New UK wholesale deals pave way for further segmentation

Posted by Gareth Willmer Monday, November 9th, 2009

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Orange’s and T-Mobile’s recent UK wholesale deals are clear examples of how the country’s mobile operators are seeking new avenues through which they can better compete in the market.

In recent weeks, Orange has struck a deal with mobile-virtual-network-enabler Transatel to bring on board new MVNO partners, and T-Mobile has signed up its first ethnic-style MVNO in the form of Vectone Mobile.

These moves are significant because recent challenging market conditions and intense competition in the UK mean it is increasingly important for operators to find ways to target new customer segments and differentiate their offers.

In the past couple of years, one method of achieving these goals has been for operators to strike deals with MVNOs, a marked change from their original reluctance to open up to wholesale partnerships.

T-Mobile’s new deal with Vectone Mobile is an example of this trend and follows the considerable success that rivals have had with MVNOs that target ethnic communities through cheap international calls.

Orange’s deal with MVNE Transatel is perhaps even more significant in that it represents operators’ next step on the path to facilitating access for MVNOs.

A new deal

Orange UK already uses Transatel to provide connectivity for operations IDT Mobile and Globalcell, but the new relationship is more a direct partnership that actively seeks to establish MVNOs, which Orange refers to as an “aggregator” (MVNA) model.

Transatel has already used its MVNA business model in France and Belgium. Marc Overton, vice president of new business, wholesale and strategy at Orange UK, says Transatel has been particularly successful in bolstering the businesses of smaller ethnic MVNOs and small and medium-sized enterprises (SMEs).

The MVNE model of Transatel and other providers helps brands launch MVNOs by reducing their setup costs and time to market and provides an access route for players looking to focus on smaller niches and those that have little or no experience in the telecoms market. Brands taking the MVNE option require far fewer subscriptions to become sustainable than those that choose a direct MVNO relationship.

MVNEs provide many of the mobile operations that newcomers would otherwise have to set up themselves, including platforms and facilities such as SIM branding, billing and customer care.

These are important factors for MVNOs looking to establish a presence in the market, a goal that can often turn into a protracted struggle. The many European and global MVNO failure over the years are proof enough of the significant barriers to entry.

Marc Overton, vice president of new business, wholesale and strategy at Orange UK, says brands taking the MVNE route can be sustainable with a subscription base of between 50,000 and 200,000, rather than needing 300,000-400,000 customers.

And some industry players say the necessary number of subscriptions can be even lower. Luis Carrera, vice president for international business at MVNE Aspider Solutions, recently estimated that MVNOs using an MVNE need only between 4,000 and 6,000 postpaid subscriptions to turn a profit. He reckons the number is roughly double when applied to prepaid customers.

According to Orange, using Transatel will enable brands to set up MVNOs in just six weeks, rather than the six months it might otherwise take.

Overton says he expects Orange to announce one to three new MVNO deals through its partnership with Transatel before Christmas. And he says it is not unrealistic to expect the company to introduce up to 20 a year, which is about as many MVNOs as the UK has in total now.

The MVNE approach therefore paves the way for a mobile model that targets a wide variety of different communities with diverse offers.

Overton says more MVNOs that target specific ethnic communities could launch, as could those related to soccer teams and religious groups. And Orange says its deal with Transatel should appeal to SMEs and telecoms resellers.

Dutch scenario

The trend of increasing segmentation has already been seen in the Netherlands, which provides an interesting case study of how an advanced and saturated mobile market can develop once it becomes crowded with players.

The Dutch market has about 50 mobile operators and MVNOs. All three network operators already use MVNEs, and KPN in particular has been signing up providers that address increasingly small niches, through partner Aspider Solutions.

Aspider has, for example, been collaborating on an MVNO with Dutch soccer team PSV Eindhoven, which is unlikely to ever have a subscription base beyond the low tens of thousands. Aspider has also been in discussions with other potential providers, such as newspapers, TV stations and political parties, about launching MVNOs.

Dutch MVNEs have additionally developed relationships with machine-to-machine (M2M) providers, which offer a major opportunity for future growth. MVNEs make it easier for M2M players to enter the market, because such providers can have ARPUs below €1 (US$1.49) a month, meaning they need to keep costs down.

Aspider already has relationships with numerous M2M players, one of which equips utility meters with SIM cards to keep track of customers’ meter readings. There are also possibilities in areas such as “track and trace” and health. “The machine-to-machine market alone is immense,” Carrera says.

The situation in the UK is not yet close to that in the Netherlands, but the Dutch market offers an interesting insight into how an advanced MVNO market can develop and become further segmented.

UK dynamics

Overton says he “wouldn’t be surprised” if other UK operators followed Orange by also striking MVNE deals.

UK operators have already seen some success with segmentation through direct MVNO agreements, in particular in the ethnic segment. Lycamobile, which runs on Orange’s network, announced in September that it had reached its UK target of 1.2 million subscriptions a year after launching. And Lebara Mobile, which operates on Vodafone’s network, announced in May that it had well over a million subscriptions.

T-Mobile’s move into the ethnic segment is evidence of the rapid growth that such providers have achieved in the UK and other European countries. T-Mobile’s partner, Vectone Mobile, already has a mobile customer base of more than a million in five other countries.

Operators are also seeking more MVNO deals. Orange has significantly increased its involvement in this market in the past couple of years, having previously had no MVNOs on its network, and is seeking more opportunities. Overton says the company is particularly eager to sign a deal with a large retailer, which it lacks now. Other operators already have such agreements in place, such as that between O2 and Tesco Mobile.

Meanwhile, it is interesting that the most recent MVNO announcements have come from Orange and T-Mobile, the two UK operators that have announced plans to merge. These developments suggest that they realize the urgency of finding new avenues through which to compete, and moves to diversify their services could bolster their joint offering once a merger goes through.