Already hyped by the strategy consultancies in 2004, in recent years the number of Mobile Virtual Network Operators (MVNOs) has grown rapidly and powerfully. But not all of them were successful in the process; especially the me-too products, which were marketed somewhat half-heartedly, found few takers in the over-saturated mobile phone market. Now, however, further development of technologies and end-user devices offers new possibilities in the field of mobile broadband. The „internet on the go“ is becoming more prevalent and data tariffs are growing in importance – and MVNOs are being presented with interesting opportunities to increase profit margins and customer value. At the forefront here are PC manufacturers that integrate hardware and connectivity.

After 17 years of the mobile phone market, there are now 110 millions of mobile phone contracts in Germany according to the industry association VATM. With a penetration rate of 134% of the population, cutthroat competition and decreasing margins are the logical consequences.

It was primarily the so-called Mobile Virtual Network Operators, as well as the mobile phone providers’ discount brands, that delivered the continuous growth seen in recent years. As, despite falling prices, they were initially able to continue achieving attractive margins by virtue of efficient distribution channels and the use of leaner systems and processes. And although not all new providers can reflect on a real success story, the MVNOs and discount brands have now achieved a market share of 13% in voice services – a figure which is growing.

But with more than 50 providers vying for the attention of customers alongside the four network operators, T-Mobile, Vodafone, E-Plus and O2, as well as service providers such as Debitel, the MVNO market is also increasingly saturated. In addition, with the per-minute tariffs of the discount brands now down at 8 cents per minute, a barrier has been reached which is unlikely to be broken in the near future – the interconnect costs mean that natural limits are placed on the providers, and engaging in pricing competition will become ever more difficult.

In fact, it is the mobile use of internet services that will deliver further growth in the mobile phone market. But how can an MVNO position itself to profit from such future developments?

Here it’s worth taking a closer look at the success factors up to now for the voice-based MVNOs, in order to identify new starting points for the virtual network operators:

1. Branded reselling – Use of attractive discount brands and established distribution channels

Strong commercial brands like Tchibo and Aldi have used their brands and existing distribution channels to successfully sell their „own“ mobile products to customers. In this respect, customer loyalty and the customer’s trust in the brand form the essential basis for the success of the product. To the customers, the trading companies appear to be MVNOs and thus to be practically mobile phone providers, but, as branded resellers, the actual product and process management is left to the network operators E-Plus and O2 behind the scenes.

In order to be able to participate more strongly in the MVNO market without putting their own existing products at risk, the network operators themselves are introducing discount brands with which they are fuelling price wars in the discount segment. With Simyo and Base, E-Plus has built up two very successful, target-group specific brands; O2 and T-Mobile have followed with Fonic and Congstar.

2. Lean production – introduction of leaner and more flexible systems and processes

In a highly dynamic market, and in the context of a price war increasingly led by the MVNOs and discount brands, the respective network operators have ultimately tried to optimise the linkage and operations of the MVNOs.

At the forefront of the technical implementation of this stood the use of cheaper CRM and billing platforms by the Mobile Virtual Network Enablers (MVNEs) which connected the network operators and the MVNOs. These enabled the rapid and flexible connection of new brands via a standardised platform with low adjustment and operating costs. In this way, the establishment of a mobile phone brand with a specific product proposition could be done in less than six months. Through greater outsourcing of IT operations, process optimisations and a reduction of service costs, it was thus possible to reduce „production costs“ for the management and care of customers significantly.

3. Product innovation – introduction of 24/7 and flat-rate tariffs

Furthermore, the great success of the MVNOs lies in the tariff innovations: above all, the introduction of uniform per-minute prices around the clock and to all networks has finally offered customers a transparency which never before existed in the tariff jungle provided by the large mobile phone providers and network operators.
The price plans have mostly been sold through the efficient distribution channels of retailers or over the internet. This has made it possible for providers to heighten the price competition further with ever cheaper per-minute rates. With Base, E-Plus went a step further and introduced flat-rate pricing for mobile phones.

4. Product integration – establishment of product and service bundles

The uniform per-minute prices spread quickly as innovation stagnated. Follower companies in particular got to see that their chances had crumbled away.

With the entry of fixed-line networks, VoIP and DSL providers, other telecoms companies managed to position new products successfully. Through a close association between fixed-line and mobile communications in the form of free calls between the company’s own fixed-line networks and mobile phone products, but also through integrated services and unified billing, HanseNet, for example, achieved a competitive advantage with Alice which was very well received by customers.

In particular product integration will offer opportunities in the coming years and for continuing development, even in a difficult market environment. A look at the telecommunications landscape shows that, in future, providers will have to go beyond a fixed-line/DSL/Mobile offering in order to provide added value to the customer.

Thus, according to Analysys Mason, by 2012 one quarter of all Europeans will not have a fixed-line connection at all; instead, however, every other will be utilising mobile broadband services. According to a projection from the European Technology Observatory, revenue in this segment will already increase by 8% this year to €5.5 billion – corresponding to one quarter of the entire mobile phone market. The IT consultancy Ovum even states that this will multiply fivefold by 2014. As well as the use of mobile broadband services via data cards and classic mobile phones, notebooks, PDAs, MP3 players, portable game consoles and digital cameras will play an increasingly important role in this.

Although there were already similar predictions years ago from various credible institutes, the current changes in the market make it clear that mobile data use stands on the verge of a breakthrough. For example, in Austria 30% of all broadband access is mobile. In Germany, too, network operators and established MVNOs have been offering so-called Surf Sticks for the last two years with increasing success and have begun to bundle their data tariffs with netbooks rather than with mobile phones.

The use and spread of mobile internet will only be fully developed, however, when the end-user devices – whether mobile phones, netbooks or notebooks – allow comfortable navigation on the internet.

In this respect, the iPhone represents an example of the penetrative power of a good user experience. The popularity of Apple’s mobile phone is based, above all, on its ease of use and the direct access to valuable services through the many applications and gimmicks on offer. At the same time, however, the iPhone is proof that hardware manufacturers are driving the integration of hardware and connectivity: internationally, special iPhone tariffs have been developed which make the integrated use of voice and data services attractive. Even if Apple with the iPhone still has not taken the step towards a real price plan of its own, concentrating rather on exclusive partnerships with network operators, this step is most likely not far away.

Dell, as perhaps the foremost PC manufacturer, recognises an opportunity in the continuing integration of hardware and connectivity and, from the middle of this year, will launch as an MVNO in Japan, supplying laptops in various price classes together with a mobile data quota which can then be extended by credit card.

A similar strategy is also possible for other hardware providers. Companies like Acer, Lenovo or Asus, which now produce laptops as well as mobile phones, can increase customer value and raise profit margins with an appropriate integrated offering. Such a strategic orientation could address both private and business customers.

For this, it is, above all, professional project and product management that is required alongside a product proposition oriented to the target group. Hardware manufacturers face the challenge of negotiating appropriate contracts, in both a commercial and technical sense, with mobile phone suppliers, defining interfaces and processes between hardware products and mobile phone services and integrating the service capacities.

This look at changes in the telecommunications market ultimately shows that customers want mobile internet service and they want it in combination with an end-user device which is convenient to use. The next MVNO success story will be written by the hardware manufacturer that seamlessly integrates mobile phone services, especially mobile broadband, into its product and configures this for an optimal user experience.

Comment by Marc Strüßmann and Tim Schlenzig, 28th April 2009