Many were surprised when Movida, the Hispanic-focused MVNO, filed for bankruptcy protection last week. With 267,000 prepaid subs and a Wal-Mart deal, Movida appeared to be building a solid subscriber base. Unlike other failed MVNOs, they seemed to have solid distribution. And while MVNOs built around content (e.g., ESPN, Disney and Amp’d) failed, those focused on ethnic segments have fared better, at least until now.
Cellular resale is a tough business, especially tough in these times. (I know, having been at MCI in 1995 when it bought the then-largest wireless reseller, Nationwide Cellular. Like Movida, Nationwide served a similar number of customers, though high-quality postpaid business and residential subs. The acquisition formed the platform for MCI’s branded cellular service – MCI Wireless – part of the company’s successful MCIone bundled offering. Earlier, I was also involved in MCI’s cellular resale operation in Los Angeles with Metromedia, so I’ve watched cellular resale almost from the start.)
Why is resale tough? Margins are razor thin, obtaining decent, low-cost handsets (an issue also cited by Movida) is difficult, and distribution is increasingly a challenge as many electronics retailers who have been wireless destinations (e.g., RadioShack, Circuit City, CompUSA) struggle. Execution is critical, and there can be no lapses. Managing a successful resale business is akin to treating a sick patient in the ICU; leave the patient alone for a long coffee break and an irreversible problem could strike. It requires that much focus. Few resellers or MVNOs have achieved long-term success. In fact, TracFone and Virgin Mobile are the only two that immediately come to mind.
If anything, cellular resale is tougher today than ever before, for several reasons:
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Unlimited pricing plans, with all-you-can-eat minutes, have wreaked havoc on wholesale pricing, typically based on bulk minutes. Carrier plans which include free nights and weekends are bad enough for resellers, who at best buy lower cost off-peak minutes. Unlimited voice plans are the worst for resellers, who simply can’t match them without risking everything;
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The arrival of mobile data, web browsing, and the cool handsets that make data accessible have created a widening gap between the terms wholesale customers can obtain on data and handsets versus what the operator can offer, e.g., iPhone with unlimited data;
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Operators can innovate, and introduce new services, while resellers/MVNOs must wait for the necessary components to trickle down and become available to wholesale customers, who often not offered the carrier’s latest services at wholesale. The operators are clearly higher up the food chain in this regard;
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Industry consolidation – with AT&T and VZW now controlling 64% of subscribers of the Big Four – has created market power not seen in the industry since the very early days of cellular, when there were only two licensees in every market; and
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The wholesale highway is increasingly littered with fresh roadkill, which has understandably spooked the operators, who are tightening availability and terms of wholesale deals, as well as potential investors.
MVNOs have failed for three reasons:
- Distribution – Disney, ESPN, Amp’d (and Voce) failed to build a robust distribution network. There were certainly other problems at all four (see below). By contrast, Virgin Mobile has distribution deals with Best Buy, RadioShack, Circuit City, 7–Eleven, K-Mart, Walgreen’s, CVS, Rite Aid, and of course, the Sprint and Virgin stores. TracFone, the oldest and most successful reseller, has phones and top-up available at 70,000 retailers.
- Proposition – Content alone or as the key proposition cannot sustain an MVNO. While compelling content can make an offering interesting, operators offer something close enough, as in sports and family-oriented content. If the business proposition addresses an unmet need, as the original prepaid providers (TracFone, Virgin and Boost) addressed, or an ethnic segment – ask anyone at the aforementioned prepaid providers what percentage of their base is Hispanic and other ethnic category – that the operators are not addressing, it has a fighting chance, provided it can navigate the five problems above, and execute.
- Execution – Again, execution with a cellular resale operation requires constant attention to details, analogous to managing a sick patient. So far, the high-profile MVNO failures have not been a result of lack of funding. Amp’d raised a staggering $350M. The Disney MVNOs (ESPN and Disney Mobile) are believed to have invested at least that much. Amp’d clearly had huge back office problems. What else could explain 80,000 non-paying subscribers (if they were subscribers at all; many may have been phantom users enrolled by agents gaming the system for commissions.) As to ESPN and Disney, I defer to Disney CEO Bob Iger, who commented on his company’s MVNO initiatives in a recent article in ADWEEK:
Iger believes there are many opportunities to offer content via mobile platforms, and said the failure of the ESPN and Disney mobile phone rollouts was due to bad marketing, bad pricing and bad research by the company. "Our approach was wrong. We made mistakes," he said, but vowed to continue to try to reach audiences via mobile outlets. "Lots of kids have cell phones and they are our audience," he said.
The vast majority of businesses ultimately fail. MVNOs are no different, especially in tough economic times. The fact that some are surviving with customer bases of more than five million subs suggests that it can be done.
It is amazing that some have failed when Tracfone has such HORRIBLE customer service. You would think that anyone that has ever called their help line would refuse to do business with them. I guess they now have 15 million customers. amazing
Posted by: Rick Prepaid Phone Guy | November 15, 2010 at 06:18 AM