Economic viability of 3G MVNOs

3G Wireless 2002

Economic viability of 3G Mobile Virtual Network Operators

D. Varoutas1, D. Katsianis, Th. Sphicopoulos (University of Athens), A. Cerboni, S. Canu (France Telecom R&D), K.O. Kalhagen, K. Stordahl (Telenor R&D), J. Harno, I.Welling (Nokia R&D)

1. INTRODUCTION
As a growing number of countries are assigning third generation mobile licences, there is exponential growth in the number of firms working in this sector which have been left without license in the race towards mobile telecommunications, widely regarded as a business opportunity characterized by an extraordinary potential for profit. On the other hand, license fees rose to such heights in some countries that they now act as an economic burden for the winning companies. This situation favours solutions for those building their business without a radio access network. Many firms, which are working or not in the mobile sector worldwide, have expressed their interest to enter this market through the networks operation or the service provision channel. For those, which have been left without license, a new channel to enter the market and take part to this big game is the Mobile Virtual Network Operator (MVNO) channel. EU IST-TONIC (www.ist-tonic.org) project is a precursor in the investigation of the economic side of such deployments and consequently this work is the first step in the assessment of the market conditions, the architectures and the potential for a profitable business case of a MVNO. The MVNO business case described hereafter, is based on 3G business cases, particularly regarding the technical infrastructure, but the 2,5G underlying infrastructure as an initial step is also taken into account. Following the definition of appropriate service sets, and taking into account demand scenarios established within the project, this work has been focused on developing a techno-economic model, based on TONIC tool. Tariff structures have been applied to compute the key economic indicators, Net Present Value (NPV), Internal Rate of Return (IRR) and payback period.

Department of Informatics & Telecommunications, University of Athens, Panepistimiopolis, Ilisia, GR 157-84, Athens, GREECE E-mail: [email protected] Tel: +3010-7275318 Fax: +3010-7275601

D.Varoutas et al.

Economic viability of 3G MVNOs

3G Wireless 2002

2. NETWORKS AND ARCHITECTURES

MVNOs are beginning to appear in the 2G mobile communications market. They form partnerships with infrastructure owners or rent network resources and focus on developing their own service offerings, essentially in content and portals.
Billing Customer Care Business Support Call Center

HLR

voicemail

WAP Gateway

Subscriber Register, VAS, Internet E

MSC/VLR MNO

GMSC

PSTN

SGSN

GGSN

Internet

MVNO

GMSC

PSTN

GGSN

Internet

Billing

Customer Care Business Support

Call Center

HLR

voicemail

WAP Gateway

Subscriber Register, VAS, Internet

Figure 1: Illustration of a 3G MVNO network (based on Release 99 UMTS architecture) A mobile virtual network operator provides cellular services without owning spectrum access rights. From the customers' point of view, a MVNO looks like any other cellular operator, but a MVNO does not own or operate base station infrastructure. The above figure illustrates the MVNO idea. There are different scenarios for a MVNO approach and consequently different architectures for the MVNO such as: A full MVNO, with its own SIM card, network selection code and switching capabilities as well as service center but without spectrum. IA-MVNO (Indirect Access MVNO) or Enhanced service provider without SIM card, but with own core network (circuit switched and/or packet) and service facilities, e.g. own IN or IP application servers. Wireless ISP without own core network; basically an Internet portal providing wireless IP services.

3. ASSUMPTIONS AND OUTPUTS OF THE BUSINESS CASE

As initial time frame for this Full MVNO case, a ten-year period has been selected for the early estimations regarding the profitability for both 2G and 3G MVNO cases. In order to calculate discounted cash flows a discount rate of 10% has been selected. This value is a mean value among the major European Telecommunication Operators. The modeling takes into account two kinds of basic deployment areas: a large European country such as D.Varoutas et al. 2

Economic viability of 3G MVNOs

3G Wireless 2002

Germany or France, and a small European country exemplified by Scandinavian countries. The models represent generic countries, e.g. countries with similar demographic characteristics. Specific demand scenarios have been built for this business case and revenue streams generated from traffic had been calculated. The costs comprise service platforms and possibly middleware investments, as well as yearly expenses for capacity rental, which can be derived from the network costs, as well as commercial and customer care costs. This business case seeks to evaluate the economic feasibility of service operators, whether they are independent or within a network operator group owning the infrastructure. The techno-economic modeling was carried out using the TONIC tool, which has been developed by the IST-TONIC project using the TERA tool as the basis. This tool is an implementation of the techno-economic modeling methodology developed by a series of EU co-operation projects in the field. Models for two main business profiles have been constructed. In the first profile, the MVNO is a telecom operator or a power company without a mobile license but well known as an operator aiming to complement/expand other services such as fixed broadband services. This will be the Operator-MVNO business profile. In the other profile, the MVNO is a high brand-value and large customer base company aiming to expand its business in the mobile area and therefore to take customers from every MNO. Therefore the churn effects must be taken into account as key element in this case. This is actually a Service-MVNO business profile. Different demand models and service penetration rates have been defined in order to take into account these two different cases for a MVNO. This business classification leads to specific service packages offered by these potential MVNOs and has been attributed to MVNO business profiles. Finally, sensitivity analysis is performed in order to identify the impact of variations in key input parameters like the price of airtime that MVNO pays to MNO that can seriously affect the profitability since it must be acceptable by MNO and sets the window for negotiations between the two operators

4. RESULTS AND CONCLUSIONS

In this analysis, which is based on assumptions described previously, the profitability of MVNO both in large and small countries has been presented through specific calculations. Furthermore, the two different business profiles associated with different plans for service provisions and specifically, companies focused on wide market like an operator or focused on lucrative market segments have been analysed. The profitability for all these cases are calculated. Sensitivity analysis used to identify the most critical parameters affecting the performance of the MVNO but also to find the impact of specific uncertainties regarding market inputs and business agreements such as interconnection costs. Usage and tariff levels have greatest impact, following by the market share at the end of the study period, especially for the large country. Variations on interconnection price and churn have D.Varoutas et al. 3

Economic viability of 3G MVNOs

3G Wireless 2002

limited impact on the economic results due to MVNOs small customer base and market share.

Cash Flows - Cash Balance Operator-Like MVNO

500
Cash Flows LC OL MVNO

250
Cash Balance LC OL MVNO Cash Flows SC OL MVNO Cash Balance SC OL MVNO

400 300 200 100 M Euro 0 2004

150

50

2005

2006

2007

2008

2009

2010

2011

2012

2013 -50

-100 -200 -300 Years

-150

Figure 2: Cash balance and cash flows for a Operator-like MVNO operating in two different countries. (Large country Left axis, Small Country Right axis) (LC=Large Country, SC=Small Country) For the case of a small country, the initial position of the MVNO in the 2G world, is mandatory for a successful business in the emerging 3G market. On the other hand, stronger service differentiation is followed by larger investments while the payback period is remaining the same. Outlining the findings of this work, acceptable business opportunities can be observed through these calculations in terms of forecasted and actual mobile penetration across Europe. Agreements with Mobile Network Operators (MNOs) for spectrum usage and interconnection give to MVNO enough space for business opportunities and acceptable profit margins. MVNO can still be an attractive opportunity for companies since both infrastructure costs (which can be high due to difficulties to obtain volume discounts) and interconnection costs are not too critical. Marketing and entry costs in general can be a burden for a potential MVNO but this can be overcome from a high brand firm or an already operating company.

D.Varoutas et al.

Economic viability of 3G MVNOs

3G Wireless 2002

CAPital EXPenditure

Access & Interconnection 19%

Employee Costs 39%

Customer Care and Marketing 42%

Figure 3: Breakdown of non-discounted Capital Expenditures (CAPEX), large country scenario. Broadband services, which are now missing from MVNOs service basket, can be also included in the future through expansion of its business adding more revenues. This can make MVNO attractiveness even better. European mobile operators and service providers interested in entering the 3G market can exploit this information but a wide audience of this report can been also foreseen since, for example, European 2G and 3G operators could become MVNOs on USA and vice versa. Therefore, in reality, the MVNO way to 3G games represents a profitable option for all involved parties.

D.Varoutas et al.