December 4, 2011

Mobile Virtual Network Operators at the Gate: The Rise of Service-Based Competition in the MENA Region

As the mobile telecom market in the Middle East and North Africa (MENA) region approaches maturity, with penetration rates in excess of 100 percent, the region is witnessing an increasing number of mobile virtual network operators (MVNOs). These entities offer mobile services to niche markets by leasing the excess capacity of existing mobile network operators (MNOs). They typically target small segments of the telecom market, with a customised value proposition that includes targeted pricing, innovative services, and an overall customer experience that resonates with the affinities of their customer base..

Mobile Virtual Network Operators (MVNOs) in other areas of the world have had an impact on the mobile telecom market, and therefore have the potential to do so in the MENA region as well. At this juncture in the development of the region’s telecom sector, stakeholders in the industry must understand the MVNO game, including lessons learned from other parts of the world. For MVNOs and their investors, the key success factors include a differentiated, focused value proposition; a lean cost model; effective sales and distribution channel; and a favourable agreement with the host telecom provider.

The challenge for Mobile Network Operators (MNOs), according to Booz & Company, is to understand the competitive threat from these upstarts, and decide whether and how to leverage their strengths through business alliances or by launching their own internal MVNOs. Finally, telecom regulators must ensure that the market remains open to service-based competitors, by policing anticompetitive behaviour and incentivising incumbent MNOs to open their networks at acceptable commercial terms, while giving consumers the widest possible range of telecom offerings.

The MENA Telecom Market Is Ripe for MVNOs

An MVNO is a company that provides mobile telecommunications services without having its own radio spectrum or physical network; in essence, it sells mobile services while leasing the capacity from an MNO (mobile network operator). MVNOs have multiple business models, which can be categorised according to their level of ownership of technical infrastructure and activities along the value chain.

Bahjat El-Darwiche, Partner, Booz & Company, said, “The success of MVNOs thus far largely stems from their nimble approach; they can access markets that large mobile operators often cannot or will not (owing to a lack of interest or, sometimes, to rigid business models and organisations). MVNOs typically offer a value proposition that builds on significant research and deep behavioural understanding of their target customer segment. This allows them to deliver services that match the needs of their target segments, such as greater service accessibility, inexpensive pricing plans, international calling deals, or innovative content and applications.”

MVNOs’ entry into the region can catalyse the market by further stimulating SIM penetration and lowering prices. Hence, established telecom players will need to determine their strategies with regard to MVNOs. With the right parameters, both sides can win. MVNOs can thrive by developing marketing strategies and service offerings that resonate with a limited and well-defined slice of the telecom market. MNOs can create incremental gains by leveraging underused telecom capacity. However, under the wrong conditions, this symbiotic relationship can fall out of balance, resulting in an unnecessary price war that will further erode margins.

Key Success Factors for MVNOs

It is important for MVNOs and their potential investors to understand the ways in which the MVNO business model differs from the traditional mobile telecom model. MVNOs in any market have four key success factors:

  • Offer a differentiated and focused value proposition. One of the key competitive advantages of MVNOs is that they have a thorough knowledge of their market segment, allowing them to cater to that segment in a far more personal, relevant way than large-scale MNOs can.
  • Create a lean organisation with a low cost structure. Since their niche market segments are small, MVNOs won’t able to acquire subscribers in sufficient volume to establish economies of scale.
  • Develop effective sales and distribution channels. Without a solid distribution network, even an MVNO with a loyal audience and premium content will not succeed. MVNOs must ensure that their products and services are highly visible and immediately accessible to the consumer segment they are targeting.
  • Set up a viable wholesale agreement with the host MNO. A whole¬sale agreement with an MNO is among the most critical success factors for MVNOs, because it has an immediate impact on the viability of the entire entity. Particularly at this stage MVNOs must negotiate their own favourable and robust agreements with host MNOs.

Typically, MVNOs prefer to pursue a retail-minus agreement with the MNO; that allows their cost structure to adjust as the prices drop (as they almost inevitably do over time in the mobile telecom market). However, rarely do MNOs award a retail-minus pricing agreement. More typically, they opt to charge wholesale bulk prices with a calculated margin to ensure that the MVNO does not have a significant price advantage in the market.

The Increasing Role of Enablers and Aggregators

The proliferation of MVNOs has given rise to third-party vendors known as mobile virtual network enablers (MVNEs), or, alternatively, as mobile virtual network aggregators (MVNAs). These vendors serve as a link between incumbent mobile operators and the smaller MVNOs, handling technical and other aspects of their shared-services arrangements. By working with multiple virtual operators, they can establish economies of scale on their technology platforms. This allows MVNOs to significantly reduce their operating costs and up-front investment, thereby reducing the subscriber base they need to break even. This in turn leads to further micro-segmentation in the market.

Why MENA MNOs Should Embrace Virtual Operators

MVNO entry has been limited in the MENA region; only Oman and Jordan have issued MVNO licenses. In other markets, such as Saudi Arabia, some operators have embraced MVNOs through the branded reseller model. MVNOs may represent direct competition to MNOs. However, they can also complement and strengthen the MNOs’ business, under the right circumstances.

“For MENA operators, MVNOs can potentially play a key role in further penetrating key underserved segments, such as youth, expatriates, and small and medium-sized enterprises—segments that full-fledged operators in the MENA region sometimes struggle to adequately serve. MNOs tend to approach such segments with generic offerings that do not resonate strongly with the target audiences, because such segments are typically too small to justify tailored products and services. The lean and agile business model of the MVNO, however, allows highly focused targeting,” commented Hilal Halaoui, Partner, Booz & Company.

MNOs should be proactive about developing their MVNO-hosting business and move quickly to sign up partners with strong brand equity, exploiting the inherent first-mover advantage. To ensure they derive the greatest benefit from these partnerships, MNOs should proactively build their MVNO strategy on the following three pillars:

  1. Seek complementary positioning
    An MNO should identify strategic niche segments that it is unable to target directly, and partner with MVNOs to meet their needs. These partnerships should enhance the MNO’s own market position to avoid erosion of market share and profitability.
  2. Ensure that the MVNO can deliver
    In choosing an MVNO partner, it is critical to ensure that the MVNO has created a sustainable and differentiated business model that offers value to the target segment and does not compete solely on price, which would cut into margins in the long term.
  3. Build a win-win partnership
    MNOs should invest in their MVNO partners’ success. Since the viability of the MVNO business model depends largely on the wholesale agreement and SLA with the host operator, MNOs should provide services and bandwidth under reasonable terms to let the MVNO invest in its commercial efforts and effectively serve its intended targets.

The Need for Adequate Regulation

Regulators have a key role to play in the growth of MVNOs. After a first wave of market liberalisation, in which alternative operators begin competing with the historical incumbent using their own spectrum and infrastructure, MVNOs can enter in a second wave – ensuring greater competition and consumer choice in their markets, which is attractive for regulators. Regulators must determine the best time to introduce MVNOs in their market. Optimal timing depends primarily on the level of market saturation, as measured by mobile penetration, and the level of market concentration, as measured by the distribution of existing players’ share in a given market. Once regulators make the decision to enable MVNOs, they should tackle the licensing framework.

“Regulators will also have to address the retail aspect of MVNOs to ensure fair and non-abusive competition among all players in the market. Finally, regulators must put in place a supportive framework to guide MNOs and MVNOs through the pricing and wholesale negotiations process, including technical aspects such as quality of service and mobile number portability. This is to ensure expedited and fair compensation for both sides. In general, regulators should limit these rules to those that standardise large-scale consumer preferences and ensure a competitive market overall. Further details of the MNO–MVNO relationship should be left to the commercial agreement between the two sides,” added El-Darwiche.

MVNO Proliferation Is Inevitable

The entry of MVNOs into the MENA region has begun. MVNO proliferation is unavoidable, and it will trigger major changes in the telecom sector. Fundamentally, the rise of service-based competition in MENA telecom markets is associated with a unique set of challenges that incumbents, investors, and regulators should make an urgent effort to understand and plan for. However, the underlying opportunities are equally significant, promising to revive a rapidly saturating telecom industry. Consumers, in particular, stand to benefit significantly from improved choice and a better user experience.

All key stakeholders in the MVNO game have strategic choices to make in how they respond to the rise of these players in the market, and they can benefit from other regions’ experience. MVNOs must articulate a clear value proposition to reach their target consumers in new and compelling ways. MNOs must look at partnerships with MVNOs as an opportunity to revive their business, and seek the most promising MVNO candidates before their competitors do. Therefore, regulators should play their role to facilitate service-based competition in their markets, while meeting the needs of both existing players and new entrants.

“So to recap, market dynamics in Europe show that a single market can support several dozen MVNOs, with an aggregate market share of 10 to 15 percent. To date, the MENA region has witnessed the entry of relatively few MVNOs, but there are indications that the market is ripe for them, and although MVNO regulation in the MENA region is not yet widespread, stakeholders can use the branded reseller model in the absence of relevant regulatory frameworks,” concluded Halaoui.