Amid price war, ‘virtual telcos’ need to differentiate or die

AS THE price war in the telecoms sector rages on, mobile virtual network operators (MVNOs) – the original disruptors of the industry – now find themselves on the back foot.

In an increasingly unfavourable environment, MVNOs have to differentiate – or die, according to industry watchers.

MVNOs, or so-called “virtual telcos”, lease network capacity from mobile network operators (MNOs) such as Singtel , StarHub and M1 to provide mobile services.

Singapore’s first MVNO, Circles.Life, reportedly started cutting jobs since early May in an effort to streamline its business. Its co-founder, Abhishek Gupta, also stepped down into a non-executive role as part of an internal staffing overhaul.

Other players, such as Gorilla Mobile, Grid Mobile and Zero Mobile, have steadily exited the market over the last four years.

Today, about 10 of these players remain. And they continue to battle with the four MNOs and their sub-brands, such as Singtel’s Gomo and StarHub’s Giga, for market share.

This currently fragmented telco market in Singapore is unsustainable, market watchers said. To survive, the various players will either need to differentiate or consolidate.

DBS analyst Sachin Mittal noted that the MNO’s sub-brands have become quite aggressive in terms of pricing.

For instance, Singtel’s heya sub-brand now offers 100 GB of 4G data at S$10, including 1 GB of roaming data in Malaysia, Indonesia and Thailand, 300 local minutes and 50 local SMSes.

In comparison, S$10 with Circles.Life will get customers just 10 GB of 4G data, and 100 mins of talktime.

Mittal said that after the pandemic, MNOs themselves began to compete in the lower price segments with their digital-only brands. This put them in direct competition with MVNOs to attract more digitally savvy customers, who were more likely to bring their own devices instead of buying devices with mobile contracts.

“(The MNOs) actually have quite aggressive pricing in the mobile space…it doesn’t leave space for MVNOs, to be honest,” he said.

Kiran Karunakaran, partner and South-east Asia head of communications and media practice at Bain & Company, said MVNOs also face a high level of churn.

MVNOs sign contracts with MNOs that have minimum guarantees with the assumption they are able to grow to a certain threshold size. For every month they do not achieve that scale, these MVNOs remain in the red.

They may initially try to price at lower levels to scale up, before raising prices to bring the company up to profitability, Karunakaran said.

However, since MVNO customers do not typically have contracts tying them down, they are able to jump to another MVNO that offers a better deal.

“When market fragmentation increases beyond four to five brands in any market, the overall earnings before interest, tax, depreciation and amortisation pool in that market is affected negatively,” he said, adding that the only true winner is the consumer.

Sai Tunuguntla, Alix Partners’ managing director and Asia-Pacific co-leader of its telecom, media and high-tech practice, said that MVNOs usually fail when incumbents respond to price-based competition, or if there is a lack of differentiation due to overcrowding.

MVNOs that have been successful in markets like the US, Germany and the UK, he said, tend to sell other services alongside mobile service.

He noted that in the UK and Germany, retailer and MVNO Tesco used its mobile service offering to increase the uptake of its store loyalty programme. In the US, cable companies have also grown their MVNO businesses by offering cable broadband and television subscriptions along with mobile services.

“MVNOs can create differentiation through unique and integrative partnerships, such as with retailers, banks or travel services firms, or through value-added services to small and medium enterprises, such as Internet-of-Things and private networking,” he said.

This sort of sustainable differentiation, he added, has not been observed in the local market.

Still, Karunakaran noted that even successful MVNOs do not get more than 10 per cent to 12 per cent of market share anywhere globally.

The goal for MVNOs, then, could be to build a scalable platform that can be taken across multiple similar markets with similar demographics and market structures.

“Oftentimes, I think where MVNOs get it wrong is that their local market success leads them to believe that a similar brand strategy could work in other markets,” Karunakaran said.

“White labelling the platform, to a large extent, (and) if you have built proprietary capabilities on that, is really the only geographic expansion strategy that any of these MVNOs have,” he added.

Nitin Soni, senior director from Fitch Ratings’ Asia-Pacific technology, media and telecom team, said that MNOs ultimately do suffer from the increased intensity in competition.

In this case, MVNOs may be able to exit the market by selling their operations to MNOs after garnering market share and creating a good brand.

He noted that Singtel’s Australian subsidiary, Optus, announced that it would acquire MVNO amaysim for A$250 million (S$218.7 million) in November 2020. Optus said that amaysim, which had 1.2 million subscribers as at February 2021, would remain a standalone brand and continue to use Optus’ network.

In January this year, MVNO MyRepublic also began offering 5G services on StarHub’s mobile network, after StarHub announced that it would acquire a 50.1 per cent stake in MyRepublic’s broadband unit in September 2021. MyRepublic continues to offer 4G services on M1’s network.

Still, Soni is not confident that this could work in most cases, as MVNOs simply ride on existing MNO infrastructure to create brand value and undercut prices of the incumbents.

“My argument is that there’s no sufficient return on investment on these MVNO investments that we see today,” he said.