Informa Comments on Sainsbury’s Mobile Proposition

Dario Talmesio, Principal Analyst at Informa, comments on the Vodafone and Sainsbury’s joint venture

The mobile virtual network operator (MVNO) business is hugely profitable for mobile operators: Operators’ margins for their MVNO business exceed 50%, while their own retail operations barely reach 25% in the UK. The UK Post Office is also set to launch mobile phone services soon by becoming an MVNO, and many other big-name UK retail brands are set to do the same.

MVNOs or “virtual operators” – companies that sell mobile phone services but don’t own and run a mobile network – are an unfamiliar concept to most consumers, and also to many retailers in countries where such services aren’t available.

Put simply, MVNOs are in the business of reselling goods and services under a private label. Take Tesco, the UK’s largest retailer: It does not run a network, but it sells mobile services, much in the way that it doesn’t grow tomatoes but sells Tesco-branded tomato sauce.

Private-label goods tend to become popular with consumers wherever they are made available. Many studies have looked at buying habits, and most have found that private labels account for about 30% of grocery sales, and the figure is growing rapidly.

This is very much in line with what we see happening in the mobile business, although there is a difference in that mobile telephony is a service, not a staple, and the business of reselling services is slightly more complicated – and in many countries effectively forbidden. Nonetheless, from a customer’s point of view it is easy to understand, since they are already generally familiar with the idea of a range of value and premium private-label products. Some people simply prefer to buy from a brand they know: It can be easier for them to stick with a single brand once they trust the quality of its offerings, as long as the price is right.

Many businesses are looking at ways of diversifying their service portfolios and increasing stagnating revenues. Retailers can sell mobile telephony services both to expand their portfolios of products and services and to enhance aspects of their core business with mobile functionality. In most global markets, regulatory changes are needed, but consumers are ready for MVNOs. Operators need to embrace rather than obstruct the sector.

Tesco and, soon, the Post Office are not the only big-name retailers to run MVNOs. The virtual-operator business is established in Europe and North America and is set to grow impressively. Informa Telecoms & Media calculates that, in the UK, private-label offerings account for about 14% of the total mobile telephony market, and their subscription counts are growing at a much faster pace than those of branded network providers, such as O2 and Vodafone.

Obviously, some businesses are more suited for reselling mobile services. BT, the UK’s fixed-line telecoms incumbent, is probably the best example: It is in the process of becoming a 4G service provider, partly as an MVNO.

Virtual operators offering private-label mobile telephony services exist in just 70 or so markets around the world. Most telecoms quasi-monopolies prefer to keep control of everything pertaining to their businesses, from their networks to the smallest street seller of SIM cards.
However, in the UK, the opposite is happening: Mobile operators are fighting each other for the chance to sell white-label mobile services, and competition for the potential MVNO “wholesale customers” is as tough as – if not tougher than – competition for end users.

Mobile operators must equip themselves for growth. Globally, there are now 120 million MVNO subscriptions (just 1.8% of the total mobile subscriptions); Informa forecasts that there will be 311 million (3.5% of the global total) by the end of 2017.

There are several reasons why mobile operators should consider opening part of their business to wholesale, the most important of which is money. The mobile wholesale business is not only growing in numbers but is more profitable than the retail business.

In countries such as the UK, where most operators’ margins are about 25%, the wholesale business produces margins of over 50%, since it enables the network operators to save the huge amount of money it costs to run their own retail chains and acquiring and servicing their customers.
Operators and countries that are not embracing the MVNO business need to equip themselves – both legally and technically – to accommodate the segment. There are plenty of examples in developed markets that prove the business case for MVNOs: Informa estimates that MVNOs in the UK alone bring in £900-950 million (US$1.4-1.5 billion) in annual revenue for mobile operators, with profits of £400-500 million.

Operators can’t ignore the trend. However, it is important to remember that serving the MVNO sector as a network operator means working with firms that are inexperienced in mobile. If you want to supply wholesale network equipment to a retailer, you need to give the retailer much more than just access to a network. Retailers are good at selling, not mastering technologies.

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David Dungay

Editor - Comms Business Magazine
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