1 The MVNO business model

remains popular
MVNOs have been launched in increasing numbers in recent years. Once offering mainly
cheap, often SIM-based, prepaid voice and SMS services (the no-frills proposition), MVNO
offerings now span a wider range of telecoms services, including 3G-based content and
data services. In this report, we review the key elements of a successful MVNO strategy.
We also consider the lessons that can be drawn from virtual players in other industries
(particularly VISPs) and what the future might hold for MVNOs.

1.1 MVNOs and SPs rely on a host network but have some
scope to offer diffentiated services
This section explains where MVNOs and SPs (ESPs and LSPs) sit in the value chain of
mobile services provision, as there is no universally recognised definition for those terms.

MNOs own and operate mobile networks that allow for end-to-end communications. In
addition, MNOs set up interconnection agreements with other operators, fixed and mobile,
national and international, to allow for communications between end-users of its network
and those of other networks. MNOs also set up roaming agreements, national (if its network
does not cover its whole licence area) and international, to allow users to make phone calls
in areas not covered by its network. MVNOs and SPs do not own a RAN so they need to
get access to the RAN of an MNO, their host network, in order to provide end-to-end
services to their customers.

What differentiates MVNOs from ESPs is whether or not they own switching equipment.
MVNOs own their switches. In addition to giving them more flexibility in the types of
service they offer, switch ownership also means that MVNOs can interconnect with other
mobile operators and charge termination fees for inbound calls to their own end users. In
this respect, Tele2 operates as a typical MVNO in countries where it has chosen to be a
virtual mobile player (see Section 5.1). ESPs do not own switches and they do not normally
get revenues for inbound calls. However, there are exceptions to this rule, for instance
Virgin Mobile UK is an ESP, but, for historical reasons, the company receives revenues for
inbound calls from host network T-Mobile UK.

© Analysys Research Limited 2007 1: The MVNO business model remains popular
3 Large retailers use their brand and
logistics to cross-sell products
For large retail companies and consumer brands with a high street presence, launching an
MVNO can present a significant opportunity. Many such companies are increasingly
diversifying from their former core product areas (such as food and clothing) into sectors
such as financial services and telecoms. The success of Virgin Mobile was attributable
primarily to the combination of a simple, competitive set of tariffs and the strength of
Virgin’s well-established brand. The impact of this strategy has not been lost on large
retailers, many of which are keen to carve out a niche for themselves within the mobile
market.

3.1 Retailers have the opportunity to exploit the strength of

their high street presence
One of the key assets of major retailers is their presence on the high street and retail parks.
Figure 31. shows a comparison of the number of sales outlets owned by several major UK
retailers and MNOs.

Figure 3.1: Number of sales outlets of major UK retailers and MNOs, 2006 [Source;
Analysys Research, 2007]

Tesco

Sainsbury's

Marks & Spencer

Morrisons

Vodafone

Asda

O2

3 UK

T-Mobile

0 100 200 300 400 500 600

UK retail outlets

Note: For UK retailers, chart includes outlets of more than 15 000 square feet capacity, which typically offer an
extended range of product lines. No outlet data available for Orange.

© Analysys Research Limited 2007 3: Large retailers use their brand and logistics to cross-sell products
Strategies for MVNOs 35

5.3 Virgin Media will be the only quadruple-play operator in the

UK
In July 2006, British triple-play operator ntl:Telewest positioned itself as the sole provider
of quadruple-play services by purchasing Virgin Mobile – the largest MVNO (in terms of
subscribers) in the UK. During the third quarter of 2006, the ntl:Telewest group announced
that it would rebrand itself as Virgin Media from the first quarter of 2007 and that it would
use its new name across all its services.

Prior to its acquisition of Virgin Mobile, ntl:Telewest had become the largest alternative
operator in the UK, most notably through cable operator ntl acquiring competitor
Telewest’s assets in March 2006. ntl:Telewest’s position in the UK communications market
at the end of the first quarter of 2006 is indicated on Table 5.2.

Table 5.2: ntl:Telewest’s position in the UK communications market, 1Q 2006 [Source:

Analysys Research, 2007]

ntl:Telewest Broadband Telephony Pay TV

Subscribers 2.8 million 4.3 million 3.3 million
Share of the market (%) 25 15 20

In addition, the acquisition of Virgin Mobile added 4.5 million customers, which at the end
of the third quarter of 2006 was equivalent to a 7% share of the UK mobile market (in
terms of active subscribers).

The integration of Virgin Mobile into ntl:Telewest’s business gives the combined entity a
number of competitive advantages.

• It enhances ntl:Telewest’s drive to become a multi-service provider. At the end of 2005,

ntl had 906 000 triple-play customers (29.3% of ntl:Telewest’s residential base). Adding
mobile services to its existing portfolio improves ntl:Telewest’s ability to cross-sell
services: in the third quarter of 2006, the company announced it would offer free mobile
handsets to its existing triple-play customers.

• It allows the company to offer rich and unique content across all its platforms.

• It gives the company a national dimension and exposure, a status which had eluded
ntl:Telewest whose cable franchise area covered 48% of UK households at the end of
2005.

© Analysys Research Limited 2007 5: Non-mobile operators launch MVNOs to extend their footprints and portfolios