The Return of the MVNO

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A mobile virtual network operator, or MVNO, is a wireless communications services provider that does not own the radio spectrum or wireless network infrastructure. Instead, MVNOs sign an agreement with a mobile network operator, or MNO, to obtain bulk access to its network's services at wholesale rates, then resell the services. MVNOs need to focus on marketing and sales while providing customer service and billing support systems.

Why go for MVNO?

The MVNO model offers a few advantages. Some regulators believe that the MVNO model would be a time efficient and cost effective route for telecom companies to enter the market and increase the competition to maximize the consumer benefit.

The MVNO can offer customization and more choices for its products for a distinct segment of the market, thus allowing an MNO to target a wider demographic while better utilizing its network. However, an MVNO maintains its own operation and all agreements are between the customer and the MVNO.

MVNO landscape in the United States

While MVNOs usually provide cheaper rates and easier switching for customers, each MVNO provides different offering based on its agreement with its mobile network operator.

There are a few popular examples of MVNOs in the United States, such as Page Plus Wireless (using Verizon’s network), H2o Wireless and Net10 (using AT&T (NYSE: T)’s network), PrepaYd wireless (using Sprint Nextel (NYSE: S)’s network), and Simple Mobile (using T-Mobile’s network).

However, certain dominant, leading mobile network operators, such as AT&T and Verizon Wireless, may not be as friendly as others while trying to protect its network. Verizon currently only provides its MVNOs access to its nationwide 3G cellular network, not its 4G LTE network. AT&T had been more protective of its network and had put restrictions on handsets for its MVNOs. On the other hand, Sprint has a long history of supporting MVNOs, and continues to open its network for wholesale partners and consequently has landed a lot of partners.

What now?

With the recent U.S. Federal Communications Commission’s approval of Softbank’s $21.6 billion acquisition of Sprint, the last hurdle for this deal was cleared. This decision will help clear the way for Sprint to take full control of Clearwire (NASDAQ: CLWR), a spectrum-rich wireless broadband provider. The FCC stated, "The increased investment in Sprint's and Clearwire's networks is likely to accelerate deployment of mobile broadband services and enhance competition in the mobile marketplace, promoting customer choice, innovation and lower prices."

With boosted capital investment and a friendly MVNO strategy, Sprint and Clearwire are expected to upscale its MVNO offering while trying to catch up with AT&T and Verizon Wireless. Earlier in March, Sprint introduced the Bring Your Own Sprint Device (BYOSD) program, allowing customers to reuse or recycle idle mobile devices in the United States while helping MVNOs offset the phone subsidy burden.

With the integration of Sprint and Clearwire, more MVNOs are expected to join Sprint-Clearwire's 4G LTE network, which could improve the network utilization and boost the revenue for Sprint and Clearwire. With increasing competitions from Sprint and other MVNOs, AT&T and Verizon Wireless will be forced to open up more of their services to stay competitive.

In fact, AT&T just launched a new pre-paid wireless MVNO called Aio Wireless with the iPhone 5 on offer in early May. However, AT&T's MVNO offering caps 4G data at 4Mb/s without LTE availability. In the mean time, MVNOs will continue to be a powerful weapon for Sprint to penetrate the market.

Furthermore, as the market consolidation continues for telecom companies in the United States, Softbank-Sprint-Clearwire will not be the last M&A deal. More potential M&A deals are speculated from the analysts such as AT&T’s potential offers to acquire DISH Network and Time Warner Cable and Verizon’s buy-out offer for Vodafone Group’s stake in Verizon Wireless.

Other major tech giants, such as Google and Amazon may also be interested in moving into telecom services, where the MVNO model would probably be the best strategy for them to expand their online and offline payment offerings. By integrating the telecom, online, mobile and payment services, Google and Amazon can gain significantly edges against other online-only competitors.

Take away

The MVNO model is becoming popular again with the increasing consolidation of the telecom sector. With the recent development of the Softbank-Sprint-Clearwire deal, Sprint and Clearwire will have much stronger resources to fight back against AT&T and Verizon, and MVNO is undoubtedly a fast, effective way to gain allies. Investors may also want to pay close attention to Google and Amazon should they decide to enter into the telecom market via the MVNO model to further strengthen their leadership.

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