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In the last issue of Pyramid Predictions, we reviewed the potential MVNOs hold within the African continent and put forward the idea that upcoming operators, such as Virgin Mobile South Africa (VMSA), would be amongst the trendsetters in the region. This issue represents Part 2 of our MVNOs in Africa theme and we assess VMSA’s entry strategy in South Africa.
VMSA is set to enter the South African mobile market in 1H06. The venture will be a 50-50 partnership between the Virgin Group and Cell C. Given that MVNOs are illegal in South Africa, VMSA is technically classified as an Enhanced Service Provider (ESP). The ESP model is the highest level of integration into Cell C’s network that VMSA can achieve under current legislation. The main selling points of VMSA will include Virgin’s brand, superior customer service to support its premium strategy and pricing plan simplicity. Among these stated differentials, Virgin’s brand is undeniably the strongest, being costly and time-consuming to build, and therefore affording a genuine competitive advantage. Along with its strong brand, we argue VMSA’s approach is solid enough to deliver a premium customer experience with higher-value and differentiated services. These factors alone may not give it mass market appeal, but will definitely position VMSA well among the country’s high-spending, quality conscious subscribers.
An Unusual Premium Strategy for an MVNO-like Entrant
VMSA is entering a dynamic market in a strategic way by effectively leveraging its brand name in all aspects of its business. First, VMSA will utilize its well established brand to meet lifestyle aspirations in the South African market. Already positioned in the market through Virgin Active (health clubs) and Virgin Airlines, VMSA will cater its value proposition to the market, justifying a premium price by utilizing the strength of its brand. At the same time, it will attract and retain consumers based on a proven track record of quality customer service and value-for-money pricing.
The second piece of VMSA’s strategy will be simplicity. Simplicity is not overrated in any market, let alone South Africa. With a mix of prepaid and postpaid offers, it will be central for VMSA to push a simple and flexible offer in the market to attract its target market and capture market share in an increasingly postpaid market.
The final piece of VMSA’s strategy will be to provide a more focused distribution mix that effectively reaches its target market. VMSA will use a mix of retailing agreements with specialist stores, the Virgin group’s current network (from its other activities), and the establishment of VMSA’s own shops and telesales outlets which will be complementary to the existing network. As distribution is often one of the most important components of entry cost for an MVNO-like operator, this strategy ensures that both investment and fixed costs, and therefore risk, remain low.
Putting Idle Assets to Work
From Cell C’s point of view, the venture is a good opportunity to use idle network capacity to reach a segment of the market it may not have been able to successfully target in the past, given Cell C’s level of brand recognition. For instance, due to their current strategy of focusing on the mass market and the youth segment, Cell C has little presence in the high-spending segments and is confined to a lower ARPS (mostly prepaid) subscriber base. Therefore, as a 50 percent equity partner, Cell C benefits on the upside while limiting possible strategic threats to its main operation. Cell C, the third mobile operator in the country – and one that experienced an initial period of growth - has seen its market share level off at around 10 percent in 2005, well behind the two leaders, MTN and Vodacom, which account for upward of 85 percent of the market.
For the Virgin group, this is a classic case of brand extension, with all the pros and cons of such a strategy. In an environment that has yet to become MVNO-friendly, the Cell C-Virgin deal is as good as it gets. Competitive pressures remain despite an initial investment of around R500m (US$82m) for headcount, the establishment of retail distribution channels and contact centers (direct sales and customer service) and support infrastructure, such as IT and communications. In the meantime, Virgin is expected to cash in on its brand equity already in place from other activities in the country. At this stage, the venture will stay clear of any involvement with hard telecom infrastructure, allowing for lower risk/capital requirements while ensuring Virgin concentrates on what it does best: consumer marketing. Meanwhile, there is a risk that the outcome of VMSA’s entry will be inherently tied to Cell C’s own network quality, a risky proposition for the brand. In addition, given its expected upbeat marketing strategy, VMSA can arguably cannibalize some of Cell C’s subscribers, in particular its sub-brand CY, by targeting the youth segment. However, Cell C’s equity ownership in VMSA will perhaps serve as a check and allow Cell C to refine VMSA’s offer in such a way that it does not pose an explicit threat to its subscriber base.
Related Research:
MVNOs and MVNEs: Analyzing the Viability of Virtual Mobile Players
MVNOs in Emerging Markets
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