The MVNO business model is successful when a company enters the mobile market, and acquires and services specific market segments more cost-effectively and profitably than a mass-market wireless carrier could. To be profitable, MVNOs have to achieve one of the following:
Increase ARPUs above levels recorded by mobile network operators (MNOs)
Slash average costs below levels recorded by MNOs
All of the above
In practical terms, the MVNO has to improve one or more of the following wireless operating metrics to be profitable: CPGA (cost per gross acquisition), CCPU (cash cost per user ), ARPU and churn. The traditional MVNO model has long been a cost story, with the MVNO venture focusing on reducing CPGA, CCPU and churn, and anticipating lower ARPU levels mainly as a result of its subscriber base profile.
area for MVNOs seeking to slash costs.
Bringing down CPGA: the case against handset subsidies
The cost per gross acquisition is a key cost element for MNOs, and understandably, a much-targeted area for MVNOs seeking to slash costs . In Western Europe and North America, CPGA ranges from around $120 (T-Mobile Germany) at the low-end to as much as $475 (Nextel) at the high-end. Translated into hundreds of thousands of subscribers, CPGA can represent as much as 30% of a carrier’s operating expenses.
The three main lines of cost in CPGA are handset subsidies, channel commissions and marketing expenses. Of these three lines, most MVNOs opt to substantially reduce or entirely forgo handset subsidies; this is an easy measure, especially if the MVNO is targeting a low-end segment, but less so in a high-end market environment. Channel commissions are also targeted, but cost-savings are only meaningful if the MVNO already has an extensive distribution network (e.g. 7-11), or exclusively sells online (e.g. Easymobile).
MVNOs use additional tools to bring down CPGA; Virgin UK, for example, sells SIM-only packages to its distributors. The retailer can add its own handsets, and sell as a bundle. For Virgin, this means no handset subsidization, lower commissions to retailers, and lower subscriber acquisition costs. Virgin estimates that almost 60% of package shipments to distributors use the SIM-only model, a key factor in the company’s ability to maintain lower costs.
Next generation MVNOs will have CPGA levels slightly lower or equal to that of network operators. Owing to their high-end target segment, they’ll have to advertise heavily and offer unique handsets. Handset subsidies will be at similarly high levels (if not higher), and marketing expenses will be at similar levels relative to revenue.
Exhibit: MVNO vs MNO CPGA
Virgin UK, T-Mobile and US carriers as of 3Q 2005; Sense and Chess as of 4Q05.
Source: Operators, Pyramid Research estimates
1) CPGA includes handset subsidies, activation and installation commissions and hardware-related promotions, any negative margin on equipment sales, as well as advertising and marketing expenses, divided by gross additions for the period.
