MVNO Wholesale Pricing Models by Mike Conradi, Partner, DLA Piper (mike.conradi@dlapiper.com)
Mike Conradi thought it might be helpful to set out some thoughts on the various MVNO (mobile virtual network operator) pricing models which have been used in respect of telecoms services.
In no particular order, these are the ones which DLA Piper have encountered or considered:
Wholesale Pricing. This is the standard model under which the host MNO (mobile network operator) agrees a wholesale price for a voice minute, for a text message and for a Mb of data with the MVNO on an arms’ length basis. The advantage of this model is that it is easy to understand and (so long as the billing system can cope with the use-recording) relatively easy to administer. The common problem, however, is that in a rapidly-changing retail market what looks like a sensible, competitive wholesale price to the MVNO on day 1 might well be out of line within just a few months as changes in the retail market make it impossible for the MVNo to compete without a change in wholesale pricing. It may be possible to mitigate this through regular price reviews and through some sort of independent benchmarking but these are only partial solutions.
Revenue-Sharing. This model is quite different – instead of having a wholesale price for each element of the service the MNO and MVNO (and often also the distributor) effectively agree to split the retail revenue (after deduction of third party costs) on an agreed ratio. This means that effectively the MVNO gets free access to the network (and possibly also free distribution). The big advantage of this approach is that it avoids the difficulties of the wholesale-pricing model – because there are no wholesale prices there is no need continually to revisit, and argue about, them – instead the management of the MVNO can set and re-set retail pricing in order to remain competitive according to market conditions. The problem of course is that because use of the network is effectively free the MNO must be confident that the management of the MVNO will not set retail prices at such a low level as to be below-cost or otherwise to cause problems such as network quality issues. Usually this means that this model will only work in the case of an MVNO which is itself a joint venture involving the MNO – and even then there will need to be measures in the contract for example looking at network congestion in order to ensure that the MNO’s interests are properly protected. A further difficulty with this approach is that if the MVNO wishes to offer bundles of mobile and other services (eg television or broadband) it will be necessary to work out a way to determine what portion of the bundled retail revenue is attributable to the mobile service, and so should be shared with the MNO.
Flat fee. This model refers to a mechanism where the MNO charges the MVNO a flat monthly fee per SIM card – perhaps combined with some usage limits on the amount of traffic that each SIM can use in that month. This is a fairly simple model and can be useful for certain specific applications (eg for connecting devices as part of a Machine2Machine service) but it doesn’t allow much room for the MVNO to differentiate its offer based on its services or pricing. For this reason it’s likely to be of more relevance for a business where the MVNO element is incidental to some wider proposition – for example in smart metering or telematics.
Retail Minus. This model sets wholesale pricing at a given discount from the retail price at any point in time. The advantage of this approach is that – as with the revenue-sharing model – it avoids the need to renegotiate wholesale pricing every time the market changes. If the discount is set at a large enough percentage this should allow an MVNO which has a low cost of distribution (such as a retailer) to make a consistent margin and thus create a profitable business. It also avoids the need (required in the revenue-sharing model) for a mechanism to ensure the MNO’s network is not adversely affected. For this reason retail-minus can be very helpful in some cases but it can only really work for relatively simple services. As with the revenue-sharing model in a market where mobile services are increasingly bought as triple or quad-play bundles together with other services it will be very difficult, if not impossible, to work out what the “retail” price is for a mobile service – it may be that hardly any of the MNO’s customers actually buy mobile as a stand-alone product and this could mean the MNO may be able to manipulate the “retail” price in order to produce a desired effect on its agreement with the MVNO. The best way to avoid this would be for the MVNO to buy a wholesale version of the complete bundle on a retail-minus basis – though this would have the disadvantage of making it very difficult for the MVNO to differentiate its services from the MNO’s – it would basically have to offer exactly the same set of services and bundles as the MNO.
Capacity pricing in some cases (usually because of a requirement from a regulator as a condition of allowing a merger between two MNOs) MVNOs may be allocated a fixed amount of capacity on the MNO’s network. This could mean, for example, that the MVNO is allocated 10% of all the capacity on the network and is free to offer it to customers however it wishes. If, however, the MNO is still operating the network then in practice the MVNO still has limited flexibility as to the range of services it can offer – though because of the fact that there will be very little marginal cost on the MVNO from each use of the network they would have an incentive to sell as much of the capacity allocated to them as possible, and so they may offer considerably lower retail pricing.
Mike Conradi, Partner, DLA Piper at MVNOs World Congress 2015, 21-23 March, Nice, France
Filed under: Guest post, Original Content Tagged: MVNO Wholesale Pricing Models 
