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© PYRAMID RESEARCH 2012 ID# 1001

HIGHLIGHTS

Ethnic MVNOs pose an additional revenue opportunity for mobile operators willing to invest in a payment platform.

Advertising and marketing can make or break an operation. We see the growing importance of viral marketing, with social networks playing an important role.

With the proliferation of 3G+ networks, provision of data is becoming more important, and this will result in a greater number of data-only MVNOs serving the growing tablet market.

For fixed operators, MVNOs are not only an opportunity to offer multiplay and a converged fixed-mobile offering, but even more importantly they offer cross-selling opportunities and reduce churn.

Vol. 4, No. 1, February 2012

Pyramid Research

Global Telecom Insider

MVNO Strategies Beyond the Traditional Ethnic and Discount Models

TABLE OF CONTENTS

INTRODUCTION 2

CHARACTERISTICS OF SUCCESSFUL MVNOS 4 A. MVNOs are a very good fit for large ethnic diasporas, and this niche will continue to be an important market in years to come 7

B. MVNOs will be a major vehicle to complement operator offerings in some markets 10

C. Verticals and external business will increasingly leverage MVNOs to offer mobile services to their clients and leverage existing relationships; a number of innovative verticals will use and benefit from MVNOs such as M2M 13

MARKET DETAIL 16 CASE STUDY: Ethnic MVNO — Lycamobile UK 16 CASE STUDY: Business MVNO — KORE Telematics, North America 17

CASE STUDY: Retail/Discount MVNO — Tesco Mobile UK 18

CASE STUDY: Data-only MVNO — giffgaff UK 19 CASE STUDY: Brand MVNO — Virgin Mobile France 20

CONCLUSIONS 23 Key findings 23 Recommendations 23

RELATED RESOURCES 24

© PYRAMID RESEARCH | GLOBAL TELECOM INSIDER VOL. 4, NO. 1 2

Introduction Outside of North America and Western Europe, MVNOs have had a limited appeal due to poor regulatory frameworks and established operators’ strategies for addressing niche markets. To date, MVNOs have generally emerged in competitive, mature market environments, where more and more MNOs have embraced the model as an additional revenue stream. More recently, MVNOs have grown from no-frill service providers to finding markets not served by the MNOs. We estimate that the global MVNO subscriber base will grow at a CAGR of 10% over the next five years and capture almost 214m subscribers in 2016, equal to 2.7% of mobile subscribers globally (see Exhibit 1). Both in Western Europe and North America MVNOs accounted for 12% of mobile subscribers by year-end 2010. By 2016, we forecast the share of MVNOs in these markets to grow to about 16% of total mobile subscriptions.

Exhibit 1: MVNO subscribers as percentage of regional subscribers, 2008-2016

Source: Pyramid Research Mobile Data Forecast Q4 2011

In general, first generation MVNOs are mass market prepaid MVNOs The second generation is still consumer-oriented, but targets niche segments with either prepaid or postpaid packages. The third generation is much more focused on a given segment (i.e., M2M), and will also offer postpaid packages. A look at some key MVNO markets (e.g., UK, US, France and Germany) reveals a relative balance in the models selected. In the US and UK, for example, three-quarters of established MVNOs offer only prepaid services. By contrast, Belgium has a high number of postpaid MVNOs.


Exhibit 2: MVNO market share in select developed markets, 2011E

Source: Pyramid Research Mobile Data Forecast Q4 2011

We believe that MVNOs will keep carving out additional niches to address, going beyond the traditional ethnic and discount models. As mobile operators focus on migrating their customers to postpaid and try to offset declining voice revenue with attractive data-based offerings, they simply cannot address all the possible niches. MVNOs, thanks to their strong focus on a specific target groups and ability to develop innovative and fresh services, will be able to find a sweet spot in the market. This report analyzes successful MVNOs in developed markets and will attempt to draw lessons for emerging markets. We will look at what type of MVNOs were successful in developed markets such as the UK, the birthplace of such giants as Virgin Mobile, Lebara Mobile, Tesco Mobile and LycaMobile and where MVNOs account for 17% of total SIMs. We will look at different breeds of MVNO, starting with so-called ethnic MVNOs, and we will take a look at the market potential of such services. Then we will analyze fixed operators’ strategies to become fully fledged multiplay operators through MVNO strategies, and finally we will describe the emerging and exciting trend of data-only MVNOs.

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Characteristics of successful MVNOs The recent news of a number of MVNOs ventures — Virgin Mobile entering a number of Latin American countries, China Mobile’s agreement with Everything Everywhere, Vodafone Egypt’s MVNO Bladna in Italy — denotes that the MVNO business model is still an attractive one, catching the attention of a wider array of players, not only in developed but also in emerging markets. When looking at the MVNOs from the value perspective (see Exhibit 3), telecom-based MVNOs targeting the mass market (e.g., fixed operators entering the mobile market or CATV operators turning to quad-play) face a prospect of limited financial returns. Their chance of success increases when they find customer niches, such as business customers or M2M. Thanks to the proliferation of 3G+ networks and the boom in data-based applications and services, those MVNOs venturing beyond the traditional provision of discount voice and SMS are finding great success, which in turn leads to further specialization.

Exhibit 3: The MVNO value matrix

Sources: Pyramid Research, Comarch

On the other hand, the non-telecom MVNOs are more able to find a sweet spot and push into lucrative market niches by taking advantage of their identifiable brands and customized mobile offerings. For instance, Virgin Group licenses the brand, and the partner phone company operates the network infrastructure. This model has worked well in most of Virgin’s markets, with the player entering Latin American markets as well. Virgin Mobile’s joint venture with Tribe Mobile can potentially shake up the Latin American MVNOs scene. Virgin Mobile’s string of rollouts starts in Chile, where it signed an agreement with Telefonica, and it plans to launch commercial services there in March 2012. The target market is young customers and the "young at heart,‖ with the service portfolio promising an alternative


solution; simple, transparent pricing; and products and services addressing the needs of its target segment. Virgin Mobile has begun a media campaign aiming to raise awareness of its brand in the market through a series of provocative commercials (see Exhibit 4), the goal of which is to position itself as a challenger to established market players. In one ad, which has been banned from several television channels, a pigeon poops on the statue of a mustachioed man, who says, ―Pronto, te van a dejar de cagar‖ (―Soon, they will stop crapping on you‖). The ad recorded 60k views on the first day, and became a number one trending brand on Twitter.

Exhibit 4: Virgin Mobile Chile advertising campaign

Sources: YouTube, Pyramid Research

A quick look at the MVNOs that launched in the Netherlands in the first ninth months in 2011 highlights the move towards a greater degree of specialization. Among the new players are UPC and Ziggo (cable operators) extending mobile data services to their existing customer base; Lycamobile’s third brand, Toggle Mobile; three new MVNOs in the business segment; one new ethnic player and one MVNO in the no-frills segment; and Youfone’s acquisition of a charity-focused MVNO, Call4Care.


Exhibit 5: A map of the risks of the MVNO model

Examples: (1) Disney Mobile, Mobile ESPN 1.0 (2) BT, Videotron, Comcast, Qwest Wireless (3) Amp’d Mobile USA, Voce, Helio (4) TracFone, Virgin Mobile (5) Amp’d Mobile Canada, Universal Mobile France, M6 Mobile, Mobile ESPN 2.0 (6) MVNOs with ethnic focus; Lebara Mobile, etc. (7) Tesco Mobile, Aldi, Carrefour

Source: Pyramid Research, “Rethinking MVNO and MVNE Economics,” August 2007

To date, successful MVNOs show a number of characteristics:

They use a prepaid platform: this is easier on costs. Prepaid subscriber valuations are not the most attractive, but prepaid allows for a more conservative approach to costs and makes the venture more likely to succeed.

They target a clear and well-defined segment.

They generally focus on what they do best. Ideally, MVNOs would just focus on areas where they have a competitive advantage, leaving the rest to the MNO (preferably) or to a capable MVNE (Mobile Virtual Network Enabler). MVNEs became instrumental for MVNOs’ rollouts; MVNEs provide MVNOs with all required back-office operations and IT platforms. The MVNO can then focus on the core of its business: building new tariffs, services, customer acquisition and retention.

A corollary of the above point is that successful MVNOs have a credible differentiator from the start, either at the operational level (e.g., established distribution network, CRM, etc.) or at the demand level (e.g., an existing customer base). The lack of either does not doom the venture, but does increase the level of risk.

Successful MVNOs have realistic models. The MVNO business is a reseller business, and nonsensical models do not last long. The venture needs a clear revenue picture, because the cost side tends to be painfully clear and unforgiving.

A hard differentiator, one that the competition cannot easily replicate.

Content

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satellite

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billing, customer care

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limited; focus on

marketing, sales

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costs, long payback

period – if it works

(3)

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startup costs, better

upside over time

(4)

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startup costs, good

profit upside (6)

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customer support to

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costs, long payback

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picture is

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use MVNEs

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Risky: high startup

costs, long payback

period – if it works

(3)

Moderate risk: High

startup costs, better

upside over time

(4)

Moderate risk: high

startup costs, good

profit upside (6)

Leverages existing

customer support to

dilute cost risk (2)

Risky: high startup

costs, long payback

– if it works; big

picture is

prerequisite (1)

Less customer

control, but lower

costs (5)

Moderate risk; most

use MVNEs

Relatively low

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works

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A. MVNOs are a very good fit for large ethnic diasporas, and this niche will continue to be an important market in years to come Over the last 10 years, the total number of international migrants has increased by 43% from an estimated 150m in 2002 to 214m people today. Today 3.1% of the world's population are migrants. The proportions of migrants diverge significantly from country to country — looking at the charts below, emerging economies sit at the top in terms of number of people emigrating. In 2010, 5 out of the top 10 emigration countries were in Asia-Pacific (see Exhibit 6), namely Bangladesh, China, India, Pakistan and the Philippines, with the majority of the labor migrating to the Middle East and, above all, to the Gulf Cooperation Council (GCC) countries (approx. 97% of temporary migrants from India and Pakistan, and 87% of temporary migrants from Sri Lanka moved to GCC countries). Not surprisingly, GCC features prominently across the countries with a high migrant contribution to total population: Qatar (87%), United Arab Emirates (70%), and Saudi Arabia (28%). Consequently, we believe that emerging countries like these are excellent markets for MVNOs to target.

Exhibit 6: Top 20 emigration and immigration countries, 2010

Sources: Pyramid Research, Migration and Remittances Factbook 2011, Development Prospects Group, World Bank, UNPD 2009, World Bank Factbook 2011

This trend is also observed in European markets where immigration is high, but MVNO activity is already high and competition is intense. The United States, however, is a developed market with high purchasing power, a large migrant population and relatively low MVNO activity when it comes to ethnic MVNOs. In 2010 the United States hosted around 43m foreign nationals, accounting for 13.5% of the total US population. Mexican immigrants accounted for almost one out of three immigrants, or 11.6m. Despite such a sizeable target market, a few attempts to launch ethic-based MVNOs in the US have failed, with the casualties including Movida. Although Movida focused on cities with significant Hispanic population, such as Dallas, Houston, Austin, Miami, Los Angeles, and Phoenix and came to the market with a good value proposition (aggressive tariffs, Spanish language services, distribution network in the areas with large Hispanic presence, e.g. Wal-Mart), other strong competitors such as TracFone and MNOs such as MetroPCS offered Spanish


language services as well (see Exhibit 7). Running on tight margins, Movida didn’t manage to survive.

Exhibit 7: TracFone’s Spanish offering

Source: Tracfone, Pyramid Research

Ethnic MVNOs are inching into Latin American markets as well. For example, in November 2010 a Colombian MVNO branded Uff launched operations over Tigo’s (Millicom’s) network. Initially the market was very pessimistic about Uff’s potential, arguing that the market was saturated because it was nearing 100% penetration (98% at the end of 2010) and already hosting three mobile operators: Comcel (America Móvil), Movistar (Telefonica) and Tigo (Millicom). However, the MVNO did relatively well by targeting a niche market through attractive international calling prices. Since its launch in 2010, the MVNO has grown to more than 250k subscribers, accounting for 0.5% of total subscriptions. In addition to traditional voice and data services, ethnic MVNOs can benefit from remittances. According to the World Bank’s 2011 Migration and Remittances Factbook, migrants sent around $440bn in remittances to their home countries in 2010, up from US$132bn in 2000.


Exhibit 8: Top 20 remittance-receiving countries and sending countries, 2009

Sources: Pyramid Research, Development Prospects Group, World Bank Migration and Remittances Factbook 2011

A number of ethnic MVNOs have already added money sending capabilities to their service offerings to tap into this revenue opportunity (see Lycamobile Case Study). Following in the the footsteps of mobile operators that subsidize devices for its customers, in October 2011 Lebara Mobile struck a global partnership with Nokia. The vendor will provide handsets, which include the Nokia 1616, 100, C1-01, C3-00 and the 500 models. In the UK, all handsets with an entry price of £24.99 ($38.78) will also include a £10 ($15.50) call credit. The devices are sold in a number of retailers including Tesco, and Carphone Warehouse, and feature Lebara software enabling access to Lebara data services. These handsets are also available in other countries where Lebara operates.

Exhibit 9: Lebara Mobile Nokia handsets, 2012

Source: Lebara Mobile


In Africa, MVNO activities have been limited, though operators have already started to reach across the borders and provide services to expatriates. Bladna (meaning homeland in Arabic) is the latest MVNO launched by Vodafone Egypt in Italy, targeting the Egyptian community living in Italy (over one million). Bladna offers go beyond cheap phone calls to Egypt and North African countries: it offers credit transfers from Bladna’s customers to Vodafone Egypt customers, tapping into the remittance opportunity. The Arabic language operator also uses viral marketing rather than traditional marketing and expensive outlets. In order to comply with Italian mobile SIM registration regulations, while at the same time reach inside the community, street vendors will be able to activate a Bladna SIM card directly upon purchase, using smartphones to take a picture of new customers and uploading the data into a central database. Bladna expects to reach 150k subscribers in four years. However, despite MVNOs being a low hanging fruit for MNOs, not all of them succeed, for example Maroc Telecom, which launched a similar MVNO offering North African residents discount call plans to Maghreb countries Morocco, Algeria and Tunisia, in France in 2006 and in Belgium in 2007 (branded Mobisud). Maroc Telecom abandoned the MVNO sector pretty quickly, claiming that it was ―not economically viable.‖ The operator sold it off its 66% share in the French MVNO for a symbolic €1 ($1.33) to its sister company SFR in June 2009, followed by an agreement with Belgacom subsidiary Scarlet in June 2010 to dispose of its share in the Belgian MVNO. Maroc Telecom decided to withdraw from the MVNO market due to limited uptake and growth, but also because it struggled to find its competitive edge and its costs were high. For instance, Mobisud France made a €19m ($25m) loss on a €12.6m ($17m) turnover in 2008, and it only gained 66k customers since its market launch, out of the 5m addressable market in France Migrant communities will continue to grow, and MVNOs are well positioned to serve this customer segment, either as an ethnic brand spreading across many regions and servicing a particular nationality, or as brand of the host country operator.

B. MVNOs will be a major vehicle to complement operator offerings in some markets For cable and telecom operators that don’t have mobile network, adding a mobile operation is mostly about increasing customer loyalty and introducing triple- and quad-play offers. We have observed this trend across a number of markets, especially in those where cable operators have strong presence and want to challenge telcos (UK, Netherlands, Spain, some Latin American countries). For instance, the Spanish cable operator ONO signed an MVNO agreement with Telefonica to use its mobile network, allowing it to become the fourth operator with a quad-play offer in Spain, bundling fixed phone, mobile phone, Internet and TV. Pyramid’s forecast estimates growth in quad-play penetration across Latin America, from almost none to 1.5% of total households by 2016, with Colombia and Mexico leading in terms of quad-play penetration in the region. Colombian operators UNE and ETB are aware of the importance of having mobile services in their portfolio. They both tested mobility as MVNOs and are venturing into running their own networks. UNE won LTE spectrum in 2010 and is set to launch commercial services in mid-2012, while ETB has publicly expressed interest in participating in an upcoming spectrum auction in Colombia this year. However, the MVNO scene for fixed operators has not been all rosy, and execution will remain vitally important. For example, US cable company Cox Communications, which operated an MVNO on Sprint’s network, put an end to selling mobile services and plans to shutter its mobile operation by March 2012. The player claimed that there was not enough scale to compete successfully in a US market dominated by AT&T and Verizon, and it lamented the fact it wasn’t able to ―access iconic wireless devices‖ such as Apple’s iPhone.


Exhibit 10: Multiplay and quad-play penetration of households in a number of Western European and Latin American markets, 2011 and 2016

Source: Pyramid Research Q3 2011 Multiplay Forecast

Building additional services in its portfolio and increasing the share of customers’ wallets is also one of the goals for telcos and operators alike. Leading Polish pay-TV operator Cyfrowy Polsat is an example of a pay-TV player keen on entering the multiplay zone. It struck a wholesale agreement with Mobyland for data services, as part of its strategy to become a multiplay operator. It has already added mobile voice and broadband to its core TV offering. The operator slowly but steadily has been entering the multiplay arena: As of Q3 2011, the MVNO’s customer base increased from 77k to 136k in a year (of which 99% were postpaid customers). The number of Internet users has increased to 54k in 2011, up from 39k in 2010. 4G deployments also seem to invigorate the MVNO scene, whetting the appetite of all kinds of players to complement their services and offers. In the US, Leap Wireless International is considering extending its MVNO deal with Sprint for 3G service to also include LTE. In Russia, following a year full of puzzlement about the future of the LTE, in November 2011 Rostelecom and MegaFon signed an agreement with Scartel, operating under Yota brand, to use Scartel’s network by means of an MVNO business model. We expect the MVNO scene in Russia to be full of vigor, with MVNO subscribers growing at a CAGR of 9.8% between 2011-2016, reaching 3.9m subscribers by 2016. This is thanks to the decision of the regulator, Minkomsvyaz, to issue MVNOs their own numbering resources, giving operators a long-awaited capability to establish full MVNOs. Among MVNO licensees there is TTK, which will use mobile to complement its rapidly growing fixed offerings in both B2C and B2B segments. Rostelecom obtained a MVNOs license and has already launched few MVNOs in order to complement its network coverage nationwide.

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2011 Total multiplay 63% 43% 73% 52% 67% 35% 18%

2016 Quadruple play 15.5% 3% 5% 3% 7% 2% 4%

2016 Total multiplay 77% 55% 85% 66% 80% 50% 38%

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Exhibit 11: Fixed mobile convergence households penetration in select European countries, 2011 and 2016

Source: Pyramid Research Q3 2011 Multiplay Forecast

Implementing fixed-mobile convergence for cable/telcos without a mobile network is tricky. Mobile operators can exploit their own networks to offer convergent services. For fixed operators, not involving convergence at a network level (home zone solutions) means they have to sign an MVNO agreement. Then fixed operators can provide convergent services either via ―home zone‖ or more likely by incorporating mobile access with their own fixed network (solution based on Wi-Fi microcells at home). Telenet is the largest provider of broadband cable services in Belgium. In February 2009, Telenet signed full MVNO agreement with Mobistar, facilitating a greater flexibility in terms of product offers, and a rollout of fixed-mobile convergence products. In Q4 2010, the operator launched a full MVNO for which it has undertaken the construction of certain proprietary mobile infrastructure, including a mobile switch, mobile rating and billing platform. Telenet plans to cross-sell mobile telephony services to its existing customer base, aiming to gain a higher ARPU stemming from higher use of both mobile voice and data. Even in a highly penetrated mobile market, the ability to offer combined fixed and mobile products is an important differentiator. The mobile cross-sell opportunity is also one of the key strategic objectives of Virgin Media, a successful British cable operator. The aptitude to cross-sell more contract mobile services to Virgin’s cable customer base favorably impacts churn and lifetime value, plus it positions the operator to make further use of product convergence (opportunities in the TiVo and Metro Wi-Fi arena). Virgin Media in Q4 2011 reported that churn among its quad-play subscribers has been observed at just 5% (vs. 6% in 2Q2011), compared to 35% (vs. 36% in 2Q 2011) for its standalone single-play subscribers (see Exhibit 12).

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Exhibit 12: Virgin Media churn and cross-selling opportunity, 2011

Source: Virgin Media Q4 2011 presentation

For fixed operators, offering mobile services is mostly about staying relevant in a marketplace where vast majority of operators already are able to offer a whole suite of services, but offering mobile services also offers the potential for FMC and cross-selling services.

C. Verticals and external business will increasingly leverage MVNOs to offer mobile services to their clients and leverage existing relationships; a number of innovative verticals will use and benefit from MVNOs such as M2M In addition to traditional retail stores extending their service offerings to also include mobile services (see Tesco Mobile Case Study), there are a number of other initiatives aiming to leverage already existing customer relationships, retail agreements and brand equity to reach potential clients (see Virgin Mobile Case Study). We observe a swift expansion of M2M MVNOs across Europe and the US. To name but a few: Wireless Logic, Wyless, Wireless Innovations Arkessa (UK), Telenor Connexion (Sweden), Asipder (Netherlands) or CrossBridge Solutions, KORE Telematics and Numerex (US & Canada). These MVNOs are reaching a partnership agreement with an MNO at the wholesale level,


whereby M2M subscriptions access operators’ radio network and the operator bills its partners on a regular basis. In addition, MVNOs are signing international roaming agreements to guarantee all-embracing accessibility and availability of the service, both on the national and global level. No additional resources or investments are required. Some MVNOs have invested in their own billing and core network infrastructure in order to have better control and to better optimize them for high volume, low capacity M2M subscriptions. The MVNO itself may offer additional M2M services, and/or offer the connectivity piece to other M2M specialists. KORE Telematics, for instance, is an MVNO in North America, and it provides connectivity for some 550 application providers, with a focus on providing highly reliable access with flexible billing capabilities. It can also provide device certification as well as application testing. Numerex also provides such services and has developed a number of end-to-end vertical services. In addition KORE Telematics offers the voice and mobile data to complement its offer, ensuring that it provides the whole suite of services to its clients. Original equipment manufacturers (OEMs) are also entering the MVNO business, utilizing the machine-to-human MVNO model. The Kindle from Amazon.com is the prime example. The Kindle Keyboard 3G uses GSM technology providing coverage in over 100 countries, including Australia, Hong Kong, Germany, Japan, Norway, Spain, South Africa, the United States and many others. The consumer pays solely for the content, not for network access. The operator receives a revenue share every time it delivers a book. This is an easy way for a telco to provide bandwidth with no operating costs such as customer support. The OEM and MNO partnership provides intelligence on customer and network, allowing data mining and utilizing the database for content promotion, providing cross-selling opportunities based on customer preferences, location, time of day and so on. For example, Vodafone considers data MVNOs an important part of its business and has a relationship with TomTom and Amazon.

Exhibit 13: Amazon Kindle Keyboard 3G wireless coverage map (3G or 2.5G (EDGE/GPRS)

Source: Amazon


In May 2011, Hewlett Packard introduced prepaid mobile broadband across selected HP EliteBook and ProBook notebooks, using Sprint’s network. HP is acting as a MVNO selling services under its own brand. The prepaid, no-contract service includes plans starting at $5 per month for 75MB of data up to $30 for 1 GB. Most HP notebooks are available pre-configured or can be customized to include mobile broadband. Current HP notebook owners may also take advantage of after-market option kits that make it easy to add mobile broadband. TruConnect is the US-based MVNO selling 3G mobile data service for laptops and tablets using the Sprint network. The player hopes for success with its pricing structure, which is based on the principle of full transparency in charging customers only for the mobile data they use. The company mirrored Skype’s charging model and automatically tops up customers’ accounts when they go down to $2. Email notifications are sent out before the funds are deducted from a customer’s account, and users can decide on the amounts of the top-up: $10, $20 or $30. TruConnect target customers are light mobile data users such as business travelers who only need a mobile connection while travelling, and thus they are not willing to sign up to a postpaid plan. Only around one-third of TruConnect’s customers use the USB modem, with the rest opting for the Wi-Fi hotspot (serving up to five users). Customers pay $4.99 per month for the service, plus 3.9 cents per megabyte. TruConnect average subscriber uses between 300MB and 500MB of data per month, translating into a bill from $11.70 to $19.50 each month, plus the $4.99 fee. With mobile data revenue becoming increasing important, globally we expect data’s share of mobile services to increase from 33% in 2011 to 45% in 2016. This will present a cumulative revenue opportunity of $2.58trn.


Market detail

CASE STUDY: Ethnic MVNO — Lycamobile UK Lycamobile was introduced in 2006 in the Netherlands and is now Europe’s largest prepaid MVNO, serving around 6.5m customers across 14 countries (UK, Netherlands, Belgium, Switzerland, Denmark, Norway, Sweden, Italy, Spain, Australia, France, Germany, Poland and Ireland). Lycamobile entered the UK market in September 2008, in cooperation with Orange, and 10 months after its launch, reached over 1m active subscribers. In 2011, the operator took 36th place in mid-market private companies section in the Sunday Times Top Track 250 companies rating, thanks to its sales of £414.5m ($640.47m), and profits of £8.8m ($13.6m) in 2010. Lycamobile is available through an extensive network of retail outlets, and its channel partnership with PayPoint, the UK’s cash and internet payments network, allows it to sell top-up cards across a number of the largest UK supermarkets, including Asda, Tesco, The Co-operative and Superdrug. The operator is also boosting its media presence through sponsorships of events such as the 2nd Ugandan UK Convention (September 2012). Lycamobile continues to expand its share of the MVNO market, and during November 2011 it ran a promotion offering free and unlimited calls between Lycamobile customers in the UK.

Exhibit 14: Lycamobile subscriptions and share of total MVNO market, 2006-2011

Source: Pyramid Research Mobile Data Q4 2011

Lycamobile expanded its offering beyond voice services. In April 2011 it launched the 'Lycamoney' cash card in partnership with Transact Network and MasterCard. There are two versions of the Lycamoney cash card available:

The Green Lycamoney Card can be purchased and topped up from a nationwide retail network of stores. This card allows users to top-up and ring-fence their daily disposable budget.

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The Silver Lycamoney Card upgrade product is free for existing Green card customers and offers extra benefits such as higher load limits and companion cards that can be sent to friends and family abroad or domestically.

The aim of both Lycamoney Cards is to enable the customers to better manage and control their monthly budgets without worrying about overspending or overdraft charges. Consumers can load their cards online or at thousands of Payzone retailers nationwide. The Lycamoney Card is also accepted at over 30m MasterCard acceptance locations worldwide. The card won’t charge monthly fee, a transaction fee for spending, or a premium rate number. Because this is a pay-as-you-go card, there is no credit check to get one. The initial £4.99 ($7.73) cost of the card will be returned to the customer as Lycamobile credit once the card is activated and loaded for the first time.

Exhibit 15: Lycamoney offer, 2012

Source: Lycamoney

CASE STUDY: Business MVNO — KORE Telematics, North America KORE Telematics is an MVNO using the AT&T network in the US (and Rogers in Canada). It was set up in 2003 in the US, and its mission was to be a pure play M2M provider. Now it offers a broad portfolio of services based on mobile data, including value-added services such as surveillance and mobile voice. The operator has international roaming agreements with nearly all major GSM operators worldwide, and thanks to that it can service the needs of the enterprise customers with a single company, which can work with multi-carrier mobile and satellite networks. KORE Telematics is a full MVNO: It manages the entire chain, starting with the commercial and billing process all the way through to network monitoring with its own network organizational center.


It has tailored solutions for a number of verticals, including security, utilities, healthcare, and government. It provides a suite of products such as vehicle location and fleet tracking, payment and transaction, and telemetry. The operator provides connectivity for some 550 application providers, with a focus on providing highly reliable access with flexible billing capabilities. It can also provide device certification as well as application testing. It offers on-demand pricing of mobile data services (pay-as-you-use). KORE Telematics has a number of established relationships with several leading OEMs, including Enfora, MultiTech, Cinterion, Telit, Digi, Elster and Sierra Wireless. This enables KORE to provide the whole suite of services, from initial deployment and certification through to commercial service deployment using advanced troubleshooting tools and methods.

Exhibit 16: KORE Telematics services portfolio, 2012

Source: KORE Telematics

This MVNO has a strong value proposition. It has technical specialization in mobile data and highly regarded client assistance. Its product portfolio and commercial approach based on verticals further reinforces its value proposition.

CASE STUDY: Retail/Discount MVNO — Tesco Mobile UK Tesco is the largest retailer in the UK and the third largest revenue generator globally. In the financial year ending February 2011, it generated £44.6bn ($68.91bn) in revenue and £2.5bn ($3.86bn) in trading profit the UK (6.1% trading margin). It operates in 15 countries, including the United States, China, Japan, Poland and Turkey. Their telecom business is consistent with a long-term strategy of following customers into large expanding markets at home. In a joint venture with O2 (Telefonica), Tesco entered the mobile market in late 2003 when Tesco Mobile, Tesco’s MVNO, was launched. Tesco Mobile added 226k customers in the first nine months, ending Q3 2011 with 2.8m customers, a year-on-year increase of 17%. Tesco Mobile focuses on the prepaid market by using a strong value proposition that encompasses aggressive promotion based on tariffs and quality supported by brand reputation. It has a broad handset portfolio, including basic and high-end models such as the iPhone, prepaid, postpaid, roaming and international calls, free SIM cards and credit recharges. Tesco has successfully leveraged its distribution network to control costs, build their subscriber base and maintain customer loyalty. Tesco has a number of sales channels such as retail outlets, the Internet, call centers and even ATMs (Tesco offers financial services). It has 2,715


stores in the UK. Tesco mobile services allow customers to have access to special supermarket offers and to earn Tesco Clubcard points when buying handsets and call time. Tesco has over 15m Clubcard holders, and this, together with Tesco’s credit card points, increases customer brand loyalty.

Exhibit 17: Tesco Mobile sample of retail offering, 2012

Source: Tesco Mobile

After being successful in the prepaid world, Tesco entered the postpaid world, seeking higher-ARPU clients. As of Q2 2010, Tesco Mobile had 160k postpaid costumers. The postpaid segment requires more attention and sales effort. There are more than 200 Tesco Phone Shops. Its vast distribution network allows Tesco to control cost per gross add (CPGA) and offer competitive tariffs. On its advertising campaigns Tesco has paid special attention to number portability and free SIM cards to attract customers from other networks. It has also jumped on the SIM-only trend (July 2009) and offers shorter contract period offers (e.g., a 12-month iPhone contract).

CASE STUDY: Data-only MVNO — giffgaff UK In November 2009, Telefonica O2 UK launched giffgaff, utilizing the concept of crowdsourcing (tapping into the general public for ideas). Giffgaff is a SIM-only MVNO. The word giffgaff in Scottish English means ―mutual giving,‖ and it was chosen to fit with the principles outlined in the service’s manifesto. The operator’s ―Run by you‖ slogan means that much of the advertising, customer acquisition, product development and customer support is outsourced to users themselves, who are awarded for their contribution via a Payback scheme: giffgaff’s members earn payback cash for every person recruited: 1 recruit (1 activated SIM) = 500 points or £5 ($7.75). For example, in


December 2011, giffgaff announced they paid back almost £700,000 ($1.084m) in this payback period, and a total of £1m ($1.55m) in 2011. Most of the questions raised by members are answered in the online support forum, but there is also a small customer service team, providing additional support when needed for issues that cannot be resolved directly by members, e.g., credit card issues. Integration with Facebook and Twitter took place in October 2010 to provide other channels for customer support. The advertising is also customer-led: Albion, giffgaff’s marketing agency, provides costumes in which the customers can dress up to make video ads. Albion picks the best, and awards the winners £5,000 ($7,750), a small amount compared to an average cost of video advertisement. The operator doesn’t publish any information about the service uptake. There are 370,000 registered community accounts, with about 10,000 new members joining each month. GiffGaff CEO said that revenue was up 11% in 2011, with membership up 7%, without mentioning actual number, and added that 25% of all new customers join the service following recommendations from existing customers. In November 2011 the operator introduced three data-only options (what the operator calls gigabags): £5 ($7.75) for 500MB, £7.50 ($11.62) for 1GB or £12.50 ($19.37) for 3GB. giffgaff has also launched a new app, available for iOS, Android and BlackBerry, which is intended for use together with the new goodybags, making it easier for members to track their usage and avoid extra charges. Gigabags can be used with all data devices including tablets, dongles and PCs as well as mobile handsets, and there are no restrictions for streaming, downloading or tethering (all smartphones except for iPhone).

Exhibit 18: Giffgaff data plans, 2012

Source: Pyramid Research, giffgaff

In January 2012, only a few months after the launch of the new gigabags, the operator applied a new data usage rule, aimed at a 1% of its subscribers consuming more than a third of its total data. The operator said that it is planning to rectify this issue by identifying patterns in data behavior and contacting (and, in extreme cases, barring) members who are not using their giffgaff SIM in accordance with the terms and conditions. The member community was very supportive of this announcement, calling for naming and shaming the users ―overusing‖ the network.

CASE STUDY: Brand MVNO — Virgin Mobile France Virgin Mobile launched in France in April 2006, and is now the fourth largest mobile operator, with around 2m customers. Virgin Mobile is commercialized by OMEA Telecom, a joint venture


between the Virgin and Carphone Warehouse groups. As of Q3 2011, Virgin reported an increase in the postpaid base, as it reduced its focus on low-end prepay, which in turn resulted in a quarterly revenue growth of 15.3% year-on-year to €109m ($153m). Beyond its aggressive commercial strategy, Virgin Mobile was the first in France to propose an unlimited SMS postpaid plan. It offers a wide range of handsets, and smartphones, and its marketing is bold. It has a strong distribution network with 2,500 sales outlets and more than 53,000 top-up outlets, while its customer service boasts more than 500 dedicated agents. Half of the operator’s mobile subscribers are under the age of 25. In June 2011 Virgin Mobile signed a five-year renewable full MVNO contract with SFR. The full MVNO agreement facilitates a higher degree of technical independence because the MVNO can install its own equipment on masts and gain more control over its customer base, giving them access to more usage data. Virgin Mobile will also launch a quad-play offer, originally planned to take place in September 2011and postponed to the beginning of 2012. This is particularly important as quad-play gains traction in France, growing from 6% in 2011 to 16% of households (see Exhibit 19). In combination with Virgin’s mobile service, the operator will enter the increasingly crowded field of French quad-play service providers at the same time as ISP Free adds the Free Mobile service competing with Orange, Bouygues, SFR and Numericable. SFR will be also Virgin’s provider of the Virgin box. The home gateway will deliver Internet, fixed telephony and over 250 TV channels.

Exhibit 19: Virgin Mobile France subscriptions and percentage of total market subscriptions, 2007-2011

Source: France Mobile Data Forecast, Q4 2011

The French statistic site Toosurtoo claims that 26% of Free Mobile’s sign-ups have migrated from MVNOs, with Virgin Mobile France being the single biggest loser. In response, Virgin Mobile France launched a €19.99 ($27.24) subscription offering unlimited calls and Internet in France, but for the same price Free Mobile includes MMS and calls to 40 destinations abroad. Virgin launched also a €10 ($13.63) a month subscription with 240 minutes and 3GB of data (like Free Mobile).

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010 2011

% to

tal su

bcrip

tions

SIM

s (0

00)

Virgin Mobile subscriptions % subscriptions


Virgin is looking for a niche not addressed by Free Mobile: consumers who want mobile Internet at less than €20 ($27.25) a month. In late January 2012, Virgin announced a new range of subscription plans, called 'Extaz,' in reaction to the low-price, SIM-only offer launched by Free Mobile, and other operators' efforts to match it. The Extaz range comes in S, M and XL, with S being SIM-only with no tie-in period, and M and XL requiring 2-year contracts, and coming with a standard mobile phone or a smartphone, respectively. Extaz plans come in start at €8.99 ($12.25) a month for 120 minutes, with unlimited SMS and no contract tie-in period, or €14.99 ($20.43) with a mobile phone on a two-year contract.

Exhibit 20: Virgin Mobile Extaz offering, 2012

Source: Virgin Mobile

Author: Sylwia Boguszewska, Senior Analyst ([email protected]) Editor: Matt Donnelly, Managing Editor ([email protected]) Support: www.pyramidresearch.com/insiders.htm ([email protected]) © PYRAMID RESEARCH | GLOBAL TELECOM INSIDER VOL. 4, NO. 1 23

Conclusions

Key findings

Ethnic MVNOs are not only attractive because of dispersed populations worldwide, but also because of the additional services that they can offer, namely remittances. This poses an additional revenue opportunity for a mobile operator willing to invest in a payment platform.

Advertising and marketing can make or break an operation. We see the growing importance of viral marketing, with social networks playing an important role as well (e.g., Virgin Mobile and giffgaff).

With the proliferation of 3G+ networks, provision of data is becoming more important, and this will result in a greater number of data-only MVNOs serving the growing tablet market.

For fixed operators, MVNOs offer not only an opportunity to provide multiplay and a converged fixed-mobile offering, but even more importantly they offer cross-selling opportunities and reduce churn.

Recommendations

MNOs — Rather than viewing MVNOs as your foes, start seeing these operators as possible revenue sources. It is possible that outsourcing the provision of services to certain customer segments may bring more benefits.

MVNOs — Study the market and see whether there is a potential to roll out new and fresh services. Diaspora communities are a good target group, and so is the provision of data-only services.

Vendors — In October 2011 Lebara struck a global partnership deal with Nokia. Consider a similar deal with another MVNO.

Regulators — Clear and transparent interconnection rates, as well as number portability, will allow MVNOs to break into the market. Whenever possible, data wholesale agreements also have to take place to enable MVNOs to gain greater control over their costs.


Related resources Global Mobile Data Forecast Forecasts published quarterly Updated on a quarterly basis, this Mobile Data Forecast product provides a complete picture of demand trends for the global market. The Excel output includes five years of historical data and five years of market projections for metrics such as penetration, mobile subscriptions (by type of package, by operator or MVNO and by network technology), users of specific data services (SMS, music, etc.), MOU, ARPS (by operator, by subscription type, by service, by application) and revenue (by messaging and non-messaging applications). The Forecast is based on extensive field research and uses a consistent methodology, aiming to capture the total spending on mobile data services on an aggregate global level. Data from these Forecasts is available online for subscribers to our DataTracker service.

mWomen: A Win-Win Opportunity for Mobile Operators Phones: A Win-Win Opportunity for MNOs Telecom Insider published December 2011 In this Insider, we examine the inhibiting factors as well as the conditions that drive interest in mobile phone adoption by women around the globe. Next we highlight examples of the benefits that mobile phones have played a role in producing for women. Then a discussion follows of the potential gains that MNOs and governments will derive from a female citizenry with better and increased mobile phone access. We conclude with case studies of mobile women (mWomen) in action from the regions of Latin America, Africa & the Middle East, and Asia-Pacific. Mobile Social Networks Get Profit Potential from Youth Movement Telecom Insider published May 2011 This report examines the sources of the demand for mobile social networks, including what will sustain and increase this demand. It explores how handset technology and mobile phone network infrastructure development can affect usage of mobile social networks. It describes the areas where MNOs and handset manufacturers could connect to revenue opportunities through mobile social networks offerings in the region. Lastly, it discusses the economic and social changes and developments that are occurring in AME as a result of mobile social networks.

Mobile App Stores: A New Mobile Web? Research Report published June 2010 This report provides in-depth, up-to-the-moment analysis of the mobile content marketplace, focusing on the app stores of major market players such as Apple, Google, Nokia, Research In Motion (BlackBerry), and Microsoft, as well as operator app stores. In addition, the report looks at the sea change in mobile advertising that may be coming with the release of Apple’s OS 4.0 for the iPhone.

Mobile Advertising in AME to Become a Key Value-Added Service for Operators Telecom Insider published February 2012 In this Insider, we explore the reasons why mobile advertising in Africa & the Middle East is an increasingly attractive proposition for operators. We present available data from a respected mobile advertising firm and include analysis of current trends that are driving mobile advertising potential upward, particularly in AME. We visualize the present location of AME MNOs in the mAdvertising value chain. A chart of possible strategies that MNOs can leverage on the path to mobile data monetization through mobile advertising moving forward is presented, as well. Afterward, we provide best practices and tips MNOs should remain aware of as they become more active in the mAdvertising ecosystem. We conclude with three experiences of mobile advertising ventures in AME, highlighting case studies from South Africa, Jordan and Nigeria.

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