Competition in wholesale markets: Do MNOs compete to host MVNOs?

Telecommunications Policy 37 (2013) 1124–1141

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Competition in wholesale markets: Do MNOs compete to host MVNOs? Elisabet Garrido a,n, Jason Whalley b a Departamento de Dirección y Organización de Empresas, Facultad de Economía y Empresa, Universidad de Zaragoza, Gran Vía, 2 50005 Zaragoza, Spain b Department of Management Science, Strathclyde Business School, University of Strathclyde, Glasgow, UK

a r t i c l e in f o

abstract

Available online 13 September 2013

This paper extends previous research examining wholesale market shares of mobile network operators (MNOs). This study demonstrates that wholesale market concentration has decreased over time because of the increase of competition of MNOs for hosting mobile virtual network operators (MVNOs). However, differences in wholesale market shares between MNOs have not disappeared. We propose that those operators that are late entrants in a market and belong to an international group with a proactive attitude towards hosting virtual operators positively influences wholesale market shares of MNOs. The empirical analysis is based on a panel data from 2000 to 2010 corresponding to MNOs and virtual operators in five European countries with high development of the virtual mobile industry. By closely examining KPN we show how being an international mobile group specialising in the wholesale market across Europe has enabled it to exploit complementarities that exist between traditional and virtual businesses. & 2013 Elsevier Ltd. All rights reserved.

Keywords: MVNOs Wholesale market Late entrant MNOs' incentives KPN

1. Introduction Virtual operators have emerged in telecommunications markets over the course of the last decade. They have gained a foothold in many retail markets, especially in Europe. According to Wireless Intelligence Database (2011), 65% of mobile virtual network operators (MVNOs) operate in Western European countries, in part because this region is characterized by a higher degree of vertical disintegration, liberalization and segmentation of the telecommunication industry (Shin, 2008; Shin & Bartolacci, 2007). However, from Wireless Intelligence Database (2011) it can be seen that four European countries stand out as being the markets with the highest number of virtual operators in terms of their market share. These four countries are Germany, the United Kingdom, The Netherlands and Belgium, where virtual operators' market shares were above 10% in 2009 reaching, for example, 23% in the case of Germany (Ofcom, 2010). The literature to date regarding MVNOs has highlighted that virtual operators, while customers of mobile network operators (MNOs), also appear as competitors in the last stage of the value chain (Maitland, Bauer, & Westerveld, 2002; Peppard & Rylander, 2006). That MNOs host on their networks virtual operators, which are simultaneously customers and competitors, has inevitably attracted the attention of researchers. Previous studies have focused on wholesale price determination (Banerjee & Dippon, 2009; Kalmus & Wiethaus, 2010; Kim & Park, 2004; Song, 2010; Ulset, 2002), the role of regulators in encouraging the introduction of MVNOs as a means of increasing competition (Banerjee & Dippon, 2009; Kim & Seol, 2007; Maitland et al., 2002) and the determinants of MVNOs diffusion based on market structure (Shin, 2008; Shin &

n

Corresponding author. Tel.: +34 976 762131x844636. E-mail address: [email protected] (E. Garrido).

0308-5961/$ - see front matter & 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.telpol.2013.03.005

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Bartolacci, 2007). A more unusual approach can be found in Curwen and Whalley (2007), who examine the strategy of Tele2, a leading proponent of MVNOs to enter new geographical markets. These studies have tended to focus on virtual operators – their definition, diffusion, characterization, strategy and regulation – instead of the competitive behavior of MNOs in the wholesale market for hosting MVNOs. The study of wholesale concentration and its determinants has been overlooked in the literature. Moreover, most of the previous studies that have been undertaken adopt a largely theoretical perspective. Only a few studies include an empirical analysis, with these often focused on a single country (see, for example, Kim and Park (2004), Kim and Seol (2007) and Olla and Patel (2002)). Even when the analysis is cross-country analysis, the observations correspond to just one period (Shin & Bartolacci, 2007). With this in mind, the aim of this paper is to empirically analyze wholesale competition and the determinants of the differences in the wholesale market shares of MNOs. The contribution of this article is twofold. First, we analyze a topic that has received little attention previously in the literature, namely, the evolution and determinants of wholesale market shares of MNOs when they host virtual operators. After showing that the size of the wholesale market has increased and that wholesale market concentration has decreased over time, we explain persistent differences in the whole market share between MNOs. We posit that being a late entrant and/or being owned by an international group that has specialized in virtual as well as traditional business is positively related to the wholesale market share of MNOs. This is because hosting virtual operators allows the market power of early entrants to be counteracted, reducing the financial pressures on MNOs after 3G and 4G licensing costs and exploiting virtual business learning. Second, we include a cross-country empirical analysis based on a panel data covering 11 years. This allows us to contribute to previous studies because empirical crosscountry analyses are scarce in MVNOs literature. We illustrate the hypotheses of our study by drawing on data covering the mobile communications industry in five European countries from 2000 to 2010. We include the four countries that have been highlighted by previous industry reports to have the highest number of virtual operators—Belgium, Germany, The Netherlands and the United Kingdom (Jaspers, Hulsink and Theeuwes, 2007). Following Farmer and Pawsey (2005) we also include Spain as a control. The data refer to the number of virtual operators by country, the wholesale market shares of MNOs and the degree of wholesale market concentration. In order to further our analysis, we complement the regression analysis with a discussion of KPN, a mobile operator that has actively developed its wholesale operations. Not only has KPN hosted virtual operators in Belgium, Germany and The Netherlands, it has also acquired and created virtual operators in its home and host countries and in new countries, such as Spain and France, as a way to internationally expand. It has, however, avoided entering the United Kingdom, either physically or virtually. These different strategic choices in the countries under analysis add a unique dimension to our analysis. The remainder of this paper is organized as follows. The following section develops the literature review and the main hypotheses. The model, data and variable description and the main findings based on the regression analysis are presented in Section 3. Section 4 focuses on KPN. We finish the paper by discussing our main findings and the managerial and policy implications. 2. Literature review 2.1. Concept of mobile virtual network operators There is no single definition of MVNOs. Online the ITU defines an MVNOs as “an operator that offers mobile services but does not own its own radio frequency”,1 while the Federal Communications Commission (2009: 6200) in the United States refers to MVNOs as resellers which “purchase airtime from facilities-based providers and resell service to the public for profit”. OVUM (2000) argued that a MVNO is a carrier which provides customers with a mobile service, has an independent network code, issues independent SIM cards, directly operates a mobile communications switch including home location register and does not own its own bandwidth. National authorities have defined MVNOs in similar terms. In the United Kingdom, for example, Ofcom (2006: 53) stated that MVNOs “offer mobile telecoms services to customers by reselling wholesale minutes that they have purchased from an existing infrastructure owner”. Shin and Bartolacci (2007: 88) summarize the literature and describe a MVNO as “an organization that does not have an assignment of 3G spectrum, but is capable of providing public cellular services to end users by accessing radio networks of one or more 3G spectrum holders”. MVNOs have been classified by regulators, such as Ofcom and OPTA, as Service Provider (SP) MVNOs, Enhanced Service Provider (ESP) MVNOs and Full MVNOs depending on the type of assets that they own (Kim & Park, 2004). An SP MVNO provides mobile services by purchasing capacity from MNOs, without its telecommunication line equipment and its own SIM card. ESP MVNOs have their own service platform and telecommunication line facilities with their own brand (although without their own SIM card) and Full MVNOs use their own brands, infrastructure and SIM cards. The main difference is the degree of dependency of the MVNOs on the MNOs; this is higher in the case of SP MVNOs and lower in the case of Full MVNOs. This translates into a higher freedom for Full MVNOs to determine their pricing policies. In all cases, however, MVNOs have been established in the last stage of the mobile telecommunications value chain as MNOs' wholesale customers to sell mobile services in retail markets (Maitland et al., 2002). This implies that MVNOs' services “may 1

The online definition can be found at http://www.itu.int/osg/spu/ni/3G/resources/MVNO/index.html.

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sometimes be virtually indistinguishable from those provided by MNOs” (Banerjee & Dippon, 2009: 72). Given that this study tries to explain differences between MNOs in their wholesale market shares, we will consider MVNOs in a wider sense by including SP, ESP and Full virtual operators which offer mobile services to customers in the last stage of the telecommunications value chain under their own brand by purchasing airtime from MNOs.2 2.2. Previous studies The role of MVNOs in the value chain after the introduction of third-generation (3G) mobile technologies has been analyzed in previous studies. Maitland et al. (2002) described the evolution of the European mobile market and the introduction of MVNOs as new organizations that are both customers of and competitors with MNOs in the last stage of the telecommunications value chain. Peppard and Rylander (2006) use the concept of value network instead of value chain in their strategic analysis of mobile industry. They determine that the introduction of MVNOs has resulted in a higher number of companies to deliver services and content, which, in turn, has increased the usage of mobile devices by users. In this way, they suggest that different firms in the telecommunications network, such as MNOs and MVNOs, co-create value. Jointly with the analysis of the competitive consequences of the introduction of MVNOs in the market, which is inconclusive and contradictory (Kalmus & Wiethaus, 2010), previous studies have also analyzed the determinants of MVNOs diffusion. Shin and Bartolacci (2007) shows that horizontal market structures – such as those in the United States and European countries – encourage the diffusion of virtual operations in the last stage of the value chain, unlike the vertical that occurs, for instance, in Asian countries where vertically integrated firms tend to control most activities of the telecom value chain. This increases the divisibility of the value chain and favours the introduction of MVNOs after the advent of 3G. Shin (2008) extends previous work to other regions such as Oceania and Latin America and finds that other factors like the degree of market competition, concentration, segmentation and liberalization, all play an important role in the diffusion of MVNOs. A key factor contributing to the diffusion of MVNOs is the acceptance of virtual operators by MNOs. Kalmus and Wiethaus (2010) extend Brito and Pereira (2008) and Ordover and Shaffer (2007) by assuming that MNOs will host MVNOs only when virtual operators do not represent a competitive constraint on MNOs wealth creation. This will occur when there is product differentiation between the services offered by MVNOs and MNOs and, thus, retail prices remain stable. Banerjee and Dippon (2009) developed an optimization model that determines the circumstances under which MNOs will create voluntary relationships with MVNOs. They assume the existence of product differentiation, which, in turn, makes MVNOs hosting by MNOs mutually profitable. The importance for MVNOs to specialize in added-value differentiated services instead of pricing-based strategies has been analyzed by Ulset (2002) from a transaction cost perspective. He concludes that MVNOs offering complex value-added services might not be competitively sustainable as separate firms from MNOs given the high transaction costs in economies with asymmetric information and incomplete contracts. A more common topic of discussion has been the role of regulator in encouraging virtual operations as a way to improve market competition when MNOs lack incentives to host MVNOs. Banerjee and Dippon (2009) found that the regulator should only mandate access by MVNOs when MNOs engage in discriminatory behavior or abuse their market power. In other cases, the role of regulator should be limited to encouraging the voluntary formation of MNOs–MVNOs relationships. Song (2010) suggests that under efficiency conditions for MVNOs, the intervention of regulator is not necessary because MNOs are going to host virtual operators voluntarily. Kim and Seol (2007) study the anticipated economics effects from the introduction of MVNOs depending on the type of virtual operators and regulation in Korea. In contrast to the previous two studies, Kim and Seol (2007) found that an active policy by the regulator of allowing access and regulation wholesale prices is generally desirable when it comes to generating consumer surplus. The consumer perceptions of MVNOs services have been analyzed by Shin (2010), which uses the unified theory of acceptance and the use of technology in the analysis. He demonstrates that factors such as relative advantage, social influence, the perceived quality and the easiness of use, all positively influence the intention of consumers to use of MVNOs. In contrast, switching costs negatively influence the willingness of consumers to use MVNOs services. In summary: previous studies have analyzed, especially from a theoretical perspective, the determinants of MVNOs diffusion, their focus in the last stage of the value chain, their relationship with MNOs and the role of regulators in encouraging MVNOs diffusion. However, there has been little attention directed towards competition in the wholesale market between MNOs to host MVNOs and the determinants of differences in wholesale market shares between MNOs. 2.3. Evolution in the number of MVNOs and wholesale market concentration Although Ulset (2002) determined that, from the transaction cost perspective, the number of price-based MVNOs would decrease and that value-based MVNOs would tend to join with MNOs to survive, evidence shows that the number of MVNOs has increased in the market (Kalmus & Wiethaus, 2010). One explanation for this is that the regulator has played an important role in encouraging the introduction of MVNOs as a remedy to unsatisfactory market performance (Kalmus & 2 This approach is used by Wireless Intelligence Database and other industry webpages, such as Telecompaper and Prepaid MVNO, which consider virtual operators in a broad sense.

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Wiethaus, 2010). For this reason, European Union authorities as well as national ones as diverse as Denmark, Japan, Ireland, Sweden, Hong Kong and Korea, have encouraged MVNOs introduction (Kim & Seol, 2007). Secondly, the advantages associated with hosting can overcome the disadvantages. The incentives of MNOs to host virtual operators have increased. While the introduction of MVNOs in the last stage of the value chain can increase the number of competitors and result in a price war,3 MVNOs also offer an alternative sales channel for excess MNOs capacity. It can be advantageous for MNOs for two reasons. The first advantage is that wholesale revenues can reduce capital pressures arising from the acquisition of 3G licenses by enhancing the use of spectrum (Kuo & Yu, 2006). The second advantage is that the wholesale revenues can be higher than the loss of customers when MVNOs focus on market segments which are not the main target market of MNOs, for example, young or old people, professional sectors or brand followers (Banerjee & Dippon, 2009; Maitland et al., 2002). For instance, the target market of Blyk in the United Kingdom is 16- to 24years olds through offering cheap services in exchange for advertisement. Lebara, in contrast, focuses on the immigrant population in countries such as the United Kingdom, Belgium, Spain and Germany. Thus, a clearly-defined market, which does not coincide with the target market of the MNOs, has been considered as one of the key elements for successful MVNOs (Informa Telecoms & Media, 2010). In summary as Shin and Bartolacci (2007: 87) point out, “operators increasingly view MVNOs as efficient indirect sales channels that can decrease the focus on price because of fierce brand loyalty, lower subscriber acquisition costs by tapping existing customer bases and increase average revenue per user via differentiated content and services”. Virtual operators have become an alternative distribution channel that allows MNOs to reinforce their financial situation (Jaspers, Hulsink, & Theeuwes, 2007), especially in those cases where MVNOs target niche markets and possess well-known brands that avoid price-based competition. For instance, O2 in the United Kingdom established an agreement with Tesco in 2005 to launch a 50/50 joint venture under Tesco brand. Taken together, these points engender the following hypothesis: H1a. MVNOs have increased their presence in markets over time. The increase in the number of virtual operators also has consequences for the wholesale competition between MNOs for hosting MVNOs. Contrary to Banerjee and Dippon (2009: 74), who found that “competition at the wholesale level has not yet emerged or matured”, we consider that, as a consequence of the increase in the number of virtual operators, wholesale competition has increased and it has had a consequent reduction of wholesale market concentration. MNOs have found that hosting MVNOs offers alternative sales channels, reduces financial pressures and, in many cases, does not imply a threat to their subscriber base (Informa Telecoms & Media 2009). Even if the introduction of virtual operators into a market could result in a reduction of retail prices, those MNOs which have not rented their networks in markets with virtual operators have to bear a greater loss, given both a reduction of their customer base and a lack of MVNOs revenues (Informa Telecoms & Media 2004). Since, in the end, MVNOs do not represent a threat as great as was initially perceived, an increasing number of MNOs have sought to sign MVNOs agreements. This has meant a reduction of wholesale market concentration in terms of the number of virtual operators hosted by each MNOs network. Thus H1b. The degree of wholesale market concentration has decreased over time. 2.4. Determining the differences in wholesale market shares between network operators The reduction in wholesale market concentration does not mean that all MNOs have a positive stance towards virtual operators. For instance, Vodafone and Telefónica have not been too positively inclined towards virtual operators, especially in their home markets. In contrast, France Télécom and KPN have actively sought to host virtual operators in both their home and other markets. We consider that differences in wholesale market shares between MNOs can be explained by two key reasons. Firstly, we posit that hosting MVNOs has been considered as a late entrants' strategy to counteract the market power of early entrants. Jaspers et al. (2007: 214f) considers that “the benefit of virtual operators as wholesale customers is most significant for operators with small market shares and large debts”. Given that the mobile industry is a clear example of market with network effects, first mover advantages have been identified by the literature (Dewenter, 2007; Gomez & Maicas, 2011). Early entrants have been able to achieve early market shares, resulting in a higher market share and performance in later periods because of the inertia found in network industries (Farrell & Klemperer, 2007). Gomez and Maicas (2011) quantify average market share and performance by entry order and show that the first and second entrants have clear advantages over later entrants in terms of both market share and performance. The likelihood of later entrants overcoming the position of early market entrants is reduced given the existence of network effects that result in lower market share and performance. Thus, the financial pressure that MNOs have suffered a consequence of acquiring 3G licenses is higher for late entrants. For instance, in The Netherlands only KPN and Vodafone – the first and second entrants – were able to launch UTMS services immediately after acquiring their licenses, whereas other GSM entrants that also had acquired UMTS licenses had to wait for their financial situation to improve before launching their own 3G services (Jaspers et al., 2007). 3

This occurred in Denmark, a market that Orange ultimately decided to leave to avoid price competition (Strand Consult, 2012).

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Given the financial pressure and the customer base disadvantage due to network effects inertia, hosting virtual operators has become a strategy adopted by late entrants to counteract the market power of early movers. According to Jaspers et al. (2007), late entrants as small operators “typically have plenty of spare network capacity and run a limited risk of cannibalizing their own customer base”. Being a late entrant can result in a higher incentive to host MVNOs as a way to increase both their customer base and financial revenues from wholesale customers. For example, KPN in Belgium is the third entrant and has taken an active role in hosting virtual operators. On June 2011, KPN hosted 68.3% of all virtual operators in Belgium on its network. On September 2011 KPN obtained for the first time a higher market share than the second entrant, Mobistar (Wireless Intelligence, 2012). Hence H2a. Being late entrant in a market is positively related to the wholesale market share of the network operator. We consider a second element that can determine the positive attitude of MNOs towards virtual operators: the existence of an international strategy based on exploiting wholesale advantages and which confers MNOs with a specialized knowledge of virtual businesses. In European countries, most national mobile operators are owned by international groups such as France Télécom, Vodafone, Telefónica, Deutsche Telekom and KPN. It can be observed that, as in the case of KPN, some international groups have specialised in negotiating agreements with virtual operators in different countries, including, on occasion, their home market. Other groups are more conservative in hosting virtual operators, especially in home countries, such as Telefónica and Deutsche Telekom. In other words, these operators have not signed hosting agreements in their home markets. International specialization on wholesale customers can have positive implications for MNOs because they accumulate greater knowledge about the various types of virtual operators, their competitive consequences and a better understanding of their requirements. These insights enable them to better negotiate individual wholesale agreements with MVNOs and negotiate cross-country agreements to host the same MVNO in different countries in which the international group operates. Thus, the existence of an international strategy specialising in the virtual mobile market by some international groups can be a determinant of wholesale market share. This provides the following hypothesis: H2b. Being part of an international group specialising in the virtual mobile market is positively related to the wholesale market share of the network operator. 3. Methodology 3.1. Model The empirical part of this paper is based on a regression analysis that will allow us to confirm or reject the aforementioned hypotheses. This will then be followed by an in-depth analysis of KPN to enable us to understand the initiatives some MNOs have taken sought to exploit the introduction and growth of virtual operators. In order to test hypotheses H1a and H1b we have sought to ascertain the evolution in the number of virtual operators over time in the countries under study, as well as the degree of wholesale market concentration. The construction of both variables is explained below. For the empirical analysis of hypotheses H2a and H2b, we develop an econometric model to describe and empirically examine the influence of being the late MNOs in a market and the existence of an international strategy that encourages MNOs to rent their network infrastructure to virtual operators. In that sense, we model the wholesale market share of firm i (competing in market k) in period t (WMSikt) as a function of the entry of late entrant (LATEik) and the international strategy (ISikt). Since our model is tested with data from more than one country, we have included a control for additional sources of variation of the dependent variable with origin in country characteristics (COUNTRYik). Finally, an additional control – the existence of a merger (MERGERikt) – has been included. This model is outlined below in Eq. (3.1) as WMSikt ¼ β0 þ β1 LATEik þ β2 ISikt þ β3 COUNTRYik þ β4 MERGERikt

ð3:1Þ

3.2. Data and variables In order to test our hypotheses, we draw on data covering all MNOs and most virtual operators in five European countries: Belgium, Germany, The Netherlands, Spain and the United Kingdom. Our data comes from multiple sources. Wireless Intelligence Database (2011) provides information about MNOs along multiple dimensions such as launch date, ownership by international group and the date of any merger that may have happened. Data referring to the number of virtual operators, the host network and the launch/close date have been collected from multiple sources. The main source is Wireless Intelligence Database (2011), which has been complemented by sector information available in sector analysis webpages,4 virtual operator webpages and various press releases. The period under analysis is between 2000 (or from the first point when the virtual operator appeared in the market if it entered at a later date) and the last (fourth) quarter of 2010. 4

Here, two key sources that have been used are Telecompaper (www.telecompaper.com) and Prepaid MVNO (www.prepaidmvno.com/).

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Table 1 Number of virtual operators. Country

2006a

2010b

Belgium Denmark Finland France Germany Ireland Italy The Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom

29 14 10 13 32 3 0 37 12 3 3 23 5 24

35 58 9 42 67 3 15 56 25 8 37 14 24 47

a

Source: Jaspers, Hulsink and Theeuwes (2007), referred to Takashimobile.com (January, 2006). Source: Wireless Intelligence Database (2011) with own correction by Belgium, Germany, Netherlands, Spain and United Kingdom. b

This large time period is important because it ensures that our sample does not suffer from survival bias for the period under analysis.

3.2.1. Markets under analysis Since the aim of the paper is to better understand the reaction of MNOs to the introduction of virtual operators in their markets, we will focus on four European markets that enjoy a series of common characteristics, such as Belgium, Germany, The Netherlands and the United Kingdom. Firstly, by considering the number of virtual operators by country (Table 1), it can be observed that in 2006 and 2010 these four countries were markets with a high number of virtual operators. This means that the virtual mobile business in these markets have stabilised with the consequence that we are better positioned to develop our analysis. We have included an additional country, Spain, because it has been considered as a control market in some industry reports – see, for example, Farmer and Pawsey (2005) – due to the late development of its virtual mobile industry in contrast to the other four markets. Moreover, since one of the aims of this paper is to highlight differences in the wholesale market shares depending on the order of entry and the implementation of an international strategy, the selection of these five markets will allow us to analyze MNOs which belong to the same international groups but which have entered in a different order in each country. These differences are evident from Table 2, which classifies MNOs by the order of market entry in each of the five markets under investigation. It is interesting to observe in Table 2 that KPN is unusual in being the only MNO that acts as a MVNO in a market – Spain – where it does not also own a network. Given the different strategies relating to virtual operations that appear to be evident in these markets, they will be further explored in the next section of the paper.

3.2.2. Number of virtual operators As argued in Section 2, there are different classifications of virtual operators. Here, taking into consideration the consumers' perspective, we consider a virtual operator to be those “organizations which offer mobile telecoms services to customers by reselling wholesale minutes that they have purchased from an existing infrastructure owner” (Ofcom, 2006: 76) and whose services are “virtually indistinguishable from those provided by MNOs” (Banerjee & Dippon, 2009: 72). For this reason, when calculating the number of virtual operators by country we have included not only MVNO in the strict sense, but also ESP and SP that offer mobile services to consumers. We have also included those brands which are wholly owned by MNOs but which can be regarded as being independent virtual operators from the consumer's perspective. In order to determine the number of virtual operators for each period of time (a quarter of a year), information pertaining to the launch and, in some cases, closure (exit) date has been collected from multiple sources specialising in virtual operators as outlined in the sample description above. The information has been complemented with corporate reports, webpages and press releases from a variety of sources. In each case, it has been cross-checked against corporate webpages to identify active virtual operators and the content of the mobile services that they offer. Those virtual operators focusing on M2M5 have been removed from the sample, as no clear description is available. Also excluded are those virtual operators that have obtained a license or made an agreement with an MNOs to operate but have not yet launched their services. 5 This type of operator has been removed from the study because information relating to the launch date is usually unavailable, and the services provided is different to the traditional wireless communications requirements of businesses and individuals.

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Table 2 Type of entrant by country and international group.

Belgium Germany Netherlands Spain United Kingdom

Deutsche Telekom

France Telecom

KPN

Telefónica

Vodafone

– 1 5 – 2

2 – 4 3 3

3 2 1 (MVNO) –

– 3 – 1 1

– 1 2 2 1

Given the difficulty in finding data pertaining to virtual operators, in particular launch and closure (exit) dates, the final sample of the study considers 82.35% of identified virtual operators in Belgium, 81.42% in Germany, 83% in The Netherlands, 95.9% in Spain and 80.9% in the United Kingdom. 3.2.3. Wholesale market shares and the degree of wholesale market concentration For every MNOs in each country we have calculated the number of hosted virtual operators on its network, this is, the number of wholesale customers by MNO. Each virtual operator has been allocated to a MNOs in accordance with Wireless Intelligence Database (2011). This data has been complemented by other sources such as specialised websites. In those cases where a virtual operator is hosted in two or more networks the virtual operator has been added to the number of hosted virtual operators for each MNOs.6 The next step was to calculate the percentage of hosted virtual operators by each MNOs in the market. Through this approach the wholesale market share for each MNOs for each time period has been obtained. Although other alternative measures of wholesale market shares exist, such as those volume-based measures, we have chosen the percentage of hosted virtual operators by each MNOs in the market as a kind of subscriber-based measure. This measure focuses on the role of MVNOs as customers instead of competitors of MNOs, and is accordingly analogous to subscriber-based measures of market share in retail markets. In order to measure the degree of wholesale market concentration, we have used previous wholesale market shares to calculate the Herfindahl–Hirschman Index (HHI) for each market and period of time.7 The analysis of this variable will allow us to observe the evolution in the wholesale market competition between MNOs to host virtual operators in our five European countries. 3.2.4. Late entrant We have identified the entries of operators during the 1990s in each of the five countries under analysis (Fig. 1) during the implementation of the GSM technology given that governments had not previously allowed the entry of new competitors jointly to incumbents firms. According to Gomez and Maicas (2011), first and second movers take on average 42% and 30% of retail market share respectively, while the third entrants achieve only 17%. The rest of the market share is shared between the later followers, if any, which are present in the market. These market share differences are based on the pioneer advantages which are achieved during the elapsed time among the entry of first and second movers and the third entrant. Thus, we have measured the late entrant through a dummy which takes the value 1 if the MNO is the third to enter the market and 0 if otherwise. As can be observed in Fig. 1, the elapsed time between the entry of the late entrant and the early movers is higher that the elapsed time among early movers' entries. 3.2.5. International strategy The use of virtual businesses as part of a strategy adopted by international groups has been measured as a proxy that takes into consideration the ownership of the national MNOs by multinational telecommunications company. We have created five dummies corresponding to the five international groups which operate in two or more of the selected countries under study, namely, Deutsche Telecom, France Télécom, KPN, Telefónica and Vodafone. These dummies take the value 1 when the ownership of the national operator is held by the international group, and 0 if otherwise. It is worth noting that there are four operators which have the value 0: Belgacom in Belgium, Telfort in The Netherlands, Yoigo (Telia Sonera) in Spain and 3 (Hutchison) in United Kingdom. The value of this dummy changes throughout the period under the observation period as the acquisition of some national operators took place after 2000. 3.2.6. Control variables Two control variables are included in the analysis. The first one refers to country characteristics. Five dummies have been created for each of the five countries under study. They take the value 1 when the MNO operates in that country and 0 if it does not. In the regression analysis, Spain has been used as a control dummy. 6 7

For example, in the United Kingdom, Lycamobile uses the networks of Everything Everywhere and O2. We use a HHI of 0–1, although it has been also measured between 0 and 10,000 in, for instance, the United States by the Department of Justice.

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Fig. 1. Late entrant by country.

The second control variable refers to the merger of MNOs within the same country. Changes in the degree of wholesale market concentration and in the wholesale market shares from one period to the next can be due the merger of two MNOs in the market. As a consequence, a dummy has been introduced that takes the value 1 if during that period the MNOs has merged with another company in the same market and 0 if not.

3.3. Descriptive statistics Table 3 shows the descriptive statistics. As can be observed, any independent and control variables shows a high correlation with other variables. It avoids multicolineality problems that can make variables non-significant. The statistics shows that, on average, the wholesale market share of a MNOs is 29%. If we observe the correlations matrix, the wholesale market share is positively related to being the late entrant in the market and being part of the KPN group. However, being part of Telefónica and France Télécom has a negative correlation with the percentage of national virtual operators hosted on the network of the MNOs. Being part of Vodafone and Deutsche Telecom group has a negative but not significant correlation with wholesale market share.

3.4. Analysis 3.4.1. Evolution in the number of virtual operators If we focus on the evolution of the number of virtual operators, there has been a remarkable growth between 2000 and 2010. This is shown in Table 4 and Fig. 2 and supports Hypothesis 1a. Thus, MVNOs have increased their presence in these five European markets over time. As it can be observed, Germany is the country with most virtual operators and has experienced a faster growth in terms of hosted virtual operators. Germany is followed as the country with the most virtual operators by The Netherlands and Belgium. This rank order was established in 2007. Previously, The Netherlands was the country with the most virtual operators in Europe, followed by Belgium. We suggest that the high number of virtual operators in Germany is related to the development of specialised Mobile Virtual Network Enablers (MVNE), such as Drillisch Telecom, which have connected MNOs and MVNOs to facilitate the access of virtual operators to physical networks. Shin and Bartolacci (2007) argue that MVNEs are a signal of horizontal market structure that promotes MVNOs diffusion. The evolution of virtual operators in Spain is particularly interesting for two reasons. Firstly, there was a late development of these firms in the country, with virtual operators launching from 2006 onwards. The principle explanation for this relatively late launch can be found in the regulation of virtual operators in Spain. A national resolution of 2002 allowed the provision of mobile services by virtual operators.8 However, MNOs in Spain were reluctant to host operators on their networks since they regarded virtual operators as competitors. Finally, in February 2006, the regulator ordered that the MNOs with market power – Telefónica, Vodafone and Orange – to open up their networks to virtual operators that had obtained a license from the government. As a consequence, virtual operators began to operate in Spain from 2006 onwards. 8

ORDEN CTE/601/2002 introduced a new type of license that allowed the provision of mobile services to the public (mobile virtual).

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Table 3 Descriptive Statistics.

5. 6. 7. 8. 9. 10. 11. 12. n

Obs. Mean Std. dev.

Min Max 1

WMS Belgium Netherlands United Kingdom Germany Merger Late entrant KPN Telefónica Vodafone Deustche Telecom France Telecom

739 739 739 739

0.29 0.15 0.21 0.29

0.26 0.36 0.40 0.45

0 0 0 0

1 1 1 1

– 0.06n – −0.07n −0.22n – −0.12n −0.27n −0.32n

739 739 739 739 739 739 739

0.25 0.00 0.21 0.16 0.12 0.20 0.18

0.43 0.06 0.41 0.37 0.32 0.40 0.38

0 0 0 0 0 0 0

1 1 1 1 1 1 1

0.18n 0.03 0.28n 0.42n −0.09n −0.00 −0.01

1

n

739

0.17

0.37

0

2

−0.20

3

−0.24n −0.29n −0.03 0.07n 0.12n −0.14n 0.19n 0.12n −0.15n −0.18n −0.21n 0.06n −0.20n 0.10n n

0.19

4

5

6

7

8

9

10

−0.37n – 0.01 −0.04 – −0.03 0.04 −0.03 – n n −0.28 0.13 0.03 0.11n – −0.03 0.23n −0.02 0.27n −0.16n – 0.02 0.06n −0.03 −0.26n −0.22n −0.18n – 0.07n 0.11n 0.08n −0.24n −0.20n −0.17n −0.23n

−0.02

n

0.07

−0.26

n

0.03

0.28

n

n

−0.20

−0.16

n

po 0.10.

Table 4 Evolution of the number of Virtual Operators (2000–2010). (OLS) Number of virtual operators

(FE) Number of virtual operators

Time (quarterly)

1.44nnn (0.101)

1.44nnn (0.299)

Belgium

10.46nnn (2.460)

Netherlands

15.07nnn (2.432)

United Kingdom

5.52n (2.884)

Germany

22.38nnn (4.900)

Constant

−23.91nnn (3.506) 229

N

Standard errors in parentheses. n p o0.10;

140 120 100 80 60 40 20 0

nn

p o 0.05;

11

12

–

229 nnn

p o 0.01.

Belgium Spain Germany United Kingdom Netherlands

2000-1 2000-3 2001-1 2001-3 2002-1 2002-3 2003-1 2003-3 2004-1 2004-3 2005-1 2005-3 2006-1 2006-3 2007-1 2007-3 2008-1 2008-3 2009-1 2009-3 2010-1 2010-3

1. 2. 3. 4.

Variable

Fig. 2. Evolution of the number of Virtual Operators (2000–2010).

−0.23

n

– −0.16n –

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Table 5 Evolution of the number of hosted virtual operators by country and MNO (2000–2010). Country

Operator

2000

Belgium

Base (KPN) Belgacom Mobistar (FT) Total Belgium

0 0 0 0

0 0 0 0

1 0 0 1

Germany

E-Plus (KPN) O2 (Telefonica) T-Mobile (DT) Vodafone Total Germany

1 0 2 1 2

1 0 2 1 2

Netherlands

Telfort KPN Orange (FT) T-Mobile (DT) Vodafone Total Netherlands

0 0 0 0 0 0

Spain

Orange (FT) Telefonica Vodafone Yoigo (TS) Total Spain

United Kingdom

3 (Hutchison) O2 (Telefonica) Orange (FT) T-Mobile (DT) Everything Everywhere Vodafone Total United Kingdom

Total

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

3 0 0 3

9 1 0 10

12 2 1 15

25 4 4 33

25 10 6 41

24 11 6 41

27 9 6 42

29 9 6 44

1 0 2 1 2

1 0 2 1 2

2 1 2 3 6

4 8 6 5 17

4 17 8 8 31

7 26 11 12 48

9 30 15 19 64

11 39 21 28 86

21 47 29 38 119

0 0 0 0 0 0

2 0 0 0 0 2

2 2 0 0 0 4

8 4 1 0 1 13

23 2 0 1 25

27 2 0 2 30

34

41

38

42

3 3 39

5 6 50

7 8 51

12 11 62

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0 0

2 0 0 0 2

3 0 6 0 9

14 0 9 0 23

18 5 14 0 37

19 7 14 0 40

0

0

0

0

0 0 4 1 1

0 5 1 3

0 5 1 3

1 5 3 3

2 6 6 5

6 7 5 6

9 7

4 8 42

5 12 78

5 13 117

9 20 167

8 24 216

9 30 264

2 1 1

3 1 1

3 1 1

0 3 1 1

1 4 9

1 5 10

1 5 13

1 5 17

12 15 40 327

Secondly, it can be observed that during the two first years (2006 and 2007) nine virtual operators were created and hosted on the networks of Orange and Vodafone. However, in 2008 the number of virtual operators increased to 23 and, in 2009, Telefónica also started to host virtual operators on its network (Table 5). According to Table 1, as of December of 2010, Spain was the sixth largest country in terms of number of virtual operators active in the market. This rapid growth in the number of virtual operations can also be due to an improvement in the regulation of interconnection charges. Initially, the regulator allowed the negotiation of prices between MNOs and virtual operators, with those termination rates approved in September 2006 as the reference point.9 Due to this, Orange started to host most of the virtual operators, followed by Vodafone. However, a resolution in December 200810 found that interconnection charges were not based on cost considerations and determined that those MNOs with market power – Telefónica, Vodafone and Orange – should adjust their charge connections to be in line with costs. Finally, in July 2009, the regulator established the interconnection charges of each of the MNOs.11 As a result of the improvement in the setting of prices and the obligation of MNOs to open their networks, the number of virtual operators in Spain has increased and, as we shall see in the following subsection, the degree of wholesale market concentration has also decreased. 3.4.2. Market concentration With regard to the degree of wholesale market concentration, Table 6 shows that the time trend variable has a negative effect on the degree of market concentration ðβ ¼ −0:01; p o 0:01Þ. This means that, on average, the HHI has suffered a variation of −0,45 during the period covered by the study. For instance, in 2002 the average HHI was 0.83 (that is, the wholesale market was highly concentrated) whereas at the end of 2010 the average was 0.41. In other words, wholesale market concentration has halved in less than 10 years. This evidence of the substantial reduction in wholesale market concentration in our five European countries supports Hypothesis 1b. With the increase in the number of virtual operators and the reduction in the wholesale market concentration in these markets, it would be expected that this would have some impact on MNO margins and profits. However, we cannot 9 The reference termination rates can be found in a Resolution of 28 September 2006 in the framework of dossiers AEM 2006/724, AEM 2006/725 and AEM 2006/726. 10 This resolution was based on the European Directive of 2002 which established the possibility of impose control over termination charges to virtual operators when the operators with market power determined prices not based in cost-considerations. 11 AEM 2009/967 (29 July 2009).

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Table 6 Evolution of the concentration VO. (OLS) Degree of wholesale market concentration

(GLS) Degree of wholesale market concentration

Time (quarter)

−0.01nnn (0.001)

−0.01nnn (0.003)

Merger

0.13nnn (0.037)

0.13nnn (0.044)

Belgium

0.11nnn (0.039)

Germany

−0.09nnn (0.030)

Netherlands

0.09n (0.045)

United Kingdom

−0.22nnn (0.032)

Constant

0.81nnn (0.052) 170

N Standard errors in parentheses. n p o 0.10;

nn

0.79nnn (0.131) 170

p o0.05;

nnn

p o0.01.

Fig. 3. Evolution of the level of concentration of VO.

demonstrate this issue because of the lack of data availability. There is some anecdotal evidence that shows retail prices have declined after the introduction of MVNOs in countries such as Germany (Pawsey, 2011). Other reports suggest that MNOs are improving their performance by hosting MVNOs through reducing their subscriber acquisition costs and the slight reduction of the average revenue per user (Nereo, 2010). Thus, evidence about the effect of increasing wholesale competition is not conclusive in terms of its impact on prices and performance of MNOs and constitutes an interesting issue to analyze in a further research line. Table 6 also shows that a merger of two MNOs in a market increases market concentration and, more interestingly, the inclusion of dummy variables for each country under analysis allows observing differences between markets in their average level of wholesale market concentration. These differences can be explained because of regulatory and competitive conditions that are specific of each market and that influence wholesale market concentration. As can be observed, by taking Spain as the control country, wholesale market concentration is higher in Belgium (β ¼ 0:11), followed by The Netherlands ðβ ¼ 0:09Þ, Spain (reference country), Germany (β ¼ −0:09) and the United Kingdom ðβ ¼ −0:22Þ. This order in terms of average level of market concentration can be also observed in Fig. 3. In this figure we can see a negative trend of wholesale market concentration in all countries and the relative position of these five markets in terms of the level of wholesale competition. One possible explanation for these differences between countries is the active role that KPN has taken in hosting virtual operators in both Belgium and The Netherlands, countries that also has a lower number of competing MNOs that in Germany and the United Kingdom. 3.4.3. The determinants of wholesale market shares Although market concentration has tended to decrease in the five European countries under analysis, there are market share differences (sometimes quite considerable) between MNOs. One possible explanation of the market shares differences

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1135

Table 7 Determinants of wholesale market shares. M.1 (GLS) WMS

M.2 (GLS) WMS

M.3 (GLS) WMS

Belgium

0.0833 (0.219)

0.0628 (0.144)

−0.0818 (0.0917)

Germany

0.126 (0.125)

0.126 (0.128)

0.0434 (0.112)

Netherlands

0.0408 (0.171)

0.0536 (0.133)

−0.0676 (0.112)

United Kingdom

−0.0139 (0.124)

−0.00155 (0.117)

−0.0475 (0.130)

Merger

0.155nn (0.0783)

0.156nn (0.0785)

0.160n (0.0857)

0.246nn (0.116)

0.272nnn (0.0949)

Late entrant KPN

0.259nn (0.116)

Telefónica

−0.237nnn (0.00644)

Vodafone

0.00677 (0.0767)

Deustche Telecom

0.0516 (0.115)

France Telecom

−0.0186 (0.0706)

Constant N F-Test vs. M.1 F-Test vs. M.2

0.250nn (0.112) 739

0.188nn (0.0925) 739 4.53nn

0.244nn (0.0955) 739 2188.11nnn 2188.09nnn

Standard errors in parentheses. n p o 0.10. nn p o 0.05. nnn p o0.01.

is postulated in H2a, namely, that the order of entry has an influence on the willingness of MNOs to host virtual operators. With this in mind, we argue that the late entrant would have used virtual operators as an instrument to counteract the market power of the previous duopolistic companies. As it can be observed from Table 7, being a late entrant implies a higher wholesale market share. H2a is, therefore, supported. We also hypothesized that the willingness of MNOs to host virtual operators could be a consequence of the wider strategy adopted by its parent company. In that sense, we postulated that some international groups could specialize in using virtual businesses in order to achieve experience and scale economies. As it can be observed, those MNOs that are part of the KPN group have a higher wholesale market share than is the case for other operators. In contrast, being part of the Telefónica group means a lower wholesale market share. We can see that, with the exception of Germany, Telefónica has a conservative attitude towards virtual operators, especially in its home market, Spain. Given that Telefónica has focused on offering high quality services, one plausible explanation for this conservative stance in most markets is that hosting virtual operators in its network could negatively influence its services. From the coefficients of the other international groups is not possible to draw any conclusion since their coefficients are not significant. Due to this fact, Hypothesis 2b – the influence of the international strategy in the willingness to host virtual operators – is supported for one of the five international groups included in this study, that is, KPN. This result makes KPN an interesting case to be analyzed in the following section. 4. KPN 4.1. Background KPN was the state-owned provider of fixed telephony and the first operator offering mobile services under the analog system in The Netherlands (van Kranenburg & Hagedoorn, 2008). This monopoly, however, ended with the award of mobile licenses in 1995 and the liberalization of the fixed telecommunication market in 1996. New competitors entered the Dutch market, such as Telfort and EnerTel in fixed telephony and Libertel – which was acquired outright by Vodafone in 1998 – in

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70.0%

35

60.0%

30

50.0%

25

40.0%

20

30.0%

15

20.0%

10

10.0%

5

0.0%

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Number VO

Proximus (Belgacom)

Mobistar (FT)

Base (KPN)

Fig. 4. Number of virtual operators hosted by KPN and evolution in market shares in Belgium. Source: Wireless Intelligence (2012).

mobile telephony (Rood & te Velde, 2003). Both KPN and Vodafone became the first MNOs using GSM after obtaining free licenses, whereas later entrants – Telfort (which was acquired in 2005 by KPN), Dutchtone (currently Orange) and Ben (currently T-Mobile) – had to purchase their GSM licenses in 1998 (Jaspers et al., 2007). This meant that from 1994 to 1998 KPN and Vodafone were able to acquire market share by exploiting their first-mover advantages derived from the existence of network effects (Gomez & Maicas, 2011; Lieberman & Montgomery, 1988). This strong position resulted in their ability to swiftly introduce UMTS services in The Netherlands after the acquisition of costly 3G licenses in 2000. Later entrants, whose financial situation had been compromised through the acquisition of 3G licenses, had to delay their introduction of UMTS services (Jaspers et al., 2007). As it has been explained, the introduction of 3G allowed a fragmentation of mobile services that favoured the diffusion of virtual operators (Shin & Bartolacci, 2007). In The Netherlands, KPN – which was focused on post-paid services – started to host SP MVNOs because this type of MVNOs was more dependent of MNOs, with less possibilities of offering new services (Jaspers et al., 2007). However, Telfort – the third entrant focusing on prepaid services – saw Full MVNOs as an opportunity to counteract the market power of earlier entrants. At the end of 2004 (Table 5) Telfort hosted 8 virtual operators, twice the number of MVNOs hosted by KPN. KPN decided to take a leading position in the wholesale market by acquiring Telfort in 2005. Through this acquisition, KPN became the main provider of mobile services to end users in The Netherlands, with a market share of 49.57% at the end of 2005. After the acquisition of Telfort, KPN decided to maintain the Telfort brand so to target low-cost consumers and take advantage of the brand value of the operator. In contrast, to the attitude of Telefónica in Spain, Vodafone in the United Kingdom or Deutsche Telekom in Germany, KPN adopted a strategic decision of actively hosting virtual operators in its home market. As of June 2011, KPN was the leading MNO in the Dutch market with a 49.43% of market share, followed by Vodafone (26.28%) and T-Mobile (24.64%). Apart from its strong position in the Dutch market, the arrival of UMTS brought about the opportunity for KPN to expand into other countries (van Kranenburg and Hageddorn, 2008). In Belgium, KPN created a 50/50 joint venture with France Télécom – KPN Orange (third entrant) – that became KPN in 2001 after the acquisition of outright control. In 2002, KPN expanded to Germany by acquiring E-Plus (third entrant). Although KPN participated in the purchase of licenses by Meteor (Ireland, 21% ownership) and 3 (United Kingdom, 12.75%), it exited these investments in 2001 and 2003 respectively. The primary reason for exiting these investments was the difficult financial situation that KPN found itself in due to the acquisition of expensive 3G licenses and subsidiaries – collectively these pushed KPN towards the point of bankruptcy (El País, 2001). The presence of KPN as an MNO in other European countries was limited to Belgium and Germany. These two countries are characterized by a high rate of mobile penetration – 116.61% and 132.30% respectively in 2011 (World Bank, 2012) – a condition that according to some commentators, such as Shin and Bartolacci (2007), has been one of the main determinants of virtual operators diffusion. In both countries KPN subsidiaries were a later entrant into the market with a smaller market share than earlier entrants: Belgacom and Mobistar (France Télécom) in Belgium, and T-Mobile and Vodafone in Germany (Table 2). Given the spare network capacity of smaller operators (Jasper et al., 2007), the pressures to overcome the financial problems resulting from the acquisition of 3G licenses (Kuo & Yu, 2006) along with the acquired experience of running MVNOs businesses in its home market, encouraged KPN to adopt a strategy based on hosting virtual operators in these two countries. As it can be observed from Figs. 4 and 5, the increase in the number of virtual operators hosted by KPN in Belgium and Germany has been accompanied by an increase in its market share in both countries. Even in Belgium, KPN became, for the first time, the second largest operator in September 2011 largely due to the success of its wholesale operations (Wireless Intelligence, 2012). 4.2. Creating brands and MVNOs to achieve growth The experience derived from hosting virtual operators in its home and overseas markets has provided KPN with a specialized knowledge of virtual operators and a greater negotiation power when determining interconnection conditions with international MVNOs across different national markets. For instance, KPN is the network provider of ACN Mobile

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Table 8 KPN's brands in Belgium, Germany and The Netherlands (2010). Source: Wireless Intelligence (2012). Belgium Germany Netherlands

AldiTalk, Allo RTL, Ay Yildiz, Chiama, JIM Mobile, Ortel Mobile, Simyo, Sudpresse Mobile Base, Blau, Blauworld, BVB Fan Fon, MyMTVmobile, NettoKom, Ortel Mobile, Pluskom, Printus Mobile, Sim Voice, Simyo, Vybemobile, Wir Mobil Ay Yildiz, HBVL Mobile, Hi, Kruidvat Mobiel, MTV Mobile, Ortel Mobile, Simyo, Telfort, Yes Telecom

(a low-cost MVNO) in Germany and The Netherlands and Transatel (a business orientated MVNO) in Belgium and The Netherlands (Wireless Intelligence, 2012). The experience of KPN in these virtual businesses is evident in two strategic decisions. Firstly, KPN has created in those countries in which possess a physical network its own brands, which appear as independent virtual operators from the perspective consumers. KPN also decided to acquire independent MVNOs and integrate them into its portfolio as its own brands, such as, for example, in the case of Ortel Mobile, which was acquired in March 2008. Table 8 shows the brands of KPN in Belgium, Germany and The Netherlands at the end of 2010. As pure virtual operators, KPN's brands are usually focused on a specific segment of the retail market in order to avoid directly competing with its MNOs. For instance, ‘Hi’ in The Netherlands focuses on young people from 18 to 24 years of age through a low-cost offer, whereas ‘Ay Yildiz’ focuses on Turkish people living in Belgium and The Netherlands. As noted above, KPN has maintained the ‘Telfort’ brand in The Netherlands to benefit from its reputation as an independent MNOs. Secondly, KPN has used its two main brands – Simyo and Ortel – to enter as an MVNOs into new markets where it does not possess a network. One such market is Spain, while a second is France. In Spain, KPN entered as a MVNOs and had to negotiate with local MNOs, which were direct competitors of KPN in those countries where it owned a MNOs – namely, Telefónica in Germany, Vodafone in Germany and The Netherlands and France Télécom in Belgium and The Netherlands. Finally, KPN started its virtual operations by purchasing network capacity from France Télécom (the third entrant in Spain). Simyo was launched in Spain in January 2008 and focused on low-costs offers and basic mobile services, whereas Ortel was launched on November 2010 and targeted the immigrant population needing low-costs international calls. KPN also tried to become a MVNE in Spain. However, in December 2010 five MVNOs created by KPN as MVNE were closed (Celularis, 2010). Several months later, in May 2011, the executive board of KPN announced its intention of reconsider its MVNOs operations in Spain and France with the aim of addressing the inefficient operations located outside The Netherlands, Germany and Belgium. As a consequence, in December 2011 Simyo France was sold to Bouygues Telecom with the aim of focusing on accelerating Ortel Mobile's growth (KPN, 2012). Although Vodafone and Orange appeared as possible buyers of Simyo in Spain, KPN decided to retain the business. One possible explanation was that the economic climate in Spain resulted in Vodafone and Orange submitting bids for the business that were unsatisfactory for whatever reason to KPN. Another explanation, however, is that KPN saw the potential of the Spanish market as a MVNO with the consequence that they decided to retain the business. Such an assessment is supported by the growth in users achieved by Simyo in Spain between December 2010 and December 2011 – as can be seen from Fig. 6, users increased by 56.86% over the year. The increase in the number of users and the exit from MVNEs investments, among other factors, resulted in the virtual operations of KPN in Spain started to move into profitability from 2011 (Fig. 7). 4.3. Avoiding the united kingdom Although KPN participated in the purchase of ‘3’ in the UK, it exited the market before this particular 3G only operator launched its services. In contrast to the Spanish case, KPN has also avoided launching any virtual operations in the UK market. There are several possible explanations for this. Firstly, the MVNOs market in the United Kingdom is less developed in terms of number of MVNOs than the Dutch or German markets. However, in the UK there is a clear MVNOs leader, Virgin Mobile, which has gained a substantial market presence of more than 3 million subscribers at the end of 2010. Secondly, the UK market is arguably more competitive than other European markets given the low level of switching costs and the balance between market shares of MNOs.12 This would result in a lower incentive to new entrants given that retaining customers can be difficult. Finally, there has been a decrease in prices in the UK after the introduction of low-costs MVNOs – such as Carphone Warehouse and easyMobile – which make this market less profitable than it previously was (Informa Telecoms & Media, 2005). 4.4. Conclusions From the KPN example several observations can be drawn. The first of these is that hosting virtual operators has been a strategy followed by KPN to counteract the market power of earlier entrants in host countries (Belgium and Germany). This 12 Until recently the market share between the four GSM operators was more or less even, with ‘3’ being substantially smaller than its rivals. However, the merger between Orange and T-Mobile to create Everything Everywhere altered the balance between the operators, creating one operator that is substantially larger than its rivals. One factor that contributed to the merger was the inability of T-Mobile to compete in the market at a level that would derive sufficient financial returns for its parent company.

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25

45.0% 40.0% 35.0%

20

Number VO E-Plus (KPN) T-Mobile O2 (Telefónica) Vodafone

30.0% 25.0% 20.0%

15 10

15.0% 10.0%

5

5.0% 0.0%

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fig. 5. Number of virtual operators hosted by KPN and evolution in market shares in Germany. Source: Wireless Intelligence (2012). 558,949 (0.96%)

600,000 500,000 400,000

303,501 (0.56%)

356,342 (0.63%)

300,000 200,000

126,725 (0.24%)

100,000 0 2008

2009

2010

2011

Fig. 6. Number of users and growth rate of Simyo Spain (2008–2011). Source: Wireless Intelligence (2012).

2008

2009

2010

2011

25% 20.29% 20% 15% 10% 5% 0% -5% -10% -15%

-6.31% -11.54% -14.04%

-20%

Fig. 7. EBITDA margin of KPN Spain (2008–2011). Source: Wireless Intelligence (2012).

reinforces the results of Section 3. Secondly, a specialization strategy on virtual business, which started with the acquisition of Telfort, has allowed KPN to acquire specific knowledge about virtual operations in order to launch its own brands in Belgium, Germany and The Netherlands. Thus, KPN has sought to exploit the complementarities that exist between its traditional and virtual businesses. This resulted in an increase in the market share of KPN in Belgium and Germany and the maintenance of its leadership in its home market. Finally, hosting MVNOs has also given KPN a specialized knowledge of virtual operations which has resulted in launching virtual operations in France and, especially, in Spain. In Spain KPN has started to obtain positive returns from virtual operations. Thus, KPN has learnt how to enhance the performance of its virtual business from hosting virtual operators and creating its own brands in its home market. In the case of KPN, this knowledge has helped it to enter new countries through the MVNOs route, which requires a lower initial investment would occur if it had to build and rollout its own physical network. This is an additional advantage that accrues from hosting MVNOs that has not been considered previously in the literature, but which should receive further attention.

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1139

Table 9 Number of operators in Latin America (August 2012). Source: Wireless Intelligence (2012).

Argentina Bolivia Brazil Chile Colombia Mexico Peru Uruguay Total

Live

Planned

1 0 3 3 3 2 0 0 12

3 2 22 4 5 2 1 2 41

4.5. A final thought on KPN On June 2012 América Móvil entered the European market by acquiring 27.7% of KPN (Wireless Intelligence, 2012). Through this acquisition, the Mexican group has become a major shareholder in the Dutch company. América Móvil is the largest mobile group in Latin America, where its main rival is Telefónica.13 Latin America is a region where mobile penetration rate has sharply increased during last decade from 12% in 2000 to 105% in 2011 (Wireless Intelligence, 2012). Given than MVNOs have tended to appear in saturated markets (Shin & Bartolacci, 2007), it is expected that virtual operations will increase in Latin America in the next few years (Gillet, 2012). For example, in August 2012 there were 12 live virtual operators in Latin American countries but another 41 were planning to start operations in the coming months (Table 9). Given the above, once a collaborative relationship is established with the management of KPN, it should be possible for América Móvil to benefit from KPN's experience of launching and operating MVNOs operations in saturated markets. Quite simply, the experience and skills of KPN could be transferred to those Latin American markets of América Móvil – Argentina, Brazil, Chile, Peru and Uruguay – where it is not the first mover and it is facing competition from Telefónica. In addition, the transfer of skills and experience to América Móvil could facilitate its entry into Bolivia and Venezuela.

5. Discussion and conclusions This paper contributes to the on going debate on MVNOs by empirically analyzing a topic that has previously received little attention in the literature due to its widespread focus on MVNOs instead of on the hosting MNOs. Through examining competition between MNOs in five key European markets, we further our understanding of the dynamics of wholesale market competition between MNOs. We also suggest several reasons that enable us to understand differences in the wholesale market shares of MNOs. Our results reveal that the number of virtual operators has increased over time, whereas wholesale market concentration has diminished. In this sense, it can be argued that competition in the wholesale market has occurred and MNOs are increasingly interested in hosting MVNOs. This finding runs contrary to Banerjee and Dippon (2009: 74), who found that “competition at the wholesale level has not yet emerged or matured”. The advantages associated with hosting MNVOs outweigh the disadvantages. Hosting MVNOs has become an alternative sales channel for MNOs, helping them to reduce the financial pressures faced in the aftermath of acquiring 3G licenses. In most of cases, MVNOs focus on a market segment by offering differentiated services from MNOs. This service differentiation means that although virtual and physical operators are present at the same end of the value chain, MVNOs do not become direct competitors of MNOs. Although wholesale market concentration has decreased with time, differences in wholesale market shares remain observable in the market. Several operators have been shown to have more incentives to host MVNOs in their networks than others. Through statistical analysis it has been shown that late entrants have adopted a strategy based on actively hosting MVNOs. Given the presence of network effects in the mobile telecommunications industry (Gomez & Maicas, 2011), later entrants have found hosting virtual businesses to be a way of counteracting the market power of earlier entrants.14 For instance, KPN in Belgium, which was the third entrant, has become the second largest operator by the number of subscribers at the end of 2011 through, in part, adopting this hosting strategy. In The Netherlands, KPN acquired Telfort, the third entrant, which had started to host a large number of virtual operators. This acquisition was a strategic reaction to the significant market share growth that the smaller operator – Telfort – was able to achieve through hosting MVNOs. 13 See, among others, Curwen and Whalley (2010: Chapter 10) for a discussion of the structure of the Latin American mobile telecommunications market. 14 See, for example, Whalley and Curwen (2012) for an overview of the market shares held by mobile incumbent operators in a range of European countries.

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Our research also analyses the possibility of some international groups specialising in the development and operation of virtual businesses in their home and overseas markets. We suggest that such a specialization strategy can lead to several advantages for MNOs, such as a better understanding of the necessities of MVNOs and a greater knowledge about which types of MVNOs can result in a more or less competitive challenge to their own performance. Moreover, since an international group can jointly negotiate interconnection conditions with the same virtual operator in several countries, its negotiating power increases with the result that better interconnection conditions occur. In examining this specialization strategy, we have included in our analysis only those international groups which have followed such as strategy. KPN has specialised in hosting MVNOs in countries in which it owns a physical network, such as The Netherlands, Belgium and Germany. As a proof of the attractiveness of the specialization strategy, KPN has also created its own brands, which, from a consumer's perspective, appear in the market as virtual operators. As a consequence of the accumulated knowledge of the virtual business derived from these operations, KPN has entered in new markets – Spain and France – as an MVNOs. Thus, it seems that a specialization strategy of hosting MVNO has provided KPN with the capabilities and skills needed to create its own virtual operators in new markets. The advantages from hosting MVNOs in domestic countries that enable it to enter new markets as a virtual operator has not yet been analyzed in the literature, with the consequence that it represents an interesting line of future research. Nor we should overlook the fact that the regulator has had an active role in encouraging the introduction of MVNOs. One of the existing areas of research on MVNOs has focused on is the role that regulators should take in encouraging virtual operations to improve market competition when MNOs do not have incentives to host MVNOs. It has been shown that even when the regulator has had to act to make MNOs host virtual operators or regulate interconnection charges, as in the case of the Spanish market, wholesale competition has eventually occurred. In the European countries we have analyzed, sustained regulatory initiatives and the existence of advantages derived from hosting virtual operators has finally increased competition among MNOs to host MVNOs. Having said this, for this competition to continue it is likely that sustained regulatory pressure on MNOs will be required for several years to come. To our knowledge, this paper represents one of the first attempts to empirically analyze wholesale competition. However, two main issues deserve further attention. Firstly, we take as representative examples wholesale competition in five European countries that have a greater penetration of virtual operators. However, it would be interesting to introduce into the analysis additional countries with a greater variability in the development of MVNOs markets in order to observe if the strategies of late entrants and international groups depend on the degree of MVNOs diffusion in each market. Second, and linked with previous suggestion, we have found that late entrants have a key role to play in hosting virtual operators and developing the MVNOs' market in the five European countries under analysis. These markets are subject to a common European Union regulation and are characterized by a high degree of competition in the retail market. It has been shown that new entrants develop incentives to host virtual operators as a way to counteract first-mover advantages, without the necessity of regulator to actively encouraging them to host MVNOs. However, it would be necessary to analyze the role of later entrants in other geographic markets with three or more MNOs, such as in the rest of European Union, as well as in other markets in which the virtual business has also started. By comparing the position of late entrants in hosting MVNOs in different regulatory contexts, a future research line would be able to offer interesting analysis about the role of regulator in encouraging wholesale competition. Finally, we have focused on wholesale market shares and concentration by taking into account the number of virtual operators hosted on each MNO network. Although it highlights the role of virtual operators as wholesale customers of MNOs, it would be desirable to complement theses measures with other information that can allow differing between virtual operators depending on its size in terms of final subscribers and volume of purchased minutes. However, it would be interesting to further explore which factors affect the willingness of MNOs to host MVNOs and thus shed light on whether such arrangements are actually profitable for network operators. As regulators have played a key role in many markets in encouraging MNOs hosting of MVNOs, future research could more fully explore the relationship between the regulation of mobile markets and MVNOs. One aspect of this further research would be to explore the competitive impact of MVNOs, while a second would be to determine the contribution to consumer welfare – greater choice, reduced prices and switching costs etc. – that MVNO make. However, before the impact of MVNOs on mobile markets or their relationship with MNOS can be assessed, the issue of data needs to be addressed. While some data on wholesale mobile markets is available, it is often insufficient. On the one hand, the data may cover just a few years while on the other hand it may be insufficiently granular to facilitate the analysis of the relationship between individual MNOs and MVNOs. In addition, data needs to be presented in a consistent manner by regulators and operators alike. This would enable comparisons to be drawn between operators and countries. At present, data inconsistencies limit the number of countries and operators that can be included within any analysis of MNOs and MVNOs interactions.

Acknowledgements We would like to thank the editor-in-chief Erik Bohlin, Peter Curwen, Lucio Fuentelsaz, Juan Maicas and two anonymous reviewers for their useful comments and suggestions which have greatly improved this paper.

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