Ed: We’re starting an occasional new section called “MoComment”, with guest essays and commentary from industry players. If you’re interested in writing about an issue related to mobile content industry, send us an e-mail. No PR-heavy essays will be entertained.
The first essay in the series is by Craig Cooper. Craig was the Co-Founder of Boost Mobile USA and is now a Partner with Softbank Capital in the Newport Beach, CA Office specializing in wireless and new media. He can be contacted at ccooper@softbank.com
“It seems like anyone with a brand to peddle or consumer business is nowadays looking to become an MVNO. MVNO’s had their basis in the early launch of Virgin Mobile in the UK and then extended globally with numerous permutations to the original business model including to Australia, New Zealand and the USA with the launch of Boost Mobile in each of those markets. The original foundation of the MVNO model was that you were in effect, a virtual network; that all but the network expenditure itself would sit on your balance sheet and that the full effect of handset subsidies, CPGA, provisioning and billing would be borne by the MVNO. You would basically “rent” the network and wholesale minutes from the carrier. The model for an MVNO was underpinned by the ability to target key demographics either underserved by the carriers or otherwise unable to be targeted due to the “carrier mentality” as opposed to the “marketing mentality” of the MVNO. Virgin was a “pure” MVNO whereas Boost Mobile had its genesis as a marketing, services and distribution company. Both were pre-paid (there have been no major efforts as a post-paid MVNO to date that I know of) and both targeted the youth market (although with a very different marketing message).
Now it seems that everywhere we turn we are hearing about MVNO’s as the next “holy grail” of telecom? CTIA was an MVNO showcase for everyone from platform providers, to software companies and handset providers all pitching their MVNO products. As a venture capitalist and given my background with Boost Mobile I must have seen 30 MVNO’s in the last year and I hear that twice that many are lined up at the doors of the carriers to sign their wholesale contracts! There has also been some high profile announcements from major brand and start ups gearing up to launch later this year (Disney, ESPN, Amp’d Mobile, SK Earthlink). There must be an opportunity somewhere right? Well there is, but not for everyone so be cautious and do your research before you convince yourself that being a great consumer brand means you can sell phones (and that you are actually an MVNO).
There are clearly underserved and under-marketed segments that are an opportunity for new entrants. Whether you are looking to leverage the advanced platform of BREW and EV-DO (like Amp’d Mobile) or the content and platform of an advanced 3G market (as SK Earthlink is looking to do) there is an opportunity to create a successful business. In addition, you have the entrenched broadband providers/MSO’s who “own” the wireless and wired networks within the home and are looking to leverage that as part of their quadruple play with a dual mode/WiFi enabled handset product and service. The MSO’s generally have an advantage as part of a bundled service offering (and more so when home wireless networks also start to be bundled by the MSO’s) but they still have to create a compelling proposition to the mobile subscriber in what will become a landscape of entertainment driven devices. Where the most caution is required however is in trying to leverage a consumer brand and create an MVNO out of what should either be an application or a branded offering which should be made directly by a carrier and/or OEM (such as Disney did in Japan in partnership with KDDI and Sanyo for fully Disney themed phones which are very cool and simple).
Take ESPN as an example. I have a bet with an industry analyst that ESPN Mobile as an MVNO, won’t be a significant business (note: it’s for a bottle of Australian Grange so I hope to win). One of my industry associates thinks this business will be as big as Boost or Virgin. I can’t see it. There is probably a warehouse full of Nextel NASCAR phones somewhere that never sold. I personally have never seen a NASCAR phone anywhere. Granted, its one sport as opposed to a full ESPN sports offering but does anyone want to own a sports phone and have it managed and provisioned solely by ESPN? As an Aussie, we are crazy about our sports and I may not completely understand the US sports culture but my bet is that a sports based MVNO will be a challenge. Personally, I think sports is one of the best applications available for mobile but that it should stay an application and leverage itself across all the networks instead of creating its own virtual one. I think Disney will have the same problem but Disney’s bigger problem will be churn and keeping the content relevant for today’s youth, especially in the USA (Japan is an exception where its considered cool to have Mickey Mouse as your wallpaper as a 40 year old). The key in this deal would be to negotiate a marketing/subscriber payment with your carrier partner to allow them to market directly to your Disney subscriber when that subscriber is nearing the churn age. Part of our pitch at Boost Mobile was that Boost provided the Happy Meals and Nextel was to concentrate on the Big Macs. We were the ones that provided the toys and the cool stuff and Nextel focused on the construction worker. When our subscribers stopped liking Happy Meals then Nextel was there to sell them Big Macs. It was a perfect match. We were like one big MacDonald’s. My point is, when you stop liking Mickey Mouse where do you go? Hopefully, not to another network so you need to plan for this in your network contract.
So as a general comment I think consumer brands should be applications, not virtual carriers. My exception to this would be a company like Apple but even Apple should consider whether it wants to be an MVNO or just be the seller of the best converged handset and integrated applications on the market. What’s the difference between Apple building a fully loaded Apple applications handset and selling it exclusively through a single carrier as opposed to being a full MVNO? Why can’t Apple just be an exclusive content partner (or Disney or ESPN for that matter)? Leave the voice minutes to the carrier and own (and share the revenue) from all the data/content from their applications and concentrate on what you do best. You don’t have to be an MVNO to leverage your content if it is compelling enough so why take on the headache of running a network with a completely different skill set? And there are smart companies out there like MSX who have server solutions for managing the whole subscriber experience and Nellymoser for provisioning media content over wireless networks (why should Starbucks be an MVNO when it can have a company like Nellymoser build a fully interactive Starbucks client on a phone integrating the web experience and all forms of new media, video, music, downloads etc). The carriers should be looking more closely at these solutions and how they can provision OTA management of branded wireless services directly in partnership with the brands.
There are also a whole other group of proposed MVNO’s that are looking to enter into the space over the next 24 months from high end concierge services, retail network offerings, all degrees of youth segmentation (5-9 year olds, 9-12 year olds etc), Soccer Moms, advertising supported business models, Family MVNO’s, Urban and Hispanic, free coupon supported models and music based services to name a few. I am waiting for the Mary Kate and Ashley MVNO to appear any time now. Some of these may succeed but most will blow through a lot of investor’s money and go nowhere. MVNO’s have traditionally been about segmented marketing and distribution but remember the business is also underpinned by some important metrics that have to be satisfied in order to be successful. Most importantly, the CPGA (cost per gross add) and the handset subsidy per subscriber. Outside of these factors are provisioning costs, billing, customer support, MDF and marketing (a factor of CPGA). And all of these link back to a lifetime value of the subscriber giving you an effective IRR on each new connection/subscriber. One thing the existing brands (like Disney) have is a lower marketing CPGA but to launch a new brand on a national basis is a huge investment (upwards of $100 million in marketing alone to do it right). Its hard work and expensive and the retail channel is not guaranteed. It’s a zero sum game at the big retailers like Best Buy. Every new service usually means someone has to go as there is not enough room for everyone on the retail floor and the economics of retail just won’t support all the new entrants that are signing contracts with the carriers. To the contrary, retailers seem to be placing their bets on select partnerships and these are usually the ones that can throw them huge spiffs and MDF (or equity?). Pre-paid is all about distribution and unless you can develop a national footprint (or a unique web based model?) then it’s hard to make the economics work. And a post paid/contract service is even more difficult to provision and manage at retail.
And where are the carriers in this process? They seem happy at the moment to sit back and wholesale as much spare capacity as they can and to let the market decide the winners and losers. But there is no reason why they can’t participate more directly in what is, in effect, a marketing business (after all, they own the distribution channel). The Disney/KDDI deal noted above was a great example of carriers and OEM’s providing a segmented service. Similarly, companies like MSX are developing managed software solutions to allow the carriers to update phones OTA with new themes and applications. Phones can be themed in the retail store (or online) depending on your demographic: a MTV music phone or an ESPN sports phone could be provisioned at point of sale with the subscriber continuing to be owned by the traditional carrier. I am sure that the marketing and content services team at Verizon would have jumped at the chance to launch their own EV-DO youth brand if given the opportunity but the culture of the carrier has not lent itself to these types of ventures. If I was Verizon I would have hired a few smart advertising agencies and sports marketing firms, signed up some sports figures and celebrities, created a new brand and created my own MVNO but within the institution of the carrier. Sounds simple? It’s not. But it’s also not that hard. So why aren’t the carriers taking the lead?
And a few final comments. Firstly, true MVNO’s, if done properly, require a LOT of cash mainly in handset subsidies and marketing. So be prepared to write big checks if you want to invest in this market with one of the lead contenders. But if you get it right and are ahead of the curve there are big rewards. And lastly, in all the investment pitches I have seen in the last year there is one I haven’t which is a real opportunity for someone. Take a look at what Telmore (and recently EasyMobile) has done with its discount MVNO in Europe and its pure web based fulfillment, no frills SIM based pre-paid service. It’s a hard model to replicate as it would require SIM unlocking but at least it is something different from all the entertainment driven MVNO’s that seem to be getting all the headlines today. And for a look at the future it’s also worth analyzing the DoCoMo purchase of Sumitomo Mitsui and the integration of the banking and telecommunications industries. Are banks the next MVNO’s?”
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