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 Virtual Network Operators (MVNOs)

Definition
A Mobile Virtual Network Operator (MVNO) offers mobile voice and data services without owning any spectrum or network infrastructure. MVNOs typically lease network capacity from a Mobile Network Operator (MNO) and provide retail services using their own brand name, complementing the network with their own assets such as a strong brand, a loyal customer base, exclusive content, or an extensive distribution channel. The evolution of telecom markets in the U.S., Western Europe and parts of Asia have demonstrated the viability of the MVNO model, with MVNOs capturing 10-20% market share in many markets.

it could adopt the role of a “Pure MVNO” in which the MVNO either buys or partners with third parties to provide all elements of the MVNO value chain beyond the spectrum and network infrastructure (Figure 1). The decision to adopt a given business model is governed by several factors including, the targeted scale of the business, level of in-house telecom expertise, extent of initial investment that the MVNO is willing to make, and the level of risk the MVNO is willing to undertake. The early MVNOs such as Virgin Mobile and Qwest in the U.S. had to build their own back-office processes and platforms to complement an MNO’s network. They accomplished this either by purchasing platforms and operating them in-house or through dedicated partnerships. However, with the increasing number of MVNOs entering the market a number of third parties emerged who could provide relevant processes and platforms (BSS/OSS). These service providers are referred to as Mobile Virtual Network Enablers (MVNEs).

MVNO Models
A MVNO can adopt a range of business models to “go to market.” At one extreme, it could act as a “Pure Reseller” wherein it re-brands an MNO’s service using its own brand name and sells through its distribution channels. On the other hand,

Potential Business Models for an MVNO

table of contents
Introduction .
. . . . . . . . . . .

VAS Platforms

Back-office Systems

Customer Care

Content & Apps

Handsets

Pricing

Branding & Distribution

cover 2 4 7
Pure Reseller
MVNO attaches its own brand to host carrier’s offer and distributes through its own network Source: Diamond analysis.

Overview of Mobile Virtual Network Operators (MVNOs).

. . . . . . . .

Pure MVNO
MVNO seeks to control each major function and achieve significant differentiation

Emergence of MVNOs in a Market Regulatory Considerations Impacting MVNOs . . . . . Conclusion .

. . . . . .

. . . . . . . . . . . . .

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About the Firm

. . . . . . . . . . . . .11 . . . . . . . . . . . .11

About the Author

For more information contact:

Vinod Nair Managing Partner—India vinod.nair@diamondconsultants.com 2

Figure 1

Diamond believes that as mobile markets mature, there will be an opportunity for several Indian companies with strong brands and loyal customers (e.g. leading national banks) and those with extensive distribution infrastructure (e.g. the Indian Postal Service) to offer their own brand of mobile communication services.

However, most of these companies neither have the wireless expertise nor the risk appetite to make significant capital outlays for the wireless business. To facilitate cost-effective and rapid deployment of such services, a class of Mobile Virtual Network Aggregators (MVNAs) who act as intermediaries

between multiple MNOs, handset providers and back-end platform providers on one hand, and potential MVNOs on the other, may emerge. MVNAs could dramatically reduce the time to market and lower the risk profile of launching an MVNO.

MVNO Partnership Models
Build-Your-Own Model
Brand and Distribution MVNO Offer Development Handsets Mobile Data Platform Back-office MNO MVNE MVNO

MVNE Model

MVNA Model
MVNO

Private Label MVNOS
• Pre-certified handsets tailored to segments and services • Segmentation, offer design and development • Pre-integrated, turn-key back-office systems and mobile data platform • Back-office processes • Pre-negotiated wholesale voice and data capacity

• Pre-integrated, turn-key back office systems and mobile data platform • Back-office processes • Wholesale voice and data capacity

Network

MVNO Scale MVNO Expertise MVNO Risks MVNO Margins

+ + + +

MNO

• Wholesale voice and data capacity

MVNA

– – – –

Source: Diamond analysis.

Figure 2

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Emergence of MVNOs in a Market

The emergence of MVNOs in a market is often a result of one or more MNOs in the market choosing to partner with an MVNO for commercial reasons. As explained below, mobile network operators who believe that they are better off adopting a wholesale model, in addition to their retail model, are the driving force behind the launch of MVNOs. MNOs with additional capacity on their network have the choices of organically acquiring retail customers to “fill up the network,” selling the capacity on a wholesale basis to a reseller, or a combination of both. Diamond believes that decision should be driven by the objective of maximizing the Average Margin per Minute (AMPM). The AMPM is determined by several factors— the price charged per minute, subscriber acquisition costs, and the costs of serving a customer post-acquisition (referred to as the Cash Cost Per User (CCPU)). The CCPU consists of network related costs (the cost of providing and operating the cellular network) and non-network costs such as customer care related expenses. Operators may find their retail AMPM levels shrinking for a variety of reasons. Key reasons include (i) decreasing airtime tariffs due to increasing price competition; (ii) change in the mix of mobile usage and spend towards lower AMPM services; (iii) loss of share amongst segments who drive higher margins (e.g. roaming customers); (iv) increasing acquisition costs for new subscribers and higher retention costs for existing subscribers; (v) lack of scale while serving specific segments (e.g. in rural or semi urban areas); vi) increasing costs of providing customer care and support to specific segments. Under such situations, an operator may find that the AMPM associated with wholesale minutes is higher than those generated by some retail subscribers. Additionally, there may be segments within the population who find an operator’s retail pricing level

beyond their level of affordability. In such cases, an MNO might consider opening up its network to MVNOs that address specific customer segments with a significantly lower CCPU (and potentially higher AMPM) or as a channel to add price-sensitive customers without having to lower the price across the entire base.

Indicators of the Emergence of MVNOs
Highly penetrated markets with limited competition between mobile network operators may lead to a situation where some customer segments are likely to be “under-served” in specific aspects of their mobile experience. The dissatisfaction could come from either poorly tailored products and services or intangibles such as a mismatch between their individual lifestyles and what their operator’s brands stand for. An underlying reason for this phenomenon is that mobile network operators suffer from the limitations of a “one size fits all” strategy. Such a strategy may lead to some scale benefits and lower operating costs but is likely to cause some dissatisfaction amongst specific customer segments with specific needs and desires. In order to systematically understand the relationship between the level of penetration and the degree of competition between MNOs on the emergence of MVNOs, Diamond analysed data from 16 countries where MVNOs have been operating for a few years now (Figure 3). Level of Mobile Penetration: Across all markets, there appears to be a threshold in terms of mobile penetration after which MNOs are likely to partner with potential MVNOs. For the sample of countries we studied this threshold seems to occur at a penetration of approximately 40%. Level of Industry Consolidation: In general, higher levels of consolidation favour the launch of MVNOs. This is consistent with

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Diamond’s experience from customer satisfaction studies that indicate higher levels of dissatisfaction amongst customers in less competitive markets. Measured in terms of the Herfindahl-Hirschman Index (HHI), fourteen out of sixteen markets in the sample had an HHI of over 18% at the time of launch of the first MVNO, which would categorise them as “highly concentrated” according to the guidelines followed by the U.S. Department of Justice for antitrust enforcement. When viewed in combination, it appears that markets typically display a level of mobile penetration above 40% at the time of launch of the first MVNO, with varying degrees of market concentration (HHI indexes ranging from ~20% to 50%). Diamond believes that these differences in the degree of competition (and concentration) can be explained partly by the different policies followed by regulators in each market.

Mobile Penetration and HHI at Time of First MNVO Launch
60%
Norway

50%
Japan Romania Estonia Poland Bolivia Australia UK Canada Hong Kong NZ Netherlands Lithuania Denmark Singapore

40%

HHI Index

30%

20% 10% 0%

0%

20%

40%

60%

80%

100%

Mobile Penetration
Note: Size of circle represents number of subscribers
Source: Informa, Diamond anaylsis.

Figure 3

Market Readiness of Metros for MNVOs
60% 50% 40% 30%

Assessment of India’s Mobile Telecom Industry
Macro-economic indicators such as GDP per capita and population density vary considerably across the 23 telecom circles in India. Correspondingly, there are significant differences in the level of mobile penetration and the degree of concentration in each circle. Given these disparities, Diamond believes that it is more appropriate to consider India as a collection of 23 separate markets instead of a single homogenous market when assessing the opportunity for MVNOs. 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.
HHI Index

20% 10% 0%

Mumbai Kolkata Chennai

Delhi

0%

20%

40%

60%

80%

100%

Penetration
Other Circles
Source: Informa, Diamond anaylsis.

Metros

Other Countries

Figure 4

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The three key metro circles in India offer high levels of penetration and have a significant number of mobile subscribers who could be viewed as potential switching to an MVNO. These metros are also characterised by a number of mobile networks and there is evidence of additional network rollouts by new entrants. This would suggest the potential opportunity for an MNO with a less competitive retail operation to offer wholesale capacity to an MVNO in a “win-win” scenario for both. Diamond

believes that some MNOs are actively exploring MVNO opportunities with potential partners in these key circles. However, there are several commercial factors that argue against the potential entry of MVNOs in these metro circles in the near term. Most MNOs are aggressively targeting first-time subscribers to drive growth and these circles exhibit signs of highly competitive (and less concentrated) markets. In such a scenario, MNOs are unlikely to pull back from the retail market

or from specific customer segments and adopt a wholesale model. In summary, while the metros may exhibit some of the characteristics shared by markets with MVNOs, it would be premature to conclude that MVNOs can enter and operate profitably in these circles today. Amongst other factors, regulatory policies governing the entry and operations of MVNOs could have the highest impact on the commercial viability of MVNOs in India.

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Regulatory Considerations Impacting MVNOs

Regulatory policies can alter the timing, scale and profitability of MVNOs. Regulators across the world have adopted varying positions with respect to regulating MVNOs. Understanding these differences and their underlying rationale may be a good starting point for India’s telecom regulatory authorities as they prepare to open up India’s marketplace to MVNOs.

Regulatory Regime in Other Markets
MVNOs have been regulated in different ways in various countries, from ensuring open access in Hong Kong to strict prohibition in Italy (Figure 5). The different regulatory approaches can be seen as a consequence of the incumbent industry structure at the time of MVNO entry. • In Hong Kong, the regulator, the Office of Telecoms Authority (OFTA), used the 3G licensing timeframe to introduce MVNO

regulations. It foresaw the opportunity to offer multiple services on the back of the same infrastructure and at the same time took precautionary measures to preempt a possible monopoly in the network operation business. OFTA strived to ensure isolation of network operators from the business of service provision so as to afford maximum benefit to the end consumer. This was achieved by using various levers within its power, including separate licenses for the two types of players, mandating a 40% minimum as the capacity that has to be leased to non-affiliated MVNOs, and a nondiscriminatory wholesale pricing regime. • At the other extreme, Italy has a telecom market which had penetration of more than 100% and yet the regulator will not permit MNOs to host MVNOs until 2011. This clause was included as part of the 3G

Regulatory Positions Adopted in Different Markets with MVNOs
Regulatory Examples Position
Force MNOs to Share Network
• Hong Kong • Norway

Relevant Regulations
• Example market: Hong Kong — 40% of network capacity should be dedicated to MVNOs — No limit on the number of MVNO licenses — Uniform wholesale pricing regardless of scale of MVNO • Example market: Australia — Mandatory sharing of networks enforced on operators with significant market power — Wholesale pricing on a cost-plus basis with regulated margins • Example market: Japan — No requirement on MNOs to open networks to MVNOs — MNO allowed to price discriminate based on its own business objectives • Example market: Argentina — Large number of MNO licenses granted to make market unattractive to MVNOs — Stringent rollout obligations to MNOs make MVNO entry difficult • Example market: Italy — MNOs not allowed to host MVNOs until 2011 as part of 3G license agreements

Number of MVNOs
• Hong Kong: 7 • Norway: 8

Facilitate Launch of MVNOs

• • • • • • • • •

Australia Belgium France Denmark UK Austria Canada Japan Portugal

• • • • • • • • •

Australia: 20 Belgium: 15 France: 17 Denmark: 11 UK: 18 Austria: 4 Canada: 5 Japan: 2 Portugal: 2

Indifferent to MVNOs

Discourage Development of MVNOs

• Bolivia • Argentina

• Bolivia: 1 • Argentina: 0

Prohibit MVNOs

• Greece • Italy

• Greece: 0 • Italy: 0

Source: Informa, Diamond research.

Figure 5

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license agreements in order to make it commercially viable and to offset the large costs incurred by network operators in license fees and telecom equipment. Such an approach could ensure adequate investments in new 3G infrastructure but could have a detrimental effect on customer choice and pricing. • The facilitative approach followed by most European regulators and the Australian regulatory authority has resulted in a thriving MVNO industry in these countries piggybacking on multiple MNOs. Though they stopped short of mandating open access, regulators ensured that any incumbent that achieved “Significant Market Power” status would open its network to MVNOs. This proved to be a safety valve against the creation of a monopoly, and resulted in MNOs actively scouting for partners with significant brand power or access to premium content. • In Bolivia, the regulator’s policies were primarily driven by the low penetration of mobile services and the low geographic reach of the network. Furthermore, low ARPUs meant that the discount MVNO model was not viable. Since the brand and data service-oriented MVNOs were seen as encroaching on the already limited capacity, the regulator stepped in and provided incentives to mobile network operators to improve capacity and coverage, as opposed to encouraging the launch of MVNOs. The only MVNO in the country was launched by Cotas, the incumbent fixedline operator serving Bolivia’s prosperous Santa Cruz region. It launched an MVNO, Cotas Movil, in mid-2002 via GSM operator Nuevatel, to complement its existing portfolio of fixed voice, ADSL and cable TV services. 8

Key Regulatory Issues Facing MVNOs in India
The Indian telecom industry has unique characteristics that add complexity to the regulatory task. Several regulatory issues could directly impact the launch timing, scale and scope of MVNOs in India. These regulatory considerations can be grouped into three categories—Industry Structure, Spectrum & Licensing and Operations.

which meets the regulator’s objectives as well as the commercial requirements of all stakeholders would be a key prerequisite. 2. MVNO access to the USO fund: Clarification on the regulatory position on access to Universal Service Obligation funds for MVNOs who may choose to provide services in rural areas. 3. Defining regulatory boundaries: MVNOs are typically launched as an additional service by an incumbent in a different industry (e.g. media, retail). Clarifying the role and jurisdiction of different regulations in the context of an MVNO’s operations will serve to streamline their operations. 4. Spectrum sharing implications: The MVNO model benefits further if spectrum sharing and trading are allowed, as it gives MVNOs increased flexibility. The regulatory position on such issues is not clear today.

Industry Structure
1. FDI limits on investing in MVNOs: Foreign Direct Investment (FDI) limits in India are different for each industry sector. Given that MVNOs will be launched predominantly by non-telecom firms, the level of FDI investment in an MVNO may require clarification. 2. Limits on MNOs investing in MVNOs: If the regulator follows an approach of maintaining a strict separation between service provisioning and network operation, the regulator has to stipulate the maximum equity that MNOs can hold in their affiliated MVNOs. 3. Definition of Significant Market Power (SMP) status: As MVNOs increase an MNO’s subscriber base, the quantitative thresholds beyond which a MNO is seen as having SMP and the implications of achieving that status may require further clarifications. 4. Tax structure of MVNOs: The present taxation level of Indian telecom players at 17%-26% is one of the highest in the world. Since MVNOs work on thin margins, high tax rates could prove to be an obstacle towards a viable commercial model.

Operations
1. Wholesale capacity and pricing policy: If regulations mandate open access, then they need to address issues such as how much of the MNO capacity will be shared and at what price. It has the further task of monitoring the implementation of these guidelines by MNOs. 2. ADC levy norms for MVNOs: The policy of charging ADC (Access Deficit Charges) on mobile operators could affect the viability of MVNO business models, given their thin margins relative to an MNO. 3. Guidelines on MVNO roaming agreements: An MVNO may require separate national and international roaming agreements from its host MNO. Guidelines may be necessary to define the options available to an MVNO.

Spectrum & Licensing
1. Licensing model for MVNOs: An effective approach for granting licences to MVNOs (e.g. auctions, fixed fee)

4. Concerns around subscriber data: The host MNO will have access to a MVNO’s subscriber database. A clarification in the regulatory position governing access to and sharing of this information for purposes of commerce and national security may be necessary.

The regulatory challenges surrounding MVNOs in India are considerable and will require concerted action by several key stakeholders. While the market poses some opportunities for leading international MVNOs and local Indian companies to consider MVNOs in India, the absence of a clearly defined

regulatory framework acts as a significant impediment today. A proactive approach to MVNOs and their operating framework in India could help address additional issues raised by expected trends such as the launch of 3G services in India.

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Conclusion

The MVNO model allows customerfacing businesses to enter the wireless marketplace through partnerships with MNOs and MVNEs/MVNAs. MVNOs are a mature market phenomenon catering to unmet needs of customers in highly penetrated and concentrated markets. Diamond’s analysis of global markets and the evolution of MVNOs indicate that most circles in India are not ready yet to see the launch of MVNOs. However, the analysis indicates that three of the four metro circles—Mumbai, Delhi and Chennai—display some of the market penetration and industry structure conditions that appear to be prerequisites

for the launch of MVNOs. Diamond believes that there may be an opportunity for some MNOs to evaluate the benefits of partnering with an MVNO in these circles. A crucial factor in the development of MVNOs in India is the regulator’s position on potential MVNO entrants and their MNO hosts. A study of MVNOs across markets shows that regulators have adopted five broad approaches, ranging from mandatory open access to strict prohibition. Resolving several regulatory issues and open questions would be essential first steps towards the introduction of MVNOs in India.

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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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