Before discussing the business opportunities for MVNOs we need to revisit the historical context of the MVNO scene in Germany. You can argue that Germany was a pioneer and one of the founders of the concept of MVNOs before this niche was defined.
When the regulator licensed 2G as part of the provisions it also mandated the concept of what was called a “Service Provider”. The licensee (initially Deutsche Telekom (D1) and Vodafone (D2)) had to make all their technical offers available to the “Service Providers” within a limited time frame, with the Operators having to support a retail- minus model and pay the Service Providers a fee, mainly used on subsidising handsets to win new subscriber. At the time a group of companies such as Hutchinson, Talkline, Debitel, VictorVox & Mobilcom etc. jumped on the opportunity using their brand and customer relationships to attract and win millions of subscribers and were very successful at this. Later on, Telefonica O2 (then VIAG Interkom) obtained an operating license without this provision but have since then inherited these “Service Provider” obligations through its purchase and merger with E-Plus.
During the 1990s as the number of net new subscribers stagnated the market started to consolidate as the squeeze on margins was unsustainable. The main notable survivor of this period is 1&1 (now owners of Drillisch) and Freenet who remain an independent service provider.
In more recent times, with the consolidation of the market in Germany, Drillisch has been propelled to the forefront due to the “surprise deal’ in 2016 where Drillisch accepted the contract to become the regulatory remedy at the time when Telefonica O2 struck with the EU regulator to buy E-Plus. The remedy was that Telefonica O2 needed to grant Drillisch RAN capacity, starting at 20% with an option to acquire up to 30% paying a fixed annual fee. The onus being then on Drillisch to fill the network (RAN) as they have the fixed sunken costs. This changed the dynamic in the market and as a result Drillisch, now owned by 1&1, has de facto become the 4th Operator in Germany. This has been further reinforced with 1&1 who are also the largest Internet provider in Germany with the acquisition of a commensurate portion of the 5G spectrum auctioned last year.
Q1) What are some of the key opportunities for MVNOs in Germany? How do you evaluate these?
The consumer budget market is saturated, with two types of light MVNOs dominating the market. We are limiting the list to the main ones:
2nd Operator brands
These are wholly owned and run by the Operator, but are targeting other market segments than the main brand.
DT – Congstar and Frank
Vodafone – Otelo
Telefoncia 02 – Ortel, Blau and Base
Drillisch – 1&1 and Yourfone
A “branded reseller”, is a partnership where the brand (often retail) provides its name and the point of sales such a retail outlets, whilst the host MNO is the contractual partner responsible for all post sales activities including customer care and billing.
DT – Kaufland, REWE(Penny)
Telefonica O2 Alditalk,Tchibo
Vodafone – Lidl and BildMobil
Therefore, if you want to enter as a new player in the consumer market you will need to have a service which adds some type of value beyond traditional telecom services.
An example that adds value is Audacious. They provide enhanced audio services for users who are hearing impaired. This works by tuning the sound based on the users’ personal hearing profile.
For B2B there seems to be a gap to be filled in the SME market, e.g. with SIP trunking and cloud solutions such as sipgate and Voiceworks. The recent announcement that Gamma Telecom Ltd. has acquired a majority stake holding in HFO Holding AG will no doubt invigorate this sector.
Another interesting niche for B2B use cases is the replacement of Tetra networks with 4G push-to-talk solutions and private LTE networks for sites.
The IoT market already adds value on top of telecoms, as you would normally buy the “IoT service” with the communications portion being embedded as an integral part of it. Given the low value of the connectivity as part of the service (often quoted as 10%) the provider might prefer having one Mobile Virtual Network Equipment Vendor (MVNE) as the partner that facilitates connectivity across the geography, including Germany, rather than one partner per country.
A perfect example of a differentiated service model is the transport and vehicle industry where we have seen MVNEs and MVNOs successfully compete and win deals against larger MNOs due to their ability to meet the exacting needs of maintaining the life cycle of the communication services over a long period of time.
Another innovative service was a well-known regional publisher challenging and considering changing its business model to digital first where due to the amount of data likely to be consumed and the national subscriber base, a local network partner would be a prerequisite. This was considered economically viable due to the savings achieved by cutting out print and logistics that actually outweighed the costs of providing a tablet for free as part of the subscription charge.
Certainly, additional niches will develop. But one thing is for sure; there is a trend for the communication connectivity just to be concealed and invisible to the user as part of a solution, product or service.
Q2 What are some of the key challenges?
If you want to run a MNO in Germany, the main challenge is that there is a high revenue guarantee threshold you need to commit to for Operators to want to work with you. In addition, your proposition needs to be perceived to be adding value beyond the Operators own offerings.
Alternatively, if you want to run your own Operations as an independent MVNO there are substantial capital outlay requirement. This is due to German market regulations with consequential requirements related to data protection and lawful interception which in themselves do not add value.
The vehicle industry in Germany is a case in point, where international MVNOs wanting to service the European market struggle to obtain viable MNO agreements.
Q3) How will 5G benefit MVNOs, particularly in the IoT space?
Germany has a large industrial base and extensive Mittelstand. – medium sized businesses. As part of the 5G licensing the German Government made the provision to reserve the 3.7 3.8MHz band for Industrial applications as part of the Industry 4.0 initiative. This means the industry can buy a license to run their own campus networks.
One of the main benefits of 5G being that you will be able to harmonise all the communication requirements, whether human, machine, video or robot. Predictive maintenance can be provided using this technology with control over the quality of service parameters for moving objects.
As of the end of June 2020, based on the information from the DIHK, The Association of German Chambers of Commerce and Industry, as many as 46 companies have been granted licenses with a further 4 in the application process. However, as we all know IT and telecoms is not the same thing and there is likely to be a shortage of telecom skills within these organisations to set up and run their telecom operations. Although the MNOs are also focusing on this area, I believe one of the reasons this will not work is that the industry does not want to have this dependency. Therefore, this presents an opportunity I believe both for Network Equipment Vendors (NEVs) and MVNEs.
Q4) You are set to speak at MVNOs World Congress 2020 in September. Why have you decided to speak here? What excites you most about this event?
I work with innovation! It should be far easier for those who want to provide innovative communication services to the market and, IFG Consulting plays the vital role as a catalyst to facilitate commercial engagements in the telecom ECO-system.
Having said that, one of the potential weaknesses in telecoms is the mindset where the MNO’s view any potential company who provides network services foremost as a potential competitor rather than partner which is compounded by the fact they are not geared or organised to engaging with smaller innovative companies.
Specifically, in relation to the German MVNO market I perceive there to be an opportunity in the market for a network aggregator aimed at the B2B segment who is easy to work with and focused on helping new innovative entrants who have yet to scale.