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This study was released in 2008 and reflects the market at that time.
- Middle East countries are beginning to liberalise their markets. Is now the point for MVNOs to enter this region?
- For those wishing to enter the sector is there a feasible way of getting a foot through the door?
- Are there rewards to be had for early entrants?
- Should investors be wary and on the lookout for warning signs?
Current market status
MVNOs have proliferated both the European and North American telecoms markets; with the latter having both over 60 MVNOs and 60 MNOs in the USA alone. The complete opposite end of the spectrum is where we find the Middle East, bar Israel, it contains no active MVNOs. Faisal Al Bannai, CEO of Axiom Telecom (leading Middle East mobile handset retailer), states “It’s not a question of if, but more of when, either this year, next year or the year after” that Axiom will launch an MVNO in its name. This comment dates back to January 2006 and is taken from Axiom’s own press release, but we have not heard of a launch and it is now over 2 years since this statement. Does this mean the market is not yet right or is something hindering their entrance?
The entrance of the first MVNO to any country is often born out of the failings of the MNO which hosts it.
In the UK, One2One was flagging in 4th place to Orange, BT Cellnet and Vodafone. Richard Branson offered the power of the Virgin brand to One2One and the two formed a partnership. The joint venture attracted a previously untargeted youth based pre-paid market and allowed One2One to indirectly gain competitive market share. In this respect the venture worked and Virgin Mobile (UK) quickly became a key player in the UK mobile sector. From a consumer point of view there was no difference between Virgin Mobile and the 4 existing players. Some even saw it as superior to One2One, even though One2One provided the network used by Virgin Mobile.
A similar scenario how now been repeated in South Africa, 3rd place Cell C has allowed Virgin Mobile on its network as an MVNO. In both cases the host MNOs have had little to lose. Neither Cell C nor One2One had the dominant market position or a significant market share. But both operators did build out nationwide networks and were faced with spare capacity and ongoing maintenance costs. Under these circumstances it makes sense for MNOs to allow an MVNO onto their network, at the least the revenue stream contributes towards the operational costs of the network.
At this point the flood gates to all MVNOs open. The host MNO picks niche market segments to go after and each of these is targeted by a specific MVNO operation – although the MNO does not design the MVNO’s business plan it does chose which business plans it accepts.
In true marketing fashion the other MNOs become alarmed by this encroachment and decide that they will inevitably lose these subscribers to the new MVNOs. By opening up their network too and working with their own MVNO partners they can combat this; the MNO will no longer have 100% of the subscribers’ revenue but will retain a percentage with fewer costs.
Competing on price alone
Western consumers have a choice when it comes to spending on their mobile service provider, both in terms of MNOs and MVNOs. In the UK there are over 20 non-MNO operations, the USA has over 100, France has around 30 and so does Germany. Many of these operations focus purely on price, with most being cheaper than the MNO they are hosted by.
Tesco Mobile UK charges 5p per SMS (pre-pay). O2 (the host MNO) charges 10p per SMS (pre-pay). Looking at the plain facts this means O2 is supporting a venture which under cuts it. To work out the logic we have to review the market as a whole. T-Mobile hosts Fresh from the Carphone Warehouse, which also offers SMS from 5p a text. This is of course cheaper than T-Mobile but with a 4th place market share T-Mobile has more to gain from causing churn against its competition and subsequently indirectly winning new subscribers. This means that O2 has to work with a priced focused MVNO or its price savvy customers will just churn to T-Mobile’s hosted MVNO, Fresh. O2 could cut their prices and have no MVNO but then ARPU overall would plummet as the reduction would be applied to all subscribers rather than just the price savvy.
This one reason highlights why the Middle-East’s MNOs are hesitant about MVNOs. The introduction of such ventures may see ARPU levels fall and subscribers churn from dominant players to MVNO start ups. Falling ARPU levels benefit consumers (assuming there is no network deterioration) but not those who own dominant MNOs.
Governments and regulators responsible for championing the interests of the consumer are a driving force for ending monopolies. Most regulators have now allowed multiple MNOs into their market and within developed markets many are working towards MVNO launches or have seen launches.
In multiple Middle-East countries the government or state is still the majority owner of the only MNO or the leading MNO. There is an obvious conflict of interest between producing revenue for the government and minimising costs for the bill payers.
The issue of control also comes into play when discussing regulation. With one MNO being owned by the government it makes controlling the use of the technology and who uses it a lot easier. The government therefore decides how communications are handled and what data maybe transmitted across the airwaves. In these circumstances they can easily monitor communications and deny service to whomever they wish.
In free markets the regulators spend a great deal of time ensuring fair play and negotiating working practices with MNOs and MVNOs.
Return on investment (ROI)
Large areas of the Middle-East do not have wireless coverage. Expansion is often paid for by the monopoly supplier and the cost of building and maintaining base stations is significant. Where new MNO entrants are allowed into the market the reasoning often involves the expansion of the overall wireless network coverage or in the improvement of the technology available to the market; 2G to 3G and above. Taking these costs into account it is not surprising that MNOs involved in a network roll out are not keen to see the proliferation of MVNOs, having to compete for market share over their own network and price wars slashing ARPU levels needed to pay off build out costs
Middle-East countries most in tune with Western economies will be the first to proliferate with MVNOs. The dynamics of an MVNO lend themselves to a free market economy where competition is the key driver to market entry. This environment will not exist until governments and regulators permit it to do so and will almost certainly not exist until the quantity of MNOs in each country on average reaches 3 nationwide players.
The purpose of this brief has been to give some insight into the MVNO market, specifically within the Middle-East. This is by no means a thorough analysis of the market and was authored in 2008.
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