What are MVNOs?*

Virgin Mobile An example of an MVNO

The question of mobile virtual network operators (MVNO) is a fairly new one. For the first time, the benefits and pitfalls of regulating these emerging players were discussed at the international level within the scope of the ITU Strategic Planning Workshop on licensing 3G mobile (Geneva, 19 to 21 September 2001).

To date, there is no consensus on what constitutes an MVNO. Generally, an MVNO is defined as an operator that offers mobile services to end users but that does not have a governmental licence to use its own radio frequency. Instead, an MVNO has access to one, or in theory, perhaps more, of the radio elements of a mobile operator and is able to offer services to subscribers using such elements. These elements include the radio transmission link, its control functions and the mobility management functions that keep track of exactly where mobile handsets are located so that calls can be delivered to them.

Analysts such as Pyramid Research define an MVNO as a company that provides mobile voice and data services to end users through a subscription agreement, without having access to the spectrum. This definition goes on to state that through commercial agreements with licensed mobile network operators, an MVNO negotiates to buy excess capacity for re-sale to customers.
*This article is based on the "Licensing of third generation (3G) mobile: Briefing Paper" prepared by Patrick Xavier of the School of Business, Swinburne University of Technology, Melbourne, Australia ( ahead of the ITU Strategic Planning Workshop (Geneva, 19-21 September 2001).

The Office of Telecommunications (Oftel), the United Kingdom's regulator, defines MVNOs to cover activities undertaken by organizations that offer mobile services but do not issue their own subscriber identity module (SIM) card. Figure 1 shows the interface between an MVNO and the telecommunications network.

From these definitions, MVNOs appear to vary in nature, depending on the extent to which they rely on the facilities of the host mobile network. So far, MVNOs that have obtained access to host networks have done so through commercial negotiation. For example, Virgin Mobile, which has a presence in a number of countries around the world (see box on page 18), since its launch in the United Kingdom in November 1999, has not established its own mobile switching centre and does not have its own mobile network code but is generally regarded by end users as a real operator and competes on a "carrier-like footing" with infrastructure-based operators.

Some analysts argue that regulation should facilitate the operations of MVNOs since they offer consumers a wider choice of services and applications at lower prices, and thereby result in a more efficient use of the spectrum. Others argue that the mobile environment is sufficiently competitive, and that the advent of 3G operators will further increase competition and that regulatory intervention in support of MVNOs is unnecessary.

Figure 1 An MVNO customer making and receiving calls


Current regulatory positions regarding MVNOs

The views of regulators towards MVNOs varies significantly at present. Regulators in many countries are still considering whether (and if so to what extent) regulatory intervention, including the regulation of access price and conditions is necessary.

There have been arguments both for and against MVNO regulation. Within the European Union (EU), directives on telecommunications regulation currently do not mandate MVNOs access to a licensed 3G operator's network.

Those in favour of regulation argue that the mobile network operators control the available radio spec trum, which is a bottleneck facility and an entry barrier for new mobile network operators. Also, mobile network operators are less likely to provide MVNO access unless it is a regulatory requirement. They maintain that regulation of the mobile market is failing, which is another reason why MVNO regulation maybe a good idea. Mobile operators have very high profit margins of 25 per cent, in some cases significantly over costs. Current regulation, as interpreted by some national regulatory authorities, already gives them the power to enforce an access obligation on existing operators.

Arguments against regulatory intervention are based on the fact that the benefits of MVNOs are as yet unproven, and that there is inadequate evidence that market failure has occurred. The mobile market is competitive by nature and therefore does not require regulation. There is no industry consensus that MVNO access is necessary, and the bleak possibility that MVNO's could even discourage investment in mobile networks (both 2G and 3G). Anti-regulatory intervention stances also argue that regulatory measures such as indirect access or 3G networks will improve the competitive situation.

Comparison with local loop unbundling

Those against mandating MVNO access to 3G networks argue that it is not the same as "local loop unbundling" in the fixed network. Several operators and regulators have begun to think about aligning MVNO access in the mobile network to local loop unbundling in the fixed network. They point out that local loop unbundling was introduced to provide competition to the local and access markets so that the incumbent would not in the long term be the only operator (aside from cable operators) to control future broadband markets. They argue that MVNO access is a far more complex issue.

The extent of price competition resulting from the entry of MVNOs will depend on the terms and conditions with which MVNOs gain access to mobile networks. It is likely that regulatory intervention will be required in determining the prices, terms and conditions for the access by MVNOs to the networks of licensed operators since the early indications are that commercial negotiation will not be easy to conclude.

Oftel recently conducted a research to obtain an up-to-date assessment of the state of policy development on the MVNO concept in other European countries. Oftel found that, with a few exceptions, it is early days for European regulators. Issues surrounding the MVNO concept have not been discussed in any great detail, and hence most regulators are not yet in a position to provide categoric statements of policy. "The exceptions are the Norwegian, Danish and Swedish regulators all three have formally ruled on disputes relevant to the MVNO concept in response to requests they have received from an organization called Sense Communications (a Norwegian based service provider)", according to Oftel's research. Sense had attempted to negotiate access to airtime from the existing operators that were reluctant to grant it, particularly as Sense wanted to use its own mobile network code and SIM card.

In the Hong Kong Special Administrative Region, the Office of the Telecommunications Authority (OFTA) has indicated that 3G networks should be opened up to MVNOs. In an analysis paper based on an industry-wide consultation, OFTA proposed a 3G licensing framework based on an "open network" requirement. Under this requirement, 3G service provision would be separated from network operation in order to enhance competition in services and provide customers with more choice and price packages. Successful bidders of 3G licences, planned for September 2001, will be required to make at least 30 per cent of their network capacity available to unaffiliated MVNOs and content and service providers. Furthermore, any successful bidder that currently operates a second-generation network must agree to offer domestic roaming service to all new entrants.

Pricing principles

There are a number of strategies that could be employed by an MVNO entering the 3G market. At one end are MVNOs that have made substantial investments in infrastructure and facilities for the provision of 3G services. Such MVNOs would require extensive interconnection with fixed and mobile networks and would depend on the mobile networks only for the minimum services that they would not be able to supply themselves because they do not have licences to use spectrum. These MVNOs would be likely to require the use of the radio elements of operators of 3G networks and such fixed parts of networks necessary to route calls between the radio elements of the licensed operator and a point of interconnection from which calls can be passed on to the MVNO's network.

At the other end are MVNOs that are primarily resellers of wholesale 3G network capacity. These MVNOs would have minimal investment in network infrastructure and would concentrate their activities and investments in marketing, customer service and billing. Licensed operators would be responsible for undertaking the verification operations and database functions required for the carriage of a call by an MVNO customer. This would include the transport and delivery of calls to a terminating network. Licensed operators would then need to pass on billing and service performance information to the MVNO that would package this information and bill the customer accordingly.

An MVNO's ability to offer effective and sustainable competition against 3G network providers will be severely limited if network providers, who effectively control near monopoly "bottleneck" facilities, are in a position to charge monopoly prices for their services. Because network providers are vertically integrated into the competitive upstream or downstream markets for the provision of 3G services, they may also have incentives to restrict access to the facilities required by competitors through the imposition of prices which make it uneconomic for MVNOs to enter the market and effectively compete for 3G customers.

Virgin Mobile An example of an MVNO

A typical example is Virgin Mobile which emerged as a 50:50 joint venture between the Virgin Group and One2One. Virgin buys airtime and network capacity from One2One on a wholesale basis, then packages and sells it to its target customer base. Unlike a pure reseller, Virgin assumes roles and responsibilities traditionally associated with a full network operator, including SIM card allocation. Virgin Mobile offers both traditional mobile voice and value-added services. A key factor in Virgin's success has been the integrated distribution and sales platform it has built: the call centre, the Web and numerous Virgin distribution outlets.

Virgin Mobile has over 675 000 customers in the United Kingdom filling about 8 per cent of One2One's network, and is seeking to expand its operations internationally. Since the UK launch, a number of operators from around the world have approached Virgin with a view to establishing joint ventures to operate in various markets. Virgin Mobile has already established a presence in the United States, Australia and Singapore and intends to be in all major European countries by year-end 2002.

The pricing principles that apply to the provision of services to MVNOs should reflect the nature of an MVNO and the extent to which it is engaging in interconnection or pure resale of network capacity. MVNOs with extensive networks of their own that make only minimum use of the licensed operator's facilities are identical to other network service providers and should be entitled to interconnection on the same basis as that adopted for licensed operators.

It has been argued that such cost-based charging for access to a 3G operator's network by MVNOs would become less necessary as the market becomes more competitive. It has also been claimed that cost-based access charges for MVNOs could damage incentives to invest in infrastructure, particularly in the early stages of investment in 3G systems. These arguments should be assessed within the context of the overall objective of promoting and strengthening the competitive framework for mobile services, which is the prime rationale for allowing MVNOs to operate in the market in the first place.

3G mobile services resale, full network interconnection and full facilities-based competition are complementary rather than alternative market entry strategies. Market factors such as population density, customer type, timing of entry and penetration levels by new entrants will determine which strategy is used in different areas and at different stages of market development. Relying solely on full facilities-based competition to deliver competing 3G services may not provide 3G service competition to all end users given the costs involved in duplicating a full network throughout all areas of a country. As such, service-based competition through the resale of network capacity will be an important element of the overall state of competition in the 3G market.

Currently the EU obliges companies with a market share of over 50 per cent to open their networks to other users at a cost-plus-margin-based price and for the moment, only KPN Mobile is in this position. Other licensed operators with market shares of more than 35 per cent do not have to charge on a cost-plus-margin basis, so leasing from them could be more expensive.

Oftel takes the view that if MVNO services were to be offered, the logical principle for charging would be retail-minus. Retail-minus sets an interconnection price by looking at foregone costs and deducting these from the retail price. The costs foregone would be those associated with customer care, billing, provision of value-added services and transportation. The 3G Briefing Paper concludes that simple resale of 3G capacity can encourage entry of efficient service providers of retail 3G services.

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