The value of MVNO (mobile virtual network operator) services for wireline incumbents has always been a question mark, given that many cable operators who tried the notion out didn’t get what they’d hoped for. Still, as this Light Reading piece says, there have also been MVNO success stories among at least some of the larger cable companies. One of the 5G features that always gets touted, network slicing, has the potential to reduce the scale and cost of MVNO relationships with mobile operators. Could this pull through 5G Core, could it induce cable companies of all sizes to have a go at mobile 5G?
There are quite a few MVNOs out there today, and some analysts on Wall Street have told me that a sizable majority of them are offering prepaid mobile service. The reason is that the big mobile operators all want to own the post-pay customers whose spending is highest and whose loyalty is most important. The theory behind prepay MVNO business is that the operator really has to pay only marketing costs and the MVNO charges to their supplier. If an operator can identify and exploit a valuable niche market, or in particular if they have some current customer base they can exploit, they can make MVNO service a success.
Well, that’s been the theory, anyway. I’ve had a lot of discussions with mobile service planners, including MVNO planners, and there seems to be another dimension of the whole MVNO thing emerging. It may be that this new dimension will decide whether MVNO opportunities really drive network slicing in 5G, and how many smaller and more specialized non-mobile operators (including cablecos) will get into the MVNO space.
I’ve said in many of my blogs that operators almost universally spend more on operations expenditures (opex) than on capex. Mobile operators are no exception; their expensed costs exceed capex by an average of 45%. If you’re wondering why opex connects to MVNO drivers, a look at how those expenses are divided will answer part of the question. The biggest contributor to opex, meaning operations-related expenses, is customer acquisition and retention, which makes up about 40% of opex overall.
Suppose you’re a cable company or other non-mobile incumbent. You can spend that money on advertising and maybe special offers, which is the traditional approach, but suppose that you offered all of your customers a sweetheart mobile service deal through an MVNO relationship. Could it be that such a deal, offered to your wireline customers only, would increase your acquisition and retention rates?
Some cable giants have suggested to me that this is exactly what happens, and that the most valuable thing to them is that such mobile service plumbs will tend to improve customer retention significantly. One cable strategist puts it this way: “mobile services to our base is like the ad you never run but your customer always sees.” If your customer looks to buy a different wireline broadband service, they have to consider that they’ll also need a new mobile service, and that’s likely to be more costly. Of course any phone deals and the hassle of number portability can be an incentive to stay the course, too.
The potential for mobile services to increase wireline broadband and TV sales means that it doesn’t have to be as profitable in itself to be useful. Nobody I’ve talked with are prepared to say they would offer MVNO mobile service as an incentive, as a loss leader, but they’ve suggested that thin margins would be acceptable, and some said that if they found it improved retention in particular, the margins could be even thinner.
Obviously the profit margin for MVNO mobile service would depend in part on what the relationship with the real mobile operator costs. That’s where some (emphasis on “some”) operators think network slicing and 5G could come in. Some prospective MVNOs tell me that their mobile operator prospects have suggested that 5G network slicing could allow them to reduce their costs to MVNOs. Some mobile operators have said the same, but so far, nobody has been willing to offer exact numbers.
One mobile operator did say that if they found 5G network slicing reduced the cost of offering MVNO services by up to ten percent, they’d be inclined to drop their prices by the same amount to increase their business. If costs were to drop by more than that, they’d pass the “majority” of the reduction on to MVNO customers.
Both the mobile operators and prospective MVNOs said that WiFi hotspot and roaming support was as important to their cost/price relationships as network slicing. Anything that unloads data traffic, and in particular, video content, is attractive as a means of reducing network service costs to the MVNO. For this to work, both parties say, there has to be both WiFi calling and automatic switchover to WiFi when in a suitable hotspot. Smaller MVNO prospects would like to see mobile operators include both solicitation for hotspot locations and support for call/data management in their MVNO offers.
All of this suggests that mobile operators who wanted to capitalize on MVNO deals should create a kind of MVNO package that includes “slices”, hotspot deals, and WiFi integration into both call/text and data services. Larger MVNOs like Comcast or Charter may be able to do their own deals and also provide the technology support needed for other important features, but smaller ones wouldn’t likely have any chance, and certainly wouldn’t be comfortable with either task.
It also shows us (yet again) that you can’t just toss 5G features out there and expect everyone to figure out how to exploit them. Supporting MVNO relationships at a reasonable cost for both parties is critical to the expansion of MVNO services, and critical to early adoption of network slicing. It’s also a way to facilitate bundling mobile and wireline services for operators who can’t afford or justify their own mobile network deployment. However, there’s more to it than just slicing 5G.
Another lesson to be learned here is that feature differentiation of connection services is very difficult; bits are bits. When you can’t feature-differentiate, price differentiation and commoditization tend to follow, and that’s a path that no network operator wants to take. The fact that customer acquisition and retention costs are a larger percentage of opex than they were five years ago, and are likely to be an even larger portion five years hence, illustrates this point. MVNO deals may help reduce those costs, but a better differentiation strategy for connection-oriented operators are the only long-term solution.