MVNO Critical Success Factors GF 25 Sep 09 V1.0

7/27/2019 MVNO Critical Success Factors GF 25 Sep 09 V1.0

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Mobile Virtual Network OperatorsCritical Success Factors


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2copyright coleago 2009Graham Friend, +44 7973 315 434, [email protected], www.coleago.com

Have a good business story

Leverage is essential for value creation

An MVNO is no different to any other business and must have asource of (sustainable) competitive advantage if it is to createvaluefor investors. Competitive advantage is achieved by successfulMVNOs through effectively leveraging their existing assets togenerate customer growth with low customer acquisition costs. It isthis leverage that provides the basis for a good business story.MVNOs typically seek to leverage the following assets:

z Existing customers it is easier to sell a new service to existing

customers than it is to win entirely new customers (e.g. Tesco)z Brand to be successful the leveraged brand must drive the

purchase of mobile telephony (e.g. Virgin)

z Distribution existing channels to market will help reduce the costof customer acquisition (e.g. Virgin, Fresh Mobile CPW)

z Content for some, mobile provides simply another media for thedistribution of existing content (e.g. using the mobile to deliver

advertising Blyk, music downloads Radio-Formula, France)z Convergence bundling of multiple communication services is

increasingly common and has been shown to increases customerloyalty (e.g. Tele2, BT leveraging customers and fixed assets)

Business Challenges and Objectives

ContentBrand

ConvergenceCustomer Base

InfrastructureDistribution

Successful MVNOs

are those that areable to leverage

existing assets in

order to create

additional

shareholder value

Tesco Mobile Virgin Mobile Blyk


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Select the appropriate MVNO network modelBusiness Challenges and Objectives

A key strategic

decision is whichelements of the

network the MVNO

to deploy

Core Network

Spectrum and

Radio Network SIM Basic Services

Advanced

Services

Sales and

Marketing Distribution

In-house or outsourced Core activityMNO

Fat MVNO In-house or outsourced Core activity

Thin MVNODefines

not ownsCore activi ty

Service

ProviderCore activi ty

MVNE In-house or outsourced

Web

Retail

Telesales

Other

ServiceActivation

CDR Collect

CRM

Billing

Bundling offixed and mobile

(Virgin)

Exclusive TVcontent (Virgin)

Branding

Advertising

Pricing

HLR

SMS-C

MSC

SGSN

GGSN

Interconnect

GSM

GPRS

UMTS

The defining characteristic of a Mobile Virtual Network Operator (MVNO) or the increasing number of Mobile Virtual Network Enablers(MVNEs) is that they do not own any spectrum or radio access infrastructure. MVNO infrastructure designs can vary dramatically from FatMVNOs which own many elements of the core network, such as their own switches, through to ThinMVNOs and Service Providers andEnhanced Service Providers which may not even own their own customers SIMs.

The greater the investment in core network assets the greater the flexibility of the MVNO in terms of tariffs and services but this must be

traded-off against the increased capital expenditure and greater critical mass of customers required to deliver a viable return on theinvestment. Many MVNOs being with a thinarchitecture but the need to differentiate in terms of services often sees a shift towards fat.

Different MVNO Models

Flexibility/

Complexity


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Control levels of different MVNO architecturesBusiness Challenges and Objectives

A potential MVNO

may first considerentering as a Service

Provider or thin

MVNO to test the

market before

investing further

NoCan define the SIM but the

host network owns it

Can issue own SIMs withembedded customised data

and / or softwareYesSIM card

NoNoCan provide all messagingplatforms, VAS and content

YesMessaging and

value added

services

NoNoCan control routing of theircustomers traffic

YesTrafficmanagement

Yes

Yes

Manages its own billing

Can control customerprovisioning, including the

supply of handsets

Yes

Yes

Fat MVNO

Yes

Yes

Yes

Yes

Yes

Yes

MNO

Resells the retail tariffs of thehost network

YesPricing

Co-branding alongside thenetwork provider

YesBranding

May have its own billing

system but dependent on theMNO for billing information

May have its own billing

system but dependent on theMNO for billing information

Billing

YesYesCustomer care

Service Provider Thin MVNOControl

Yes

No

YesFraud and bad

debt risk

NoCustomer

provisioning


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Typical revenue models

HeadingHeadingService Provider Fat MVNO


Securing the

optimum networkdeal is fundamental

to the success of the

business but so too

is managing

customer acquisition

costs and minimisingfixed costs

Thin MVNO

z The revenues from the customer foroutgoing minutes generate a marginwhich is passed to the Service Provider

z The Service Provider may also receivecommission for each new acquisition

z The revenues from inbound traffic(interconnect income) accrue to the hostnetwork or MNO

z The MVNO collects outbound trafficrevenues from the customer and paysthe appropriate wholesale amount to theMNO

z The revenues from inbound traffic(interconnect income) accrue to the hostnetwork or MNO

z The MVNO collects both outboundrevenue from the customer and inboundrevenue (interconnect) from otheroperators

z The MVNO then pays an agreed rate tothe host network for the traffic carriedover the network

Incoming

Revenue

OutgoingRevenue

SP

MNO

ARPU Costs Margin

MNO

Incoming

Revenue

OutgoingRevenue

M

VNO

MNO

ARPU Costs Margin

MNO

Incoming

Revenue

OutgoingRevenue

M

VNO

MNO

ARPU Costs Margin

MNO


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Typical cost structures

HeadingHeadingTypical cost structures for MNOs and MVNOs

MNO cost base

The cost structure of an MNO is biased heavily towards fixedcosts. The main fixed cost elements of the MNO are:

z Network operations and maintenance (typically 30% of allfixed costs)

z Sales (20%)

z Customer service and billing (15%)

z Marketing and communications (10-15%)

The main variable cost elements for the MNO are:

z Interconnect costs

z Customer acquisition

z Customer retention costs

MVNO cost base

The cost structure of the typical MVNO is almost completelythe opposite of a facilities based network operator. The mainfixed cost elements are relatively small and comprise:

z Customer care and billing

z Sales, marketing and communications

The variable cost proportions are dominated by wholesale

airtime costs as well as customer acquisition. Wholesale costscan often represent 60% to 70% of a typical MVNOs operatingcosts which immediately limits profit margins. It is thereforeessential for the MVNO to develop a business model thatminimises the cost of customer acquisition and retention aswell as fixed costs in order for the business model to becommercially viable. Successful MVNOs are often those thatcan leverage existing distribution assets and channels to

reduce these costs.

Analysis of costs


Securing the

optimum networkdeal is fundamental

to the success of the

business but so too

is managing

customer acquisition

costs and minimisingfixed costs

Fixed

75%

Variable

25%

Fixed

25%

Variable

75%

MNO

MVNO


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Examples of commercial performance from MVNOs Virgin Mobile (UK)Business Challenges and Objectives

Customers

EBITDA Margin

Virgin Mobile

launched in 2000and became EBITDA

positive 5 years later

and is currently

generating margins

of approximately

20%

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

2000 2001 2002 2003 2004 2005 2006 2007

C

ustomers

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2000 2001 2002 2003 2004 2005 2006 2007

GBThousands

Revenue (GB 000s)

-150,000

-100,000

-50,000

-

50,000

100,000

150,000

2000 2001 2002 2003 2004 2005 2006 2007

GBThousands

EBITDA (GB 000s)

-140%

-120%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

2000 2001 2002 2003 2004 2005 2006 2007

EBITDA%


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Examples of commercial performance from MVNOs Tesco Mobile (UK)Business Challenges and Objectives

Revenue (millions GB)

EBITDA (millions GB)

EBITDA Margin

Net Book Value of Fixed Assets (millions GB)

Tesco mobile also

took 5 years to reachEBITDA positive.

However, in order to

provide a return on

its asset base of

1.6m it must

continue to grow thecustomer base

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

2003 2004 2005 2006 2007

0

20

40

60

80

100

120

140

160

180

200

2003 2004 2005 2006 2007

-12

-10

-8

-6

-4

-2

0

2

4

2003 2004 2005 2006 2007

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2003 2004 2005 2006 2007


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Develop a robust business plan and model

A successful MVNO needs a good business plan

The business plan plays a number of essential roles in the planningand creation of a successful MVNO. The roles of the business planare as follows:

z Allows the entrepreneurs, founders or sponsoring business toassess whether the creation of an MVNO will create value for theshareholders

z Supports the identification of potential target host networks andfacilitates the engagement and negotiation process with potential

partnersz Provides the information required to prepare an Information

Memorandum to support the raising of the finance required toimplement the project

z Provides the MVNO network architecture and the starting point fordeveloping an equipment vendor Request for Proposal andsupporting subsequent vendor negotiations

z Provides the blueprint for programme managing the creation andlaunch of the MVNO

Characteristics of a good business plan

The business plan must be compelling, credible and convincing as itmust convince investors and the potential host network that yourcustomer and traffic forecast is achievable. The more convincing thebusiness case the stronger the negotiating position of the MVNO. Agood business plan will have the following characteristics:

z Clear, logical and internally consistent

z Credible and realistic customer and usage forecasts

z Supported by market research

z Feasible within the appropriate timeframes and flexible

z Fully funded through to cash flow positive

Host networks will want to ensure that the MVNO will be ableto fund its activities until it becomes cash flow positive

As the Virgin and Tesco case studies illustrate EBITDApositive may not be achieved until year 5

z Underpinned by a robust Excel business model that allows theMVNO to examine the impact of different wholesale rates

Developing a robust

business plan andsupporting Excel

model are essential

for creating a

successful MVNO



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Select the right vendor strategy

Outsourcing

Outsourcing offers the quickest and least risky route to market (from3 months) and the lowest levels of capital expenditure and thereforeinvested capital. Capital expenditure is substituted by increasedoperational costs to the outsource company which scale up withgrowth in the customer base and usage. Outsourcing reduces cashoutflows in the short term and shortens the time to cash flow positive.

However, the longer term margins are lower and so is the potentiallong term return on investment. Outsourcing also typically results in

less flexibility over the capabilities of the business and propositions itcan offer.

In-house

Developing an in-house solution requires more time (6-12 months)before commercial service launch and greater investment as the timeto cash flow positive and payback is longer. The higher levels ofinvestment increase significantly the operational and financial risk ofthe business. Furthermore, a poorly designed infrastructure or poor

implementation could damage the businesss ability to operateeffectively. The right design for network and systems, the rightchoiceof suppliers, rigorous implementation, integration and testing are allcritical. Getting any one of these wrong can result in significant timeand budget overruns, poor service to customers and greater expenseto put things right.

Developing core network capabilities in-house however, offersgreater flexibility over the development of innovative products andservices and higher potential returns on investment in the long runprovided the target number of customers are acquired.

Choosing between

outsourcing versusbuilding in-house

represents a trade-

off between risk,

flexibility and return


Outsourcing versus In-house trade offs

RiskLow High

SpeedQuick Slow

FlexibilityHigh Low

ReturnHigh Low

CapitalLow High

Outsource In-house

Outsource

Outsource

Outsource

Outsource

In-house

In-house

In-house

In-house


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Select the right vendor strategy

MVNE

A mobile virtual network enabler (MVNE) deal bundles all thecomponents an MVNO requires (BSS, OSS and core network) in asingle package, either as a delivered product or a managed service.

It eliminates many of the integration issues that could otherwise slowdeployment, or even sink the business altogether. Again, thepromise is of a fast route to market, but potentially at the expense ofthe flexibility you can offer your customers and the margin available.

Best of breed

Selecting best of breed packages can be a long and expensivebusiness, and taking responsibility for their integration is a riskyenterprise. The reward will be a highly responsive and flexiblyplatform from which you can rapidly deploy innovative propositions tostay ahead in a fast moving industry.

Striking the right balance

To meet the Business Plan objectives for time to market, productand service portfolio, differentiation from competitors and expenditureprofile will usually mean striking a careful balance between theoptions of in-house and outsource and between MVNE and best-of-breed suppliers. Getting this balance right choosing what to doyourself and what to outsource is critical to minimising the risks tothe business and maximising returns.

Outsourcing may be the preferred option for those with brand based

offers or seeking to complete on price. Outsourcing may also suitmore risky market propositions where the levels of customer take-upare hard to predict or for those business with limited funding.

An in-house solution may be the preferred option for those seeking todifferentiate in terms of their product or service offering or wherethere is a high degree of confidence in the ability to win market shareand customers. An in-house solution will only be available to thosewith strong financial resources and a longer time horizon.

Choosing between

an MVNE and best-of-breed is also a

trade-off between

risk and reward



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Put in place world class programme management

Complexity and challenges in implementation

Deploying an MVNO involves multiple streams of fast-moving,complex and inter-dependent activities. The role of the programmemanager is to monitor and control these streams while maintaining ablueprint of the end result in mind.

Each stream is required to make rapid, crisp and effective decisionsin order to maintain momentum, but each decision made can impactthe other streams. The Programme Manager must keep a tightcontrol on this process, ensuring the decisions are communicated

cleanly and any negative impact countered, whilst not putting anybrakes or impediments on the flow of each stream.

It is a delicate balance and requires experience, effective decisionmaking and the ability to switch between the big picture and adetailed understanding of each stream.

Deploying an MVNO

is a complex andchallenging task

requiring world class

programme

management



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Stefan Zehle, MBA

Tel: +44 7974 356 258

[email protected]

CEO, Coleago Consulting Ltd

Graham Friend, MA

Tel: +44 7973 315 434

[email protected]

Managing Director, Coleago Consulting Ltd

Further information: www.coleago.com


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Coleago Consulting

A brief introduction to Coleago Consulting, ourexpertise and experience

Coleago Consulting


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A leading boutique telecommunications consulting and training firmColeago Consulting

Our experience encompasses mobile, WiFi, WiMAX, cable, broadband, fixed services and

television. Our expertise ranges from strategy and business planning, spectrum auctions and due

diligence through market forecasting, market research and marketplanning to interconnect and

regulation, cost modelling and network planning and optimisation.

Broad range of consulting

services

Coleago only recruits leading industry experts with over 10, 15 and even 25 years experience,

many at board and director level. Our team shape industry opinion; are quoted in the Financial

Times and Wall Street J ournal and have written for The Economist.

We only recruit leading

industry experts

We have unrivalled experience and insight into emerging markets such as the Middle East and

Africa through directorships of mobile businesses in the region and have provided advice to

operators such as Qtel, Warid, MTN, Digicel and Zain.

Emerging market specialists

We provide Partner level, end-to-end consulting expertise on every assignment and specialise in

complex assignments requiring the highest level of expertise and experience throughout. We

never use recent MBAs, juniors or associates.

End-to-end Partner level

consulting on all

assignments

Global players such as Orange, Vodafone and Telefonica and leading regional players such as

KPN, Qtel and Zain, along with regulators such as Ofcom, have selected Coleago as a preferredsupplier for a wide range of consulting services around the world.

Preferred suppl ier to majorglobal & regional players

Since its launch in

2001, ColeagoConsulting, based in

the UK, has

established itself

amongst operators

around the world as

one of the leadingboutique telecoms

advisory firms.

Coleago Consulting


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Coleago has delivered assignments for global operators and smaller playersColeago Consulting

Our clients include

fixed and mobileoperators, MVNOs,

equipment vendors,

regulators and

content providers

Coleago Consulting


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We offer practical, realistic advice that can be implemented to deliver real valueColeago Consulting

Major operators are

increasinglychoosing to work

with Coleagos small,

dedicated and highly

experienced teams

over traditional

consultancies withtheir large,

expensive teams of

relatively

inexperienced

consultants.

Many Coleago team members are fluent in a number of languages including French, Spanish,

Arabic, German and Dutch language skills are often crucial in delivering assignments in

emerging markets.

Language Skills

Our consultants are highly experienced, multi-skilled and have extensive project management

experience this means we can deploy smaller teams, without the hierarchy of traditional

consultancies, which clients find easier to work with and integrate into their own project teams.

Small, effective teams

As we only focus on the telecoms sector we have an extensive library of modelling and

forecasting tools developed specifically for the sector as well as comprehensive benchmark

databases which ensure that we can be adding value from the outset of a project.

Existing tools and

databases

Our advice is based on hands on experience, much at Director andBoard level, and ensures that

our recommendations are realistic, practical and achievable.Practical, relevant advice

Coleago focuses only on providing independent advice, we have nocommercial interest in

recommending infrastructure investment, system implementations or on-going outsourcingservices.

Independent opinions

Coleago Consulting


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Fears About Debt Levels of

Mobile Operators are

Misplaced

Article, Total Telecom &

elsewhere

Demand for Mobi le Internet

Services

Article, Total Telecom

Trends in Mobile Tariff ingArticle, Telecommunications &

Microwave Journal

International Accounting

RatesLetter, Telecommunications

A Cel lu lar Al ternat ive in

Eastern Europe?

Opinion, Mobile Europe

Telecoms in Eastern

Europe: Investing for

Growth

Article, Telecommunications

Mobile Networks in Eastern

EuropeArticle, Telecommunications

Inter German

Telecommunications

Integration

Article, Communications

International

GSM Billing

Article, Communications

International

PMR in EuropeArticle, Communications

International

Coleagos consultants lead and shape the industryColeago Consulting

Business texts written by the founders of ColeagoSome of the papers publ ished by ColeagoColeago is regularly

asked to speak atkey telecoms

conferences around

the world as well as

sitting on

governmental

working groups andindustry bodies that

shape the future of

the industry.

Coleago Consulting


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Our services include advisory roles, operational support and trainingg g

Strategic Analysis & Planning Regulatory Cost ModellingIdentifying and Screening

OpportunitiesNetwork Optimisation

Market Research &Forecasting

Spectrum and Licence Bids Commercial Due Diligence Geo Marketing

War Gaming and ScenarioPlanning

Interconnect Strategy Technical Due DiligenceProduct & Services

Development

Marketing PlanningReference Interconnect

OffersPreparing Information

MemorandumBudgeting Process Re-

engineering

Technical & NetworkPlanning

Interconnect Agreements Valuation Training Services

Financial Forecasting International ConnectivityExcel Modelling and Bespoke

Models

Valuations & Benchmarking

Business Planning RegulationM&A Transaction

Support

Performance

Improvement

Coleago Consulting


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Global outlook

Austria, Belgium, Bulgaria, Czech Republic, Croatia,Denmark, Finland, France, Germany, Ireland, Italy,

Luxembourg, Malta, Netherlands, Norway, Poland,Spain, Sweden, Switzerland, UK

Canada, USA

Algeria, Tunisia, Egypt, Sudan,Madagascar, South Africa

Argentina, Venezuela,Brazil

Caribbean, El Salvador,Haiti, Mexico, Panama

Australia, China, Hong Kong,India, Indonesia, Iran, Japan,Korea, Malaysia, Pakistan,

Taiwan, Singapore

Kuwait, Saudi Arabia, Yemen,Oman

We have delivered

projects on everycontinent of the globe

Documents

MVNO Critical Success Factors GF 25 Sep 09 V1.0