Silo - Tips - Jumping On The Mvno Brandwagon How Niche Can You Get

Jumping on the MVNO brandwagon:
How niche can you get?

Australia’s next wave MVNO Op
I N F O R M AT I O N , C O M M U N I C AT I O N S & E N T E RTA I N M E N T
“The boom in MVNO relationships is
the means by which wireless operators
can achieve a competitive edge by
capitalising on market differentiation
and segmentation in the industry
rather than competing on price.”
www.3G.co.uk
Contents
Foreword 2
Executive summary 3
What is an MVNO? 8
Why MVNOs make sense 12
What’s going on internationally? 20
What factors will determine the success

of the next-wave integrated MVNO? 26
The potential next-wave MVNO opportunities

in Australia 30
Conclusion 33
About the authors 34
Glossary of terms 35
2 Jumping on the MVNO brandwagon
Foreword
Mobile Virtual Network Operators (MVNOs) are suddenly receiving a great

deal of focus in the telco world.
KPMG defines an MVNO as an enhanced service provider that independently

brands and markets its wireless service, usually targeted at specific market
niches and supported by an existing customer base holding some affinity with
the brand. So therein lies the basic recipe to the MVNO – branding, marketing,
customers. Or does it? And the basic MVNO premise is not a new phenomenon
so why the renewed focus on it now?
In this white paper, KPMG in Australia explores some of the key strategic
issues, critical success factors and prospective opportunities for consumer
brand and distribution leaders, media and content owners, entrepreneurs
and incumbent network operators in the Australian mobile market. The paper
is focused on the high-level case and opportunity for the next-wave integrated
MVNO, and explores the evolutionary tiering or segmentation of MVNO
models which may broadly be termed ‘brand-stamping’, ‘co-hosting’ and
‘integrated MVNO’.
KPMG believes that there are latent opportunities in the Australian mobile
telecom services market for integrated MVNOs, and that this is the time Australia
will see these gain momentum and materialise.
Malcolm Alder
Head of National ICE Advisory
Information, Communications & Entertainment
KPMG in Australia
Jumping on the MVNO brandwagon 3
Executive summary
MVNOs have largely proven to be a successful lean business model for

a number of innovative marketeers over the past five years or so around
the world.
In particular, there has been a surge over the past two years, with the
emergence of brand leader, distribution leader and plain cut-price, internet-
based ventures. The MVNO segment itself is experiencing an evolutionary
tiering or segmentation of business models, which may broadly be termed
‘brand-stamping’, ‘co-hosting’ and ‘integrated MVNO’ as illustrated below.
Each of these strategies presents differing opportunities, costs and benefits,
not the least of which being the level of customer relationship intimacy (CRI)
which may be achieved.
The MVNO business model

Ownership is a flexible entry point to the
mobile sector for established
Customer Relationship Intimacy
brand leaders.
Investment $
Affinity
Association
Brand-stamping Co-hosting Integrated
MVNO business models
Source: KPMG
Figure 1.1 – MVNO Models vs Customer Relationship Intimacy
Nearly every leading mobile market has seen some significant activity in the
MVNO space in the past 18 months. Australia is no exception with the realisation
of new ‘lite MVNOs’ through the elevation up the value chain of former service
providers such as AAPT and Macquarie Telecom. Telstra’s largest independent
reseller – Crazy John’s – has also recently announced that it is going down
the MVNO path. Despite these developments, Australia is far from having
fully capitalised on the MVNO market opportunity.
The evolution of the MVNO model has itself spawned a new sub-segment
in the industry with the rise of the Mobile Virtual Network Enabler (MVNE).
The primary focus of MVNEs to date has essentially been on the supply of
the necessary back-office systems, that sit between the host network and
an MVNO, to facilitate the launch and operation of the MVNO business. As a
result, implementing the core systems to launch an MVNO has never been
more attainable for non-telecom businesses.
An increasing number of So what is an MVNO? To the customer, it’s just another mobile operator;
Australian consumers are the real difference is that MVNOs do not own telecom network infrastructure
and are far leaner. They limit their technology systems to billing and customer
going purely mobile – attracted
care, prepaid IN, SMS-MMS-content delivery management and business
by capped and bundled plans,
support systems. MVNOs own their customers but use the telecom network
convenient infotainment and radio spectrum of a Host Network Operator (HNO) under a commercial
services, cool multi-functional wholesale arrangement. The most often cited example of a successful MVNO
devices and affinity-group is Virgin Mobile (Australia, UK, US, Canada), a company which KPMG directly
marketing campaigns. advised during its pre and immediate post-launch phases.
This value chain is summarised in figure 1.2 below.
MVNE-MVNO services
agreement (optional)
HNO MVNO/MVNE MVNO
MVNO MVNO MVNO

Mobile subscriber customer branding,
Radio
network management, management, marketing
spectrum
infrastructure BSS/OSS products and propositions
platforms services
Brand – stamping
MVNO
Host network Co-hosting model
(wholesale) agreement complexity
Full service, integrated MVNO

Source: KPMG
Figure 1.2 – MVNO value chain

The Australian mobile market continues to mature. It has surpassed 90 percent

penetration, has increasing take-up of new multi-functional wireless devices
facilitating voice, text, pictures, video, music and gaming, all within an
infrastructure-rich environment with a choice of three GSM, two CDMA, two
3G commercial mobile network infrastructures, and at least three wireless
broadband networks. There is also a recognised migration from fixed (PSTN)
to mobile voice services, meaning that the wireless wallet share will continue
to increase. All of this points to much change and opportunity for innovation
in both retail and wholesale sectors – paving the way for the next-wave
integrated MVNO(s), beyond the ‘brand-stamping’ and ‘co-branding’ models
which have been predominant so far.
Supply drivers Demand drivers “There is a recognised

• Substantial investments have
been made in mobile telecom
• Consumer market is mature and
highly segmented; opportunities in migration from fixed (PSTN)
infrastructure in Australia: niche/segmented markets require
– 3 GSM networks unique and integrated offerings. to mobile voice services,
Integrated • Increased wireless time & wallet
– 2 CDMA networks
– 2 3G networks MVNO share due to Fixed to Mobile (F2M) meaning that the wireless
opportunity migration and attractive capped /
– 3 plus wireless broadband
providers.
in Australia bundled plans. wallet share will continue
• With higher bandwidth availability
• Over-capacity in host networks
exists: geography, spectrum, time
from 2.5G/ 3G networks to increase.”
consumers are seeking convergent
of day, new technologies, slower
lë ifestyle’ applications and content.
than expected growth of non-voice
on 2.5G. • Wireless devices are increasingly
• The Australian mobile market equipped to accommodate more
is mature: applications and data usage
(eg: MP3, MPEG and gaming).
– incumbents realise that they can’t
be all things to all people and now
see the value of wholesale.
– 90% penetration and each next
1% is harder.
• The economics of launching an
MVNO is more attractive today
than 5 years ago:
– technology efficiency
– emergence of specialist MVNEs.
Source: KPMG
Figure 1.3 – MVNO opportunity: supply and demand drivers in Australia
KPMG believes that the MVNO business model is one relatively low-risk,
low-investment tactic to capitalise directly on the burgeoning mobile
sector for:
• consumer brand and distribution leaders
• media and content owners
• incumbent network operators.

Key benefits for players in the next-wave growth of this industry segment
will include:
• financial – new revenue, higher margins
• strategic – defensive, niche tapping
• operational – network utilisation
• customer – lower churn, grow market, cross-sell.
These benefits are real and quantifiable. Both the HNO and the MVNO
will enjoy a mix of these, though the mix will differ for 2G and 3G HNOs
and MVNOs depending on the ultimate go-to-market strategy and customer
value proposition (CVP).
Opportunities exist in the The US, UK, Europe and Asia have already seen the rise of brand-led,
wholesale mobile telecom niche-focused MVNOs. These include value brand and distribution leaders
such as Tesco in the UK and 7-Eleven in the US, media and content owners
arena for non-telecom brand
Disney and ESPN, and ethnic-population-centred Movida Communications
leaders and incumbent in the US and Philippine Long Distance Telephone in Hong Kong – to name
operators alike. just a few.
It’s also important to note that the inherent scalability of the MVNO business
model means that small players with low up-front capital can be profitable
with a low customer base. An investment of less than $25 million for an
integrated MVNO can yield profitable returns with the right partner(s) and
commercial model. For example, one successful Scandinavian MVNO
manages over half a million customers with fewer than 100 employees.
KPMG believes that there are latent opportunities in the Australian mobile
services market for some of Australia’s leading and aspiring companies with
strong brand and distribution, media and content, affinity group associations,
or an established, loyal customer (or membership) base.
“Pulling together an MVNO and the amount of focus

… frankly, it’s just a completely new
business opportunity for us.”
Larry Shapiro
VP, Walt Disney Interactive
(Commenting on Disney’s decision to

enter the telecom business via
an ESPN-branded MVNO)
What is an MVNO?
To the customer, an MVNO is just another mobile

operator. The real difference is that MVNOs do not
own any telecom network infrastructure and are far
leaner, limiting their technology systems to billing
and customer care, prepaid IN, SMS-MMS-content
delivery management and business support systems.
MVNOs own their customers and brand, but use the telecom network
and radio spectrum of an HNO under a commercial wholesale arrangement.
Such agreements generally can be modelled on the basis of long range
average incremental costs (LRAIC), retail-minus, bulk airtime and so forth.
The most often cited example of a successful MVNO is Virgin Mobile (Australia,
UK, US, Canada), a company which KPMG directly advised during its pre and
immediate post-launch phases.
Ownership
“The wireless game isn’t
just for cell phone carriers
Customer Relationship Intimacy

anymore. Companies that
deal with everything from
Investment $
Affinity convenience to comedy are

finding money in mobile.”
A.T. Kearney Executive Agenda,
Fourth Quarter 2004
Association
Brand-stamping Co-hosting Integrated
MVNO business models
Source: KPMG
Figure 2.1 – MVNO Models vs Customer Relationship Intimacy
As indicated in figure 2.1 above and figure 2.2 following, MVNOs can
differ in their degree of control over their products, services and systems.
The strategy employed in turn has a direct impact on the level of investment
required and the achievable level of CRI.
KPMG identifies three models of modern MVNOs.
Brand-stamping
This tier of MVNO is more like a service provider, where standard services
are provided based on an HNO’s or MVNE’s systems and the MVNO itself
merely ‘stamps’ their brand on the end product or may also be co-branded
with the host operator. Services provided are predominantly prepaid voice
and SMS. The ability to achieve personalisation of the customer experience
is limited and the value proposition is primarily based on association with the
brand. The MVNO is highly coupled to the HNO.
Co-hosting
This tier of MVNO offers a greater level of customer relationship affinity.
The MVNO implements some of its own systems, enabling differentiated
products and services rather than relying on a ‘vanilla’ host-enabled offering.
The MVNO may provide its own prepaid platform and post-pay billing, as well
as non-voice services. The level of up-front investment is greater, however
so is the achievable level of customer affinity.
Integrated MVNO
This is an MVNO in the truest sense. All non-network systems are implemented
by the MVNO to de-couple it from the HNO. In doing so, the MVNO is able to
offer a far more personalised customer experience, ranging from numbering
through to tariffs, services, bundling and devices. The level of CRI is highest
and hence the ability to own loyal niches is superior. Virgin Mobile in Australia
operates this model with Optus as its HNO.
How does an MVNO differ from a ‘real’ telecom

operator?
To the customer, an MVNO is a ‘real’ telecom operator. Many customers do
not, and should not, know or care that their mobile service is being provided
by a virtual operator rather than one which owns its own network.
The entire premise of an MVNO is that it provides a mobile telecom service to

customers completely transparently, so that the customer perceives the service
to be equivalent to – or better than – the MVNO’s infrastructure-based peers.
Aside: in fact, there have been consumer studies conducted in the past
which have produced some interesting results about the improved perception
of MVNOs by their customers. One such study conducted following the
launch of Virgin Mobile in one of its markets indicated that some customers
actually perceived the quality of the telecom service provided by Virgin to be
superior to that of the HNO – even though they shared the same physical
network. Such improved perception is due to the increased affinity customers
share with a niche focused brand, resulting in less customer churn.
The reality is that an MVNO shares the same core telecom infrastructure
of the HNO – and the customers’ calls travel over the HNO’s infrastructure.
Put simply, transport or carriage is provided by the HNO but under the MVNO’s
brand. It is similar in principle to staying in a boutique hotel where the customer
is attracted to and buys a branded, personalised experience yet the building
is actually owned by someone else.
The key point of differentiation between an MVNO and HNO is generally

in the products and services offered by the MVNO, whereby its content,
customer management and billing systems will be packaged for a targeted
niche customer segment.
MVNE-MVNO services
agreement (optional)
HNO MVNO/MVNE MVNO
MVNO MVNO MVNO

Mobile subscriber customer branding,
Radio
network management, management, marketing
spectrum
infrastructure BSS/OSS products and propositions
platforms services
Brand – stamping
MVNO
Host network Co-hosting model
(wholesale) agreement complexity
Full service, integrated MVNO

Source: KPMG
Figure 2.2 – MVNO value chain
Model of a typical MVNO

The essential difference between an MVNO and HNO is that the MVNO
does not have radio network infrastructure, transmission networks or radio
frequency spectrum licences. The core elements associated with network
operation are also not required. Those elements – including business functions
and staff – that are required, are not of the same scale of investment as their
infrastructure-based peers.
Below is a simplified representation of the difference between an

infrastructure-based mobile operator and a typical integrated MVNO.
HNO MVNO
HLR/
HLR/VLR VMS/UMS VMS/UMS
VLR
Business functions and staff
Business functions and staff
Gateway
MSC SMSC/MMSC SMSC/MMSC
MSC
BSC GPRS/data GPRS/data

getaway
P&S/content Customer care and P&S/content Customer care and

management billing management billing
IN OSS BSS IN OSS BSS
Radio
network
RF spectrum
Transmission * MVNOs differ in desired degree of systems control;
network some elements may be further outsourced to an MVNE
Source: KPMG
Figure 2.3 – Simplified typical integrated MVNO model vs HNO

Why MVNOs make sense

Niche MVNOs are not new, but the opportunity
for the next-wave of MVNOs has never been
greater. Why?
The reasons lie on both the supply and demand sides of the mobile market.
The key drivers are increased technology efficiency through to network capacity
on the supply side, and market maturity giving clearer understanding/formation
of customer niches and convergence on the demand side.
Incumbent operators will never be able to efficiently penetrate all market “Device and service integration
niches. Being the pioneers who have been required to sink massive investments will provide the opportunity
into spectrum, network infrastructure and site acquisition – and to subsidise
to drive incremental revenue”
the market to spur the initial growth cycle – their business models necessitate
IDC
casting their marketing net wide in order to reach mass consumer adoption
to earn the necessary return on their capital, i.e. the antithesis of a niche.
From the demand side, faster data speeds for multimedia content delivery
and lower costs are spurring consumer demand and hence interest from
non-telecom businesses who previously may have considered the venture
beyond their capability or inclination.
Critically also, the convergence and integration of devices now offering voice,
video, music and gaming are changing the playing field for consumer mobile
services. They are truly making mobile a viable media content channel.
Add to these factors the commoditisation of mobile voice, migration from

fixed to mobile services (F2M), greater customer segmentation and affinity
group associations and the stage is set for the next-wave of innovative and
integrated-media MVNOs.
Figure 3.1 below summarises both supply and demand drivers for further
MVNOs in Australia.
Supply drivers Demand drivers
• Substantial investments have • Consumer market is mature and

been made in mobile telecom highly segmented; opportunities in
infrastructure in Australia: niche/segmented markets require
– 3 GSM networks unique and integrated offerings.
– 2 CDMA networks Integrated • Increased wireless time & wallet
– 2 3G networks MVNO share due to Fixed to Mobile (F2M)
opportunity migration and attractive capped /
– 3 plus wireless broadband bundled plans.
in Australia
providers.
• With higher bandwidth availability
• Over-capacity in host networks
from 2.5G/ 3G networks
exists: geography, spectrum, time
consumers are seeking convergent
of day, new technologies, slower
‘lifestyle’ applications and content.
than expected growth of non-voice
on 2.5G. • Wireless devices are increasingly
• The Australian mobile market equipped to accommodate more
is mature: applications and data usage
(eg: MP3, MPEG and gaming).
– incumbents realise that they can’t
be all things to all people and now
see the value of wholesale.
– 90% penetration and each next
1% is harder.
• The economics of launching an
MVNO is more attractive today
than 5 years ago:
– technology efficiency
– emergence of specialist MVNEs.
Source: KPMG
Whether the number is Figure 3.1 – Supply and demand factors driving MVNO opportunities
three, seven or 10 plus

niche sustainable MVNOs Simple examples of leveraging overcapacity into a business
opportunity.
in Australia over the coming
• Let’s say operator A is an HNO targeting business users, and brand owner
two-to-five year period is B is a potential MVNO trying to target the youth market. Operator A’s
open to conjecture, however traffic will be very heavy 9am to 5pm, and B’s target market traffic will
the fact that the supply and be heavy 5pm to 10pm and on the weekends. That takes advantage of
demand side factors in the the over-capacity on the host network.
domestic mobile market
or
have evolved to the point
they are now at, is not. • Let’s say operator C is an HNO with a strong presence in the cities but
under-utilised infrastructure in regional Australia, and brand owner D is
a potential MVNO with a strong regional affinity group/brand name.
D can market its service as an independent business and generate traffic
on C’s network in its region. Operator C wins by gaining new (wholesale)
customers and earning additional revenue with no extra customer acquisition
costs, and D wins by operating a viable niche business in its core customer
segment for modest capital outlay.
Despite the Australian mobile market being at over 90 percent penetration,

integrated MVNOs do have the potential to penetrate further niches and
increase customer growth beyond the natural threshold level which has
already been reached.
Figure 3.2 below illustrates the potential effect of introducing new integrated
MVNOs on penetration in the Australian mobile market.
Max
In some markets Niche market growth
up to 20% of the through integrated
customer base is MVNOs / affinity
Threshold% with a MVNO services
Market size/(customer penetration)
Positive ‘hockey-stick’
effect of competition on
market development
0 1 2+
(Mass market/infrastructure) (MVNO)
Number of operators
Source: KPMG Not to scale
Figure 3.2 – Integrated MVNOs driving new market growth
The benefits for HNOs and MVNOs alike will include:
• financial – new revenue, higher margins from lower costs and higher network
ROI (return on investment)
• strategic – defensive, niche tapping
• operational – network utilisation
• customer – lower churn, grow market, cross-sell.
These benefits are real and quantifiable for both the HNO and the MVNO.
They will differ for 2G and 3G HNOs and MVNOs depending on the go-to-market
strategy and market proposition.
In the following section these benefits are explored in further detail from the
perspective of MVNO investors, customers and HNOs.
Benefits – dollars and sense

For the MVNO investor(s)
Scalability – start small, think big One of the attractions of the MVNO
model for aspiring businesses is the inherent scalability of the MVNO
business model. Small players, or those only wanting to commit low up-front
capital, can be profitable even with a low customer base, but also grow the
business more rapidly than their infrastructure peers in line with customer
growth and revenue.
The positive ‘hockey-stick Low capital outlay Launching a national MVNO business can be achieved
effect’ of competition on for less than A$25M*, whereas one would need to add another zero for a
similar infrastructure-based venture. Launching a more targeted regional or
provoking customer adoption
affinity group MVNO could be even less capital intensive.
of mobile has been well
documented over the past Lower operating costs With minimal Capex and an order of magnitude
decade; 3G operators have relative lower operating expenditure, an MVNO can achieve sustainable
an opportunity to leverage margins with genuinely lower retail tariffs and far fewer customers.
these learnings to accelerate However, developing the appropriate business model really is paramount,
3G take-up through MVNOs. particularly negotiating a favourable HNO agreement.
Focussed marketing The MVNO can focus more narrowly and differentiate
via affinity marketing and other integrated services (content, customer
management, devices), leveraging their pre-existing brand/customer base.
In return, the MVNO should enjoy lower customer churn through service
personalisation/affinity and greater/more certain Customer Lifetime Value
(CLTV) on which to plan business expansion.
The table below summarises some of the high-level benefits of pursuing an

MVNO venture, to investors with a pre-existing brand and distribution.
Benefits to the investor(s) Brand Co-hosting Integrated

stamping MVNO
Further leverage the strength of the brand into an

integrated mobile experience ¸ ¸ ¸
Create a new revenue stream and channel from existing ¸ ¸ ¸
brand, content and services
Own the new customers and the intimate customer Dependent
relationship with them upon MVNE ¸
agreement
Realise the full potential of mobility by controlling the Dependent

development and proposition of new integrated upon MVNE ¸
products and services agreement
Provide a low cost model of direct entry into the branded
mobility services space ¸ ¸ ¸
Leverage existing distribution channels to lower costs
and create cross-promotion and bundling opportunities ¸ ¸ ¸
Figure 3.3 – Benefits of becoming an MVNO
* KPMG estimate depending on business model and go to market strategy.

For consumers
Customers most certainly benefit from the entry into the market of an MVNO.
To the consumer, as mentioned previously, the quality of service offered by an
MVNO is generally perceived to be at least equal to, or better than, that of the
HNO telco. As well as stronger brand affinity, increased personalisation of
services which are offered by integrated MVNOs also helps.
Further, MVNOs generally offer lower prices for equivalent services to the
incumbents, enabled by their lower operating cost base. They may offer further
value to consumers by bundling and cross-selling products within their existing
brand portfolio and distribution channels.
For the HNO

For current infrastructure owners, attracting MVNOs to their network will “Adding MVNOs to the
accrue substantial benefits, as long as the HNO attracts a complementary network makes sense for
MVNO partner:
operators because it allows
• For 2G (GSM, CDMA) operators, it will bring a new, guaranteed wholesale a wireless carrier to load its
revenue stream and hence lower their unit cost of carriage. Furthermore, it network with customers
will deliver revenue from excess capacity or under-employed assets such while keeping its acquisition
as regional networks and data infrastructure which has seen slower than
costs to a minimum.”
anticipated growth.
Wireless Week, MVNOs: Master Stroke
• For 3G operators, it will provide all of the above benefits plus act to Or Menace? Sue Marek, 1 August 2004
stimulate the 3G retail market much faster than otherwise would likely
be the case to attain critical mass – this should in turn benefit the HNO’s
primary (retail) business which will grow more rapidly in line with the
HNO’s retail strategy.
Example: Unison Mobile

Unison Mobile is an MVNO start-up in Australia which over the past year has
been working to cultivate its target market and exclusive distribution channels
under-the-radar. With moderate investment it has now established itself as
the exclusive co-branded MVNO partner to some of the largest trade unions
in Australia, and has successfully begun to tap this particularly strong affinity
group which numbers over 2.5 million Australian workers.
Benefits – self defence

Adding the right MVNO to a host network is an effective defensive strategy
and a near certainty for reducing net customer churn (when considered from
a retained revenue flow standpoint).
Today’s mobile market – particularly in highly developed markets like Australia –

is a churn market, costing operators millions of dollars per month in customer
acquisition and retention activities. By adding the right kind of MVNO (i.e. it
does not directly cannibalise core customers) there will be another operator in
the market for customers to churn to, boosting inbound gains to the HNO.
Consider a theoretical example in a market of three incumbent mobile operators

1, 2 and 3 who are experiencing customer churn between them.
• In the current market, if a customer, (Customer A), churns from 1, he will

only go to 2 or 3. However, if operator 1 introduces an MVNO – called 1a
–
now Customer A has an extra choice. If he chooses 1a, then operator 1
keeps Customer A as a wholesale revenue generating customer.
• Conversely, a customer of operator 2 who is thinking of churning,

Customer B, now has a choice of 1, 3 or 1a – i.e. operator 1 has
greatly enhanced prospects of winning Customer B revenue.
Such defensive strategic benefits from opening a host network to an MVNO

will be realised and optimised only by selecting the right MVNO and HNO
pairing. Some ill-conceived MVNO marriages end in divorce when either the
HNO begins to see core customer cannibalisation (and starts to go sour on the
relationship) or the MVNO begins to feel its host is lacking in operational support.
Example: MVNO boosting Optus numbers

An example of the benefit of having an MVNO on your host network is seen
in the recent customer figures released in the Australian market by SingTel
Optus for the full financial year 2004-5.
• As reported in its full financial year results, Optus’ subscriber numbers

rose by 6.6 percent, or 370,000.
• At least 30,000 – approximately 10 percent – of Optus’ new customers are

reported to have come from its Virgin Mobile MVNO venture. The reason this
is possible is that Optus counts Virgin’s 500,000 customers as contract
customers – even though they are primarily prepaid customers – due to the
nature of the MVNO contract and model in place.
Source: The Australian, Optus Clears Out Customers,

Michael Sainsbury, 4 May 2005
What’s going on internationally?
Internationally, there has been significant movement and growth in the MVNO
arena over the past five years. This is accelerating and there are numerous
new and impending MVNO launches around the globe at the time of writing.
MVNOs are on the rise across

almost all categories, from value
brand and distribution leaders, such
as Tesco in the UK and 7-Eleven in
the US, to media and content owners
Disney and ESPN, to niche and
ethnic-population-centred Movida
Communications in the US and
PLDT in Hong Kong.
Even the US, a market which

traditionally has lagged in mobile
development, now enjoys around
20 MVNOs in various forms, with
varying strategic focuses, including:
• MVNOs targeting ethnic groups
• retailers looking to extend their

existing core brands
• incumbent telecom operators

extending their service offering
by creating their own MVNOs
• low-cost international long- distance

provision and
• customer profile, eg. low credit

or youth.
One of the attractions of the MVNO model for non-telecom businesses is “You have a change in the
the inherent scalability of the business model. Small players or those only industry right now.”
wanting to commit low up-front capital can be profitable with a low base
Paul O’Sullivan, SingTel Optus CEO,
and subsequently upscale the business in line with customer growth more The Australian, 16 May 2005
rapidly than their infrastructure-based peers. In fact, investments of less
than $25 million can yield profitable returns with the right partner(s) and
commercial model.
For example, a successful Scandinavian MVNO, Telmore, manages over half

a million customers with less than 100 employees.
Telmore and CBB Mobil of Denmark both launched in the second half of 2000.
Between then and 2003 they collectively acquired 43.7 percent of all new
mobile customers in Denmark. Today, around 20 percent of the total mobile
customer base in Denmark is with an MVNO.1
In its quest for rapid low cost customer growth in the fiercely competitive
Danish market, Telmore pursued an internet-based channel model and acquired
over half a million customers (12 percent market share). They now have a
reputation for having the best customer care in Denmark.2
In the UK, there has been much publicity around the success of Virgin Mobile,
one of the most successful global MVNOs. They have gained an eight percent
plus share of the market (>4M customers) in five years by leveraging their
youth-oriented brand to target customers who already purchased entertainment
from Virgin Megastores and associate with the trendiness and strong affinity
of ‘being a Virgin’. Virgin’s expertise is in developing propositions specifically
to attract and retain youth segment customers.
However, whilst this was the beginning of the previous MVNO wave and a
proven pioneering success story in its own right there are new developments
deserving of attention. This ‘next-wave’ aims to create a lifestyle experience
for affinity customers, and in doing so increase CLTV.
1Source: Strand Consult.

2Source: Noble House Media Ltd.
Below are a series of mini case studies exploring these MVNOs leading the
drive into the next-wave.
Mini case study – Movida (US)

Movida is a local MVNO targeting the Hispanic ethnic population in the US.
This ethnic group numbers in excess of 40 million and has been found to
generate 10 percent higher Average Revenue Per Unit (ARPU) than other groups
and use more data/content services. Movida is an MVNO operating off the
Sprint network.
Movida operates its mobile business and services in Spanish as the primary
language and programs the handsets it sells to operate in Spanish as the default.
Movida’s value proposition is providing personalised language and value-added

services to Hispanics including:
• low-cost flat fees of 20 cents per minute
• calls to Mexico at only five cents per minute and attractive fees to other
Latin American countries
• outgoing SMS at only 10 cents per message
• prepaid offerings for customers who cannot obtain credit approval
• distribution channels convenient for Hispanic communities.

Mini case study – Tesco Mobile

Tesco Mobile is the MVNO of the dominant UK retail chain, targeting their
loyal and price conscious customers.
It leverages its competitive advantage of distribution and strong brand

associations to create affinity through a strong family value proposition.
Therefore, Tesco is positioning itself to capitalise on its ‘value’ and ‘trusted’

brand associations, which has made it a success to date. It gained 500,000
customers in its first year of operation.
Regarding its distribution efficiencies, Tesco has the potential to tie mobile
spend with rebates and discounts on other products within their stores to
create value driven bundles for their customers across groceries and mobile.
Tesco Mobile is now being treated essentially like another commodity grocery
item: ‘Pick up a top up card whilst doing the grocery shopping’.
Aside: In Australia, Coles and Woolworths have already successfully bundled

another commodity item – petrol – with their brand and offer rebates on fuel
purchases from purchase receipts made by customers in-store. Translating
this into mobile – say with a commodity voice/text 2G offering – would be
a similar proposition.
Mini case study - Mobile ESPN

Disney’s ‘Mobile ESPN’ is an example of the emerging next-wave MVNO
to which this paper refers. It is a brand, and distribution-led model similar
to others, however, it adds another two key dimensions to the mix:
content and a custom device.
US-based ESPN (owned by Disney) is set to launch its MVNO in February

2006. It will build on ESPN’s television channels, websites and the ESPN
magazine, to offer sports news, highlights and scores to customers, in
addition to voice and basic text services. Hosted on the Sprint network, the
MVNO will offer a unique, custom ‘Sanyo MVP’ device complete with brand
compliant ‘ESPN red buttons’, i.e. one-touch content access (which shows
sports facts while applications are loading), an MP3 player, 1.3 mega pixel
camera, miniSD memory slot and a stereo headset. (Total Telecom, 28/9/05)
This proposition is particularly compelling as the affinity group associated with

sports fans is one of the strongest known. ESPN will seek to tap its existing
loyal following - predominantly male and reportedly 97 million in size – to rapidly
ramp up its customer base. Once this segment is tapped, its retention
prospects are very high, as long as the MVNO can successfully bundle and
cross-promote exclusive offerings not available through other channels.
This exclusivity issue in content owners entering the MVNO space does,
however, raise a potential point of conflict. If they are perceived to be
hoarding valuable content for their own MVNO customers whilst supplying
content of lesser value through their wholesale content channels to other
mobile operators, major issues could arise. This is one area yet to be
strongly tested.
“Never underestimate the power of a passionate sports fan.”

George W. Bodenheimer, Co-Chairman Disney Media Networks, President ESPN, Inc.
Mini case study – PLDT ‘1528 Smart’

Smart, the mobile subsidiary of The Philippine Long Distance Telephone Company
(PLDT), launched an MVNO in Hong Kong in August 2004 to specifically target
the ethnic/affinity group that is the overseas Filipino worker. The service is
operating on the TelstraCSL GSM network in Hong Kong.
Smart and PLDT Global’s MVNO is called ‘1528 Smart’, and provides Filipinos
in Hong Kong with access to the same Smart mobile services and content
they can use in the Philippines.
The suite of services offered to customers of 1528 Smart include:
• Smart Money, Smart Load, Smart Pasaload, Smart Padala (the world’s first
text-based money remittance service) and Bible verses
• 24-hour customer service from fellow Filipinos
• Filipino customers in Hong Kong can also make long-distance calls to the
Philippines and send text messages for around 50 percent less than they
would otherwise pay on a local Hong Kong network.
The Filipino ethnic group living and working in Hong Kong reportedly numbers
around 180,000 people. In a span of six months since launching ‘1528 Smart’,
they captured 14 percent of the target market. By the end of 2005, they expect
to attract 50 percent of the target market, or around 90,000 customers. It is
estimated that 87 percent of Filipinos in Hong Kong own a mobile phone and a
large proportion of them send prepaid recharges to family back in the Philippines.
In this type of next-wave MVNO venture PLDT is a true pioneer. Building

upon this initial success it plans to launch similar services in Singapore and
the US by the end of 2005.
"It effectively establishes a virtual presence for Smart and

PLDT Global in Hong Kong, a historic OFW (overseas
Filipino worker) bastion."
PLDT and Smart Chairman Manuel Pangilinan
Potential market entrants

The following organisations are also reportedly considering launching
MVNOs in the US:
• Disney Mobile
• Wal-Mart
• Target
• Exxon
• American Association for Retired People.

What factors will determine

the success of the next-wave
integrated MVNO?
Brand? Distribution? Content? Affinity Group?

What factors will make some MVNOs more
successful than others and what combination
will provide sustainable competitive advantage?
The ‘ideal MVNO’ – the focus here being on the next-wave integrated MVNO –
consists of a number of core elements, which interdependently provide a sound
foundation upon which to build a sustainable business. MVNOs that enter the
market on price competition alone will likely have little sustainable advantage.
That’s not to say that MVNOs without all of these ingredients – see Figure 4.1
below – are slated to endure a bleak future, but the chance of success is
substantially increased through a core subset of the following elements,
thereby creating an integrated MVNO.
Below is an illustration of the key strategic considerations for any company

considering entering the MVNO business.
4.
5. Technology
Business model strategy: devices
/structure & network
3.
Market/affinity
group
6. proposition
Financier Integrated
MVNO
7. 2.
Host network Distribution
operator channels
1.
Brand/affinity
owner
1.1. 1.2
Customer base Content supply
Source: KPMG
Figure 4.1 – Strategic composition of the next-wave integrated MVNO

“Successful large MVNO Checklist for the aspiring MVNO

players… will continue to Some of the more relevant upfront focusing questions aspiring MVNO
experience growth and fuel proponents may consider:
the industry by segmenting 1 Do we have a recognised and trusted brand, and can it be leveraged
the … target subscriber base into selling mobile services?
and distribution channels.” 2 What is the unique market proposition and what would be the marketing
www.3G.co.uk strategy, brand positioning and target customer segment(s)?
3 Do we have existing loyal customers and distribution to leverage for

rapid take-up, and can we achieve channel efficiency, complementarity
and cross-sell economies through the new venture?
4 Where will the revenue streams, both direct (call charges, data usage)
and indirect (interconnect, advertising, bundling and cross-promotion
across other groups), come from?
5 Do we have the capability to do this alone or should we engage partners?
6 Should we approach a GSM, CDMA, 3G or Mobile/Wireless Broadband

operator as the HNO?
7 Who is the right HNO to approach to ensure the strategy, marketing,

customer base and technology is complementary to the MVNO plans?
8 What are the key strategic, commercial and operational issues to be

addressed in the Host Network Agreement (HNA), and how do we know
we are getting a good deal?
9 Does our strategy and business model leverage the available capabilities
(e.g. 2G/3G, Devices and Content, existing Media technologies)?
10 Who could be the Partners for content, distribution, devices, applications?
11 What benefits will the MVNO create in the existing business and are
there any negatives?
12 How much funding will the venture require, who should we approach,
and how should it be structured?
13 Have we considered how to inter-weave a unique self-branded device

into the integrated target segment proposition?
Leveraging the technology

A holistic MVNO strategy will incorporate a technology strategy aimed at
appropriately selecting and leveraging available devices and network technologies.
With regard to devices, the market is only now starting to see the true
realisation of Personal Mobile Gateway (PMG) and low cost dedicated
segment devices from companies such as IXI Mobile (the inventor of PMG
technology) and Sanyo, which are set to revolutionise the way the market
perceives a mobile phone.
Imagine being able to go in and buy a basic PMG node (say, a matchbox size
‘black box’ which you may keep in your pocket) and then customise it as desired
with various wireless (Bluetooth) credit card size ‘lite attachments’ such as:
• voice phone
• messaging pad
• MP3 player
• wireless headset
• game console
• camera.
This is now a reality, with an example of some innovative devices featuring

applications including IM, SMS, and Email illustrated below:
Source: www.IXI.com (IXI Mobile)
Figure 4.2 – MVNO propositions enabled by innovative devices
With regard to networks, as outlined in the checklist, an aspiring MVNO’s

strategy should consider the appropriate host network in line with its
intended customer value proposition.
A summary of such technology and associated value proposition options is

illustrated in the figure below.
• Integrated entertainment proposition

– voice and rich multimedia content
• Brand-led niche segments, verticals
• Music, video, gaming, info
3G • E.g. Media company with content through
CD’s, DVD’s, movies, radio, magazine, TV,
internet leverages an MVNO business as
new channel to market – with huge
cross-sell opportunities
• Low cost value proposition

– voice and simple data
2G • Regional/community focus
• Niche/minority segments
Figure 4.3 – MVNO Proposition by Technology

The potential next-wave MVNO

opportunities in Australia
There is most certainly scope for increased activity in the wholesale and retail
mobile telecom market in Australia. There is money to be made, and it’s not
restricted to flowing to the incumbent operators.
Incumbent operators now accept that

there are niches which they are not
best suited to tap, and that there are
real financial, strategic, operational
and customer benefits to be had in
setting up new wholesale revenue
streams. Some pioneering operators
in the Australian mobile market are
actively pursuing more wholesale
and MVNO opportunities.
This is particularly relevant in the

emerging 3G arena where there
are two competing 3G network
infrastructures. Rapid customer
take-up will be realised only as
more customers are convinced of
the incremental benefits of moving
to a 3G service. By encouraging
smaller businesses whose specialty
is not building networks but creating
innovative multimedia experiences
in their niches, 3G infrastructure
owners can only stand to benefit
from attracting niche MVNOs to
their networks.
The positive ‘hockey-stick effect’ of competition on customer interest and

adoption in the mobile market has been well documented over the past decade
in all 2G mobile markets; 3G operators know this and should now build upon
these learnings to accelerate 3G take-up through MVNOs.
“There is now universal agreement that wireless has evolved

dramatically from a generic voice market to one that is highly
segmented. Every single carrier is strong in certain segments
and weak in others. That’s taken some carriers a lot of time
to come to terms with and to agree with.”
Andrew Cole, A.T. Kearney US communications and media practice leader
However, even in the 2G mobile segment genuine opportunities remain open

for MVNOs to compete and be successful with lower cost value propositions
and bundled offerings to niche segments including the corporate market and
ethnic or affinity groups.
The following are some of the categories of next-wave MVNO opportunity

which are evident today.
1 Brand and distribution leaders, including consumer brand leaders, retailers

and existing telecom service resellers with a loyal customer base.
2 Media and content owners, such as internet companies, broadcasters,

publishers and entertainment providers.
3 Affinity groups – for example, ethnic, geographic/demographic, religious

and social.
Recently Australia has seen some former service providers such as AAPT
and Macquarie Telecom move up the value chain into MVNOs under a
brand-stamping or co-branding model – in the GSM space this has equated
to providing SIM cards with their own brand to their customers. By moving
up the value chain these providers are seeking to ‘own’ their own customers
and provide more flexibility to bundle other offered products and services to
increase wallet share and customer stickiness.
This is most definitely a step in the right direction for existing telecom players,
but substantial scope exists for even more innovation to be realised through
the true integration of telecom, media and technology – the ‘next-wave
integrated MVNO’.
Consider the compelling nature of an existing company, with interests in

some or all of the following, leveraging its current strengths and assets
into an MVNO business model:
• broadcasting and media content
• internet portal(s), email and IM
• newspaper and magazine publishing
• movie distribution and content (cinema, DVD)
• music and recording artists (CD, DVD)
• gaming and entertainment.
By leveraging existing brand, media content, distribution channels and targeted

propositions with, say, a lifestyle device, organisations can produce a compelling
and low-risk investment proposition that will take advantage of the continuing
high growth in the mobile arena as an effective channel to reach high-value
customer segments.
On the supply side, in terms of host network sentiment and innovation in

Australia, the wholesale/MVNO mobile market segment is active and willing
to support and/or partner on innovative initiatives.
Example: opportunity for ethnic/affinity group MVNO

There are an estimated 300,000 Muslims in Australia according to the
2001 census (plus an estimated one million Australians of Arabic descent).
Being a particularly strong affinity group and also having specific opportunities
for tailoring customer care and content/application services makes this one
opportunity which may constitute a compelling business case.
Entrepreneurs might wish to consider the fact that a target 40 percent

penetration of this affinity group would represent a potential investment
cost of under $175 per customer.
(Based on a potential investment of $20 million; business plan dependent.)

Conclusion
KPMG believes that the MVNO business model is one key, and relatively
low investment, strategy by which to capitalise directly on the innovative
opportunities and supply side factors coming into play in the Australian mobile
telecom market. There are real prospects for consumer brand and distribution
leaders, media and content owners, and incumbent network operators.
Benefits ranging from financial (new revenue, higher margins) and strategic
(defensive, niche tapping), to operational (network utilisation) and customer
(lower churn, grow market, cross-sell) are real and quantifiable for both the
HNO and the MVNO. They will differ for 2G and 3G HNOs and MVNOs
depending on the go-to-market strategy and market proposition.
There are numerous successful examples from around the world that can
be learnt from. We believe the Australian wireless telecommunications
landscape could look quite different in a relatively short period of time with
the advent of new niche-focused integrated MVNOs.
Aside: As one popular culture entertainer – rap artist Shaun “P. Diddy” Coombs,
who is himself jumping on the MVNO brandwagon – puts it:
“I don’t have the spectrum, I don’t own the network

infrastructure, I don’t make customer service calls, but I do
have subscribers. I have tens of millions of … subscribers,
who spent billions of dollars every year on music, on fast foods,
on cosmetics, on soda, and yes, on consumer electronics
and wireless communications technology. I know where
they live, what they like, what they eat and what they drink,
I know what they wear, and more importantly for you, I know
how to communicate to them, I know how to talk to them.
The reason why they’re mine, … my subscribers, is because
I know how to listen to them… (and will)… take advantage
of the power of the latest 3G technologies that allow customers
to easily use and virally spread the content.”
Now how can you argue with that!

34 Jumping on the MVNO Bandwagon
About the authors
Malcolm Alder
+61 2 9335 8041
malcolmalder@kpmg.com.au
Malcolm Alder is the national head of KPMG’s Information, Communications

& Entertainment advisory practice in Australia. For the past 14 years Malcolm
has focused on the information, communications and entertainment industries,
working with operators, regulators, investors and customers in Australasia,
North America and Asia. He has previously managed engagements for MVNO
launches in Australia and Asia and has been instrumental in the successful
creation of new ventures in both the telecom and media segments.
Dominic P Arena
+61 2 9335 8220
dominicarena@kpmg.com.au
Dominic Arena is an Associate Director with KPMG’s Information,

Communications & Entertainment advisory practice in Australia.
Over the past 10 years he has focused on the telecom and technology
industries, primarily in the wireless segment, working across Australia,
Europe and Asia. Dominic has held local and international appointments
with global telecom operators and professional services firms, particularly
in strategy and new markets, commercial and regulatory, operations
improvement and technology innovation.
Jumping on the MVNO Bandwagon 35
Glossary of terms
BSS Business Support Sub-Systems

The systems responsible for managing business support functions and front-of-house enterprise operations.
CLTV Customer Lifetime Value

The dollar value/contribution of a customer over the life of their retention. Enables quantification of the
value of a customer or segment for analytical retention initiatives.
CRI Customer Relationship Intimacy

The degree to which a service provider is engaged with its customers through its brand, from the lowest
level of ‘Association’, through to ‘Affinity’ and the most intimate state of ‘Ownership’.
HNO Host Network Operator

The incumbent operator owning the physical network infrastructure and radio spectrum.
HLR Home Location Register

The telecom network element responsible for storing registered customer and numbering information.
IN Intelligent Network/Node
Prepaid subscriber management platforms responsible for real-time debiting of customer balances and
other customer account management functions.
MMS Multimedia Messaging Service

Enhanced messaging service enabling pictures, audio and video to be transmitted between mobile customers.
MMSC Multimedia Messaging Service Centre

The store and forward system enabling the transmission of MMS in the network.
MVNE Mobile Virtual Network Enabler

Companies that provide infrastructure and related services to MVNOs to enable their business to operate.
MVNO Mobile Virtual Network Operator

A telecom service provider which owns the customer relationship, provides its own services, billing and
customer care, but does not own its own telecom network infrastructure or radio spectrum.
OSS Operational Support Sub-Systems

The systems responsible for managing networks, customers, products/services and billing operations.
PMG Personal Mobile Gateway

Personal Mobile Gateway technology (PMG®) combines cellular and short distance wireless (e.g. Bluetooth or
WiFi), with micro-router and micro-server functionalities. The PMG can be a stand-alone device the size of
a small mint box, or integrated into a cellular phone, and can be remotely managed by the mobile operator.
(Source: IXI Mobile, www.ixi.com)
Contact us
For further information about the services offered by KPMG’s Information,

Communication & Entertainment practice, please contact us on:
Adelaide Perth
+ 61 8 8236 3111 + 61 8 9263 7171
Brisbane Sydney
+ 61 7 3233 3111 + 61 2 9335 7000
Canberra National toll free number

+ 61 2 6249 1877 1800 500 376
Melbourne Alternatively, visit our website at

+ 61 3 9288 5555 kpmg.com.au
kpmg.com.au
© 2006 KPMG, an Australian partnership, is

The information contained herein is of a general nature and is not intended to address the
part of the KPMG International network. KPMG
circumstances of any particular individual or entity. Although we endeavour to provide accurate and
International is a Swiss cooperative. All rights
timely information, there can be no guarantee that such information is accurate as of the date it is
reserved. Printed in Australia. The KPMG logo
received or that it will continue to be accurate in the future. No one should act on such information
and name are trademarks of KPMG.
without appropriate professional advice after a thorough examination of the particular situation.
January 2006. NSW9266ICE.

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Jumping on the MVNO brandwagon:

How niche can you get?

Why MVNOs make sense 12

What’s going on internationally? 20

What factors will determine the success

The potential next-wave MVNO opportunities

About the authors 34

Mobile Virtual Network Operators (MVNOs) are suddenly receiving a great

KPMG defines an MVNO as an enhanced service provider that independently

MVNOs have largely proven to be a successful lean business model for

The MVNO business model

Brand-stamping Co-hosting Integrated

MVNO business models

Figure 1.1 – MVNO Models vs Customer Relationship Intimacy

This value chain is summarised in figure 1.2 below.

HNO MVNO/MVNE MVNO

MVNO MVNO MVNO

Full service, integrated MVNO

Figure 1.2 – MVNO value chain

The Australian mobile market continues to mature. It has surpassed 90 percent

Supply drivers Demand drivers “There is a recognised

Figure 1.3 – MVNO opportunity: supply and demand drivers in Australia

• consumer brand and distribution leaders

• media and content owners

• incumbent network operators.

• financial – new revenue, higher margins

• strategic – defensive, niche tapping

• operational – network utilisation

• customer – lower churn, grow market, cross-sell.

“Pulling together an MVNO and the amount of focus

(Commenting on Disney’s decision to

To the customer, an MVNO is just another mobile

Customer Relationship Intimacy

Affinity convenience to comedy are

Brand-stamping Co-hosting Integrated

MVNO business models

Figure 2.1 – MVNO Models vs Customer Relationship Intimacy

KPMG identifies three models of modern MVNOs.

How does an MVNO differ from a ‘real’ telecom

The entire premise of an MVNO is that it provides a mobile telecom service to

The key point of differentiation between an MVNO and HNO is generally

HNO MVNO/MVNE MVNO

MVNO MVNO MVNO

Full service, integrated MVNO

Figure 2.2 – MVNO value chain

Model of a typical MVNO

Below is a simplified representation of the difference between an

Business functions and staff

BSC GPRS/data GPRS/data

P&S/content Customer care and P&S/content Customer care and

IN OSS BSS IN OSS BSS

Figure 2.3 – Simplified typical integrated MVNO model vs HNO

Why MVNOs make sense

Add to these factors the commoditisation of mobile voice, migration from

Supply drivers Demand drivers

• Substantial investments have • Consumer market is mature and

three, seven or 10 plus

Despite the Australian mobile market being at over 90 percent penetration,

Source: KPMG Not to scale

Figure 3.2 – Integrated MVNOs driving new market growth

The benefits for HNOs and MVNOs alike will include:

• strategic – defensive, niche tapping