MVNO 2.0: MVNO of the digital age

MVNO 2.0: MVNO of the digital age

The Delta Perspective

Author: Nino Vashakidze

Since the early 2000s Mobile Virtual Network Operators (“MVNOs”) have proliferated, first in the developed markets and subsequently in emerging markets. Key drivers for MVNO growth were: growing mobile markets with increasing mobile penetration and usage, and market liberalisation. Some MVNOs have seen phenomenal growth and lucrative exits. For example, Virgin Mobile UK had a 6% market share when it exited to NTL in 2006 at 2.3x EV/revenues1 in a deal worth $1.7bn.

Unfortunately, such a fertile environment for MVNOs has ended due to significant structural changes including (i) saturated mobile penetration, (ii) many MVNOs competing in markets with at least three strong MNOs, each with segment-specific sub-brands, and (iii) over-the-top players negatively impacting traditional telco ARPUs.  As a result, MVNOs struggle to grow and stay profitable.

Despite these challenges, MVNOs have the potential to exploit the opportunities stemming from the new digital age. Specifically innovating to best serve digital-savvy consumers enabled by the proliferation of smartphones, connectivity and digital content and services, particularly as millennials are becoming an increasingly meaningful part of the consumer base. These consumers are always connected, impatient, seeking personalised offers and experiences, and consume mostly digital media and shop online.  

While these patterns are becoming mainstream, MNOs are struggling to switch gear to the new digital age, creating an opportunity for smaller, more nimble players to take a lead in serving these emerging digital consumers. Some of the recent MVNO entrants, such as FreedomPop in the US, giffgaff in the UK, amaysim in Australia and Virgin Mobile CEE, have proven that it is possible to innovate value proposition and customer experience in order to succeed even in mature, competitive markets (see Exhibit 1).

Exhibit 1: MVNO evolution timeline
Source: Wireless Intelligence, Delta Partners analysis 
On top of the basic hygiene factor of a simple and transparent telco proposition at a competitive price, there is built innovation in the form of personalised, differential tariffing and niche products, such as app-based pricing or third-party sponsored data. Some MVNOs such as FreedomPop and Virgin Mobile CEE even offer free basic packages to subsidise subscriber acquisition and then upsell additional services in a freemium model.

Success lies in delivering a superior holistic customer experience. It starts from building awareness through digital channels, social networks and word of mouth and executing via a seamless online purchase experience, with contextual customer engagement whereby customers are regularly offered personalised offers, at the right time, through the most convenient channels, provisioning service instantly and resolving queries through an app in real time.

MVNOs that are able to deliver such experience to digital-savvy customers not only see growth in saturated, stagnating telco markets, but also manage to become profitable2 (see Exhibit 2).

Exhibit 2: Performance of MVNO 2.0s

1 2015 subscriber and EBITDA numbers are management estimates based on H1 2015 actuals as provided in IPO prospectus. In H1, amaysim had 679 subscribers and $4.6m EBITDA. 
Source: amaysim prospectus, GSMA Intelligence, Delta Partners analysis 

MNOs are slow in replicating the disruptive value proposition of MVNO 2.0s. In some cases, that is due to the risk of cannibalisation of existing revenues. For example, while FreedomPop benefits from the economic arbitrage created from the price differential between IP voice versus circuit switched voice, by serving most calls through WiFi or IP, MNOs are hesitant to do the same as traditional voice revenues still constitute a significant part of their revenues.  In other cases, it is because MNOs are hindered by old ways of running business including custom built IT systems and traditional sales and distribution channels.  These are now being challenged by MVNO 2.0s and the MNOs may soon need to learn from them.

There are three most critical enablers for MVNO 2.0s to succeed:

(1) Technology - an MVNO 2.0 needs to have its own IT platform that will not only enable it to be independent from the host’s IT platform, but will assist in driving innovation, flexibility, automation and personalisation of offers, services and overall customer experience.  

(2) Data and analytics allowing an MVNO 2.0 to gain a holistic understanding of its customers and their behaviour in real time, and thus offer personalised offers and services through targeted, personalised communication.  An example is sending a push notification through an app offering a one week Instagram package to a customer that ran out of data allowance a second before but is trying to access Instagram.

(3) An organisation that is designed from the outset to be agile and collaborative, with a ‘trial and error’ culture. An organisation that is less focused on functions, boxes and lines but rather on processes and capabilities in order to deliver a holistic, superior customer journey. A good example is giffgaff which has only a couple of dozen professionals in a lean organisation focused on understanding customer behaviour and preferences, and creating a superior customer experience.

Given the window of opportunity for MVNO 2.0s to serve digital-savvy consumers, we believe there are interesting investment opportunities in the MVNO space. For MNOs, there are opportunities to strike win-win partnerships with MVNO 2.0s.  MNOs also have a potential to learn from and build on some of the innovation from MVNO 2.0s on how to serve digital-savvy consumers. The recent investment by Axiata in FreedomPop is a demonstration of an MNO’s willingness to learn from MVNO 2.0s. 

[1] Source: Wireless Intelligence, Capital IQ, Delta Partners Analysis
[2] Source: amaysim’s IPO prospectus, Capital IQ, 

About the author

Nino is a Vice President at Delta Partners’ Investment business in Dubai where she focuses on investments in growth companies across Telecoms, Media and Digital (TMD) sector globally. Nino has 8 years of private equity, corporate finance and strategic advisory experience and holds an MBA degree from London Business School.