Can Giffgaff, Wifog and other new MVNOs become the next Virgin Mobile?

By Anne Morris

When CEO Vittorio Colao said Vodafone had closed down five MVNOs in four markets during its recent financial year, and said the operator's choice is "not to keep MVNOs who are not willing to pay the full price of the services," it begged the question: what does it actually take to become a successful MVNO?

Network operators, MVNOs and enablers of MVNOs likely have different answers to that question. The overwhelming message appears to be that to succeed MVNOs need to find a business model that works for all parties concerned.

"Colao clearly believes that the long-term impact of a more stringent approach will be beneficial for Vodafone, thereby avoiding the possibility of MVNOs becoming a competitor within a few years," CCS Insight analyst Kester Mann said.

Finding the right business model

Business models for MVNOs range from "Full MVNOs" such as Virgin Mobile, which take on more network management activities, to brand partnerships such as Red Bull Mobile. Some of the newer business models include ad-funded MVNOs and the likes of Giffgaff, which is a community-based MVNO on the O2 UK network (albeit also owned by O2).

MVNOs are trying out multiple business models to find success.

"In terms of new models for zero-rated and ad-funded partnerships, there are still more failures than successes to point to," Current Analysis analyst Emma Mohr-McClune said. "Model innovation is vulnerable to teething problems."

Some of the best examples of high-profile MVNO successes to date include Virgin Mobile and supermarket brands such as Tesco, which have a clear route to market for their mobile plans and devices.

"Generally large-scale big brands working together offer a good chance of success due to the high barriers on either side to exit," Mann said. "I'm thinking here of Virgin/EE, Tesco/O2, Sainsbury's/Vodafone etc."

However, if you are not already a leading brand or want to try something new, what are the best approaches and why? Competing solely on price certainly seems to be a direct route to failure.

The ad-funded model

Tecnotree, which is targeting future MVNOs with a product called BSS Express to simplify the set-up process, espouses the idea that establishing a target market is a first requirement, as this can add value both for the network operator and the MVNO.

"If you are only in the margin business you will be squeezed out," said Ilkka Aura, Tecnotree's chief commercial officer. "Often the margin for MVNOs is brutally low."

According to Sébastien Crozier, CEO of Orange Horizons, Orange's business development subsidiary, MVNOs that solely compete on price and do not provide enough differentiation in their value proposition (through thins like going after a targeted segment, brand, offers and customer service) are generally "not sustainable in the long run" because "they cannot support the deflationary price pressure in Europe."

"As long as they innovate, both ends of the spectrum (Full MVNO and brand licence) can find their place in the market," Crozier said.

Crozier also noted that some of the ad-funded MVNOs have had rocky pasts, such as Blyk in the UK.

"Looking at the economics of Internet ad-funded players, it seems difficult to generate enough revenue in the best case to support the cost of a mobile access," he said. "For instance the yearly ARPU of Facebook users in Europe in 2013 was $7 to $8, which is too low to support the cost of a basic mobile network access. The economics might, however, change in the future, and some hybrid models (customer and ad- or service- funded) may emerge and find a way to be sustainable."

There are certainly some companies that still believe the ad-funded approach is viable because of its ability to enable "free" communications to users in exchange for time spent watching a few short video clips.

Carl Ander, Wifog's founder and CEO.

Wifog is a Swedish MVNO that uses 3 Sweden's network, and the company thinks it has the right model for success with the ad-funded approach, and indeed is now looking to expand into more markets.

Carl Ander, Wifog's founder and CEO, said the company's approach is to regard itself more as a "media company" that attracts advertisements and offers a high level of analytics to advertisers, without being "too crazy for users."

Users are offered unlimited data and a restricted amount of voice minutes and texts, although Ander said unlimited calls and texts will also be available in the next two months. In return, customers are asked to watch three 15-second videos when they first subscribe and every other hour thereafter.

So far, "users are queuing up to get the service," Ander said, adding that the company is set to reach its goal of 1 per cent market share in Sweden by the start of August. "I want to prove we can cover costs with the type of ads we have," he said, noting that the company's ads have a very high click-through rate.

"So now we are looking for bigger markets such as the UK and the U.S.," he added. Ander also said the company is interested in markets with highly mature media and advertising sectors.

Taking other approaches

Some companies are tackling the MVNO sector with a multi-pronged approach. A UK-based company called Voiamo has the not inconsiderable ambition of becoming "the best provider of mobile broadband services at local rates around the world," and currently has relationships with the 3 UK, U.S.-based Sprint and Optus in Australia.

Voiamo plans to achieve its goal by focusing on three main channels to market. The company offers "MVNOs in a box" to retail partners to allow them to launch an MVNO in 12 weeks; functions as an MVNA by offering wholesale access to partners such as airline companies through Affinity channels; and also sells mobile broadband services under its own brands, which are currently MobiData and Globalgig.

MobiData could be described as a traditional MVNO because it buys data at wholesale rates from 3 UK and sells it to retail customers. According to CMO Bryn Morgan, the company's unique selling proposition is that it targets consumers that want to use a lot of data, particularly tablet users, both domestically and abroad.

"We are cheaper than 3 UK," added Morgan, who noted that the company's policy is to buy big and deliver good value. "We target the space between home Wi-Fi and office Wi-Fi," he said.

For network operators such as 3 UK, MVNOs are a strategic priority and it takes its time to find the right partners.

"These are the questions we ask in order to form a view on the attractiveness of a MVNO partnership," said Lynda Burton, 3 UK's director of wholesale. "What market is the MVNO targeting and how will they be successful in that market vs. the established direct and in-direct competition? How will they distribute their service?  What is their forecast? What technical enablers do they require from the MNO in order to deliver the end customer experience? What other complementary services do they currently offer? Is their brand a good mobile fit? What is their mobile/MVNO experience? How are they funded? What is their long-term plan post go live? How will the MVNO contribute to the MNO's goals?"

Answering these questions is something of a minefield, but one thing is for sure: the MVNO market is a buoyant sector with plenty of interest from all market participants and some interesting new opportunities ahead.

"With the boom of connected devices and the Internet of Things, new forms of MVNOs will emerge whereby the connectivity of the device will be included in the price of the product or the service alike, similar to the Kindle model from Amazon or the TomTom GPS device," said Orange's Crozier. "This flourishing market is a great opportunity for mobile operators."

Can Giffgaff, Wifog and other new MVNOs become the next Virgin Mobile?
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