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Perspectives on building technology businesses and AcceleratorIndia from Cartezia

Is the MVNO route the best way to enter the Indian mobile market?

Thursday, March 19, 2009

With the recent decision by Department of Telecommunications (DoT) of the Indian government to allow Mobile Virtual Network Operators (MVNOs) to offer mobile communication services to Indian customers, expectations are high that many international players will enter the fast-growing Indian mobile market through the MVNO route.

Some of the big-names believed to be interested already are BT Mobile, France Telecom and Telekom Malaysia. Interestingly, this list also includes equipment makers Nokia and Ericsson who have expressed interest.  Although equipment makers becoming MVNOs may not be a natural diversification strategy, Nokia has already ventured into the Japanese market by launching a MVNO under its luxury brand Vertu.

The MVNO market entry strategy is an interesting one in the Indian context. Typically, MVNOs thrive where there is an arbitrage opportunity in price or a niche that is ignored or insufficiently serviced or the market is saturated.  In the UK, the success of Tesco and Virgin in providing mobile services via the MVNO route illustrates the potential of these types of opportunities.

India’s industry average ARPU is among the lowest in the world, amounting to around £3 per month (Rs 220) resulting in very few cost arbitrage opportunities. Competition to grab market share is so high that any price reductions are keenly matched by other players in the market. Hence, applying a cost-arbitrage model may not work for the Indian mobile market.

With a fast growing market with current penetration levels of just 26%, India has huge untapped potential. However, the sheer size of the market makes it a challenge to identify specific niches. Further, the value-consciousness of the Indian customer may take some of the new market entrants by surprise, given their limited experience with the Indian market.

The untapped market potential also means that the big players like Bharti Airtel, Reliance and Vodafone may be reluctant to share network spectrum that they need for their own growing customer base. From their perspective, allowing MVNOs to use their spectrum only makes sense when their potential markets are saturated and the return from their marketing spend drops significantly.

Given these challenges, it will be interesting to see what strategy that MVNOs entering the Indian market adopt. One of the options may be to focus on specific groups of customers who may have relatives abroad. This would be a reverse strategy of European MVNOs like LycaTel and Lebara which targeted European customers who make regular international calls to specific countries. Another option would be to use the opening up of the 3G spectrum in India to enter the market. Globally, 3G has enabled phenomenal growth for the MVNO model as these operators win new consumers by offering highly-specialized value-added services and a superior branding experience. Finally MVNOs may also enter the Indian market by partnering with smaller mobile companies. Virgin Mobile used this strategy in 2008 by signing up a branding-franchisee agreement with Tata Teleservices and rolling out mobile services under the Virgin brand. By offering many new “firsts” in the Indian CDMA mobile services space, Virgin Mobile helped Tata Teleservices sign-up more than 920,000 subscribers in March 2008, its highest number of new subscribers in a single month till then.

Irrespective of which option they choose, MVNOs will find it hard to resist the 1.2 billion strong population of India with a mobile penetration rate of just 26%.