However, Virgin’s options are limited. UK regulator Ofcom recently stated that it believes that commercial LTE services will not be launched before 2014. Therefore, in the short term, a partnership with or acquisition of 3 would make the most sense as it would give Virgin access to a data-centric network and 3 some much-needed scale. However, as broadband convergence increases in importance, Virgin will not be the only player interested in these strategies.
Fixed telcos need a strategy for mobile
Virgin’s statements highlight the dilemma for fixed-only network owners that are trying to contend with fixed–mobile convergence (FMC). This is especially the case for cable providers, which place their content assets at the heart of their offerings. From a mobile perspective, this makes their core opportunity very data-centric. As such, a wholesale-only approach to mobile can prove inflexible and expensive.
Several options besides wholesale are open to fixed network operators. Firstly, they could acquire spectrum and build mobile networks, as Ziggo is doing with LTE in the Netherlands. However, this approach depends on the availability of spectrum and funding. Secondly, operators can acquire, establish joint ventures, or partner with an existing mobile player. However, this strategy can prove expensive and risky for investors in the current economic climate. Thirdly, a commercial partnership can be attempted between fixed and mobile operators, but these partnerships can end badly, as seen with the ill-fated Pivot experiment in the US.
Another option is to forget being the center of the FMC universe and become a LEAN access provider of over-the-top services. As more services are being hosted in the cloud and are accessible through multiple devices (for example Google and Apple’s forays into computers, smartphones, and now TVs), fixed-only players could simply provide access rather than content and services. Examples of this approach will increase over the next 10 years, even though most players are reticent to embrace this strategy today.
Finally, there is the approach taken by Virgin of adopting Wi-Fi.
Wi-Fi only viable in the short term
Virgin faces the same dilemma in the UK as BT, in that it has a fixed network but doesn’t have a mobile network. As a result, Virgin is contemplating the same Wi-Fi-based response as BT. The issue for both players is that no new spectrum will become available in the short term, with commercial LTE services not expected to be launched before 2014.
However, the use of Wi-Fi brings the same challenges for Virgin as it does for BT. Mobile broadband is cheap and readily available in the UK, so Wi-Fi offers little differentiation to the majority of mobile users. So how does Virgin intend to make money from this? While the company is yet to answer this question, it will most likely adopt a similar strategy to BT and bundle Wi-Fi access for broadband customers. However, this offers little differentiation from BT or a revenue boost as it will probably provide the service free of charge. The major difference to BT’s strategy is that Wi-Fi represents a significant investment for Virgin, whereas BT had existing assets to sweat.
Virgin points to the success of similar metropolitan Wi-Fi networks in the US, but this ignores the fact that spectrum constraints for mobile operators have boosted opportunities. Similarly, PCCW’s success with Wi-Fi in Hong Kong is based on small geographic coverage. This suggests that Wi-Fi may work in cities, but national coverage is different. Therefore, Wi-Fi offers little support for Virgin’s nationwide focus on smartphones. It may reduce wholesale costs in concentrated areas, but it is not conducive to a national FMC strategy, particularly as mobile network capabilities improve.
Virgin needs mobile spectrum to fulfill its potential
Given the limitations of using Wi-Fi, we believe that even if Virgin does proceed with this approach it will still need to bolster its mobile credentials in the UK. To do this, we see two options as being the most attractive to Virgin.
The first is to wait for LTE spectrum, bid, and then build a mobile network. This would be data-centric, but the wait for spectrum to be available could see other operators seize the initiative in a space where Virgin is currently strongly positioned.
The second option is for Virgin to partner or acquire 3, and this is our favored approach. 3 remains sub-scale in the UK, and its position has been further diminished now that Orange and T-Mobile have combined their operations. It is also still dealing with poor brand perception. However, the terms of the Orange/T-Mobile agreement protect 3′s status and the advantages of its MBNL network sharing deal. 3 uses the same 3G RAN as T-Mobile and Orange and has the most recently deployed core network among the mobile operators. Therefore, it has the most data-centric network in the UK.
Virgin believes that there is significant demand for convergent services in the UK, and acquiring 3 and refreshing its brand could provide significant differentiation for Virgin. The key to whether this is a partnership or acquisition is whether Hutchison Whampoa is prepared to sell, and if so at what price.
Acquiring spectrum or 3 will require significant investment, which is a crucial point given that Virgin has stated its intentions to reduce its debt. Virgin needs to be clear on what its role in the convergence space will be as the UK is ripe for a convergent player and fortune will favor the brave.