Two recent announcements on the MVNO front:

  1. Amp’d Mobile approaching the 200,000 subscriber mark [press release]
  2. KDDI to start cellphone service in the US [article]

Industry pundits continue to talk about whether MVNOs are a viable business or business model. I am more interested in understanding whether MVNOs are propping up the MNOs or whether they are agents of change.

My belief is that most MNOs look at the MVNOs as high margin businesses since the MNO is not responsible for customer acquisition costs or customer care. Some may also look at MVNOs as laboratory experiments. Rather than ask their shareholders to fund experiments in business models & offers, the MNOs are basically asking the VC/investment community to fund these experiments. Assuming that more MVNOs will fail, the MNOs will be able to cherry pick what works and what does not work. In essence, MVNOs will help the MNOs evolve, but they won’t bring about revolutionary change.

MVNOs won’t bring revolutionary change unless and until other basic principals of the mobile ecosystem change. My position is that there are two fundamental barriers to radical change: (1) operators ability to recoup huge infrastructure investments while remaining kind to their investors, and (2) operators handset subsidies.

I don’t think the first issue can go away very easy. Unlike the mass bankrupcy of Internet infrastructure vendors post-bubble, I don’t expect to see the MNOs going bankrupt and giving their capacity to a new wave of businesses for pennies on the dollar. The best hope here is for substitutes for the current bandwidth — whether that be WiFi, WiMax, or mobile television. If the MNOs take control of this bandwidth, I have little hope for change. Last time I checked T-Mobile’s Wifi service in Europe cost consumers as much or more than 3G.

On the second matter (subsidies), I have far more hope. This is primarily a regulatory issue with precedence throughout the world. While independent handsets might not initially work as well on an operator’s network, there will be mutual benefits to both parties to fix these issues. If you buy a cool handset that does not work well on one network, you are apt to switch to another network. The importance of unlocking subsidies is that handset manufacturers and retailers will innovate in order to differentiate. This will shift value away from the underlying network provider and towards the service or content provider.

Does this mean the MNO becomes a bit pipe? Yes and no. I think you will see the MNO as a publicly traded company bifurcating into two business. The first business runs the bit pipe and the second becomes one of many MVNOs. From a shareholder perspective, I think this is good since there is more long term value in the service business than in running the underlying network.

Sidebar: Today, I tend to prefer MVNOs tied to culture (race, religion, nationality, etc.) vs. lifestyle. With handset subsidies, the mobile operators have huge costs for customer acquisition that can take years to amortize. As people age, they tend to remain in the same cultural group but they tend to migrate between lifestyles. Hence, I would expect the long term margin per subscriber (not sure if that is a real statistic) to be higher with culture-based MVNOs. I would expect to see some high initial ARPUs for lifestyle MVNOs (especially if the handset purchase is folded into ARPU), but worrying churn later down the road.