Operator sub brands – the death of MVNOs?

Last week Three and Vodafone launched new sub brands targeting the youth segment. It’s hardly a new concept. O2 launched giffgaff seven years ago, following up with ‘48’ two years later in Ireland.

What’s interesting is that two new sub brands have come along at once and it’s potentially a glimpse of what’s to come for the highly competitive telecoms market.

Sub brands clearly work. giffgaff is rumoured to have 2 million customers and proving that if your brand won’t stretch and appeal to all customer segments than you must create one that will.

Up until now this has been the role of the MVNO market and operator wholesale teams. But dynamics are changing.

The case for the sub brand
Simple economics drive the mobile market: the more customers you have using your network the better the revenues and profits.

However, the values of a brand don’t always support the theory. Take Vodafone for example. It’s not a brand that has traditionally appealed to the under 25s, so it stands to reason that they should launch a brand that does in the guise of Voxi.

And of course, the network economics add up – there are no wholesale costs and every penny of the margin is banked. What’s more, the parent network can trade on the credibility of its brand, control the segments that the sub brand targets and most importantly influence its pricing and offers to ensure it’s not competing head to head.

Of course, parent brands have to put a lot of faith in the power of its brand to drive the success of the sub brand. And, to be blunt, that’s not enough to attract customers, in fact it could actually detract from its appeal.

Brand awareness is therefore vital to ensure sub brands feature on the list of operators people consider. But that doesn’t come cheap. Millions are spent every month by operators persuading us to switch, stick and/or buy more. Releasing funds to do it for another brand isn’t going to be easy for a CFO and many will be looking to other distribution channels to ease the financial burden.

But even that costs money to set up and maintain. It’s a fine balance and so entering the market with a sub brand is a massive strategic decision.

The case for MVNO

For years the wholesale market has worked on the principle that a good MVNO partnership will be complementary – targeting customers that their host network cannot address. Get it right and they bring on faster growth and margin rich business.

If you look at some of the most successful MVNOs many have an existing brand that their customers love and is transferable to mobile, Tesco and Virgin being the obvious examples.

Naturally this reduces the marketing costs especially for retail and quadplay brands. They have readymade access to existing customers reducing channel and acquisition costs.

MVNOs also tend to be more ‘challenger’ making their propositions more innovative than their wholesale network provider, and, dare I say it, the sub brand of any operator too.

And that’s an important point. The host network never owns the customers and they will be competing with the MVNO and only controlling it indirectly through the wholesale costs.

That makes for tough trading for MVNOs, and could explain why TalkTalk is considering pulling out of the mobile market altogether.

So is it sub brand or bust?

In a mature market like the UK, where many of the appealing MVNO deals are already done, a sub brand strategy certainly has its place. But it doesn’t mean the death of MVNOs.

There are still brands out there that would make very appealing MVNO partners that would fit a multi-brand strategy.

But MVNOs will find it tough in the next few years as roam like home and Brexit exert real pressure on their business models. Some MVNOs will survive, some will merge, some will fold.

Operators will feel this, and those that have MVNO brands that are grossly affected will have to ensure the hole in their finances is plugged.  Sub brands are likely to be the answer as new customer segments emerge from the MVNO fall out or look to other operators to fill the gap left by market exits.

However, those considering launching a sub brand should take a look at the MVNOs to understand how they have made their businesses successful, especially in an environment of higher telecoms costs. Every successful MVNO has built a proposition that will appeal to their specific target segments. Fail to do this and operators will fail their customer and their shareholder.

James Gray

James Gray

Managing Director at Graystone Strategy
James has over 20 years of experience working in the telecoms and retail industries. He is an expert in subscription-based business models, CRM, direct and indirect channel management and major proposition development and launches. He has held a number of Marketing Director and Consumer Director roles.
James Gray

About James Gray

James has over 20 years of experience working in the telecoms and retail industries. He is an expert in subscription-based business models, CRM, direct and indirect channel management and major proposition development and launches. He has held a number of Marketing Director and Consumer Director roles.