MVNOs find new opportunity in 4G

Like many telecom trends, the MVNO business model has gone in and out of fashion in the last decade. The early explosion of MVNOs across developed markets has somewhat subsided, with many MVNOs having a relatively short lifecycle of approximately three years.
After this, they either go out of business because someone else has a cheaper “me too” offer or they are bought by the host network provider. Very few MVNOs manage to achieve scale and longevity.
While 4G is the latest MVNO opportunity, there is still doubt as to whether the new technology can truly change the telecom landscape or if it will just provide another wave on which to ride.
The US is leading the way for 4G MVNOs
The US telecom market has had some high-profile MVNO failures, including ESPN MVP, Disney Mobile, and Amp’d Mobile. All of them promised to offer more than just voice services, and a lot of resources were invested in them before they were even launched.
As a result of these failures, MVNO became a dirty word in the US that was not to be spoken if you wanted to get financial backing. That’s not to say that MVNOs didn’t exist, but the concept was a much harder proposition to sell to financial backers. As a result of this history, it is interesting to see that the US is now leading the way in terms of 4G MVNOs.
Sprint is currently the most aggressive LTE wholesaler in the world. This will come as no surprise to anyone who tracks MVNOs as Sprint has always driven the wholesale market in the US. In fact, it was Sprint’s success in generating wholesale revenues that led its competitors to take MVNOs on board in the first place.
To date, Sprint has more than 10 MVNOs on its network that offer 4G services to their customers. From the launch of its LTE network, Sprint has offered the technology as part of its wholesale proposition, deciding not to reserve it for its own customers as other operators have done.
While the other US operators have been slower to make LTE available at a wholesale level (although AT&T is now allowing its sub-brand, AIO Wireless, to sell LTE services), we expect this to change in the near future.
Other markets are also seeing the beginnings of 4G MVNO activity
4G MVNO activity is also beginning to occur in markets outside of the US, albeit at a much slower pace. These include Australia, where Optus is beginning to wholesale its 4G network, and Japan, where DoCoMo has two ISPs currently offering 4G services. Europe has yet to really get going with wholesale LTE.
Network rollouts are much slower and most operators are choosing to retain LTE as a premium service for their own retail channels rather than offering it as a wholesale proposition. However, a few deals have begun to emerge, with KPN in the Netherlands and Sunrise in Switzerland offering LTE to MVNOs. In the UK, EE has stated it will wholesale LTE by the end of 2013, announcing that mobile phone retailer Phones4U will be its first 4G MVNO customer.
4G presents many barriers for MVNOs to overcome
Before everyone gets carried away and thinks that 4G is a license for MVNOs to print money, there are two key barriers that must be overcome.
Firstly, MVNOs need to get wholesale access to a 4G network. While some operators are opening up their LTE networks, these opportunities are limited as most operators are either not advanced enough in their network rollouts or still believe that 4G should be reserved for their own retail customers.
Most operators are still under the misguided belief that they can charge a premium for 4G access. By reserving the faster network for their own customers, they believe that they can gain a competitive advantage and increase ARPU.
While retaining a competitive advantage may make some sense in the short term, we don’t believe that operators should be charging a premium for 4G at the retail level (as discussed in this Ovum comment). However, that’s not to say that operators can’t charge a premium for 4G at the wholesale level, provided that the regulator doesn’t stop them from doing so.
Secondly, 4G devices are still new, expensive, and difficult to source. As most MVNOs run a lean operation with relatively low margins, taking on the cost of a 4G device is not within most of their financial means.
For MVNOs that only provide SIMs and micro SIMs and in markets where subsidized handsets are still prevalent, this is a significant barrier to customer adoption. If the device in question is the iPhone 5 or any of its later incarnations, most operators are keen to keep it for their own retail channels.
In addition, almost all MVNOs are not in a position to negotiate with Apple or other vendors directly due to a lack of scale. As a result, 4G will need to mature before it becomes within the reach of most existing MVNOs.
In many ways, the 4G MVNO proposition is just an extension of the existing MVNO model with the same pros and cons. However, it is different in that it also provides credible broadband connectivity. This means that a number of new MVNOs could emerge.
It is no coincidence that the 4G MVNOs in Japan are ISPs, while interest in the UK is also coming from enterprise specialists such as Gamma. This provides host network providers with the possibility of broadening the type of customers that they do wholesale business with. However, due to the restrictions outlined previously, growth is likely to be slow.
Carrier Pawsey is a senior analyst for industry, communications and broadband at Ovum. For more information, visit