The communications market is being reclassified. Content providers, consumer products chains, computer equipment vendors, and other players from a variety of markets are now taking their initial steps towards entering the virtual communications operator market. They are changing the rules of the game for the entire communications market. The first signs of the impending revolution are the content companies, headed by giants Walt Disney Holding Co. (NYSE: DIS), MTV, and others. Consumer products companies and other players are expected to join the trend later on.
The new trend is only beginning, but existing communications operators are taking notice. Many of them are becoming virtual operators in areas in which they have not previously been active. Wireline communications operators and cable companies can become virtual operators in wireless communications, and wireless operators can virtual operators in wireline communications.
”Companies in consumer products, content, and so forth can add calls and other wireless services to their existing basket of products,” explains AudioCodes VP systems Yehuda Hershkovits. “The SuperPharm chain, for example, could decide that it has enough loyal customers to provide wireless services to them. It could rent infrastructure from a wireless operator, provide the service on this infrastructure, and label the wireless handsets ‘Lifestyle’ (the SuperPharm private label brand name).”
A virtual operator is an operator without its own communications infrastructure, which rents a network, or parts of one, from an operator that has a network. Entry of these operators into the market is expected to significantly intensify competition between communications operators, especially wireless operators, but also increase the revenue potential of existing operators.
Entry of new operators into the communications market is very good news for suppliers of systems such as billing, customer relations management (CRM), voice mailboxes, value added services, and content. A rise in the number of communications market players will greatly enlarge their target market. The most substantial growth among those supplying these systems occurred in the early years of the wireless market.
The official term for virtual operator is mobile virtual network operator (MVNO). The term implies a virtual wireless operator, but the phenomenon has recently been spreading to all communications sectors.
In any case, although the technological capabilities for setting up MVNOs have already existed for several years, little progress was made until recently. It appears that one of the reasons for the current in this field is a combination of maturing infrastructures, which make it possible to provide new generation content and value added services, and the lack of viability in deploying infrastructure.
The revolution will probably gain momentum mainly in regions in which a new operators will be unable to recruit enough users to cover the cost of setting up a network. One industry source explains, “Each US operator, for example, has a relatively large territory. In an average European country that already has three operators, on the other hand, setting up a network isn’t worthwhile for a fourth operator. The number of subscribers that can be recruited will be relatively small, and in the end, the cost of setting up a network are liable to exceed the revenue to be received. Therefore, if a given entity nevertheless wishes to become a wireless operator, it will prefer being a virtual operator.”
”There are two kinds of virtual operators,” Hershkovits says. “The older kind of virtual operator have no infrastructure at all, and rent the entire network. However, there are also virtual operators that own one element of the infrastructure and rent another element. For example, an operator might own wireline infrastructure, and rent radio infrastructure.”
Market sources believe that initially, virtual operators will prefer targeting a prepaid audience, while charging low prices.
The oldest virtual operator is British chain Virgin, which supplies music CDs and tourism packages. Virgin, which launched its virtual wireless network in November 1996, uses its strong brand name in music and tourism to sell wireless services, mostly to the youth market segment. The chain, which provides most of its services through prepaid billing, has over four million active wireless subscribers.
Virgin’s success made the market think that brand names would lead the revolution, but it didn’t happen. In recent years, Virgin has become one of the few remaining virtual operators.
What has changed now, and why are more and more MVNOs appearing? The main reason appears to be the maturing of the content market. It seems that as long as revenue from content services on wireless was not a significant factor, there was no motivation to found virtual operators. The fact that content services are beginning to emerge as more significant contributors to wireless operators’ revenue is generating a strong motive for development in this field.
That is probably also the main reason why the early birds in the virtual communications market are the content companies. New virtual communications players include Extreme Networks (Nasdaq: EXTR), sports channel provider X-TV, Walt Disney Holding Co. (NYSE: DIS), EasyGroup, and MTV. But content providers are only the pioneers who dared to cross the lines by providing independent communications services, instead of remaining dependent on wireless operators to broadcast their content.
Next in line are expected to be retail chains, which are already planning their entry into the virtual communications market. Recent rumors say that Apple Computer (Nasdaq: AAPL) is interested in providing wireless services in the US.
If retail chains can do it, computer equipment manufacturers and content providers are also candidates, and it is only natural for existing communications operators to aspire to expand their range of services by entering communications sectors in which they have not previously operated.
Wireless operators can rent infrastructure from wireline operators and cable companies in order to provide wireline telephone and Internet services. Wireless operator SmarTone Mobile Communications, for example, has begun providing wireline telephony on IP networks.
At the same time, wireline and cable communications operators can add wireless services to their line of products. One of the most interesting examples is British Telecom (LSE: BT.A), which already set up a wireless operator in the past, but later sold it. With the rise of wireless-wireline convergence, British Telecom decided eighteen months ago to return to the wireless market by setting up a virtual operator. It acquired British infrastructure company T Mobile, and now has its own wireless brand name BT Mobile.
One of the questions raised by the increasing trend towards MVNOs is why operators should lease parts of their network to potential competitors. It turns out that because of the great capacity of 3G networks, operators regard the leasing of parts of the their network as more efficient use of the network and a source of revenue, not a potential loss.
Another question is whether the new trend will lead to deployment of new communications networks. One market source explains that this is possible, but not inevitable. If, for example, a given country has three wireless operators, each with its own infrastructure, the smallest of which has a 15-20% market share, the amount of traffic on this operator’s network will be small, particularly if most of its customers are in the low-end market.
Such an operator has a nationally deployed network that is designed for a smaller capacity. If a virtual operator rents part of the network from this operator, obtains a substantial market share, and appeals to the high-end market, thereby significantly increasing traffic on the network, the network owner will have to increase the network’s capacity. Eventually, the network owner can profit from this, particularly charges are calculated according to traffic.
A third question is whether the new trend will create a new market of infrastructure owners whether new players will arise dealing solely in building, handling, and leasing infrastructures. One market source says that when the communications market was prospering, some providers played with the idea of setting up a network for leasing purposes. As of now, this idea has yet to get off the ground. It requires large investments, which will be logical only in the presence of a critical mass of virtual operators.
It is reasonable to assume that if new lessors of networks arise, they will be subsidiaries founded by operators that already have their own networks, in order to separate communications services from leasing of parts of networks.
A fourth question concerns the costs of leasing a network. One of the advantages enjoyed by virtual operators is supposed to be that they charge lower prices than ordinary operators. Since ordinary operators must profit from leasing parts of their networks, however, it is reasonable to assume that they will charge virtual operators more than the regular cost of maintaining the network.
Another industry source explains that virtual operators have no capital expenditure for setting up networks. Their operating expenditures, which include renting a network, are higher than those of infrastructure owners, but virtual operators probably have lower total costs.
It is reasonable to assume that an infrastructure owner charges a virtual operator more than the per minute cost of airtime, but less than the network owner charges users. As a result, a virtual operator can charge lower prices in order to enter the market.
Finally, the entry into the market of voice over Internet protocol (VoIP) operators, such as Vonage and Skype, has hastened the virtual operators revolution. “Vonage and Skype own several elements of the network, the most important of which is the software switch, but they don’t own their own complete infrastructure,” says Hershkovits. “For example, Vonage doesn’t have its own broadband access network (DSL, cable). A call from a Vonage’s subscriber reaches its software switches and media gateway by way of a DSL or cable network belonging to other operators.”
"Globes": What about a cable operator who wants to provide wireless services, or a wireless operator who wants to provide wireline telephony services?
Hershkovits: ”Cable infrastructure does not include radio infrastructure. Cable operators can rent radio infrastructure from a wireless operator, and hook it up to their IP infrastructure. In principle, every communications operator whose infrastructure operates on the IMS standard (after the standards are set) will be able to provide VoIP services to wireless subscribers with IMS-compatible devices, and wireline telephone services to subscribers with IMS-compatible IP telephones.
”However, setting of IMS standards is expected only in the second half of 2006. Meanwhile, these services can be provided through applications that mediate between the protocols. If one subscriber has an IP telephone that uses SIP protocol, and another subscriber has a 2G (GPRS) wireless handset, they can communicate with each other through an application that translates from each protocol to the other.
”As a result, wireless operators can provide wireline communications services for owners of IP telephones, using their wireless networks.”
Communications infrastructure is the main asset of ordinary operators. What assets can virtual operators bring to the market?
”The main assets of virtual operators are content, a brand name, and distribution channels. The conditions essential for the success of a virtual operator are services equal in quality to those of ordinary operators, powerful switching capabilities, and features to distinguish the operator from the infrastructure owners. Another condition is deep pockets and agreements that facilitate wide coverage.”
Published by Globes [online] - www.globes.co.il - on September 8, 2005