Ethnic Marketing and the MVNO Model

Implications: APC Wireless’s acquisition of Movida combines ethnic marketing and the MVNO model to exploit the strong sense of community, but will face challenges in handset costs and service margins.

Analysis: Movida’s strength in ethnic marketing was hampered by the costs of trying to be a MVNO with differentiated service and paying reseller rates from Sprint Nextel.  Ethnic marketing and the MVNO model both have in common the capability to create a sense of community.  Ethnic marketing can have a lower subscriber acquisition cost (SAC) by pursuing an established community through strongly-patronized distribution channels.  In comparison, an MVNO creates a community of users with messaging, social networking and content features.  The MVNO incurs the cost of building distribution, but can generate significant revenue from the data applications.  Ethnic marketing and MVNOs both acquire a core group of users.
The competitive challenge for ethnic marketing and MVNOs is providing a handset that is competitive with carrier-subsidized devices.  In acquiring Movida, APC Wireless has the advantage of being experienced in customizing and packaging phones.   The problem is keeping up with the shorter life spans of phones and faster rollout of advanced technology.  If mobile users have the capability to qualify for a contract term, they will move to a carrier for a better device.  A niche-market provider has to reach the base size and revenue to compete for phone prices.  For the 2008 first quarter results, MVNO Virgin Mobile showed lower gross adds of 795,575 compared to 881,756 subscribers during the year-ago period.  Virgin Mobile alluded to not using aggressive handset pricing and the effect of an economic slowdown.  And Virgin Mobile showed the MVNO challenge of having a 5.1% churn compared to AT&T and Verizon being below 2%.  And despite targeting heavy data users in the youth segment, Virgin Mobile only had an ARPU of $19.93 compared to the major carriers averaging slightly above $50.
APC appears committed to continuing Movida’s appeal of no contract and flexible payment terms.  Leap and MetroPCS with their non-contract plans reported relatively flat churn rates of 3.4% and 4% respectively.  APC has the greater challenge of being dependent on Sprint’s resale pricing to discount network features to retain customers.   A previous Latino-focused provider, ConexOne with its Zuma prepaid, shut down with low service margins and high billing costs.  MVNOs Amp’d, ESPN and Disney failed from the issues of handset costs, distribution scale and service margins.  APC will test the strength of ethnic marketing for the MVNO model.