Pros and cons of MVNO deals

Deutsche Telekom (DT) recently announced the end of its relationship with German MVNO and service provider Drillisch. DT accused Drillisch of connecting 30,000 “ghost SIMs” (connections with no associated customer relationship) for which the MVNO has been paid commission.

 

The connections all relate to the “SIMply” discount MVNO brand, and DT claims that it is owed approximately €1.3m. Drillisch denies all the accusations, and has responded by moving the customers to another network. We believe that this network is Telefonica’s O2, which has an existing wholesale relationship for some of Drillisch’s SIMply customers.

 

This story again raises the questions: are MVNOs a friend or foe to mobile operators? And which is the right MVNO wholesale business model for mobile network operators (MNOs)?

 

MVNOs should be a way for mobile operators to reach new customer segments, and they should provide some benefit to MNOs. This could be by providing a new distribution channel, the ability to serve a niche segment that an MNO can’t reach because it can’t customize to that level, a strong brand resonance with a key customer segment (such as ethnic groups or young users), or a more profitable way to reach a particular market segment (i.e. very low-usage customers).

 

However, MVNOs should never be a direct competitor to their host as once an MVNO starts to cannibalize its host’s customer base, cracks will begin to appear in the relationship. If an MVNO becomes a very large player with increasing market power, the balance of power in the relationship shifts. The dynamic of the relationship changes as the potential risk of a large MVNO customer moving host providers becomes a significant threat to the MNO’s business rather than a channel for additional revenues.

 

When MNOs look at their wholesale strategies, many simply opt for standard wholesale airtime deals. This involves selling airtime minutes to an MVNO, with the relationship not going much deeper. While this strategy doesn’t require any additional investment from MNOs, it means that they have limited control over the MVNO’s pricing and marketing strategy.

 

Alternatively, some operators choose to enter into a 50/50 joint venture, such as in the case of O2 and Tesco (a UK-based supermarket chain) in the UK. This involves the creation of a separate legal entity. The investment required by the MNO is much higher, but the operator has far more control over the MVNO. This means that the MNO is unlikely to experience cannibalization of its customer base, with the MVNO becoming more of a sub-brand than a competitor.

 

 

The last option is a combination of these two approaches. Under this model, the MVNO remains as a third-party business with no equity investment from the MNO, but the MNO provides more than just airtime minutes. The MNO becomes a mobile virtual network enabler, offering additional services to MVNOs such as billing and rating, customer relationship management, and other back-office functions. This enables the operator to generate additional revenues from its wholesale partnership, while its closer link with the MVNO allows it to gain an insight into the MVNO’s strategic direction.

 

O2 and Vodafone were both quick to defend Drillisch, stating they had no issues with the MVNO/service provider. Drillisch is regarded as a disruptive presence in the German market as it has a number of MVNO brands that compete on price. Collectively, MVNOs have played a major role in driving down retail prices in the German market. Drillisch’s base of 2.6 million mobile customers makes it a partner that operators would much rather have on their network than as a competitor.

 

O2 and Vodafone’s public support for Drillisch reinforces the idea that there are no bad MVNO customers, just bad MVNO relationships. If all of Drillisch’s customers have been moved onto O2′s network, it is an excellent organic customer acquisition move by Germany’s smallest network operator.