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Follow UsAs predicted by Boston Consulting Group, the Indian telecom market will surpass a psychological $100 billion-mark by 2015, despite host of concerning factors such as intense competition on the back of low-tariff structures and ensuing decline in ARPUs in the sector.
Also Read: CAGs estimate on financial loss erroneous: Sibal
Also, with the Indian government’s determination for making radio airwaves pricing market-driven, delinking license from spectrum, penalizing the operators who could not roll 3G services after winning start-up spectrum and powering the consumers with ease to switch operators with the launch of mobile number portability across the country, it is quite clear that there is an increase in the regulatory intervention designed to lower the barriers for market entry and ultimately increasing competition.
Given the regulatory and market conditions, it is quite intriguing to see how the telecom service providers, especially the new entrants who are yet to turn profitable or those who lost 3G auctions or even those who even after winning, could not launch services and are under the threat to loose their spectrum would meet the pressure of sustaining in one of the toughest telecom markets.
In such a scenario, will the much talked about mobile virtual network operator (MVNO) business model make a success story in India?
Before we assess whether MVNO’s will flourish or struggle on the Indian soil, let us understand what MVNO stands for and how are they different from mobile operators.
A MVNO is a mobile operator that does not have any spectrum of its own. It purchases bulk airtime from Mobile Network Operator (MNO) and may also utilize the infrastructure of an incumbent telecom operator, also called Home Network operator (HNO) to launch its services.
The efficiency is obtained by the nature of the MVNO business model as an MVNO does not incur the significant capital expenditure on spectrum and infrastructure that an MNO does, nor does it have the time consuming task of rolling out extensive radio infrastructure.
As MVNOs enter into a market already dominated with incumbent players, they have to offer a definitive advantage in the form of brand value, attractive content or a segment specific service offering to lure the customers.
Various types of MVNOs such as resellers, service providers, enhanced service providers and full MVNOs exist which define the level of involvement in the telecom operations and nature of arrangement between the MVNO and incumbent operator.
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While the reseller or branded reseller MVNO is responsible for branding and marketing activities including customer acquisition and sometimes distribution channels too, the MNO provides rest of the business.
The service provider MVNO, in addition to branding and marketing is also responsible for billing and customer care. An enhanced service provider has the responsibility of applications and service management.
In both these models, the MVNO enjoys increased the level of control over the back-office processes and valued-added services definition and operations. In case of the full-MVNO, the MNO just provides the access network infrastructure and, sometimes, part of the core network, while the MVNO provides the rest of the elements of the value chain.
This MVNO business model is typically adopted by telecom players that could gain synergies from their current business operation.
A MVNO may or may not have any prior telecom experience and may depend on Mobile Virtual Network Enablers (MVNE) for providing infrastructure and back office services such as end-to-end enablement services, gateways and interfaces such as messaging platforms, data platforms and billing and operations solutions.
Mobile Virtual Network Consultants (MVNC) & SI are independent of MVNE’s and acts as a reliable advisor to provide industry specific expertise to the MVNO in areas such as strategy and planning, business case and operational models, system integration and end-to-end testing and more.
MVNOs have a fair share of both successes and failures throughout the world. As per Ovum's latest forecasts, global MVNO connections will reach 85.6 million by 2015, and revenues will reach $9.5 billion.
While the established MVNO markets will drive this growth, the emerging markets are also warming up to introduce MVNOs. Western Europe has pioneered the MVNO space worldwide with approximately 357 active MVNOs. USA and Canada stand second on the charts with an approximate number of 72 MVNOs active.
MVNOs are expected to move into markets in Brazil and Chile in South and Central America; Turkey in the Middle East; and India, Pakistan, and Vietnam in Asia-Pacific.
Currently there are no true MVNOs in these markets, however it is expected that new MVNOs would enter from 2011 with India and Indonesia leading the way. South America is not to be left far behind with Brazil planning to release regulations for MVNOs.
If we critically evaluate the entry of MVNOs into the Indian market, we can see various forces working in favor of and against MVNOs. The mobile penetration is expected to go up to nearly 100 per cent by 2015 and Mobile Value Added Services (MVAS) to generate Rs 48,000cr worth of revenue.
MVAS is slated to drive the vehicle for inclusive growth in India. (Source: Study on “Mobile Value Added Services (MVAS) by ASSOCHAM & Deloitte). This fusion of wireless and entertainment industry led by the profound industry shift from being a voice-only market to one dominated by a glut of non-voice and mobile value added services is creating a much larger and more profitable market.
The revenue growth potential, large pool of churn customers, emerging broadband wireless technologies and compelling economics are creating market conditions conducive to give thrust to the MVNO business model.
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Though the Indian telecom regulatory authorities are keenly studying these developments and formulating their recommendations on MVNOs, the decision for allowing MVNOs to operate in India has been pending since 2008.
As per the Telecom Regulatory Authority of India (Trai), to maintain an exponential growth, introduction of MVNO is seen as a natural progression towards enhancing free market principles and contributing to efficient use of existing telecommunication infrastructure.
Trai came up with a paper on the recommendations 'On Mobile Virtual Network Operator' in August 2008. Implications of the recommendations overall are in favour of launching MVNOs in India.
Trai has recommended that the entry fee imposed on MVNO should be nominal. It may be 10 per cent of MNO’s entry fee subject to circle-wise maximum of Rs 5 crores for the Metros and Category ‘A’; Rs 3 crores for Category ‘B’ and Rs 1 crores for Category ‘C’.
MVNO should be issued a license under section 4 of the Indian Telegraph Act for providing the services; and MVNOs players to have the freedom to choose business model by MVNO (Full or Intermediate or Thin).
These recommendations not only give low cost and low-risk advantage to MVNO players but also facilitate ease in getting a licence and setting up business as well as flexibility to enter MNVO market in alignment to their business strategy.
However, in order to ensure that only serious players take this route, Trai recommended that to exit business, MVNO has to give a six months notice to MNO, customers, licensor and TRAI.
The Bank guarantee would be forfeited and the player will be is disqualified for getting fresh license in same service area.
Another positive development took place in February 2009 when the Telecom Commission gave consent to the proposal of allowing MVNOs to launch their services in the country. However, post the Commission’s approval, the Indian government is yet to issue a formal notification along with guidelines for MVNOs to operate in India.
The final decision is still pending with the Department of Telecommunication (DoT).
In the mid of January 2011, Trai issued yet another consultation paper on "Issues related to Telecom Infrastructure Policy", incorporating initial comments from stakeholders on whether or not MVNOs should be allowed to operate in the country.
It has asked the industry and other stakeholders to give inputs on the issues raised in the paper by January 31, and send in counter-comments on February 7.
Also, in its recent press release, Trai has further recommended that any firm which wishes to become a MVNO should also be granted a universal access service licence (UASL) without any spectrum. Such companies can subsequently enter into a spectrum sharing arrangement with an operator having spectrum.
As part of the recommendations the Trai has also said MVNOs should fulfill all the obligations of a telecom licencee.
It is interesting to note that while the market still awaits the final verdict from the government on MVNOs entry in India, companies vying to take the first mover advantage, are finding innovative ways of addressing the MVNO needs of the market.
Tata Teleservices have been the pioneers, with two partnerships based on the likes of the MVNO model. The latest one is with India’s largest retail chain, the Future Group (February 2010) branded as ‘Talk24’ and the first one was with Virgin Mobile (March 2008).
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The combined subscriber base for Tata Indicom and Docomo which has 26 per cent investment since Mar 2009, is 80,817,298 as on October 2010 (source: Telecom Track) while Virgin Mobile claims that it is now adding more than 10 per cent of Tata Tele's subscriber base every month and that its Indian operations are the second largest, globally in terms of subscriber base.
Virgin Mobile has revenue share arrangement with Tata Teleservices and targets the youth segment across 300 cities which are about 30-40 per cent of the market opportunity. Virgin Mobile offers pocket friendly, innovative offerings such as “Get paid for incoming”, “New 50 P STD Local” etc to meet their style, budget and aspiration quotient.
Virgin has its own design team for the handset which works with the manufacturers to develop customized devices. The company has been able to drive adoption of value-added services to 30 per cent of its revenues compared to market average of just 10 per cent.
This has also pushed up its average revenue per user to double that of other CDMA players. The company was offering CDMA-based mobile services till recently and has now moved into the GSM space as well. For Tata Teleservices, there is benefit in terms of the additional customers as well as increased minutes of use on its network.
Future Group’s Talk 24 (T24) mobile services are sold only to the Future Group customers, thus, functioning like a loyalty programme wherein a customer of Future Group will get some talk time when he shops at Future Group and vice-versa.
This is a unique marketing alliance between a retailer and a telecom operator in India. It offers Tata direct access to millions of Future Group customers through its widespread retail presence across India in over 75 cities and 65 rural destinations.
The success of TATA’s may aspire incumbent operators like BSNL who do not see marketing and branding as their core strengths and would consider leasing out excess network capacity to MVNOs for better utilization of resources and a venue for alternate revenue generation.
Another innovative way of market entry is that of Blyk. Though Blyk operates as a MVNO with ad-funded model in other countries, it has taken a content service provider route in India, launching its content services on the Aircel platform on November 2009. Aircel subscribers have to pay an additional service charge of Rs. 74 to become a Blyk subscriber.
Blyk has already signed up more than 100,000 subscribers since its launch in November 2010. The partnership is on a revenue-share basis, with Aircel providing the connectivity and Blyk taking care of advertisement sales and campaign management.
The real value to advertisers (and merchants, governments, developers, enterprises and other upstream customers) is from having access to a seriously large numbers of end-user customers willing to accept advertising and other telecom-enabled VAS services.
The success of this model remains to be seen in the Indian market as such a platform will only thrive when it has a larger pool of retail partnerships in place for revenue generation and also provides an effective end-to-end service delivery.
For example, identification, authentication, advertising, billing, content delivery, customer care and contact centre management has to be effectively coupled with a very strong product management capability. And all this has to be done in most cost effective manner to stay profitable.
Hence, with the initial success stories of the MVNO like business models, time is not far when MVNOs would start flourishing on the Indian soil as well. Some of the likely players from India could come from retail, banking and finance, or even government sectors like the Indian Post.
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International players such as Telekom Malaysia, Mobile ESPN and ValueFirst are planning to take the MVNO route and are already looking for strategic alliances in India. The government’s latest initiatives towards making spectrum on demand would mean more value-added services (VAS) such as Internet browsing and downloading, being available on 2G as well.
Also, operators missing out on 3G licensing can take the MVNO route to carve a share of the 3G pie as only four out of the 10 or so operators in each circle have 3G spectrum. The MVNO model opens up the possibility of such services being launched by more and more players.
Owning the customer with the lowest possible build and operate costs is the success mantra for the MVNO business model. Hence, players devising their entry strategy must ensure that they have the right mix of services and a lean but scalable business and operations support system which enables reduced time to market.
MVNOs need to conduct due diligence for selecting their IT partners and opt for solutions which could be customized to suit their business objectives without sacrificing on the ability to come out with innovative offerings.
The solutions need to be evaluated on features such as flexibility of bundling voice services with VAS, customize billing and rating engine for creating innovative product offerings, converged billing and preferably have inbuilt support for using business intelligence to device promotions and campaigns, execute loyalty programs and customer care initiatives for managing the customer experience throughout their lifecycle.
A reliable IT solution is the backbone of MVNO business, driving growth and revenues. And equipped with a strong backbone, MVNO’s would be able to device innovative pricing structures that will help in faster customer acquisition as they pass cost benefits to customers.
For the customer, the introduction of MVNO would mean a wide variety of services packaged together in one bouquet with the option of customization at very affordable prices. This would improve the overall customer satisfaction level and would help stabilizing and increasing the current ARPU levels of the operator.
They would have ample number of choices not only in terms of network parameters, but also, favored brand, brand loyalty, specific discounts and schemes available, etc.
However, given the nature Indian market which has high price sensitivity and low profit margins due to falling ARPUs, the financial viability and sustainability needs to be worked out before exploring the turf.
Little differentiation in value proposition from exiting MNO offerings, inability in understanding and addressing the needs of the niches identified or a flawed business model which overlooks the need for developing strong distribution capability are some of the marketing failures an MVNO must be thoroughly prepared to avoid. Another major reason of failure is bad customer experience with service fulfillment and delivery. Customer churn increases with repeated bill shocks, call drops and failure of service provider to respond well in time.
Churn due to over-billing and revenue leakages and frauds due to under-billing, wrong billing or no billing due to inconsistent IT systems and network outages can lead to a complete failure of an MVNO. Hence, critical evaluation of products on reliability, scalability and efficiency as well as ensuring vendor’ after sales service support is a must.
Similarly, in case of a hosted partner, MVNOs must select an experienced partner with established repute, ensure that all the critical SLA’s are defined properly, there is no room for ambiguity in responsibilities and the partner is committed to deliver. Same is true while choosing an MNO as well as capital investors.
A serious dent is caused to business profitability when the relationship with the host mobile operator is strained or they are simply not motivated to encourage the MVNO it hosts to be successful or when investors under capitalize the business. It goes without saying that business will only be successful when organizational competency and good program management with right partner ecosystem is developed.
And last but not least, costs such as entry fee, licenses, investing in evaluating and tying up with an MNO, establishing a service delivery platform have to be factored in and weighted against cost of exit, in case the business does not flourish.
In parallel, devising the right strategy to approach the Indian market and gain mileage from its natural demographic advantage due to high percentage of youth population and burgeoning middle class with pro-spending habits will play a crucial role in defining success for the MVNO.
The Indian diversity offers a number on niches based on languages (22 languages have status of official languages in the constitution of India), 23 regions with each having its own culture and community lifestyle, huge NRI population in pockets of Kerala & Punjab; in addition to the existence of varied socio-economic and demographic segments, that can be tapped successfully.
Another crucial aspect is the enablement of IT and network platform for supporting the subscriber base with flawless service delivery. It would be wise not to opt for reinventing the wheel when they can partner with a solution provider who offers ready to use service delivery platform on a hosted model and enables quick launch to market.
It will be indeed interesting to watch how MVNOs will identify their niches going beyond age and economic strata and kickoff another revolution by catalyzing 100% adoption of telecom services in India.
In a nutshell, MVNO’s are in a strong position to appeal to the customers with service innovation, enabling rapid customer acquisition. They have the dual benefit of making the market more efficient on the cost side and expediting the adoption of services on the revenue side.
Though individual performances of players would vary, but MVNOs do have the potential of changing the structure, economic flows and culture of the Indian wireless industry for years to come.
The authors belong to the Portfolio Management Group at Tech Mahindra Ltd.