There's been a lot of talk about MVNO failures, especially in the US, and how perhaps how the model isn't valid. When we noted that so many of the spectacular US MVNO failures have been for Los Angeles based companies (look out, Helio!!), I decided to investigate a little further.
First, keep in mind that brands such as TracFone (over 8m users) and Virgin Mobile (US) are MVNOs. They are using a very different business model: low cost pre-paid services, with phones specific to their network. Virgin Mobile, for example, works extensively with device manufacturers to create customized handsets.
There are some very low-investment MVNOs which appear to be doing fine. Working Assets, for example, has provided liberal-agenda retailing of telecommunications services for well over 10 years. They've added wireless services from Sprint: no special phones, no special services, just a branded retailer for Sprint. And the ability to go carbon-neutral.
I think that Boost Mobile (a Sprint subsidiary) and Jitterbug Mobile are still too new to declare success or failure just yet. I have hope for Jitterbug, as they are targeting a growing market segment.
So the folks who are failing are mostly going after the same type of market: youth or topic-obsessed (e.g., ESPN) who will pay extra money for cool services. Because of the strong branding implications, cost of customer acquisition is higher.
An excellent resource to understand the MVNO market in general, and the European MVNO market in particular, is found at market research company FirstPartner (find European MVNO 3.0 and select Download). It's a big diagram, and it will take a while to really understand it. We've extracted a small amount of the data here for further exploration.
The pie chart shows the segments of the European MVNO market as identified by FirstPartner. Paraphrasing a bit, they are:
- cost-driven, voice + text only
- physical retailers extending their store brand into mobile, usually voice + text only, such as Walmart and Tesco
- niche affinity brands, such as Gaymobile
- content-focused brands (this is the first category where non-messaging data become important)
- convergence plays, such as triple-plays
If we assume that the European market will have a similar structure to a mature American market, then we can slot companies into each category and see how they are competing.
- TracFone, Virgin Mobile USA, Boost's prepaid offering, STI Mobile. High volume players with excellent distribution models. TracFone is doing great; Virgin Mobile is in trouble, paying more than $100 to acquire subscribers and losing 4.8% of its users per month, and only making $21.48 per user per month.
- 7-11 Wireless and a host of tiny brands such as The University of Kansas.
- Movida, Voce, KDDI, Working Assets. A crowded marketplace for what is in Europe only 8% of the market. As a result, success will happen by keeping costs down or being able to charge a premium; others will have trouble succeeding.
- ESPN, Helio, Disney, Amp'd, Boost (premium). Here's where we are seeing the bulk of the failures in the US.
- Embarq, Pivot. Competition includes Verizon (Fios, Wireless, and so forth). Cable and wireless executives are enthusiastic about the "triple-play" and even "quadruple-play", but I'm still waiting on a good reason to limit my wireless choices to what cable operator I have. I expect the bulk of these folks to be either business focused with data, or consumer focused with voice + text only.
Obviously the US market won't end up being exactly as the European market; we also can not expect one analyst's document to model the industry precisely.
Of particular interest in understanding failures is cost of acquiring a subscriber. The FirstPartner document (in addition to the column on the left discussing business models) lists average cost to acquire customers at 30-200 euros for content MVNOs, as compared with 25-30 euros for cost-driven MVNOs. TracFone, the largest MVNO in the US, is still subsidizing handsets; in 2004 their acquisition cost was $70, or over double the European costs. Virgin was $121 last year. Helio, Amp'd, ESPN, and Disney are/were paying much much more.
As a user experience blog, I'll point out that all of this has a profound effect on what companies are willing to invest in user experience. Eliminating device subsidies would significantly reduce acquisition costs, but then we'd have to rely on device manufacturers to get user experience right. So far, that's Apple. Nokia and SonyEricsson are pretty good, but certainly not great.
I belive that the key in the MVNO market is to have a large coverage area like Tracfone does and to appeal to a broad customer base. The MVNO market is a numbers game since their profit for airtime is much lower than your standard carriers. So appealing to a large audience is the key. I don’t see how the niche products can compete in this arena since they naturally have a much smaller customer base. Less customers means less leverage with the major carriers which means a more expensive product. Tracfone is now at over 10 million customers and continue to add customers at a healthy pace. They continue to drive pricing down and continue to add new products and services.