/* ----------------------------------------------- Comment out annoying Snap... ----------------------------------------------- */

Tuesday, October 24, 2006

German MVNOs – Last Rites?

TeleGeography is reporting that the 5 German MVNOs (Drillisch, debitel, mobilcom, Talkline and Phonehouse) are planning a merger which would create the world’s biggest MVNO with 25m customers and a distribution network to die for.

Personally, I see this as illustrative of the fundamental weakness of the underlying MVNO business model: it only works for niches where the network operators are not prepared to venture in a particular moment of time. Even worse, I believe the MVNO model is self-destructive: the more successful a MVNO becomes the more appealing the niche becomes to the network operator to target. The final nail in the coffin is that any network operator has a huge cost advantage over any MVNO and therefore will ultimately win out. The only viable strategy for a MVNO is to build a niche and sell-out: witness the exit route of the only MVNO success stories, Saunalauhti in Finland and Virgin Mobile in the UK.

Over the last couple of years in Germany, E-plus has launched several sub-brands aimed at particular market niches (Immigrant, Low Cost etc) and triggered a response from T-Mobile and Vodafone who have slashed prices across the board. This will have directly affected the MVNOs margins and churn rates and given that two are owed by private equity (highly leveraged) and another by a UK Retailer (Carphone Warehouse - who needs cash for other purposes); it is hardly surprising that all five are thinking about a strategy of reduction in costs rather than expansion.

In my opinion, the strategy is flawed and will only prolong the MVNOs ultimate death. The better strategy is to wait for a couple of the MVNOs to merge and then for a remaining MVNO to raise the “For Sale” sign – available to all networks. A MVNO which could easily follow this path is Talkline, which is ultimately owned by TDC, the incumbent in Denmark, which is owned by private equity and also owns really, really juicy assets in the Denmark, Baltics, Poland & Switzerland. I think a “For Sale” sign on TDC would trigger a bidding war between Vodafone and Deutsche Telekom and potentially deliver decent returns on the investment for the private equity companies.