Declining ARPU, decreasing EBIDTA and increasing churn rates on the one hand, and ever increasing subscriber acquisition costs on the other, are forcing the telecommunications industry players in saturating markets to find new ways of increasing minutes of use and airtime. Martin Löffler looks at survival strategies
Mobile network operators are increasingly challenged by market developments. Facing the threats to which they need to respond, new attitudes, and openness to new business models will be critical to survival.
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Communities such as lifestyle, special interest groups, fan groups, health, sports, music, etc. could be ideal targets. Singly or in combination they could support a viable MVNO business. However, a mindset shift is required to separate the business models necessary for communities of interest - typically service provider-led and driven by 'pushed' services - from those required for affinity groups, where the groups themselves determine key issues such as membership, security and profiling. In both cases the opportunities to drive up data revenues for the MVNO (and therefore also the underlying MNO) are strong – in Japan there are already examples of mobile data ARPUs above ?25.
Organisations, including Logan Orviss, are closely following the market conditions for MVNOs. EMarketer, for instance, recently said that 'MVNOs will become increasingly important for both wireless operators and brands', and indeed, MVNO business is expected to account for almost $30 billion in overall revenue by 2010 (ARC Group).
Logan Orviss International's assessment examines how MVNO business models are evolving, including the expanded use of revenue sharing models with the operators, versus today's cost-plus pricing approach.
As mobile markets are reaching saturation, or have already reached saturation, in all European countries, the further appearance of potentially successful MVNOs has added to the competitive pressures on the existing mobile operators. Moreover, competition is arising from new and unexpected sources. In this fiercely competitive landscape operators have coped by differentiating through their business models, with some adopting a walled garden approach, and some utilising a dynamic, open garden approach which requires constantly monitoring demand amongst its subscriber base and constantly offering new services.
Despite the fierce competition MVNOs have proven their ability to enter these markets and still have the capability to increase overall market revenues from basic services like voice, SMS and PSMS. With increasing market share MVNOs can reduce their cost margins and evolve into a high ARPU business. However, not all MVNO business models will survive.
MVNO models have usually been seen as relevant only to developed markets where the penetration rates are high and customer retention through loyalty (coupled with overall ARPU growth) is the critical success factor. MVNOs allow the MNO to access revenues from market niches that could (a) potentially conflict with the core brand positioning and/or tariffing regime, (b) avoid the cost and risk of going after these niches, and (c) potentially increase their market share – even over and above that allowed by the regulator – by extracting revenues from an MVNO whose ownership is maintained at 'arms length' from the MNO. Although the returns are lower, the MNO's revenues from MVNOs are relatively risk free and under-utilised network capacity is exploited with minimum outlay.
At first glance, this wouldn't appear to be applicable in high growth markets where the current penetration rates are low and the MVNO model is seen as being 'more trouble than it is worth'.
However, in high growth markets, shareholders and boards are continually pushing for an increase in the number and proportion of postpaid subscribers (ie converting prepaid into postpaid subscribers) as a way of increasing ARPUs. (Example fact: No network in Nigeria claims to have more than 50,000 postpaid subscribers.) From the shareholder perspective, a secondary but equally critical factor is that with postpaid (contract based) revenues the potential to project revenue streams forward (under increasingly onerous audit rules) is much greater. This can be of high importance for the CEO/CFO, allowing them to present a stable, auditable and profitable business growth/development plan.
In predominantly prepaid markets there is little point in trying to create a wholesale migration to postpaid - it won't work and is not, at this point, remotely competitor proof. But why shouldn't operators build a wholesale platform that allows them to easily connect MVNOs to grow their overall number of subscribers? In many developing countries the banking system is still weak and people don't trust direct debit, which is an important factor in postpaid environments. An alternative strategy is to redevelop the brands and sub-brands in a way that separates them from the payment mechanism, but not from potential ARPU stratification.
Brand management expertise deployed in many developing markets is becoming increasingly more sophisticated. Currently, global best practice in telecoms markets is, quite possibly, to be found in Pakistan, not in Europe. One key factor is the cost of advertising, and hence the cost of supporting multiple sub-brands, which is much cheaper in developing markets. Mobile channels also allow direct interaction with the customer. Customer experience management has now moved far beyond basic SMS interaction and into the domains of balance enquiry and AoC (Advice of Charge) marketing, which, if the MIS is set up correctly, is highly cost effective and very good at generating service usage growth.
This approach – based on marketing smoke and mirrors rather than hard technology - benefits from a degree of systems convergence, but does not necessarily require it. .
The CMOs and CIOs in high growth markets tasked with enabling large scale pre- to post- conversion are struggling. Many have 95 per cent prepaid customer bases; the survey and focus group responses suggest that this isn't going to change in the near future, and that if it does it may well negatively impact their overall growth rates. Further, whilst their postpaid ARPUs are higher, the margins achieved are not necessarily any larger as the overall cost of customer management can be much greater. Many shareholders – and even some board members – of companies active in these markets are unaware that in some cases up to 40 per cent of their postpaid subscribers have very low ARPUs. These 'vanity' customers maintain postpaid accounts purely for the social prestige value, and therefore don't generate significant service revenues. Indeed, in many cases these customers may be retained on negative margins, but can't be churned off without creating negative pressure on the 'elite' postpaid brand positioning. The development of 'hybrid' accounts – very effective in other respects - does not help much with this problem.
Brands and sub-brands, therefore, need to be aligned to lifestyles and bundled service offerings of which the payment channel selection is no longer the defining context, but becomes an option.
A growing concept in prepaid is service-led 'customer self-locking'. Rather than locking a customer in to a contract to ensure their 'loyalty', the customer is encouraged (by a suitable marketing inducement) to subscribe to a single or bundled service subscription over a longer period of time. For example: a customer who might want a one month subscription to a text alert or paypal service is offered three free months if he pre-subscribes for six months, giving him service access for nine months. If the service is new to the customer, a one month 'try before you buy' offer could be added in to the mix, refundable against the free extra three months offer. The customer is now effectively committing himself to the relationship with the CSP – and any brand manager will tell you that this is far more powerful in customer experience management terms than a contract could ever be. Customers in high growth markets can be clever, and many often own multiple SIMs which they 'juggle' to minimise the price they have to pay (or at least their expectation of the price they have to pay!) and the specific services – for example international calling or fund remittance to family members 'back home' - that they frequently use. Leaving aside SIM-locking practices in some countries… anything such as a self-locking programme that keeps the SIM in the phone for longer is good news as it will attract both inbound termination revenues and promote serendipitous additional service usage.
The strategies outlined above potentially offer a greater degree of customer retention, but they don't substantively assist the CFO in providing auditable forward projected revenues, which are an important factor in increasing shareholder confidence. One route to achieving this could be to adopt an MVNO model based on either third party brand ownership, or as a JV through a discretely branded subsidiary. Termination clauses placed in the business agreement between network and MVNO could be designed to enhance and stabilise forward revenue projections. The entertainment industry offers many good examples of how this approach can be exploited. However, the same methodology has been far less successful in the commercial aviation environment.
Whilst the per subscriber margins from MVNO-sourced customers will obviously be lower for the MNO than from a 'direct' customer, the cannibalisation effect will be minimal in the high growth environment. However, assuring revenues on this basis may provide an effective means to appease shareholders on revenue continuity. This just might prove to be important, not least as they come to terms with the fact that mass prepaid to postpaid migration isn't going to happen and that their expectations have been based on the erroneous assumption that customer behaviour in high growth markets will eventually normalise with the behaviour patterns encountered in the UK and Germany.
Martin Löffler is Managing Director, Logan Orviss International Deutschland