MVNOs, OTTs and Innovation in Emerging Markets

Will regulation or taxation create the next m-pesa?

Recently we looked at MVNOs in emerging markets to see how they were faring.  The focus was on 25 moderate-income countries, Indonesia, South Africa and Ukraine among them. The numbers were not inspiring.  We found a total of 25 MVNOs, on average one per country. Many of the countries had no MVNOs, with three countries accounting for 80% of the 25. This compares to 50 to 150 MVNOs in some advanced economies.

So why the slow “diffusion?”  There are several reasons, low ARPU among them. Also, achieving MVNO loyalty in multi-SIM environments can be a challenge.  Finally, most of the markets—unlike Indonesia—are small.  So now some regulators, eager to stimulate innovative services and apps, are thinking of mandating MVNOs.  Will this help?

In fact, most viable MVNOs in emerging markets are call-centered.  They allow individuals to reach diasporas in other countries at discount rates.  This application even underpins the world’s largest MVNO, U.S.-based TracFone (owned by Mexico's America Movil and being acquired by Verizon), which facilitates calls and remittances to Mexico.  Similar services help connect families in the Philippines to their relatives in Hong Kong, migrants from Zimbabwe in South Africa to their relatives back home, and so on.

But overall, MVNOs have not spread across emerging markets. As new ones emerge others close down. Even Tracfone lost millions of subscribers before the Covid crisis, while call-based Lycamobile, operating in 15 countries, has lost subs in some emerging markets by over 50%.  MVNOs are doing better in high-income markets, even creating innovative niche applications. Still, we found higher mobile prices in the OECD countries where MVNOs are mandated, challenging the idea that mandated MVNOs foster competition.

So how to stimulate mobile innovation in emerging markets?  Could the OTTs be the answer?  And, if so, how will taxing them, as many countries are starting to do, help?  The short answer is maybe.  In a few emerging markets, the OTTs have fostered local content (think YouTube's popular video and music channels from Brazil and Mexico).  In a few other cases popular home-grown sites have thrived, such as Indonesia's high-traffic news site tribunnews.com.  Possibly, some of the digital tax revenues could be used to foster more local apps.  And the OTTs may partner with local entities to bypass the taxes, as these are usually aimed at foreign sourced services.

Will all this broaden innovation across emerging markets or will Silicon Valley and Shenzhen still guide digital advances?  It was not always like this. Prepaid was born in Mexico in 1992.  M-pesa in Kenya in 2007.  And the Philippines has hosted the highest per capita use of texting.  These mega-apps took hold due to necessities like the high voice call rates (until recent years) in the Philippines and Mexico's credit-squeezing peso crisis. They were not fostered by tech hubs but by operators with market presence.  How to repeat these remarkable achievements going forward?