Fixed Wireless Business

MVNO Business Tempts ISPs

You're used to the idea of wholesaling infrastructure for DSL and fiber and dialup. Now you can do the same for cellular phone service, if you have the cash and the knowledge.

by Max Smetannikov [June 16, 2005]

Now that SK-EarthLink is a separate wireless provider looking to nab data-centric mobile phone users from traditional wireless carriers like Sprint PCS and Verizon Wireless, it's official: the Mobile Virtual Network Operator (MVNO) craze has come to the land of ISPs.

The MVNO hype wave features the same cast of telecommunications and media companies that played so prominent a role in the ISP hype of the last decade. MVNOs are popping up like mushrooms. The MVNO with the biggest name recognition in the U.S. is Virgin Mobile, thanks to a massive marketing blitz. But Virgin's not the only one. The ranks of MVNOs are swelling fast. At the end of Q1 2005, there were at least 60, and more setting up shop every month. Big MVNOs include EarthLink, Virgin, Nextel, Qwest, and Seven Eleven. MVNO launches are expected from ESPN, Disney, and AOL.

What makes MVNOs so appealing is the seeming ease of getting into this business. The network—the most significant barrier to entry—is exactly what wireless operators, suffering from overcapacity, are seeking to lease out. With that problem solved, what's left is the back end and marketing.

Don't mistake us: it's not easy to set up an MVNO. As any ISP owner knows, marketing and billing are thorny and expensive issues that could easily get out of control. So here's what's involved in setting up an MVNO.

First steps
Most significant is the fact that wireless carriers are no longer running wild in the streets looking for MVNO partners. About two years ago, when Sprint PCS was experimenting with this business model, wireless operators may have been eager to sign all comers, but these days, MVNOs are chasing the contracts, and securing one could take between six to 12 months.

It's not a venture for small companies. Most wireless operators require a $1 million deposit in order to start the process of provisioning capacity. The deposit protects the carrier against an MVNO failing to subscribe enough customers to pay for the contract.

To help navigate the process, there's a growing cottage industry of MVNO consultants. Some players aggregate minutes from several MVNOs against a single $1 million deposit. Others help companies lease a network from another MVNO, the option of choice for smaller carriers and for enterprises that want their own mobile telephony network.

Next comes the familiar issue of CPE, which in this case means handsets, not modems. These are tough to get at a decent wholesale price, which may surprise anyone who knows what's available practically for free to individuals.

The holy grail here is the $30 to $35 handset. But at those prices, you can forget about premium brands. MVNOs must either negotiate directly with vendors in China and Korea or use refurbished handsets. A good brand handset can be refurbished up to seven times, making this is a viable option. Another issue with the handset is putting a corporate logo on it. This costs extra, and most MVNOs make do with a "splash screen," their logo coming up when the phone is turned on.

Last but not least, an MVNO needs a backend, virtual or real. There are eight functions that MVNOs need to fill either with their own equipment or with partners:

• First, an MVNO should be able to give its customers and partners a web interface to provision their handsets and set up and maintain their plans. This front end should be designed and managed properly.
• Second, MVNOs need billing, which includes the ability to charge end users for services rendered and be able to settle charges with wholesale network providers.
• Third, MVNOs need the ability to process payments from credit cards to merchant accounts, but any ISP with a webhosting operation understands the issues involved.
• Fourth, MVNOs need to distribute their devices to end customers. Most large wireless providers run their fulfillment operations much like Amazon.com or FreshDirect do, via large automated warehouse operations that a small ISP cannot duplicate or imitate.
• Fifth, an MVNO needs a customer contact center big enough to handle initial users and capable of scaling as the customer base grows.
• Sixth, the MVNO needs a print and mail operation aimed at delivering bills and collateral to end users, distributors, and conducting the marketing campaign.
• Seventh, the MVNO needs marketing. Without a known brand name, the MVNO will fail.
• Eighth and last, MVNOs need service and content to address customers' needs and concerns and to differentiate their service from others'.

Conclusion
Most ISPs looking through this laundry list of issues will immediately see that they have plenty of skills that translate from the ISP space to the MVNO spce. This is precisely what makes MVNO model attractive to ISPs. EarthLink got into this business because it was looking for more ways to extend its reach beyond dialup—in fact, the ISP started out selling two-way pagers synced with members' online accounts. AOL, once and if it develops an MVNO service, is likely to capitalize on AIM and the AOL content members are familiar with.

For ISPs, the MVNO business is another way to increase ARPU from a stagnant customer base, with potential and peril similar to broadband. If only 2 percent of the ISPs in the U.S. roll out MVNOs, and if there are 4,000 ISPs in the U.S., then there will be 80 new MVNOs in the nation, a significant trend.

—End