Research Notes

10 reasons why consolidation in the European mobile market forces operators to assess their MVNO strategy

There is a wave of consolidation across the European mobile market, and regulators are calling the shots when it comes to winners and losers in the MVNO market. Regulators in Switzerland and Greece would not accept the market going from three to two network operators. In other cases, regulators impose MVNO “remedies” as conditions for merger approval, as was the recent experience in Austria, Ireland and Germany. Given regulators’ increased focus on MVNO and merger conditions, operators need to review their MVNO strategy and their readiness for the structural changes coming to many markets as part of consolidation.

The conventional wisdom among many regulators, politicians, and policymakers is that the more operators or MVNOs in a given market, the better the competition will work. A recent OECD report even makes the naive assertion that the more operators in the marketplace, the more willingness there is to invest in new infrastructure. This research note focuses on why mobile operators need to ensure that they have the right MVNO strategy in light of inevitable consolidation.

First of all, an MVNO cannot be compared with a MNO, a mobile network operator. MVNOs have more in common with retailers and classic distribution channels that sell mobile products to niche markets than with mobile operators. While network operators struggle to run their mass market brands cost effectively, MVNOs generally serve narrow customer segments with more profitability. Put simply, MVNOs pick the choice dishes from the rich man’s buffet. Their primary value is that they can attract and retain small customers segments more cheaply than a network operator – precisely because MVNOs have lower overhead and targeted marketing.

Many regulators and competition authorities have attempted to compensate for the declining number of network operators by increasing the number of MVNOs. This is largely based on a feeling that a higher number is better, even though there is no salient theoretical or empirical evidence that there is no magic number of operators for any marketplace. Moreover markets are not static; they move through periods of consolidation and investment. However it is well documented that aggressive MVNO strategies can reduce distribution costs. See our Research Note French Free Mobile has successfully launched a real MVNO strategy and in just a few days changed the French mobile market for ever

Naturally regulators are concerned how consolidation affects competition, and many have a knee-jerk reaction that the number of MVNOs must increase because the number of MNOs will decrease. But this is not necessarily the right response. Regulators need to be careful because the conditions they impose can have unintended consequences to all the operators in the marketplace, even if they are not a part of the consolidation.

Many regulators and policy makers have misunderstood the “ladder of investment” theory, assuming that if entrants are allowed a leg up in the market that they will become full-fledged operators, investing in infrastructure, creating mass market brands and so on. But most founders of MVNOs never intend their enterprises become network operators. The kinds of entrepreneurs or management groups that are attracted to MVNO business models are largely marketers or retailers from other industries. They know how to sell wireless services by setting up web-shops. They want to be infrastructure light.

For many MVNOs, their goal is to be acquired by a network operator. Network operators own and operate MVNOs as part of their multibrand strategies, frequently allowing these entities to operate largely independently with their original management and employees. But regulatory actions can destroy these happy campers. In Austria, Ireland and Germany, it was the regulator, not consumers, who decided that MVNOs and sub brands will have a central role. Regulators may demand that network operators spinoff certain MVNOs or sub-brands as part of a merger, potentially endangering the viability of those sub-brand units.

Strand Consult has developed a process for operators to prepare for these situations with its Strategic Review of Operators’ MVNO Strategy. This is a tool set to analyze the market in 360 degrees, determine the possible outcomes of consolidation, and options for operators given the various scenarios.

There is no doubt that regulatory remedies can have far reaching impacts beyond the parties of the merger itself. This means that even operators that are not a part of the consolidation may be impacted by regulators’ decisions. To understand the thinking behind the Strategic Review of Operators’ MVNO Strategy, here are 10 points about the impact of consolidation for operators and MVNOs to consider.

1. Impact to large network operators. Operators frequently acquire MVNO brands as a defensive strategy. It may be a way to attract and retain price-sensitive customer segments. Forced spinoffs of their discount brands can have serious consequences for them, ultimately lowering the value of the merger, though this may be the implicit goal of the regulator. Alternatively an operator may want to increase the number of sub-brands in its portfolio before a consolidation to lessen the impact of regulators’ interventions.

2. Impact to small network operators. A number of smaller network operators have used MVNO models to increase distribution, reduce sales acquisition cost, and increase market share. Operators risk losing some of their most successful brands if they consolidate, as regulators may require spinoffs at reduced prices. See our Research Note Future successful mobile operators will have a multibrand strategy

3. Impact to MVNO entrepreneurs. Many MVNOs are established with the idea to sell them to network operators. However, regulatory interventions in mergers can create disincentives for MVNO entrepreneurs and investors, as the purchase price of MVNOs may be reduced. Knowing that regulators may ultimately force the spinoff MVNO brands, those who invest in MVNOs may grow risk averse. Moreover entrepreneurs who launch MVNOs may find their exit strategies less attractive, so may lessen their investment, or look for opportunities outside the mobile sector. See our Research Note Strand Consult congratulates Telmore, as the mother of all no-frills MVNOs celebrates its 10th birthday

4. Impact to retail-based MVNOs. Retail-based MVNOs should consider what role they will have in the future and whether consolidation means that they have to make a new agreement with another operator in connection with the consolidation or whether they can use consolidation to renegotiate their existing contracts.

5. Opportunity for international calling card MVNOs. A number of companies sell international and long distance calling. Many of these firms have changed strategy to become MVNOs selling cheap international traffic. These players need to consider whether their customer base and brand can help to increase the value of the operator that allows itself to consolidate into another operator.

6. Opportunity for fixed line operators. A fixed line operator that focuses on the SME market could go into the mobile market and become an MVNO. There are a number of mobile operators that are weak in the B2B segment. When these are included in the consolidation, these fixed line/MVNO operators could consider selling their business to a weak operator in the SME market which will be consolidated into another operator.

7. Opportunity for cable TV providers. Cable TV operators now offer their customers access to mobile telephony. Their choice of mobile partner is important; the side effects of consolidation may offer them new opportunities. With forced spinoffs from mobile operators, cable providers may find quality MVNO brands to purchase at a discount.

8. Opportunity for weak MVNOs. For those MVNO that have had limited success, they may find renewed opportunities because of consolidation. These actors could market themselves to operators in need of “build or buy” mobile solutions.

9. Need for regulatory reflection. A number of regulators and policy makers mistakenly consider MVNOs “small operators”, as if the market activity of MNVOs can simply be substituted for a network operator. Regulatory intervention in market has a number of unintended consequences to operators, which can be either positive or negative depending on the actor. However regulators should reflect before intervening, as the outcome of their action may have the opposite of the intended effect. They can empower or disempower other actors that are not even part of the consolidation. This is an important point for staffers in the public and regulatory affairs departments to emphasize in their communication.

10. Impact to other markets. With consolidation comes structural change which may create new ways to put the market together. Consolidation in the mobile industry will rub off on landline providers and TV providers. Those that are the best-dressed with the right strategy will have the best potential to create the most value for their shareholders.

Looking at a variety of markets around the world, it shows that regulators and competition authorities have limited imagination and understanding to what creates competition in the mobile market. However they have the power to change the rules of the game, pick winners and losers, and ultimately impact value to shareholders. Companies with great value today can be minimized tomorrow and correspondingly, new companies, whether they have merit or not, can be promoted.

Strand Consult has worked with the MVNO market for more than 15 years and with its many reports and analyses, is one of the world’s leading knowledge centers on MVNOs. Our research has been early to discuss trends and has provided the foundation for successful MVNO strategies both for virtual and network operators, particularly our report How to Succeed in the Second-Generation MVNO Market. Operators in over 50 countries have benefited from Strand Consult’s tailor-made workshops.

Strand Consult’s new offering, Strategic Review of Operators’ MVNO Strategy, helps operators and others address factors relating to consolidation. Recent events in Europe show that operators were not prepared for the interventions of regulators and that shareholder value may have suffered. On the other side, those operators that have prepared are able to maximize their transactions.

To learn more about Strategic Review of Operators’ MVNO Strategy contact us here

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