MVNO strategies are rapidly filling out every possible mobile micro-market. But competition and economic realities are forcing MVNOs to heighten revenue hopes and keep their eyes on the bottom line.

The big news to come out of the CTIA Wireless 2006 trade show this week is already a given: Disney is set to formally announce Disney Mobile, the mobile virtual network operator play that went from being a highly believable rumor to being a much-anticipated and badly kept secret to being a market-ready offering over the last several years.

The magazine Ad Age reported last week that Disney is launching a $50 million marketing campaign to coincide with the launch. (The actual announcement is expected to come at Wireless 2006 on Wednesday — visit www.telephonyonline.com for further details on that announcement and other Wireless 2006 news this week.)

Though a startling sum, that is exactly the kind of money that most people in the industry would expect Disney to put behind its MVNO launch. After all, Mobile ESPN, the MVNO from Disney-owned ESPN, debuted with a 60-second commercial spot during Superbowl XL in January — the average cost of a 30-second spot during that event was $2.5 million, according to advertising industry sources. The same “Sports Heaven” commercial that ran during the Superbowl has been in heavy circulation online and on TV ever since.

Marketing and other related start-up expenses fall into the realm of customer acquisition costs, a necessary but perennially painful thorn in the side of traditional mobile network operators and an issue that also will create challenges for MVNOs that are looking to profit from their mobile strategies and not simply serve as a loss-leader extension of a brand from another industry.

“Most of the early MVNOs right now are focusing on the sales part of the value chain,” said Ozgur Aytar, senior analyst for Pyramid Research and co-author of the recent report “MVNOs and MVNEs: Analyzing the Potential of Virtual Mobile Players.” Aytar called that group “lighter-side” MVNOs — companies that focus on marketing and sales and outsource all other parts of their operations, including customer relationship management, applications platforms and back-office functions.

But the focus on sales and customer acquisition will not necessarily turn MVNOs into money-making machines. In fact, while certain MVNOs are spending a lot of money on advertising, Aytar said that many current MVNOs are likely to focus so much on actually reducing metrics such as cost per gross acquisition (CPGA) and cash cost per user (CCPU) that they are also living with lower average revenue per user (ARPU) as a result. CPGA can typically account for up to 30% of a mobile network operator's expenses, the Pyramid report noted, but MVNOs are attempting to curb those costs in some cases by not engaging in some traditional mobile industry marketing activities like subsidizing handsets.

Most of the current MVNOs are also simple resellers of low-overhead voice minutes. The goal with some of them has been brand extension, but at the lowest possible cost.

However, MVNOs like Disney Mobile and Mobile ESPN are part of a group of next-generation MVNOs that are turning the old model upside down. Amp'd Mobile, which also launched earlier this year and is focused on the market of 18- to 25-year-olds, is another member of that club. These enterprises are separating themselves from the previous generation of MVNOs by focusing heavily on content applications intended to distinguish their offerings as much from other service providers as their niche market aims to distinguish themselves. The high-end applications are being packaged in high-end devices that are all part of an effort to create expectations for ARPU at or above the levels of traditional network operators.

To some extent, the next-generation MVNOs also are more involved in content creation and distribution, either leveraging content they already own or creating new mobile-dedicated content that extends naturally from their existing content. Or, in other cases, they are forging ground-breaking content partnerships that are coaxing the mobile industry into new ways of thinking about content. For example, Helio, the yet-to-launch MVNO from EarthLink and SK Telecom, announced a partnership with the online social networking site MySpace.com (see Telephony, page 34). That act already has had a ripple effect through the mobile industry, with other carriers seeking out operators of social networking sites. In addition, the new round of content-focused MVNOs also seems keen on more open content policies, rather than the “walled garden” strategies that most traditional mobile carriers offering content have gotten by on thus far.

“They are trying to change the mobile content game by delivering more openness,” said Mark Donovan, senior analyst and vice president of product management for M:Metrics, which tracks adoption of many different mobile content categories. “It's still early in that game. Amp'd's numbers may still be too small to measure. Among MVNOs, Helio may pose the most chance for disruption of the mobile content market, given how well it's capitalized.”

Two years ago, MVNO strategies were still rare, and the market niches that could potentially support MVNOs seemed limitless. Now some segments already have more than one MVNO addressing them, in addition to the traditional mobile carriers that still believe they have the voice, data and content services and devices for which all users are looking. Even with some of the service and business model differentiation, MVNOs may not travel an easy road to profitability. Pyramid Research points out in its report that most current MVNOs are either operating at a loss or just above break-even. The only clearly profitable MVNO is the U.K.'s Virgin Mobile, but that company was the first MVNO to debut and has been around since 1999.

Aytar said that as MVNOs become more successful and build their customer bases, competition between traditional carriers and MVNOs is an eventual reality. Companies like Cingular Wireless already admit that they consider MVNOs both partners and competitors.

That means MVNOs will have to continue to differentiate. While several of them count on hosted and outsourced solutions for every facet of their businesses, others are beginning to think strategically about owning the customer relationship management (CRM) systems and interfaces or the application platforms.

“The new guys may be managing not only CRM but also applications platforms and back office,” Aytar said. Though there is additional capital expense involved in owning and operating these platforms, the competitive edge the MVNOs believe they gain could pay off in higher ARPU, stronger customer loyalty or greater service efficiency.

And the trend toward system ownership may not stop there. Blueslice Networks is a small vendor of home location register (HLR) systems that is specifically targeting Tier 2 and Tier 3 MVNO operations, according to Noah Bloom, director of marketing at Blueslice Networks.

“Now, as an MVNO, you need to stand out not just by reselling but by being able to launch your own platforms, and that includes HLRs,” Bloom said. “Some MVNOs will become less and less virtual and more and more like real network operators.”

Whether MVNOs' strategies become a common path to network ownership remains to be seen. After all, the fact that network ownership and technology acumen are not prerequisites is part of the reason so many brands are latching on to the MVNO model so quickly. However, Pyramid's Aytar said there could be important decisions to be made about network ownership somewhere along the line in the MVNO evolution.

“Potentially, they could evolve to become network operators,” Aytar said. “It depends on how much they can resonate in their market segments.” She said that she has talked to an MVNO in Finland that said, ‘After you gain 20% of your target market, it really doesn't make sense anymore not to own your own infrastructure.’ This company started by buying their own switches, though eventually, the company itself got acquired.”

As MVNO operations continue to mature, the MVNO phenomenon remains largely, but not exclusively, a North American business model. According to the Pyramid Research report, there are already 65 million subscribers of MVNO services globally. This number was tallied at the end of 2005 and was a 25% increase from the previous year. MVNOs are cropping up in Western Europe, Asia and even South America. Some U.S.-based MVNOs also are looking internationally for the next phase of their own growth. Mobile ESPN Publishing Worldwide, which provides content for Mobile ESPN, also recently expanded content availability to Canada, Europe and Latin America.

If the MVNO business models in other regions of the world can advance the way they have in the U.S., the global mobile industry will have a whole new competitive environment on its hands, and the dollar dilemma that emerging MVNOs face as they are just getting started will be one the traditional mobile carrier giants may have to consider as well.