"New Zealand’s mobile duopoly at an end” trumpeted the television headlines of TelstraClear’s launch as a mobile virtual network operator (MVNO).
“TelstraClear has re-entered the market to shake up competitors who have had it too good for too long” — a move expected to “trigger a price war”, claimed other media.
I am sure TelstraClear will be delighted if its one handset, one price plan bundle can truly challenge Telecom and Vodafone. It won’t — obviously. But the reasons go deeper than just the spartan nature of the offering.
The virtual mobile model is a brutally tough one. While well established in US, Western European and Australian markets, MVNOs have disappeared just as quickly as they emerged, with market share highly fragmented and few able to claim profitable success.
This is the challenge for New Zealand’s new breed of virtual challengers: TelstraClear, start-up Black+White, Orcon, Compass and M2 – how can they offer something truly different to survive (let alone thrive) in a saturated market?
An MVNO is very dependent on its wholesale arrangement with its network partner. It does not own spectrum or radio infrastructure, so provides retail services through wholesale arrangements with mobile operators like Vodafone or Telecom.
Yet it is more than a simple reseller engagement: an MVNO has customer ownership, from point of sale through to billing, customer care and retention. It has independent branding, independent tariffs and services and issues its own SIM cards. It uses its own distribution channels and may operate its own switching systems. This requires investment, and the ability to acquire, serve and retain customers.
Yet it remains dependent on its network partner. Vodafone and Telecom may be happy to grow their mobile wholesale business but not at the expense of cannibalising their own customer base or destroying voice and data revenues in a price war.
So what are the MVNO options?
In Western Europe, early MVNOs took a low-cost, “no frills” approach to target the lower value pre-pay market, often supported by third or fourth-ranked operators. Consumers could get one or more SIM cards in the mail or at their local retailer, and traded away limited customer service for big buckets of text and voice minutes. It drove down cost per minute, pushed up call volumes, and encouraged customers to use their mobile instead of their fixed line — all great news for the public.
For example in Germany, where MVNOs have the highest aggregated market share of 35%, per-minute voice charges dropped from over 0.40 euros in 2004, when the first MVNO, Tchibo, launched, to 0.10 euros in 2007. But this required continued cost leadership in order to keep innovating on price.
By the end of 2007, the UK, Germany and the Netherlands had the highest portion of MVNOs which collectively held between 15% and 25% mobile market share — but this was fragmented from between 10 to 40 different providers with a steady ebb of shut-downs and start ups.
The most high profile MVNO’s already had significant brand power (for example, youth brand, Virgin Mobile), well-established retail outlets (supermarket Tesco in the UK or retailer Tchibo in Germany) and existing customer relationships (Carphone Warehouse, UK). Some saw their MVNO offering as loss leadership: success was less about subscriber numbers or revenue and more about adding customer value as part of a broader portfolio of services.
In the past two years, as mass-market competition has intensified, MVNOs have shifted to explore new niches. For example, Lebara has launched in Spain, Sweden, the Netherlands and the UK offering low-priced international calls to immigrant populations. Schwarzfunk in Germany is focused on youth communities from the social networking site uboot.com. UK-based Blyk offers 16-24-year-olds free calls and text messaging in exchange for opting in to receive targeted advertising. The value is that these are niches network operators struggle to segment and target effectively, providing a win-win for both parties.
The challenge is developing a profitable niche. Disney, for example, launched an MVNO service in the US, with subsidised handsets and family-friendly locator functions, but simply could not meet targets in the competitive US market. It shut down in 18 months.
Lessons for New Zealand
There is little disagreement that mobile competition is good for New Zealand — and given current mobile regulatory scrutiny, there is a strong incentive for mobile operators to voluntarily drive wholesale models. There is pent up demand for cost effective data, in particular.
However, a “me too” strategy that copies existing bundles but shaves a little off pricing, will get little traction. As one MVNO entrant put it: “We have to differentiate; be innovative. And we are simply not sure how we can achieve that in this environment.”
It is hard to see scope for a proliferation of MVNOs: the New Zealand market is just too small. Indeed we believe some MVNOs will simply decide not to launch. Those that do will need to exploit the gaps: create partnerships with existing high profile brands and retail outlets; target communities. Make the most of being asset “light”. Bundle mobile use with loyalty schemes that attract and build communities. Think like a consumer brand — not a telecommunications operator.
And above all have realistic objectives for “virtual” competition: mass-market share will, frankly, not be achievable; focused, profitable growth just might.
Nelson is research telecommunications manager at IDC New Zealand