The Future of MVNOs - Prepaid MVNO

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Informa, however, believes that for Latin American MNOs the option of teaming up with low-cost MVNOs to bring price competition to other MNOs is not particularly attractive. In the prepaid-dominated Latin American markets, the potential negative impact of low-cost MVNOs on an already flat or declining ARPU is a major concern for MNOs. Latin American MNOs will be more interested in teaming up with MVNOs that, although helping improve EBITDA margins, can also bring additional revenues from unaddressed niches willing to use incremental airtime and data services (see fig. 4). Fig. 4: Selected operators, EBITDA margin, 3Q11 Margin (%) 50 40 30 20 10 0 Movistar (Argentina) Claro (Brazil) TIM (Brazil) Source: Informa Telecoms & Media Telcel (Mexico) Informa also believes that pricing will be crucial to the success of the higher-value data MVNOs. In addition to the well-known benefits of the MVNO model, higher-value data-focused MVNOs can help provide incremental revenues to offset declining ARPU levels. Finding the correct pricing levels and models, however, is a tough task. As in the case of Virgin Mobile in Latin America, data MVNOs will be eager to add smartphones to their data plans, but without subsidies it can be challenging to meet customer demand for the devices at the right price. At the same time, MVNOs must be able to negotiate good wholesale rates from MNOs for the data they then sell at retail. In the retail market, MNOs are moving away from flat rates and toward models where they charge by actual data consumption, by time or by access to selected apps. MNOs themselves are still struggling to find efficient ways to price data services in the retail market. When it comes time to negotiate wholesale data prices, MVNOs face the risk of remaining stuck with unfavorable conditions, which could ultimately jeopardize their business model. Orange (France) Vodafone (UK) AT&T (US) Triple play will remain a major MVNO driver Challenging fixed-line operators and ISPs should exploit the MVNO model to develop more competitive offerings Most of the early Latin American MVNOs have been driven by the opportunity to offer fixed/mobile bundles, especially in the most concentrated markets, such as Mexico and Colombia (see fig. 5). It is not a coincidence that despite the absence of a full regulatory framework, both Movistar in Mexico and Tigo in Colombia have taken advantage of existing rules allowing telecoms services to be resold to build MVNO partnerships with ISPs and cable players. To erode shares of strong competitors in their respective markets, Movistar and Tigo have established MVNOs with fixed operators looking to add value to their bundles of voice, TV and Internet service by including mobility. Movistar was the first to pursue this strategy, when it teamed up with Maxcom at the start of 2008. Similarly, Tigo in Colombia has partnered with ISPs UNE EPM and ETB to offer mobile broadband services to contract customers. For the foreseeable future, Informa expects alternative ISPs, especially in the most unbalanced fixed-line markets, to retain a strong interest in the MVNO model with the aim of increasing customer loyalty Fig. 5: Brazil, Argentina, Colombia, Mexico, market share and concentration, 3Q11 100 90 80 70 60 50 40 30 20 10 0 Market share (%) America Movil Telefonica Millicom Telecom Italia Telecom Personal Oi Others* Brazil Argentina Concentration: Herfindahl index Colombia Mexico 0.25 0.32 0.51 0.54 Notes: The Herfindahl index is defined by the sum of the squares of the market shares of all firms in the market, where the market shares are expressed as fractions. An index below 0.01 indicates a highly competitive market. An index below 0.15 indicates an unconcentrated market. An index between 0.15 and 0.25 indicates moderate concentration. An index above 0.25 indicates high concentration. *Nextel, CTBC and Sercomtel In Brazil; Iusacell and Nextel in Mexico; and Nextel in Argentina. Telecom Italia owns 22.9% of Telecom Personal in Argentina. Source: Informa Telecoms & Media 6 © 2012 Informa UK Ltd. All rights reserved. www.informatandm.com
and reinforcing their offering by bundling products. With their knowledge of and expertise in the telecoms business, fixed-line players and ISPs remain the most likely candidates to buy into the MVNO model at the early stages of its development. It is no coincidence that the first cable operator to launch an MVNO was Megacable in Mexico and that the challenger fixed-line operator Axtel is also said to be close to launching an MVNO there. The opportunity is comparatively weaker in countries where the broadband market is more competitive, such as Brazil, and the main existing mobile operators can develop converged offers through partnering with their own fixed-line counterparts. In markets like Brazil, it is the nontelecoms companies that are expected to be major players in the MVNO business, starting with retailers and financial institutions. Beyond the “telecoms MVNO”: The retailer, the financial and the youth MVNO Retailers can help MNOs increase loyalty and reduce churn, but negotiations with MNOs will be tough Beyond the “telecoms MVNO” (e.g., an existing fixed-line telecoms player with an MVNO operation), retailers and financial institutions have been and remain among the strongest candidates to become MVNOs in Latin America (see fig. 6). Large and mass-market retailers are already key players in the value chain, since they take Fig. 6: Brazil, companies interested in launching an MVNO Telecoms Financial GVT, Lebara, Virgin Mobile Banco do Brasil, Banco Real Santander, Itau, HSBC the largest slice of handset sales, especially for prepaid users. The combination of a strong brand and a larger and far-reaching retail network are the key benefits retailer MVNOs could offer MNOs. Despite the clear benefits that retailers could bring to MNOs, only a handful of international retailers, such as supermarket chains Tesco in the UK and Aldi in Germany, have launched MVNOs. Retailers are typically focused on volumes, have low EBITDA margins and are used to having strong negotiating and bargaining power with suppliers, factors that can prove to be especially challenging in their negotiations with MNOs. Furthermore, retailers will naturally target the mass market, which for MNOs raises the risk of market-share cannibalization, especially in the prepaid-dominated Latin American markets. Even so, the retailer model does have potential in the region, starting in the geographically larger countries, such as Brazil, Mexico and Argentina, where it is more challenging for MNOs to develop far-reaching retail networks. In addition, retailers can help MNOs increase loyalty and reduce churn by using their customer-loyalty experience to offer discount and loyalty cards and to offer leasing programs for device purchases. As the VAS market develops, the retail MVNO is also in a good position to develop mobile commerce. The m-commerce and m-banking opportunity, alongside the retail network, is at the core of the potential value proposition of the financial MVNO. The opportunity for this type of MVNO varies across Latin America, depending on the level of maturity of each market. There is certainly scope in the region for prospective ethnic MVNOs, targeting communities of migrants and nationals with family or friends living abroad to provide financial services. Given the reach and needs of the Latin American diaspora in Europe and North America, the long-distance market offers a good opportunity to add mobile-money value-added services (VAS), such as international credit transfers, to voice services. Retail Sports Others Carrefour, Casas Bahia, Pao de Acucar, Walmart Sao Paulo FC, Santos FC, S.E. Palmeiras, Gremio FBPA, Corinthians, CR Vasco de Gama Correios, Ipiranga, Globo Sources: Sisteer, Datora, Informa Telecoms & Media Overall, banking penetration remains on average lower than mobile penetration, and telecoms and financial regulators are starting to develop rules for the provision of mobile-money VAS to those both with and without bank accounts. A number of providers of financial services have already launched m-banking platforms and could be interested in the MVNO model. Since smartphone penetration remains about 10% regionally, the MVNO opportunity is initially expected to be limited mainly to © 2012 Informa UK Ltd. All rights reserved. www.informatandm.com 7
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The Future of MVNOs - Prepaid MVNO

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