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insight Is the Indian Market Ready

to go “Virtual” for Mobile?


The opportunity for MVNOs in India—
a market and regulatory perspective
By Louie Mathew, Jayanth Mysore, and Vinod Nair
Photo: Vinukumar Ranganathan

The Indian mobile telecom industry is witnessing significant growth, with 110 million
subscribers as of July 2006 representing a year-on-year growth rate of about 85%.
Even as the mobile operators continue to gain share by adding first-time users
of mobile services, there are some early indications of mobile virtual network
operators (MVNOs) potentially entering the Indian market. However, is the Indian
market ready to accept MVNOs and is there a credible business model that would
make these MVNOs viable in India?

This paper is based on Diamond’s experience of working with MVNOs, Mobile Network
Operators (MNOs), and regulators in different markets. It first defines an MVNO and
describes potential business and partnership models that MVNOs could adopt. It
then assesses the readiness of the Indian telecom market for MVNOs using market
and industry indicators from other countries where MVNOs have been in operation.
Finally, the paper provides some perspective on regulatory issues and challenges that
will influence the scale, scope and launch schedules of MVNOs in India.
Overview of Mobile Definition it could adopt the role of a “Pure MVNO”
A Mobile Virtual Network Operator in which the MVNO either buys or partners
Virtual Network Operators with third parties to provide all elements
(MVNO) offers mobile voice and data
(MVNOs) services without owning any spectrum or of the MVNO value chain beyond the
network infrastructure. MVNOs typically spectrum and network infrastructure
lease network capacity from a Mobile (Figure 1). The decision to adopt a given
Network Operator (MNO) and provide business model is governed by several
retail services using their own brand name, factors including, the targeted scale of
complementing the network with their the business, level of in-house telecom
own assets such as a strong brand, a loyal expertise, extent of initial investment that
customer base, exclusive content, or the MVNO is willing to make, and the level
an extensive distribution channel. The of risk the MVNO is willing to undertake.
evolution of telecom markets in the
The early MVNOs such as Virgin Mobile
U.S., Western Europe and parts of Asia
and Qwest in the U.S. had to build their
have demonstrated the viability of the
own back-office processes and platforms
MVNO model, with MVNOs capturing
to complement an MNO’s network. They
10-20% market share in many markets.
accomplished this either by purchasing
platforms and operating them in-house or
MVNO Models through dedicated partnerships. However,
A MVNO can adopt a range of business with the increasing number of MVNOs
models to “go to market.” At one extreme, entering the market a number of third
it could act as a “Pure Reseller” wherein parties emerged who could provide relevant
it re-brands an MNO’s service using processes and platforms (BSS/OSS).
its own brand name and sells through its These service providers are referred to as
distribution channels. On the other hand, Mobile Virtual Network Enablers (MVNEs).

Potential Business Models for an MVNO

VAS Back-office Customer Content & Branding &


Handsets Pricing
table of contents Platforms Systems Care Apps Distribution

Introduction . . . . . . . . . . . . cover
Pure
Overview of Mobile Virtual MVNO
Network Operators (MVNOs). . . . . . 2
MVNO seeks to
Emergence of MVNOs in a Market . . . 4 control each major
function and
achieve significant
Regulatory Considerations differentiation
Impacting MVNOs . . . . . . . . . . . 7
Pure
Conclusion . . . . . . . . . . . . . . 10 Reseller
About the Firm . . . . . . . . . . . . .11
MVNO attaches its
own brand to host
About the Author . . . . . . . . . . . .11 carrier’s offer and
distributes through
its own network

For more information contact: Source: Diamond analysis.

Vinod Nair Figure 1


Managing Partner—India
vinod.nair@diamondconsultants.com
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Diamond believes that as mobile markets However, most of these companies between multiple MNOs, handset
mature, there will be an opportunity for neither have the wireless expertise nor providers and back-end platform providers
several Indian companies with strong the risk appetite to make significant on one hand, and potential MVNOs
brands and loyal customers (e.g. leading capital outlays for the wireless business. on the other, may emerge. MVNAs could
national banks) and those with extensive To facilitate cost-effective and rapid dramatically reduce the time to market
distribution infrastructure (e.g. the deployment of such services, a class of and lower the risk profile of launching
Indian Postal Service) to offer their own Mobile Virtual Network Aggregators an MVNO.
brand of mobile communication services. (MVNAs) who act as intermediaries

MVNO Partnership Models

Build-Your-Own Model MVNE Model MVNA Model

Brand and Private Label

MVNO
Distribution MVNOS

Offer • Pre-certified handsets


MVNO

Development
tailored to segments
and services
• Segmentation,
MVNO

Handsets
offer design and
development

MVNA
Mobile • Pre-integrated, • Pre-integrated,
Data Platform turn-key back office turn-key back-office
systems and mobile
MVNE

systems and mobile


data platform data platform
Back-office • Back-office processes • Back-office processes
• Pre-negotiated
wholesale voice and
• Wholesale voice and • Wholesale voice and
MNO

MNO

Network data capacity


data capacity data capacity

MVNO Scale + –
MVNO Expertise + –
MVNO Risks + –
MVNO Margins + –

Source: Diamond analysis.

Figure 2

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Emergence The emergence of MVNOs in a market is beyond their level of affordability. In such
often a result of one or more MNOs in the cases, an MNO might consider opening
of MVNOs market choosing to partner with an MVNO up its network to MVNOs that address
in a Market for commercial reasons. As explained specific customer segments with a
below, mobile network operators who significantly lower CCPU (and potentially
believe that they are better off adopting higher AMPM) or as a channel to add
a wholesale model, in addition to their price-sensitive customers without having
retail model, are the driving force behind to lower the price across the entire base.
the launch of MVNOs.

MNOs with additional capacity on their Indicators of the


network have the choices of organically Emergence of MVNOs
acquiring retail customers to “fill up the Highly penetrated markets with limited
network,” selling the capacity on a wholesale competition between mobile network
basis to a reseller, or a combination of both. operators may lead to a situation where
Diamond believes that decision should some customer segments are likely to be
be driven by the objective of maximizing the “under-served” in specific aspects of their
Average Margin per Minute (AMPM). The mobile experience. The dissatisfaction
AMPM is determined by several factors— could come from either poorly tailored
the price charged per minute, subscriber products and services or intangibles such
acquisition costs, and the costs of serving a as a mismatch between their individual
customer post-acquisition (referred to lifestyles and what their operator’s brands
as the Cash Cost Per User (CCPU)). The CCPU stand for. An underlying reason for this
consists of network related costs (the cost phenomenon is that mobile network
of providing and operating the cellular operators suffer from the limitations of a
network) and non-network costs such as “one size fits all” strategy. Such a strategy
customer care related expenses. may lead to some scale benefits and lower
operating costs but is likely to cause some
Operators may find their retail AMPM levels
dissatisfaction amongst specific customer
shrinking for a variety of reasons. Key
segments with specific needs and desires.
reasons include (i) decreasing airtime
tariffs due to increasing price competition; In order to systematically understand
(ii) change in the mix of mobile usage the relationship between the level of
and spend towards lower AMPM services; penetration and the degree of competition
(iii) loss of share amongst segments between MNOs on the emergence
who drive higher margins (e.g. roaming of MVNOs, Diamond analysed data from
customers); (iv) increasing acquisition costs 16 countries where MVNOs have been
for new subscribers and higher retention operating for a few years now (Figure 3).
costs for existing subscribers; (v) lack
Level of Mobile Penetration: Across all
of scale while serving specific segments
markets, there appears to be a threshold
(e.g. in rural or semi urban areas);
in terms of mobile penetration after which
vi) increasing costs of providing customer
MNOs are likely to partner with potential
care and support to specific segments.
MVNOs. For the sample of countries
Under such situations, an operator may find we studied this threshold seems to occur
that the AMPM associated with wholesale at a penetration of approximately 40%.
minutes is higher than those generated by
Level of Industry Consolidation: In general,
some retail subscribers. Additionally, there
higher levels of consolidation favour the
may be segments within the population
launch of MVNOs. This is consistent with
who find an operator’s retail pricing level
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Diamond’s experience from customer Mobile Penetration and HHI at Time of First MNVO Launch
satisfaction studies that indicate higher
levels of dissatisfaction amongst customers 60%
in less competitive markets. Measured Norway
in terms of the Herfindahl-Hirschman Index 50%
Romania
(HHI), fourteen out of sixteen markets Japan
Estonia
40%
in the sample had an HHI of over 18% Poland Lithuania

HHI Index
at the time of launch of the first MVNO, Bolivia Australia
Denmark Singapore
30% NZ
which would categorise them as “highly UK Netherlands

concentrated” according to the guidelines Canada


20%
followed by the U.S. Department of Justice
Hong Kong
for antitrust enforcement. 10%

When viewed in combination, it appears that


0%
markets typically display a level of mobile 0% 20% 40% 60% 80% 100%

penetration above 40% at the time of launch Mobile Penetration

of the first MVNO, with varying degrees Note: Size of circle represents number of subscribers

of market concentration (HHI indexes ranging Source: Informa, Diamond anaylsis.

from ~20% to 50%). Diamond believes Figure 3

that these differences in the degree of


competition (and concentration) can be Market Readiness of Metros for MNVOs
explained partly by the different policies
followed by regulators in each market. 60%

50%
Assessment of India’s
Mobile Telecom Industry 40%
Macro-economic indicators such as GDP
per capita and population density 30%
HHI Index

vary considerably across the 23 telecom


circles in India. Correspondingly, there 20% Kolkata Mumbai
Chennai Delhi
are significant differences in the level
of mobile penetration and the degree of 10%

concentration in each circle. Given these


0%
disparities, Diamond believes that it is 0% 20% 40% 60% 80% 100%
more appropriate to consider India as a Penetration
collection of 23 separate markets instead
Other Circles Metros Other Countries
of a single homogenous market when
assessing the opportunity for MVNOs. Source: Informa, Diamond anaylsis.

Figure 4
When viewed from this perspective,
three of the metro circles, Delhi, Mumbai
and Chennai, appear to display some of
the market conditions which characterize
countries at the time of their first MVNO
launch (Figure 4). However, all other
circles are significantly under-penetrated,
indicating that the opportunity for
MVNOs in these circles may still be
a few years away.
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The three key metro circles in India offer believes that some MNOs are actively or from specific customer segments and
high levels of penetration and have a exploring MVNO opportunities with adopt a wholesale model.
significant number of mobile subscribers potential partners in these key circles.
In summary, while the metros may exhibit
who could be viewed as potential
However, there are several commercial some of the characteristics shared
switching to an MVNO. These metros
factors that argue against the potential entry by markets with MVNOs, it would be
are also characterised by a number
of MVNOs in these metro circles in the premature to conclude that MVNOs can
of mobile networks and there is evidence
near term. Most MNOs are aggressively enter and operate profitably in these
of additional network rollouts by new
targeting first-time subscribers to drive circles today. Amongst other factors,
entrants. This would suggest the potential
growth and these circles exhibit signs of regulatory policies governing the entry
opportunity for an MNO with a less
highly competitive (and less concentrated) and operations of MVNOs could have the
competitive retail operation to offer
markets. In such a scenario, MNOs are highest impact on the commercial viability
wholesale capacity to an MVNO in
unlikely to pull back from the retail market of MVNOs in India.
a “win-win” scenario for both. Diamond

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Regulatory policies can alter the timing, regulations. It foresaw the opportunity
Regulatory
scale and profitability of MVNOs. Regulators to offer multiple services on the back
Considerations across the world have adopted varying of the same infrastructure and at the
Impacting MVNOs positions with respect to regulating MVNOs. same time took precautionary measures
Understanding these differences and to preempt a possible monopoly in the
their underlying rationale may be a good network operation business. OFTA
starting point for India’s telecom regulatory strived to ensure isolation of network
authorities as they prepare to open up operators from the business of service
India’s marketplace to MVNOs. provision so as to afford maximum
benefit to the end consumer. This was
achieved by using various levers
Regulatory Regime in
within its power, including separate
Other Markets
licenses for the two types of players,
MVNOs have been regulated in different
mandating a 40% minimum as
ways in various countries, from ensuring
the capacity that has to be leased to
open access in Hong Kong to strict
non-affiliated MVNOs, and a non-
prohibition in Italy (Figure 5).
discriminatory wholesale pricing regime.
The different regulatory approaches can be
• At the other extreme, Italy has a
seen as a consequence of the incumbent
telecom market which had penetration
industry structure at the time of MVNO entry.
of more than 100% and yet the
• In Hong Kong, the regulator, the Office of regulator will not permit MNOs to
Telecoms Authority (OFTA), used the 3G host MVNOs until 2011. This clause
licensing timeframe to introduce MVNO was included as part of the 3G

Regulatory Positions Adopted in Different Markets with MVNOs

Regulatory
Position Examples Relevant Regulations Number of MVNOs

• Hong Kong • Example market: Hong Kong • Hong Kong: 7


Force MNOs • Norway — 40% of network capacity should be dedicated • Norway: 8
to MVNOs
to Share
— No limit on the number of MVNO licenses
Network — Uniform wholesale pricing regardless of scale
of MVNO
• Australia • Example market: Australia • Australia: 20
Facilitate • Belgium — Mandatory sharing of networks enforced on • Belgium: 15
• France operators with significant market power • France: 17
Launch — Wholesale pricing on a cost-plus basis with
of MVNOs • Denmark • Denmark: 11
regulated margins
• UK • UK: 18

• Austria • Example market: Japan • Austria: 4


• Canada — No requirement on MNOs to open networks • Canada: 5
Indifferent • Japan to MVNOs • Japan: 2
to MVNOs • Portugal — MNO allowed to price discriminate based on • Portugal: 2
its own business objectives

• Bolivia • Example market: Argentina • Bolivia: 1


Discourage • Argentina — Large number of MNO licenses granted to make • Argentina: 0
market unattractive to MVNOs
Development
— Stringent rollout obligations to MNOs make
of MVNOs MVNO entry difficult

• Greece • Example market: Italy • Greece: 0


• Italy — MNOs not allowed to host MVNOs until 2011 • Italy: 0
Prohibit as part of 3G license agreements
MVNOs

Source: Informa, Diamond research.

Figure 5

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license agreements in order to make Key Regulatory Issues Facing which meets the regulator’s objectives
it commercially viable and to offset MVNOs in India as well as the commercial requirements
the large costs incurred by network The Indian telecom industry has unique of all stakeholders would be a key
operators in license fees and telecom characteristics that add complexity to the prerequisite.
equipment. Such an approach could regulatory task. Several regulatory issues
2. MVNO access to the USO fund:
ensure adequate investments in new could directly impact the launch timing,
Clarification on the regulatory position
3G infrastructure but could have a scale and scope of MVNOs in India. These
on access to Universal Service Obligation
detrimental effect on customer choice regulatory considerations can be grouped
funds for MVNOs who may choose
and pricing. into three categories—Industry Structure,
to provide services in rural areas.
Spectrum & Licensing and Operations.
• The facilitative approach followed
3. Defining regulatory boundaries:
by most European regulators and the
MVNOs are typically launched as an
Australian regulatory authority has Industry Structure
additional service by an incumbent
resulted in a thriving MVNO industry 1. FDI limits on investing in MVNOs:
in a different industry (e.g. media, retail).
in these countries piggybacking on Foreign Direct Investment (FDI) limits
Clarifying the role and jurisdiction
multiple MNOs. Though they stopped in India are different for each industry
of different regulations in the context
short of mandating open access, sector. Given that MVNOs will be
of an MVNO’s operations will serve
regulators ensured that any incumbent launched predominantly by non-telecom
to streamline their operations.
that achieved “Significant Market firms, the level of FDI investment in an
Power” status would open its network MVNO may require clarification. 4. Spectrum sharing implications:
to MVNOs. This proved to be a The MVNO model benefits further
safety valve against the creation of 2. Limits on MNOs investing in MVNOs:
if spectrum sharing and trading are
a monopoly, and resulted in MNOs If the regulator follows an approach of
allowed, as it gives MVNOs increased
actively scouting for partners with maintaining a strict separation between
flexibility. The regulatory position
significant brand power or access to service provisioning and network
on such issues is not clear today.
premium content. operation, the regulator has to stipulate
the maximum equity that MNOs can
• In Bolivia, the regulator’s policies hold in their affiliated MVNOs. Operations
were primarily driven by the low 1. Wholesale capacity and pricing
penetration of mobile services and 3. Definition of Significant Market
policy: If regulations mandate open
the low geographic reach of the Power (SMP) status: As MVNOs
access, then they need to address
network. Furthermore, low ARPUs increase an MNO’s subscriber base, the
issues such as how much of the MNO
meant that the discount MVNO model quantitative thresholds beyond which
capacity will be shared and at what
was not viable. Since the brand a MNO is seen as having SMP and the
price. It has the further task of
and data service-oriented MVNOs implications of achieving that status
monitoring the implementation of
were seen as encroaching on the may require further clarifications.
these guidelines by MNOs.
already limited capacity, the regulator 4. Tax structure of MVNOs: The
stepped in and provided incentives to 2. ADC levy norms for MVNOs: The
present taxation level of Indian
mobile network operators to improve policy of charging ADC (Access Deficit
telecom players at 17%-26% is one of
capacity and coverage, as opposed Charges) on mobile operators could
the highest in the world. Since MVNOs
to encouraging the launch of MVNOs. affect the viability of MVNO business
work on thin margins, high tax rates
The only MVNO in the country was models, given their thin margins relative
could prove to be an obstacle towards
launched by Cotas, the incumbent fixed- to an MNO.
a viable commercial model.
line operator serving Bolivia’s prosperous
3. Guidelines on MVNO roaming
Santa Cruz region. It launched an
agreements: An MVNO may require
MVNO, Cotas Movil, in mid-2002 via Spectrum & Licensing
separate national and international
GSM operator Nuevatel, to complement 1. Licensing model for MVNOs: An
roaming agreements from its host MNO.
its existing portfolio of fixed voice, effective approach for granting licences
Guidelines may be necessary to define
ADSL and cable TV services. to MVNOs (e.g. auctions, fixed fee)
the options available to an MVNO.
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4. Concerns around subscriber data: The regulatory challenges surrounding regulatory framework acts as a significant
The host MNO will have access MVNOs in India are considerable and impediment today. A proactive approach
to a MVNO’s subscriber database. will require concerted action by several to MVNOs and their operating framework
A clarification in the regulatory key stakeholders. While the market in India could help address additional
position governing access to and poses some opportunities for leading issues raised by expected trends such as
sharing of this information for purposes international MVNOs and local Indian the launch of 3G services in India.
of commerce and national security companies to consider MVNOs in
may be necessary. India, the absence of a clearly defined

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Conclusion The MVNO model allows customer- for the launch of MVNOs. Diamond
facing businesses to enter the wireless believes that there may be an opportunity
marketplace through partnerships with for some MNOs to evaluate the benefits
MNOs and MVNEs/MVNAs. MVNOs are of partnering with an MVNO in these
a mature market phenomenon catering circles. A crucial factor in the development
to unmet needs of customers in highly of MVNOs in India is the regulator’s
penetrated and concentrated markets. position on potential MVNO entrants
Diamond’s analysis of global markets and and their MNO hosts. A study of MVNOs
the evolution of MVNOs indicate that across markets shows that regulators
most circles in India are not ready yet to have adopted five broad approaches,
see the launch of MVNOs. However, ranging from mandatory open access
the analysis indicates that three of the to strict prohibition. Resolving several
four metro circles—Mumbai, Delhi regulatory issues and open questions
and Chennai—display some of the would be essential first steps towards the
market penetration and industry structure introduction of MVNOs in India.
conditions that appear to be prerequisites

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About the Firm Diamond (NASDAQ: DTPI) is a premier global management consulting firm that helps
leading organizations develop and implement growth strategies, improve operations,
and capitalize on technology. Mobilizing multidisciplinary teams from our highly
skilled strategy, technology, and operations professionals worldwide, Diamond works
collaboratively with clients, unleashing the power within their own organizations to
achieve sustainable business advantage. Diamond is headquartered in Chicago, with
offices in Washington, D.C., New York, Hartford, London and Mumbai. To learn more,
visit www.diamondconsultants.com.

About the Authors Vinod Nair is a Partner at Diamond and the head of the practice in India. He has worked
with clients in India, Europe, Middle East, US and South Africa on a range of strategic
and operational issues. In the telecommunications arena, Vinod has worked with leading
fixed and mobile operators in Europe on such issues as successful market entry strategies
for mobile operators, market segmentation, and proposition development for voice and
data offers; development and validation of fixed/mobile convergent solutions; analytical
marketing techniques to improve customer lifetime values; and mobile application strategies
for handset vendors. His clients include leading corporations in the telecommunications,
financial services, media, automotive and manufacturing sectors. He has also advised leading
private equity houses on potential transactions in Europe and in India.

Jayanth Mysore is a Manager in Diamond’s Telecom practice in Chicago. Jayanth


has worked with wireless operators on 3G product strategy and launch management;
conducted commercial due diligence for large scale investments in the telecom sector in
India; assisted telecom operators in their post-merger organizational integration efforts;
and performed process assessments of the customer acquisition process for wireless
operators. He has also worked with large enterprises on developing their Voice over IP
strategy. Prior to joining Diamond, Jayanth was a Research engineer at Motorola Labs.

Louie Mathew is an Associate in Diamond’s India office. Louie has over four years
of experience in the telecom industry working in roles across strategy and operations
in marketing and engineering. Prior to joining Diamond, Louie has worked with Motorola
where he supervised a large system integration effort for Internet Protocol-based
switches for cellular operators. Louie has also worked on project assignments with three
large telecom equipment manufacturers in the U.S. in various roles across engineering,
client relationship management, and business development.

The authors would like to acknowledge the contributions of Hamilton Sekino,


Amaresh Tripathy, and David Gates of Diamond’s US Telecom practice. Their earlier
work on two Diamond whitepapers, “Your Brand, Unplugged,” and “MVNO 3.0,”
was a valuable source of insight and inspiration.

Both of those whitepapers are available for download at


www.diamondconsultants.com/PublicSite/ideas/perspectives

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© 2006 Diamond Management & Technology Consultants, Inc. All rights reserved.
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