The learning curve is over as Latin America gets real about MVNOs
After years of discussions about the potential of the MVNO business model for Latin America, it appears that regional players have come to a consensus that MVNOs can bring significant benefits to mobile operators. This was possibly the main message for the 200 delegates gathered in Sao Paulo on May 29-30 for the third annual MVNOs Industry Summit. The main evidence that something is moving, and that we are finally evolving from the theory to the practice of MVNOs, is that for the first time since its inception in 2010 the event hosted several case-study presentations from regional MVNOs: Porto Seguro in Brazil, Virgin Mobile in Chile, UFF and ETB in Colombia, and FullMovil in Costa Rica.
Enablers will play a key role in the highly regulated Brazilian market
In Brazil, the MVNO market is following a different path from what we are seeing in other Latin American countries. But that is no surprise and applies not only to the telecoms industry. In Brazil, MVNO regulation came ex ante, before the market, to set a clear framework and encourage MNOs and nontelecoms players to buy into the MVNO model. A typical prepaid-dominated maturing market, with penetration close to 130%, Brazil is also more competitive than other Latin American markets, with none of the four MNOs holding more than 30% share. MNOs have been reluctant to experiment with MVNOs, and without regulation it is unlikely that new virtual operators would have emerged. Still, the Brazilian MNO attitude toward MVNOs ranges from active (TIM), to more cautious (Vivo and Claro), to pretty negative (Oi).
The fundamentals enabling MVNOs to prosper, however, are all there. From a socioeconomic standpoint, Diogo Barcellos Ferreira of the Communications Ministry pointed at Brazil’s economic boom, which is pushing out of poverty a large fraction of the population. This is not only reflected in the traffic explosion in the streets of Sao Paulo, where more families can now afford basic cars, but also in telecoms, where mobile users increasingly buy smartphones and require more different and personalized services. The government is also adding to the equation by planning to cut taxation on tablets and smartphones manufactured in the country. Such developments are leading to a larger variety of mobile user profiles, creating opportunities for MNOs to team up with a range of new players to better reach niche users.
MVNOs will operate in Brazil in a highly regulated environment under the two MVNO paradigms as defined by the regulator, Anatel, in 2010: The “authorized” MVNO (autorizada) and the “accredited” MVNO (credenciada). Under the authorized model, MVNOs effectively retain all obligations of traditional mobile operators with spectrum licenses. Tiago Galli, the managing director of Porto Seguro Telecom, an MVNO to be launched next July by an insurance company, described the authorized MVNO as “an MNO without an antenna.” The accredited MVNO, on the other hand, appears as a private contract between the accredited company and the traditional operator, whereby the latter retains all obligations. In this second model, the MVNO is allowed to represent the MNO but representation is not considered a telecommunications service.
It is no surprise that in a highly regulated market it is taking a long time for MVNOs to appear, and we have not yet seen the first commercial launch, while in non regulated markets, such as Mexico and Colombia, we are seeing a greater deal of activity. Porto Seguro has held a license for well over a year, but it is expected to launch operations only in 2H12.
What emerged from the debate at the MVNO Latam event is that in Brazil the authorized model is more likely to succeed because it allows MVNOs to maintain full control of their operations and more flexibility. Under the authorized model, however, MVNOs will inevitably need to invest more capex, because they will effectively become full mobile operators without their own spectrum. Given the complexities involved in launching a fully functioning accredited MVNO, mobile virtual network enablers (MVNEs) and, especially, mobile virtual network aggregators (MVNAs) are already playing, and will continue to play, a key role in the development of the MVNO market in Brazil. It is no surprise that two of the three MVNO licenses granted by Anatel are in the hands of MVNEs Datora and Sisteer.
The retailer MVNO: Good in theory, but in practice?
Porto Seguro Telecom will serve to increase the loyalty of the customers and brokers of the insurance company behind it. And customer loyalty is arguably the key benefit that the retailer MVNO can offer to the MNO. Retailers are well positioned to help MNOs increase loyalty and reduce churn by using their customer-loyalty experience to offer discount and loyalty cards and to offer leasing programs for mobile device purchases. In Latin America, retailers also continue to control the main distribution channel for devices and are key players in the value chain.
The success of the MVNO launched by supermarket chain Tesco in the UK was repeatedly mentioned at the event, but the big local players from the retail industry do not seem confident that they can replicate that model. Overall, retailers are typically focused on volume, have low EBITDA margins and are used to having strong negotiating and bargaining power with suppliers, and these factors can prove to be especially challenging in their negotiations with MNOs. Furthermore, retailers will naturally target the mass market, which for MNOs raises the risk of market-share cannibalization, especially in the prepaid-dominated Latin American markets.
Should a big retailer group – namely Casas Bahia and Pao de Acucar in Brazil, Exito in Colombia or Carrefour across Latin America – announce an MVNO venture, it would be a major boost for the nascent MVNO market. In Brazil the accredited MVNOs’ many obligations are not making things easy for retailers, given the long time-to-market between getting a license and launching operations. Even so, there was consensus that the retailer model does show strong potential, starting in the geographically larger countries, such as Brazil, Mexico and Argentina, where it is more challenging for MNOs to develop far-reaching retail networks.
Virgin presents a bold panregional strategy to address the high-growth youth segment
In the most anticipated presentation, Jeff Buckwalter of Virgin Mobile Latin America (VMLA) illustrated the company’s strategy to launch by 2015 the Virgin brand in eight Latin American markets: Chile, Colombia, Brazil, Mexico, Peru, Argentina, Uruguay and Bolivia. Virgin aims to become the leading MVNO in the region, also using Virgin Mobile as a mean to introduce other Virgin brands in other sectors. According to Buckwalter, market conditions in Latin America are just ripe for MVNO entry thanks to a positive mix of improved regulatory conditions, mobile market saturation limiting growth opportunity for MNOs, and intensified service-based competition, which opens up the opportunity to offer more and better data services. VMLA, which launched in Chile in April 2012, will focus on the segment it defines as the “sweet spot”: the “youth and youthful” people age 15-34. VMLA puts a special focus on providing superior customer service and on developing highly efficient operations, especially through strong partnerships with distributors.
VMLA has seen encouraging initial take-up in Chile, where it aims to attract 250,000 customers in the first year after launch. The Chile launch cleverly piggybacked off the introduction of mobile number portability (MNP) and was supported by a launch campaign whose slogan was “Cambia el chip” (Get a new SIM). At the same time, VMLA used a number of irreverent TV commercials showing pigeons (the existing MNOs) defecating on the heads of statues (the mobile customers). Although the campaign caused the company some problems with the advertising-standards agency of a conservative country such as Chile, it achieved its main objective of creating a buzz around the new MVNO.
Even in Chile, arguably the most advanced mobile market in Latin America, it will take 10-15 years for MVNOs to obtain market shares comparable to those of second- or third-tier MNOs (5-10%). These are the market shares that some of the most successful MVNOs in mature markets have been able to achieve. VMLA is off to a good start in Chile, and it is set to start operations later in the year in Colombia, where it has an agreement with Telefonica, the same MNO it teams up with in Chile. However, VMLA has not yet announced an MNO in Brazil, and that is no surprise, considering the hurdles of Brazilian regulation.
Overall, the main challenge facing VMLA is the heterogeneity of the Latin American market. Although there is certainly a “youth and youthful” segment to address in each country, it is clear that the size of such a segment and the way it can be addressed will vary considerably between countries as different as Chile and Bolivia. Another specific challenge for Virgin arises from the political tensions between the UK, the home of Virgin, and Argentina. VMLA has already delayed its launch in Argentina, the third-largest market in its target list. In the current situation, obtaining a license for VMLA might be more difficult than originally planned
Beyond VMLA, the opportunity of addressing the youth segment through MVNOs was also discussed by MTV. The fact that a leading youth-oriented media company such as MTV was the main sponsor of an MVNO event in Latin America is significant per se. MTV came to Sao Paulo to position itself as a premium third-party content provider for potential MVNOs in the region. Recently, MTV launched a youth-oriented MVNO in Poland in partnership with T-Mobile, but unlike Virgin the company has no plans to do the same in Latin America, at least for the time being.
Chile and Colombia offer the best ground for MVNOs to prosper
When it comes to comparing the strength of the MVNO opportunity in different Latin American countries, it is Colombia, as much as Chile, that offers the most fertile ground. This was the main message from the presentations of Santiago Aldana, the CEO of UFF Movil, the most sizable MVNO in Latin America, and Sergio Gonzalez, vice president for strategic planning of the MVNO arm of Colombian fixed-line operator ETB.
Chile and Colombia feature a mix of macroeconomics and telecoms indicators that favor MVNOs. Chile is the only country besides Brazil to have formal MVNO regulation in place, while in Colombia MVNOs have been able to start operations without formal regulation, taking advantage of soft rules that allow telecoms services to be resold. In both countries, number portability has been an important ally to MVNOs as they seek to erode shares of MNOs.
At the same time, the positive macroeconomic environment, combining in both countries high growth with low inflation, is playing an important role in attracting investors. The fact that by end-2012 VMLA will have commercial operations only in Colombia and Chile shows that the two countries offer fertile ground to startups. Colombia is the Latin American country with most MVNO activity, and Informa forecasts the country to grow from six MVNOs now to more than 10 by 1H13. Alongside Virgin, Chile hosts only one other MVNO, but with 26 companies originally applying for an MVNO license, several new launches are expected in the next 12 months.