MVNOs: the next step for growth in Latin America?

Developing Telecoms takes a look at the market potential of MVNOs in Latin America, where the model faces numerous difficulties despite the massive potential for growth in this burgeoning region...

The MVNO model – Mobile Virtual Network Operator – is relatively new in terms of the industry, but has swiftly gained support, and has found favour among many companies and regulators. The model allows operators to enter a market in a timely and cost effective fashion, increasing competition for the benefit of the customer.

MVNOs are defined by several criteria: they typically operate under their own branding; they provide mobile services to subscribers; and, most crucially, they do not hold their own spectrum licence, but instead lease spectrum from authorised licensees who wish to capitalise on their spectrum.

While they have recently gained popularity in the Middle East, the markets that have been the swiftest to adopt MVNOs are Asia and Western Europe – which until recently were the world’s first and second largest mobile regions respectively. However, the second quarter of 2010 saw Latin America surge ahead of Europe in terms of connections to take second place, with 15 million new connections in Q2 2010.

Compared to the first quarter, only seven of the region’s operators saw a fall in connections. Brazil in particular witnessed strong growth, with its mobile market growing by 16% year-on-year to 188 million connections. It now represents over a third of Latin America’s mobile connections, and is expected to surpass 200 million connections by next year.

As mobile connections soar, the time may now be ripe for the expansion of MVNOs in Latin America. However, the fact that there are many established voice service providers in the region makes it unlikely that MVNOs will be able to compete in this sector, so data-centric models and M2M services are more likely to represent a key growth area.

According to Joss Gillet, Senior Analyst at Wireless Intelligence, this is precisely what is in demand: "In recent quarters, Latin American mobile operators have increased their marketing and technological investments, which have had a positive impact on connections growth. This has also led to increased demand for new data services in the region. Compared to the more saturated European markets, the Americas region still has plenty of room for growth." However, while demand is there, MVNOs may still face an uphill battle in Latin America.

As MVNOs do not operate on spectrum that they own, they were long viewed by service providers as somehow parasitic – however, this attitude is beginning to change. Where once the extra competition that they represented was unwelcome, operators are now looking to MVNOs as a means of supplementing their revenues in the face of increasingly saturated markets.

In Latin America – as in much of the rest of the world – upcoming MVNOs are typically not major, recognised operators, but less established service providers who aspire to supply a full complement of services; examples of these include Chile’s Telsur and Mexico’s Maxcom.

MVNOs are typically launched by firms with no involvement in telecoms - such as the UK’s Virgin Group - and tend to supplement the market by targeting niche demographics with specialised services. However, as markets across the region are nearing saturation point, MVNOs will need to be extremely competitive. With an absence of first-time customers, gaining subscribers becomes a matter of luring the existing customers of an established operator to jump ship.

With MVNOs a largely unknown quantity in the market, it is natural for consumers to be cautious. It is therefore unsurprising that MVNOs are expected to provide serious incentives for potential subscribers to sign up. This presents a problem for start-up MVNOs: they are expected to undercut competitors who will have a solid enough foundation – and a steady enough revenue stream – to afford a price war. This in turn means that newcomers to the market need to be very well funded.

Another problem faced by MVNOs in Latin America is the lack of a definitive set of legal regulations to govern their operation. As MVNOs do not own spectrum, they must lease it from licence holders; however, the lack of parameters allows licensees to impose draconian restrictions on MVNOs, and has ultimately caused several to cease operations. Currently, Chile is the only Latin American country with a specific clause regarding the operation of MVNOs, although Brazil is reportedly set to follow suit.

While market saturation (along with decreasing ARPU and regulatory limitations) are common to markets worldwide, the Latin American market has unique issues which could affect the market in unpredictable ways, such as the massive discrepancy between higher and lower earners. Concerns over issues such as these are reinforced by problems such as limited spectrum capacity, and ultimately serve to discourage investors, as the addressable market simply doesn’t have enough promise. The global economic downturn is unfortunately another possible reason for investors spurning potential partnerships with operators to launch services via an MVNO.

However, despite the myriad problems faced by MVNOs in Latin America, they have already gained a foothold in the region. The Bolivian service provider Cotas Movil pioneered the MVNO model in the region, providing its customers with services that complement its existing portfolio – a typical function that several operators in the region have since imitated.

With this foundation, MVNO adoption is Latin America is likely to be driven by companies that are not involved in telecoms, but have recognisable and attractive branding. As the MVNO model is suitable for providing a wide range of services, firms will be able to plug gaps in the market by launching services targeted at market niches and relying on their brand to attract customers.

Ultimately, whether national firms are able to launch mobile services and M2M applications via MVNOs depends on the availability of MVNEs – Mobile Virtual Network Enablers - to provide support. However, with big names such as Argentina’s Fecosur beginning services this year, the outlook is currently positive: as of Q1 2010, over 20 companies have set out concrete plans to enter the Latin American mobile market place by launching an MVNO.

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