Comments about cultural trends, mobile business, eCommerce and Internet developments

Two weeks ago I was asked by a journalist ‘what’s the lowest price a MVNO can support?’ caused by the latest decline of MVNO’s (MObile Virtual Network Operators) per minute prices in Spain.

One and a half years ago when we launched simyo in Spain with 9ct/min with 15ct call setup fee (note: Spain requires per second charging) people told me we’re crazy, the lowest price at that point was 12ct with 12ct call setup from Yoigo.

After an interim move of the low-cost market to 8ct, in the recent months MVNOs lowered their prices to 6ct/min and pepephone the low-cost leader even to 5,5ct/min (with call setup of 15ct) and last week their launched a promotional tarif with 9ct/min with NO call setup fee.

So what’s the lowest tariff an MVNO can support?

Let’s take a look at the mobile market in Austria, probably one of the most competitive markets. Yess offers a tariff with 2,9ct/min No call setup fee, but 60s/30s rounding. They now also launched a flat-rate including 1.000 minutes and 1.000 SMS for just 8,80 Euros/month!

The main cost driver for voice per minute prices are the regulated mobile termination cost. The latest reduction of prices in Spain is actually driven by the reduction of these regulated cost: octubre 2009 – april 2010 of 6,127ct/min to 5,507 ct/min for april ‘10 – october ‘10. Considering these cost and for example the 9ct/min of pepephone with no rounding and no call setup, so they have 3ct margin left on mobile-to-mobile calls to pay the mobile host network and contribute to their operations cost.

In Austria the mobile termination cost are lower, currently at 4ct and starting 2010 at 3,5ct. So theoretically at MVNO prices of 2.9ct, they don’t make money on these calls. But considering rounding, incoming calls, minimum consumption (for example 15 Euros in the case of Yess’s 2,9ct tariff) in total there is still enough margin to support their lean cost structure.

The key for all these low tariff mobile virtual operators is to have extremely low operating cost, which allows the business to be profitable even on smallest margins. No or minimal overhead and operating cost that allow them to support customers with extremely low contribution margins.

The business philosophy of these low-cost companies is to run at or close to break-even, so it’s impossible for anybody to undercut without running at a deficit (see also Tom Evslin’s law of networks) and give the benefit to the customer in form of lower tariffs. Growing based on customer satisfaction and word-of-mouth rather than expensive marketing campaigns and high handset subsidies.

Considering the huge margin mobile operator make at their prices today, gives us an idea of the overhead cost they are running in their business model. as long as an MVNO manages to really keep it’s operating cost low and stable even with a growing customer base prices in Spain will get a lot lower before MVNOs can’t support them anymore.

This decline will be especially hard for lower cost M(V)NOs that have already a significant customer base with double-digit millions of revenues. They run the risk to get stuck in the middle between the lowest-cost MVNOs and the marketing-subsidy oriented MNO offers and are left with only two options:

a) following the trend decreasing their current price for the whole customer base and accepting to loose out in 10% or more of their revenue

or

b) keep introducing new tariffs with lower nominal price points, but ever higher commitments and cross-subsidizing from other call scenarios. letting their customers wonder, why they are not benefiting from these new tariffs.

consumer awareness and migration to low-cost offers is still relatively small in Spain, but has accelerated significantly during the last year driven by the economic crisis. MNOs are estimating that around 20-30% of new mobile gross adds are already signing up with low-cost tariffs. They are fighting hard against this migration with the typical non-transparent offers, heavy marketing campaigns and free handsets.

Let’s wait and see if 2010 will get Spain anywhere near the price levels of Austria.