Mobile virtual network operators (MVNOs) have long been a feature of mobile telephony markets. An MVNO can be a simple reseller of mobile network operator (MNO) services, or even an operator that owns and operates some non-radio networking equipment, but MVNOs typically lie somewhere in the middle of the continuum — handling its own customer service and issuing SIM cards. MVNOs, such as Boost Mobile or Xfinity Mobile in the US, compete with MNOs on services-based elements (plans, prices, and non-core network service quality). The US mobile market boasts the largest number MVNOs of any country in the world, accounting for around 7 percent of connections. 

MVNOs can be good

For the most part, MVNOs complement rather than compete with MNOs. Theoretical and empirical research suggests MVNOs target specific market niches that MNOs are not well-positioned to serve or are unable to serve cost-effectively. Consequently, MNOs typically enter into agreements with MVNOs voluntarily to increase their total subscription numbers.

Many MVNOs have been launched by supermarkets, chain stores, banks, and other retail-facing operations that can leverage their existing brand and service infrastructure (e.g., Kroger Wireless). A similar rationale underpins their use by cable (e.g. Xfinity, by Comcast) and internet platform operators (e.g. Google Fi). MVNOs frequently feature in the prepaid market, often competing with an MNO’s own differentiated budget brand (e.g. Cricket Wireless and AT&T) targeting price-sensitive consumers.

While their market share is small, MVNOs appear to have made a valuable contribution toward delivering a mobile market that the Federal Communications Commission (FCC) has deemed “effectively competitive;” That is, regardless of its structural composition (i.e., a limited number of full MNO operators — four in the US), the market is delivering the artifacts expected when network operators are not unduly exercising market power. 

But do more MVNOs mean better outcomes?

However, successful outcomes in the US (or indeed any other) market should not be taken as evidence that a large number of MVNO operators is necessary for effective competition to emerge. To make such an assumption is to presume that market performance derives from structural artifacts only on the supply side — a tightly prescribed application of a Structure-Conduct-Performance view of competitive interaction. This analytical viewpoint is at odds with a more nuanced approach that takes case-specific characteristics and interactions on both sides of the market into account.

For example, the New Zealand Commerce Commission recently found the New Zealand mobile market to be effectively competitive even though there is negligible MVNO activity. This is because competition between the MNOs has evolved in a manner that resulted in a later MNO entrant targeting price-sensitive consumers normally served by MVNOs. (Indeed, one of the incumbent MNOs has subsequently developed its own subsidiary brand to compete with the new entrant in this market segment.) Following this logic, if there is no identifiable market segment with significant demand left unaddressed, (that is, the market is effectively competitive), then there is no room for another entrant — whether MVNO or MNO.

To intervene or not? The case of Canada

Considerable evidence exists supporting the contention that MVNOs will emerge endogenously as a consequence of commercial relationships willingly entered into by MNOs and partner entities. This begs the question whether there is a role for regulations endeavoring to make MVNO entry more desirable or feasible — for example, requiring MNOs to supply access to MVNOs at mandated prices and terms.

Such an intervention was proposed in February by the Canadian Radio-television and Telecommunications Commission (CRTC), in response to observations that despite a range of other access provisions being made — notably the regulated availability of roaming by Canada’s three national network operators — an MVNO market had not developed as expected. The market share and number of MVNOs in Canada has changed little under the roaming regulations.

Yet such regulation may
have negligible effect on patterns of competitive interaction.

First, the Canadian proposal appears to be supported by a finding that the market is not effectively competitive based primarily on supply-side structural artifacts: three national MNOs and “not enough” MVNOs. Yet by the criteria used by the FCC and New Zealand’s Commerce Commission, the Canadian market could already be effectively competitive. CRTC’s own data confirm wide availability of high-quality networks indicating considerable investment (99 percent of Canadians have access to LTE services, 92 percent to higher-quality LTE-Advanced), high subscription rates (90 percent of households), increasing usage, and falling prices (from 21 percent for plans with low data allowances in 2016 to 35 percent for plans with high data allowances in 2018).

Second, it is not
clear which market segments are not being well served by the existing MNOs and
MVNOs. A notable feature of the Canadian market (as with the US) is regional
MNO operators providing infrastructure-based competition and capable of
catering to market segments not well served by the national MNOs. If these
regional operators have already substantively addressed demand in market
segments that would otherwise be targeted by MVNOs, MVNO regulation would have
no noticeable effect on market performance — although it would increase the
cost of providing the same outcome.

If the intention of the regulation is to increase competitive pressure on the national MNOs, MVNO regulation is substantially misdirected. If there are no gaps left (quite likely, given the number of regional providers and the small scale of Canadian markets), entry will not occur as there is no business case for it. If entry does occur due to regulatory arbitrage options, it will increase competitive pressure disproportionately at the margins for the regional operators (and the national operators’ own proprietary MVNOs) rather than in national markets.

It therefore cannot be
discounted that the Canadian MVNO regulation proposal risks using a structural
sledgehammer to crack nuts that have already been substantively shelled.

Lessons from Canada

The pertinent lesson from Canada is that structural artifacts on the supply side of mobile markets offer only an incomplete picture of competitive interaction. The demand side (and in particular the identification of market segments not well served) is equally important when considering regulatory intervention. While these may not have been explicitly considered in the US and New Zealand decisions, by implication they have been, by way of the focus on outcomes for consumers and not supply-side structures.

Something, perhaps,
for which US consumers should be commending the FCC.

The post Mobile virtual network operators and competition in mobile markets: Lessons from Canada appeared first on American Enterprise Institute – AEI.