Mark Lowenstein: The Emergence of MVNO 2.0

Over the past couple of years, we have witnessed the failure of many high profile MVNOs--Disney Mobile, Mobile ESPN, AMP'd, Helio--and the ongoing struggles of many others. Analysts and the press have declared the MVNO market all but dead. I think this proclamation is premature. In fact, we are witnessing the rebirth of the MVNO concept, but in a different form. My prediction: we will see a number of MVNOs be quite successful over the next few of years. Call it MVNO Version 2.0. Who might they be? What will they look like?  And how will they impact the market?

Cutting right to the chase, we are seeing the birth of the first major 2.0 MVNO right before our eyes: Apple. We have conventionally defined the MVNO as an entity that purchases capacity on a carrier's network on a wholesale basis, uses a third party (MVNE) for back-end for OSS, and offers its own branded service, device, application suite, and markets directly to consumers. It is successful as an MVNO because the overall experience--device, applications, user interface--is compelling. The model is different from traditional MVNOs in that Apple is making most of its money from devices rather than services, and has a cooperative model with its host operators from the standpoint of distribution.

Another, far less sexy, MVNO that has traction is Jitterbug--the service from Great Call focused on the senior market. They have created a sufficiently different overall experience, from pricing to device to UI, that demonstrates their understanding of a market segment that has been under-addressed by the major operators.  

To understand how MVNOs might be successful in this new clothing, we should understand why so many Version 1.0 MVNOs struggled.  First, as retail wireless prices declined, the "spread" between wholesale and retail disappeared, leaving little margin on voice. Second, the relationship between the host operator and the MVNO has often been strained. Virgin USA, Boost Mobile and TracFone have been MVNO success stories because the operators were happy to "outsource" their prepaid business. In many other cases, MVNOs were treated as second-class citizens with respect to the latest devices, data network availability, or advanced features such as GPS. Clearly, many made significant errors themselves. They were naive about the capital involved and mis-spent what they had in some cases; misread their segments; and faltered on execution. Finally, I would say that their value proposition was not differentiated enough. Again, look at Apple. In nearly all aspects, the customer experience is significantly different, which we can see in the way people are using their iPhones. 

But the stars are aligning to create MVNO Version 2.0, and it will be about more than Apple. One key element that is enabling the "rebirth" of the MVNO is a less monolithic mindset among the major operators. In AT&T's case with Apple, it is willing to be that dreaded "dumb pipe" in return for ARPU that is 50 percent above the industry average, thank you very much. In Verizon's case, the Open Development Initiative allows for the possibility of a third party offering a relatively complete service to subscribers, using Verizon's network and some components of its back-end infrastructure. ODI is in many respects the reincarnation of Verizon Wireless' wholesale business--2008 style.

Another key factor is a burgeoning application development environment. Yes, it is still frustratingly fragmented, but there is tremendous energy--and, now, real capital--behind developing applications for the Apple, Blackberry, Windows and Symbian operating systems.

We are also entering an era where there is greater abundance of network capacity. With consolidation, and the significant amount of additional spectrum that is coming online, operators might be more anxious to have additional major tenants. The definition of "service provider" will evolve as 4G networks are build, and we see a new class of data-centric devices.

We will have to broaden our definition of what constitutes an MVNO. Some will be at the vanguard of business model experimentation and will make money in different ways. For example, I believe there will be some MVNOs that rely on advertiser support of various flavors. For example, an MVNO in the U.K called Blyk, which is focused on the 16-year-old  to 24-year-old segment is offering a bucket of free texts and voice minutes in return for users' willingness to view ads.

There also is significant opportunity for the provider who can effectively combine search, LBS and advertising. Targeted advertising enables the type of market segmentation that has been an integral component of the original MVNO concept, and the technologies are there to measure the effectiveness of this approach.

Who might some of these new MVNOs be? Here are some of my predictions:

• Google. The much-anticipated Google device will feature a host of Google applications optimized for mobile, third-party apps based on the Android development platform, and over time, a business model more dependent on advertising than a traditional operator model.
• International. Someone is going to come along and take a serious whack at exorbitant international roaming rates. We will see numerous approaches, from cellular VoIP to local HLRs to dual SIMs and SIM farms.
• Auto-centric services. OnStar is one of the unsung success stories of the MVNO market, with more than 5 million subscribers. Ford has launched a competitive service called Sync that is being well received. Between auto companies' needs for additional sources of revenue, the steady spread of legislation concerning the talking/texting while driving issue, and the availability of applications that would be attractive in a vehicle, we should see a lot of innovation coming out of this sector.
• M2M. This is an area that has been growing quietly but steadily. It doesn't have the buzz of the Apples and the Disneys, but operators see this as an untapped area and have been more willing to host third parties creating M2M apps.  
• Enterprise. There have been few success stories in the enterprise beyond email and mobile broadband. I do believe that over the next couple of years there will be some good application-specific plays, or perhaps an MVNO that develops a common platform offering a suite of enterprise applications (just don't call it middleware). Top candidates are in the sales force automation area and medical sectors. I also believe major operators will be more open to working with third party entities who really know these markets well.
• Device-centric MVNOs. We are at the beginning of a new phase of device form factor and user experience evolution. Of course there will be numerous attempts to copy the Apple model. We will also see a host of devices optimized for particular applications, such as email, multimedia, games, and so on, employing a diversity of business models, from traditional operator to MVNO-esque like the iPhone.

The success of MVNO 2.0 is not assured. A challenging economy and a bad quarter or two could cause the operators to retreat like turtles back into their shell. One concern, in the U.S. at least, is where the MVNO "subscribers" will come from, as the major operators have been very effective at reducing churn and getting customers into "sticky" arrangements such as family plans.

So for those who thought they wrote the last chapter on MVNOs, we've already begun the sequel. 

Mark Lowenstein is Managing Director of Mobile Ecosystem. Click here to subscribe to his Lens on Wireless newsletter, and to find out more about an exciting event planned for October, the New England Mobile Summit.