MVNOs in India: Spicing up the Telecom Market

Introduction
Economic slowdown, meltdown, recession, depression, and stimulus packages - these are some of the most popular keyword searches these days on the Internet. Amidst all this we know that India added 15 million+ mobile subscribers in January’09. This is an all time high subscriber additions in India and perhaps the world in a single month. The story has been similar for Q3 2008 with around 9-10 million subscribers added each month. The scorching pace at which the India telecom story marches ahead is a silver lining amidst dark clouds hanging over the overall economy.

The department of telecommunications (DoT), on Feb 25th 209 permitted Mobile Virtual Network Operators (MVNO) to provide services in India. MVNOs are companies that do not own spectrum or license to offer services. They lease radio frequency from mobile service providers and sell services under their own brand. Essentially, they buy minutes of usage (MOU) in bulk from the service provider (also referred to as mobile network provider or operator). The telecom infrastructure may also be completely leased or the MVNOs can build up their own infrastructure at least partially. In very simple terms the relationship is like a wholesaler & a retailer. The typical value chain of an MVNO is depicted below:
(sorry issues in pasting picture here)

Depending on what they own in the telecom value chain MVNOs can be categorized as following:
a. Full MVNO
Typically, has its own network elements (MSC, HLR, VLR) and performs all other downstream value chain activities like Distribution, Marketing, Cusomer Care (includes billing)
b. Intermediate MVNO
Typically, shares some of the network infrastructure with the service provider and performs all other downstream activities.
c. Thin MVNO
Typically, does not own any network infrastructure. Focus is on leveraging the strengths in distribution and brand management.

Licensing Norms
India’s Telecom Commission has set $17.02 million as the price for MVNO license in India. The Commission also confirms pre-defined fees an operator will have to pay for individual service area of 10% of the amount that UASL holders pay. MVNO licenses for the A category will cost $1 million whereas category B and C circles will be priced at $0.60 million and $0.20 million respectively. MVNOs will also have to pay spectrum charges and a bank guarantee equivalent to 5% of the amount paid by the full network operators.

Now let’s look at the opportunities and the challenges the entry of MVNOs in India could throw up.
Opportunities

Increase in Mobile Penetration
At around 360+ million mobile subscribers the mobile penetration is around 30%. Most developed nations have a penetration close to 100% (a few have more than 100% as well). Given these statistics it is evident that there is still lot of headroom to grow for the telecom service providers. We are already aware that a vast majority of the new subscribers being added are coming from tier2/tier3 cities and rural areas. The argument for MVNOs is that they can help expanding into these markets rapidly. As most MVNO are going to be focused on offering services at attractive prices India could reach its 500 million subscriber target by 2010 pretty early and the tele-density can increase significantly in next few years.

Diversification
For those companies who wanted to venture into telecom but could not do so earlier due to the entry barriers associated with high spectrum cost this could be a golden opportunity. As the international experience shows many MVNOs are companies who have diversified from other businesses leveraging their strong brand, distribution channels and other such strengths. In India too there could be companies from FMCG (e.g. ITC), retail (e.g. Big Bazaar) and other sectors who want to leverage their strong brands, distribution network, understanding of the rural consumers, and past relationships to forge a new connect.

Horizontal & Vertical Integration
In terms of horizontal integration there are opportunities for the existing telecom operators to launch services as MVNOs in areas where they do not have a license or provide services across different technology viz. CDMA operator offering GSM service or GSM operator offering CDMA service.
The telecom ecosystem comprising of handset players (e.g. Nokia, Samsung), service providers (e.g. Airtel), VAS players (OnMobile, 197 communications), OS providers (Microsoft, Google) is itself going through a great game of one-upmanship. The service providers are still holding forte as they are closer to the customers and are the ones who own the so called “pipe” to the customer. Given this, MVNOs offer an opportunity for some of the players in the ecosystem to integrate vertically and venture into service provider’s domain. For instance, the VAS players who have long been unhappy with the revenue sharing agreement with the service providers (70-80% of the VAS revenue is retained by the service provider whereas 20-30% goes to the VAS players. This 20-30% is further distributed among the players which make up the VAS value chain). This really takes the fight into enemy’s camp and could result in strapping of the delicate chord which binds together the players in this ecosystem.

Challenges
Increased Competition
Irrespective of the bonhomie associated with the subscriber growth in India, telecom operators face significant challenges. These are low ARPUs, high CAPEX & OPEX, providing differentiated services at reasonable cost and essentially losing out on competitive advantage. MVNOs are just going to add to these challenges. True, MVNOs may help penetrate the markets further but it will surely lead to a bloody price war. Already, we offer the cheapest tariff in the world at less than 2 cents per minute. How many operators can maintain profitability and sustain that in the long run given that tariffs are surely south bound? And all those who are ready to tell me that 3G is in the offing, time will come when VAS will show its true colors and so on, don’t forget this is an extremely price sensitive market and our next 100 million customers and beyond are going to come from rural areas.

Entry Barriers
Given the licensing norms highlighted above I don’t perceive too many entry barriers from a monetary perspective. However, how do you overcome the “mind barrier”? How many companies would be willing to take the plunge in this economic turmoil in an apparent low margin business?

Strategy & Business Models
Alright let’s hope there are a few brave companies who take the plunge. Now what sort of strategy they should adopt. A mere price leadership or low cost strategy will not be sustainable. And if they come up with a focused or differentiated strategy then which customer segments will they focus on? What kind of different offering they have which the existing service providers don’t have or cannot have? These sort of questions really intrigue me.

Cannibalization
MVNOs will after all be buying airtime in bulk from existing service providers. Hence, there’s always a trusted relationship between the two. However, both are still eating from the same pie. Will this not lead to cannibalization of market share?

Recently, Sunil Mittal said that MVNOs in India will not be successful. I tend to partially agree with him. If you look carefully most of the big operators like Airtel have already outsourced most of their operations whether network, IT infrastructure etc. to the Ericcson’s and IBM’s of this world. In essence, they are already operating like an MVNO. However, for operators who are small and the upcoming players with new UASL licenses, MVNOs could help them catapult into the big league faster.

The question is how many will survive when the race is on?

Sameer Tikoo