I just read a thoughtful piece on why MVNOs aren’t working in America. I think it comes down to four issues:
1. Every US-based MVNO is struggling with the virtually impossible challenge of making money buying wholesale minutes while network operators are pushing unlimited plans in the market. There is always a time lag between what network operators offer their retail customers and when they make these features, services or pricing available to their wholesale customers. Trust me, this is the nature of the beast. However, what is happening in the US today is far more profound. We are in the middle of a sea change in mobile service pricing as we transition from usage sensitive pricing to flat rate, all-you-can-eat unlimited plans. While most postpaid subscribers still use retail “bucket plans”, e.g., $39.95 for a given number of minutes per month, and prepaid subscribers buy a given number of minutes for, say 15 or 20 cents per minute, a typical unlimited voice plan, introduced earlier this year by all the national operators, offers $99 unlimited voice, or in the case of Sprint’s Everything Plan, everything but the kitchen sink – voice, data, messaging, navigation – for that amount. Unlimited pricing is not just a postpaid phenomena. Sprint’s Boost unit offers its unlimited package, and both metroPCS and Cricket (Leap) offer similar hybrid unlimited plans where credit-challenged customers prepay a the beginning of the billing period rather than the end. Unfortunately, wholesale customers cannot purchase these unlimited plans at a discount (discounted buckets). Wholesale customers must still buy bulk minutes (and pay on a per minute basis). This forces them to either take an unacceptable risk by offering an unlimited plan while hoping they have more lower usage subs than high-usage customers, or not offer competitive plans with obvious consequences. Resellers are thus caught in the middle of what looks like a classic price squeeze but is actually something far bigger – the transition from the telecom service model to the Internet service model. Time may sort this out as some variant of unlimited pricing reaches the wholesale market, but there will be few if any survivors. To reiterate, every US-based MVNO is struggling with this challenge today.
2. Distribution has evolved, but not for the benefit of MVNOs/resellers. Network operators are increasingly reliant on their own stores, shelf space which is not available to MVNOs (except Virgin and Boost sold in Sprint stores, but these are affiliates and wholly-owned units, respectively.) At the same time, non-carrier retailers are not faring well, e.g., RadioShack, Circuit City, CompUSA and other wireless destinations, are struggling and don’t account for as many new subscribers as they used to. For these reasons, MVNOs can’t find the broad distribution needed to acquire new customers, or must pay much higher commissions to buy their way onto non-carrier shelves. Either way, this drives up acquisition costs. The original notion of MVNOs was they could leverage existing assets – a strong brand, distribution, existing customer relationships – to reduce acquisition cost. In most cases, MVNO acquisition costs are higher than operator costs. (Oh yes, as noted in the paragraph above, so are their airtime costs.)
3. Content is simply not a compelling proposition for MVNOs, as many thought it would be. Disney, ESPN, Amp’d all failed to sign up significant (paying) customers based on content alone. And believe me, they spent a lot of money trying. Disney is thought to have spent more than $400 million, and shuttered their doors quickly. Amp’d spent hundreds of millions. And Helio’s investors, SK and Earthlink, have invested more than $400 million so far.
4. Cool handsets are now what network operators tout, and MVNOs have almost never been able to offer as cool of handsets as the operators. They don’t buy the volumes of handsets that get OEMs excited. They often must purchase handsets from the operators, who “push the fish.” (You’ll have to ask me to explain that one.) The one possible exception to this has been Helio, at least until the iPhone was introduced.
Early successes by TracFone, Virgin and Boost were in the then-untapped prepaid market. Now the prepaid market has many providers, operators have come in with their own prepaid offerings, metroPCS and Cricket offer a compelling alternative to prepaid (and landline phone service), and unlimited plans are squeezing everyone. With penetration to a point where just about everyone who wants a cellphone has one, there just isn’t the white space (unserved markets/segments) there was before. Notwithstanding Movida (which was snapped up quickly), the one exception to this is the ethnic markets, where big operators have historically been ineffective. Nevertheless, there are still the issues of pricing and distribution described above, both of which are extremely challenging.
Historically, the most successful resellers I’ve seen, and a decade ago while at (pre-WCOM) MCI, we bought the then-largest reseller in the US, Nationwide Cellular, focused on the details. It wasn’t a glamorous business, with no fancy content or handsets. But the key then was watching pennies, aggressively managing carrier relationships, and focusing on details, not cool but not compelling content. It comes down to basics, and this is a far tougher business in the US today, for everybody.
It’s really time for a new model. I have a few ideas on this score. But that’s what my clients pay me for.
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