#19 How do MVNOs like Circles.life & Lycamobile make money?
The "Dealership" or buy-wholesale-sell-retail business model.
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A mobile virtual network operator (MVNO) is a mobile service provider that does not have its own network infrastructure or radio spectrum licenses, but rather uses an existing mobile network operator’s infrastructure and spectrum.
An MVNO provides services by purchasing a wholesale ‘full service’ mobile offering. The service provider then delivers (as a retailer) a full suite of mobile services to end-users, with their own branding, billing, and so on.
Example,
Aerovoyce buys telecom data in bulk from BSNL and sells it to consumers in rural parts of India.
Circles.Life buys telecom data in bulk from M1 (Singapore), Optus (Australia) and CHT (Taiwan). Circles does not operate any stores and is a completely “digital telco”, thus saving a lot on the physical store and support spends.
Lycamobile and other US based MVNOs buy telecom data from either Verizon, AT&T or T-Mobile and sell it for discounted rates to their consumers.
Note: I haven’t covered in detail the operational model of MVNOs here. There are many resources online that can explain how MVNOs actually work.
Why do MVNOs exist?
Shouldn’t mobile network operators (MNOs) like M1, BSNL, AT&T etc. just directly sell to consumers? What’s in it for the MNOs to sell its services in bulk to MVNOs thus creating their own competitors?
The main reason why MNOs accept MVNOs to interconnect is that they can partially serve a niche market without investing in marketing efforts. This means the MNO can get a part of the profits of that market.
Niche markets
The MVNOs are known as operators that serve a certain niche market. A niche market is a segment of a larger market that can be defined by its own unique needs, preferences, or identity that makes it different from the market at large. That's why an MNO would find it difficult to address niche markets as good as MVNOs.
Example: an MVNO that creates a business model out of selling telecommunication services to the African population in France that are charged cheaper for the calls they make towards the African countries. The MVNO uses technical solutions that serve this business model – cheaper routes from France to Africa.Marketing Outcomes
There is a gap in the marketing outcomes between MNOs and MVNOs. An MVNO can achieve better marketing outcomes in niche markets at a lower cost than the MNO. The logical reason for the MNO agreeing to accept an MVNO is because he would rather share some of the money than seeing that niche leave to another operator.
Example: Singapore based Circles.Life keeps taking a jab at M1’s competitors Singtel and Starhub with very public remarks. It is beneficial for M1 (MNO) if Circles.Life (MVNO) acquires M1’s competitor’s customers.
How do MVNOs make money?
It's similar to how car manufacturers work - Ford builds a car, then sells it to a dealer wholesale, who then sells it to a consumer, retail. Ford makes a profit when they sell it to the dealer, and the dealer makes a profit when they sell it to the consumer. In actuality, the dealer's profit on the sale of a single car is often larger than Ford's profit on the same single car is, but Ford sells millions of cars, whereas the dealer sells maybe a few hundred.
The MVNO goes to the MNO and says "I can buy the wireless service from your network division for the same amount that your internal retail division does, but I can add value (lower cost, better service, different phones, different payment methods, etc) that your retail division can't or won't."
MNO likes this, because it helps earn extra revenue for the network, without doing things it might not like to do (eg, cutting prices, or changing policies that discriminate against lower-income consumers).
So your question starts from a few flawed premises:
creating competition
Most of the MVNO's on MNO’s network (for example BSNL) don't compete with the MNO (they are going after a different market segment - usually pay-as-you-go customers who don't or can't get contracts).
undersells your own same product
They are underselling the retail division, but they pay at least the same rates as the retail division does for network access - and potentially more. In addition, the MVNO's probably have to make volume commitments (ie, guarantee that they will buy $X Million in service per annum) which is great for your balance sheet because big commitments are cheaper than a bunch of small ones.
using your own network be bad for business?
From the perspective of the network company it isn't, because they are getting paid more money for the same network service (ie, they have to pay for the network regardless of how many users are on it, by getting more users they are able to spread the cost of maintaining the network over more users and thus increase profitability).
Its a win-win - best of both world's mode.
Other Industries with an MVNO-like business model
Any dealership operation, typically cars, chemicals etc.
Electricity (Open Electricity Market)
Service Providers can buy electricity in bulk and re-sell it to households.Liquified Petroleum Gas for home
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