.”
• —  “European calls shouldn’t count as a costly international call; not within a true single market. …. so any difference in price must be objectively justified by additional costs.”
• —  “In a true single market, there are no artificial roaming charges. It’s irritating, it’s unfair, it belongs to the past.”

In her speech Ms Kroes also addressed the issue of cross border consolidation: “If you’re allowed to operate anywhere in Europe – authorised within an EU framework — then you should be able to operate everywhere in the EU. … Like a single authorisation system with supervision by the home member state.”

While as yet true cross border consolidation has been rare, we already witness increased consolidation within markets either outright through M&A or through RAN sharing. RAN sharing is encouraged by some regulators in order to deliver mobile broadband coverage in rural areas and better LTE speeds in a wider band. For example, the “mutualisation” of spectrum was central to the 800MHz licence award in France. Regulators are well aware of the threat to competition posed by RAN sharing but in a mobile broadband world the economics of deploying LTE in a wide band favour RAN sharing.

These factors – cost orientated pricing, net neutrality, and consolidation – will shape the European mobile industry during the coming years.  They may even lead to the unbundling of mobile access from the provision of services, just as we have seen in the fixed network. Implicit in consolidation at network level is increased price transparency at wholesale level to allow multiple operators to compete fairly at retail level. In this context the elimination of roaming charges points towards the end of the traditional Inter Operator Tariff (IOT) roaming wholesale tariffing. Possibly within the EU bureaucracy someone has already been tasked with drafting a directive that would require EU mobile operators to publish a “reference access price offer”.

Let’s imagine a future where Apple or Google obtain wholesale access (MVNO) agreements in each of the European states and, instead of replicating the national mobile operator model, launch a pan-European service where the EU is a single nation, at least in terms of mobile phone service costs. Far-fetched? Well, many consumers already make smartphone choices ahead of network choices and to many people OTT services such as Skype, FaceTime and WhatsApp matter more than traditional phone calls.  We might even see a resuscitation of the trans-Europe dialling code (+388) designated for the European Telephony Numbering Space or ETNS.

As regards separating access and service, a line of attack comes from operators such as Rebtel in Sweden and Republic Wireless in the USA. These operators use WiFi offload and “push” their customers to make calls using Skype like services.  Mobile networks are only used in an MVNO fashion when out of WiFi coverage.

Is this the nightmare scenario for traditional mobile operators, where they are relegated to perform the role of the much quoted “dumb pipe”?  Firstly there is nothing “dumb” in operating a highly sophisticated LTE network while migrating millions of users from GSM and HSPA and coping with the mobile data tsunami. Secondly the massive growth in mobile broadband requires huge investments. Investments require returns and therefore it is the pipe where returns will be earned.

This scenario may actually be rather benign for investors in the mobile industry. Rather than fighting subsidy wars, being played off against each other by Apple, and driving up prices in spectrum auctions, operators could get on with building a superb mobile broadband infrastructure in an environment that allows investors to earn stable returns. After all, in the history of the European mobile industry the greatest decline in return on capital employed resulted from the 3G auctions in 1999 – 2002. Let others go crazy!  Investors who are attracted to stable returns would continue to invest in mobile network operators whereas those who seek a higher risk / return profile would invest in companies that provide services over these networks.

What has been the reaction of the mobile operators to threat to roaming and international call margins?  Some claimed that the loss of margin from roaming would lead to price increases elsewhere.   Yes, it probably would i.e. prices would become more cost orientated. This is not necessarily a bad thing for the mobile industry.

As the market is opened up and access is unbundled from other value chain activities, this provides an opportunity for new competitors. Operators such as Lebara and Lyca had some success in competing on the basis of low cost international calls from mobile phones. MVNOs such as Truphone, WoldSIM, roamline.com arbitrage the difference between wholesale and retail prices to deliver cheap roaming. Mobile operators watch these trends carefully and will not make general price cuts on high margin services if this reduces overall profits. They are responding in smart ways by offering low cost roaming to those who seek it. For example, EE of the UK which focusses on LTE offers “inclusive unlimited roaming minutes and texts for an extra £5 a month on a 24 month roaming plan”. Here we can see the future of roaming tariffs. The bigger threat is to those niche operators because their arbitrage opportunity reduces.

In response to lower intra-EU roaming charges some operators increased roaming prices outside Europe, but not in a cost orientated manner.  Most operators are wedded to a zonal pricing approach, pretending that somehow costs increase with distance. That’s nonsense.  Some of the highest Inter Operator Tariffs are levied close to Europe. For example, Tunisian mobile operators collude to set wholesale roaming prices as high as €1.50 per minute. While a European operator’s retail price for roaming in Tunisia of €2 per minute including VAT might seem high, it barely covers the wholesale cost. In some other markets much lower wholesale roaming prices can be obtained. This is also evident from the countries covered by EE’s unlimited international roaming deal which includes Europe and an odd mixture of countries including Australia, the US, Peru, Turkey, etc.

And what about the subsidised contract customer, i.e. the customer supposedly “owned” by the operator? After all the separation of handset and SIM was one of the great innovations of GSM because of its potential for increased competition. It is not necessarily the case that a customer life time value is higher for a consumer with an operator provided subsidised smartphone compared to a SIM only smartphone customer with a 30 day rolling contract.

Operators are aware of these trends and their offers are evolving in a segmented response to changes in the regulatory and competitive environment. There may be bumps along the road, but I am optimistic for the future of the mobile industry as a sector worth investing in.

Written by Stefan Zehle, CEO Coleago Consulting

Towards a single EU telecoms market

In a speech delivered at Mobile World Congress 2013, Neelie Kroes, European Commissioner for Digital Agenda, called for the creation of a single telecoms market in the EU. Kroes iterated that it would be of great benefit to the European telecoms industry as well as consumers. There are numerous aspects to this, but mobile telecoms and notably spectrum allocation is most notably one of the focal points.

In recent times, common EU policy has led to the harmonisation of mobile spectrum and technology in the form of GSM at 900MHz and 1800MHz. One could argue that it is this which kicked off the global boom in mobile communications as a result of delivering low equipment prices (terminals and network) as well as international roaming. The benefits to both the European industry and users are undeniable. Mobile communications is now a global business and with the inclusion of multiple LTE bands on chipsets, harmonisation is perhaps a little less important from the technology perspective, but it still matters from a business perspective.

Spectrum allocation mechanisms and prices paid by operators are driven by national policy objectives. Some governments (e.g. Finland) rightly think that spectrum should be made available to operators as cheaply as possible since ultimately this generates the greatest benefit to society. Others (e.g. Ireland and Greece) focus on immediate cash generation. Views on competition may also differ. The 800MHz auction rules in France are a good illustration of a government ensuring the survival of the 4th entrant, whereas in the highly competitive UK market, competition does has not been a big issue in the recent spectrum auction.

These policy differences result in very different costs for mobile operators and yet there is an assumption that prices, notably wholesale prices should be standardised across the EU. Clearly there is a contradiction.

Another key point in pushing for an EU wide approach to telecoms regulation is that cross-border mergers should be made easier in the EU. The fragmentation of telecoms services provision within the EU is a barrier to the single market. An innocent bystander might ask a whole series of questions which demonstrate that the current EU mobile and fixed regulatory environment is unsatisfactory, for example:

—Why is it that a call on a mobile network within a country tends to be included in the bundle whereas a call to a neighbouring country is usually priced at a premium?

—Austria has a smaller population than Bavaria, so why does T-Mobile run Austria as a separate business from its German operation?

—Why are mobile numbers portable within a country but not within the EU?

The current structure of the EU telecoms industry and markets are an artefact of national telecoms regulation. Faced with competition from global OTT players who are not bound by national regulatory regimes, it is the European telecoms companies who suffer. Both industry and end-users would greatly benefit from a truly EU wide approach to telecoms policy and regulation.

Written by Stefan Zehle, CEO, Coleago Consulting

Misguided approach to licencing MVNOs in Egypt

On the 8^th of May 2012 the National Telecommunication Regulatory Authority (NTRA) of Egypt indicated that it is preparing to accept tenders for a new mobile virtual network operator (MVNO) licensee. The NTRA aims to form a committee and define the necessary regulatory framework for the introduction of MVNOs within three months. In 2011 Saudi Arabia’s regulator took a similar MVNO licencing approach.

Regulators in many emerging markets have not grasped the essence of an MVNO nor do they appear to understand that there is no need for a restrictive licensing regime for MVNOs.  Of course mobile network operators require a licence, because they need to construct sites, require way-rights and most importantly they require spectrum licences. The latter point is particularly relevant because spectrum is a limited resource.

There is nothing that limits the number of MVNOs that could operate in a country other than their ability survive in a competitive market. Witness the 50 or so MVNOs in the Netherlands, if governments wish to bring the market benefits of MVNOs to their country they should allow anyone to operate an MVNO, perhaps with a simple authorisation to ensure that the MVNO adheres to telecoms regulations already in place. Once the authorisation is granted, the MVNO could then obtain a numbering range and whatever else it needs to operate. Certainly there should be no fee payable other than a cost based administration charge.

Instead of a restrictive licensing regime for MVNOs, international gateways or other telecoms services, regulators in emerging markets should endeavour to create liberalised mobile wholesale and retail markets as we see in many European markets and North America.  This may well require a fundamental shift in political thinking. One of the key reasons why many countries in emerging markets, such Egypt or India are so attached to licensing, not just in field of telecoms, is that it allows them to exert state control and extract hefty licence fees.  State control, for example restricting innovative tariffs or business models, hinders the development of a vibrant telecoms and mobile broadband market and holds back the economies in those countries.  Liberalising telecoms would be an excellent initiative to stimulate growth and bring mobile broadband internet access to the maximum number of people.

Written by Stefan Zehle, CEO, Coleago Consulting

How to become a successful wholesale Mobile Virtual Network Operator (MVNO) host operator

With most mobile markets (including many in developing markets) becoming heavily saturated the mobile business is becoming increasingly a market share game. It is well understood that with high fixed costs, Mobile Network Operator (MNO) businesses demonstrate increasing returns to scale and therefore obtaining a larger share of the market in terms of service revenue is the key to success. The switch from voice to data is further exacerbating this issue.  Just as Fast Moving Consumer Goods (FMCG) companies such as Proctor and Gamble have multiple washing powder brands to serve different market segments, so MNOs need to develop a multi-brand strategy involving a mix of their own (retail) and partner (wholesale) propositions which extend their reach. We often meet MNO clients who want to grow their business by developing a wholesale MVNO strategy and are asked how they should go about it. The following are the basic principles:

Constantly Scan the Market for Opportunities

In order to be successful in such a multi-brand world, MNOs need to be good at understanding different segments in the market that might currently be underserved as well as spotting good potential wholesale partners who have complementary assets such as distribution or customer relationships. In other words they need to develop strong strategic, competitor and market intelligence functions internally and then set them to work constantly scanning the market looking for opportunities. It should be noted that some segment opportunities might be better addressed with a wholly owned brand if no suitable wholesale partner can be identified.

Sell, Sell, Sell But Do Not Forget Account Management

Once an opportunity and potential partners are identified the organisation needs to have the capability to make the deal happen and afterwards manage the relationship. In order to do this they need to set up a dedicated wholesale department which is really a professional Business To Business To Consumer (B2B2C) sales and account management function. Each wholesale partner should be assigned an account manager who will be involved in developing the wholesale contract and working with the partner on an ongoing basis to make them a success.

Accommodate Different Business Models

Within the limits of national regulations, we advise MNOs to offer wholesale partners a range of models all the way from co-branding or branded reselling through to a full MVNO. Different partners will have different technical and IT capabilities e.g. a supermarket might want to have a co-branding deal so that they can focus on distribution while a more infrastructure minded partner such as a cable TV operator might want a full MVNO and just rent the radio access network. In all cases the partner will need some sort of clearly differentiated product or tariff if they are to be successful with their target customer group.

Remember it is Not a Zero Sum Game

Many MNOs are reluctant to give good terms to wholesale or MVNO partners reasoning that they can potentially serve the end customers themselves. If a wholesale partner has the right target in mind they will be able to deliver new customers that the MNO cannot reach on its own. Therefore in order to motivate chosen partners we advise MNOs to offer generous terms which reward success. The guiding principle should be that x% of something is worth infinitely more than 100% of nothing.

Cannibalisation – What Cannibalisation?

Many MNOs are concerned that wholesale partners might cannibalise their core retail customer base. Our experience tells us that these risks are often greatly overstated especially if the partner has been correctly selected and has a well-defined target.  If an operator has a low market share then the risk is inherently low and even market leaders can benefit from a wholesale multi-brand strategy by for example using discount MVNO partners to compete with the later entrants without impacting their more premium retail brands.

Scott McKenzie, Director, Coleago Consulting Limited