By Amanda Pilkington, Legal Director (UK) and Mike Conradi, Partner (UK)

Today’s news that the Post Office is to launch a Mobile Virtual Network Operator (MVNO) in partnership with EE has led us to put together a few thoughts about the market and about MVNO contracts.

Market trends

Recent months have seen perhaps an increasing number of smaller MVNOs ceasing trading – often citing the prohibitive tariffs offered by wholesale providers as the key determining factor (eg the ad-funded networks Ovivo Mobile and Samba Mobile). Similarly Vodafone’s MVNA partner Cognatel announced recently they would focus only on larger-scale MVNOs going forward.

Interestingly this trend is against a back drop of more new MVNO joint ventures between larger established players such as the Post Office one referred-to at the start of this blog and also the BT and EE MVNO (albeit that BT’s focus has not been on the consumer mobile market since the days of BT Cellnet). Other larger MVNOs, especially those with a clear cost advantage in terms of distribution (such as Lebara or Tesco Mobile) seem to be continuing their success and growth.

We also note the emergence of new entrants utilising new innovative platforms. For example, Now Mobile has launched a new MVNO service in the UK based on the prepaid mobile solution from DIGITALK, a global vendor of prepaid service platforms.

In the press release about its new MVNO BT outlined details of the basis on which EE will provide various MVNO services to BT’s customers and employees based in the UK, strengthening the existing relationship between the companies.  The arrangement will see BT’s mobile customers accessing 2G, 3G and 4G services via the EE network. We think it likely that BT may also be planning to combine its EE MVNO with its newly-acquired slice of high-frequency 2.6GHz spectrum, which it won for £186m in the auction last year, and which is suitable for high bandwidth but low range services -so may be especially useful in urban areas.

It seems, then, that whilst smaller MVNOS may struggle there is no shortage of innovation and interest in the sector, and larger players with established brands in other areas, like the Post Office, continue to see possibilities in the MVNO business model.

It will be interesting to see whether these trends continue for the remainder of 2014 in light of the race to provide 4G offerings.

Introducing flexibility in MVNO contracts

The MVNO market is constantly changing and evolving with new technologies, platforms and service propositions. The contract between the MVNO and its Mobile Network Operator (MNO) can at times be a blunt tool in the race to adapt to and remain competitive in the face of these changes and the MVNOs can be in the weaker position because of the difficulties they would face in switching from one MNO to another. However, there are ways in which a degree of flexibility can be introduced into the contractual terms (assuming a convention wholesale-priced model for the arrangement with the MNO).

One of the most commonly used tool is a benchmarking mechanism. This enables the wholesale prices in the contract to be tested at regular intervals against what is market practice, with the ability to adjust prices should the wholesale prices be found to be out of kilter (usually within agreed parameters). The contract can even provide that the benchmarker can look at retail prices offered by competitors to the MVNO as a likely indicator of their underlying wholesale prices. Although, of course, retail prices could be offered below cost as some kind of “loss leader” if, in the long term, retail prices offered by the MVNO’s competitors are below the wholesale prices in the contract this would seem to suggest that the wholesale prices in the contract are too high.

The appropriateness of benchmarking provisions will of course vary as between jurisdictions. In heavily regulated markets with strict controls on wholesale pricing benchmarking provisions may be less important. Likewise in countries where the MNO has a monopoly there is effectively no market to benchmark. However, it is prudent to include the right to benchmark in any event should the in territory’s circumstances changes; benchmarking is a right but not an obligation, this right does not need to be exercised.

To keep pace with the changing technologies and capabilities, the MVNO needs to have sight of the MNO’s roadmap plans for its network so that it can adapt its customer products accordingly. This can be achieved in the commercial terms by including a requirement on the MNO to produce and provide to the MVNO a technical development plan to allow the MVNO to plan its retail offerings and market campaigns

Finally there is often a discussion about service levels in MVNO contracts. The MNO may argue that since customers of the MVNO are on the same network as their own customers there is no reason to agree specific service levels and service credits. This may be so but in many cases the profile of the MVNO’s customers will be different from those of the underlying MNO – they may for example be more concentrated geographically, or make more international calls. If so then it may not be sufficient for the MVNO simply to rely on the MNOs general interest in fixing their own network if it breaks – the MVNO may instead want some sort of specific reassurance about the areas which are especially important to it. This could take the form of a specific service level regime or else could be something simpler like a right to be informed and consulted on decisions or issues having a particular impact in the critical areas.

See also Mike’s blog piece Top 6 Issues to Consider for an MVNO access contract