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How capacity-based network wholesale deals can secure the future for MVNOs

Andrew Kloeden Principal, Consulting

"The most important factor for MVNO competitiveness is the nature of the wholesale deal struck with the host mobile operator."

Mobile networks and consumer behaviour around the world are evolving, particularly in developed countries. New network technologies, the planned release of new spectrum in most developed markets, and the spread of attractive, data-intensive, content and services are having significant impacts.

Consumers are demanding and using ever more data from their mobile services (especially video and audio streaming and gaming services). The average monthly volume of data consumed by each customer is increasing. As such, the demand on the network from a stable number of customers is continually increasing (see Figure 1).

Figure 1: Average data usage per mobile connection, UK

Figure 1: Average data usage per mobile connection, UK

At the same time, the roll-out of new technologies, and the release of new spectrum, has resulted in increasing network capacity. While this takes significant capital investments by mobile operators, it has resulted in falling unit costs to carry voice and data, allowing operators to offer larger and larger data bundles – indeed, some operators are offering unlimited data bundles in some markets.

These trends have an impact on MVNOs, which have had to adapt to stay competitive. The most important factor for MVNO competitiveness is the nature of the wholesale deal struck with the host mobile operator. Traditional wholesale deals are per unit. Prices are typically set per minute of voice, per megabyte of data, and per message carried. Costs are entirely variable. Unless a wholesale deal is structured such that unit wholesale prices decrease in line with mobile operator unit costs, an MVNO with such a wholesale deal will become less and less competitive as network capacity and data demand increases, and network unit costs decrease.

In recent years, new types of wholesale deal have emerged. Foremost among these is the capacity deal. In a capacity deal, the MVNO pays a fixed annual amount for a proportion (say 10%) of the mobile operator’s network capacity in voice, data and messaging. This type of deal has advantages for both MVNOs and mobile operators.

For MVNOs, the key advantage of a capacity deal is that the total capacity offered expands automatically as the mobile operator’s network capacity increases. This means that unit costs decrease and an MVNO with a capacity deal can react to market demands for ever larger data bundles at a constant retail price. The key risk for MVNOs is that they may not be able to fill the purchased network capacity as variable costs are exchanged for fixed costs. This makes a capacity deal more attractive for larger MVNOs that can carry the financial risk.

For the mobile operator, a capacity deal can provide a constant and guaranteed source of income for a certain part of the network regardless of whether it has been filled.

Capacity deals have typically been introduced by regulators in response to mergers between mobile operators (at least in Europe). However, under the right circumstances (for example, for a new-entrant mobile operator), and at the right price, it can make sense for both mobile operators and MVNOs, to help ensure future competitiveness of the MVNO, and secure long-term wholesale revenue for mobile operators.


Analysys Mason has significant expertise in, and experience of, assisting MVNOs with designing and negotiating wholesale network deals, and can also assist with business planning and strategy work required to understand the opportunities that arise from a new wholesale network deal.