Enhance mobility, virtually

TECH TALK

Virtual operators could bring more competition to the Indian cellular services market and expand it even further.

About three years back in these columns, we talked about MVNOs, short for mobile virtual network operators. There was just one MVNO model spoken highly of then: Virgin Mobile, owned by maverick Britisher Richard Branson.

Since then, the MVNO trend has caught on in developed, high yielding markets: the US has about 40 existing and planned such operators; in Europe the number is likely to top 100.

For those who came in late, an MVNO involves renting wireless capacity from a network owner, branding it and selling connections as a new voice and data service.

It could be a win-win for both the incumbent owning the infrastructure, which piggybacks on a reseller to have its network utilised better, and for the MVNO entrant which gets access to infrastructure without investing heavily and creates a potentially powerful brand.

What does this MVNO trend, increasingly becoming established in the West, hold out for developing markets?

India, for instance, today has about 54 million mobile phone subscribers, which is expected to more than treble by March 2007 and could approach 400 million in 2010.

This sizeable number will be spread across six mobile service operators: four global system for mobile (GSM) and two code division multiple access (CDMA) companies.

Traditionally, MVNO models are ideal in stagnating markets that have single digit annual growths, report a relatively high monthly average revenue per user (ARPU) and operate on a high cost structure.

Developing markets, on the other hand, have strong double-digit growth and an increasingly shrinking ARPU. In India, for instance, the growth was about 80 per cent last year and is projected at an average of 55 per cent over the next two years.

ARPU, which was at about $11 at the end of 2003, is projected to drop to about $7 by 2008. Will an MVNO model then work in India?

Pyramid thinks it will. The consultancy's London-based director Guy Engon Zibi lays out the rules: tweak the MVNO model in keeping with local wants; keep a tight leash on costs; and, finally, aggressively woo an incumbent which will lease out capacity.

"Emerging markets such as India do not offer the traditional [cost-arbitrage] advantage," Zibi told me last week on the phone.

"One of the key market entry strategies will be to either focus at the low end of the market or focus on a very specific niche at the top end."

At the top end, the market is small but profitable: think of a mobile service with a WiFi overlay offering voice and high-speed data access to travelling businesspeople.

For a low-end market entry strategy which is likely to be favoured in a country like India, look at the numbers: assume network infrastructure is leased to an MVNO at cost.

On top of this cost, a traditional emerging market network operator, according to Zibi, has sales, general and administration, or SG&A, expenses of 15 to 25 per cent of revenues.

"If an MVNO has an established (sales and distribution) system which can be leveraged at a small incremental cost, it will work," reckons Zibi.

Caution: the SG&A breathing space, however, may be minimal given that companies such as Bharti have already vacuumed all possible costs through a mix of outsourcing and cost cutting.

From a pure strategy perspective, which players have such an "established system" to use as market entry levers?

A few names come to mind: consumables leaders Hindustan Lever and ITC, lenders State Bank of India (together with its affiliates) and ICICI Bank, media giants like ESPN-Star and Bennett, Colman & Co. (which owns "The Times of India") and retail chains such as Kishore Bayani's Central, Pantaloons and Big Bazaar or Shoppers' Stop.

Others with niche market opportunities are airline companies like Jet Airways or Deccan Air or brands with youth appeal such as Coffee Day.

(India has a variation of the MVNO model already: youth channel MTV and Airtel have already launched co-branded SIM cards.)

How would various models operate? There could a hypothetical "continuum of models", says Alpesh Shah, a Boston Consulting Group principal in Mumbai.

"Somebody like Jet Airways, for instance, could lease capacity from Bharti and launch a full-blooded service Jet Mobile. Or it could launch a co-branded service. Or it could just sell the Bharti service to its frequent fliers. The models could be multiple," he says.

Essentially, any agent with a sizeable community to leverage (SBI has three million banking customers; there are five million Maruti auto owners) has an opportunity.

Yet we haven't seen a single MVNO attempt in India. Why? For two reasons.

The regulator does not allow service re-sellers to do business in India yet, fearing fly-by-night operators and, second, existing service providers have not been too keen to lease out capacity to 'potential competitors'.

With a few interested entrants (reportedly, Virgin Mobile to ESPN-Star) and operators such as the Tatas eager to increase their capacity utilisation, that situation may change soon.

What needs to be established in tandem is number portability that will allow customers to float from one service provider to another rather seamlessly in the hunt for the best value service.

Josey Puliyenthuruthel can be reached at josey@vsnl.net