Prepaid Rules
I am skeptical about a lot of MVNOs. These companies used to be called resellers: they resell wireless service from one of the ‘legacy’ operators, under their own brand. Mobile Virtual Network Operator may sound fancier, but it’s the same strategy. The problem is that you are always competing with your own suppliers.
Running a carrier is a capital-intensive business, and most people assume that the MVNOs with the most money will win. But I am most skeptical about the big, well-funded, highly visible MVNOs, because they compete with their own suppliers for the most valuable customers in the market. Unless you can switch suppliers easily (they can’t) or you have some feature that your supplier cannot replicate (they don’t), this is usually a bad idea, no matter what you’re selling, be it books, groceries, or wireless phones.
I think the most successful MVNOs will come from the wrong side of the tracks: companies selling prepaid service to customers with no credit or low credit. If you work in the industry you know Tracfone and Virgin Mobile and Boost, but have you heard of Houdini, Roam4free, Xtreme, Movida, Tuyo, Net10, Redpocket, STI Mobile, Oxygen, Locus, Callplus, iWireless, Airvoice, Liberty, Lucky Aces, MX Mobile, Skynet, Nexus, Maxx, or Sendglobal?
Yes, these companies also compete with their suppliers, but for customers that their suppliers don’t want. Major carriers have taught Wall St. to measure them on ARPU and churn. Since prepaid customers spend less money and change carrier more often, they are bad for both numbers. Carriers don’t even know their identity (every crook has a prepaid cellphone, according to CSI and Law & Order). Leaving these customers to the MVNOs allows Verizon and Sprint to capture much of the revenue while segregating them in their financial statements.
Though the ARPU may be low, the prepaid market is still growing fast. At this point in the US the carriers and the big postpaid MVNOs are just stealing customers from each other. Their lack of emphasis on prepaid may be the single biggest factor explaining why cellphone penetration in the US lags Europe and Asia.
The little prepaid MVNOs are selling phones to young people and seniors and immigrants who have never owned a phone before. Their marketing costs are lower, they don’t need to design and subsidize cool custom handsets, they can sell phones in Wal-Mart and Safeway instead of building their own experience stores, and since their upfront costs are so much lower they can get to breakeven sooner.
The catch is that it’s incredibly hard to differentiate yourself at the low end of the market. You can go after specific ethnic minorities and sell handsets with menus in their native languages. Or make phones with large buttons and big fonts for the elderly. But for the most part it’s about price; price and a lot of luck.