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Ninth Annual IBER & TLC Conference Proceedings 2009

Las Vegas, NV, USA

A Compensation Method of MVNO


Service in Korean Mobile
Telecommunications Market
Moon-Soo Kim, Hankuk University of Foreign Studies (HUFS), Korea
Byung Woon Kim, Electronics and Telecommunication Research Institute, Korea

Abstract
Under the nowadays Korean mobile market situation and the trend of advanced countries regulation, Korean
government is now introducing a new service based competition policy like a mobile virtual network operator
(MVNO) to mobile telecommunications market in order to increase a fair competition and for user protection. In the
introduction of MVNO to mobile market as a kind of wholesale regulation, especially, the compensation level and its
calculation method of MVNO service to pay to mobile network operator (MNO) are critical issue between MNO and
MVNO. This paper proposes 3 methods with empirical cases to calculate the compensation of MVNO service
considering Korean mobile market, regulation situation and types of MVNO: benchmark of interconnection cost
model, using by retail-minus method and trade-off method between interconnection cost model and retail-minus. We
expect the proposed methods and empirical cases can be utilized a useful guideline when setting a wholesale
compensation rule by regulator in near future.
Key words: MVNO, MNO, SBC, compensation, wholesale rate, cost-plus, retail-minus, benchmark

1. Introduction
Since the introduction of competition to Korean telecommunications market in 1990s, the entry of several mobile
and fixed network operators is a main driver of rapid development of telecommunications industry such as mobile
telecommunications and Internet industry. So far their competition, however, has been based on the investment of
telecommunications network facilities such as RF, base station, switching system, etc under Korean governments
facility based competition (FBC) policy. Such a kind of competition, in order to obtain many subscribers, has made
the operators more concentrate on marketing strategy such as gigantic advertisement, excess cellular phone subsidy
as well as investments to enlarge their network rather than competition of price and service quality. While the FBC
was powerful and useful to grow up fast an early mobile market, competition on price and service quality is more
important in the mature stage of todays Korean mobile market. So, advanced countries such as EU, Japan and
Australia have tried to boost competition of mobile market in order to increase service quality and decrease price
using SBC (service based competition) policy such new telecommunications institution as mobile virtual network
operator (MVNO) service, indirect access service etc. Under the background of nowadays Korean mobile market
situation and the trend of advanced countries regulation, Korean government is now introducing a new SBC policy
like MVNO to mobile telecommunications market in order to increase a fair competition and for user protection.
The introduction of MVNO to mobile market is a kind of wholesale regulation because it is related to the existing
mobile network operator (MNO) and MVNO. Especially, the compensation level and its calculation method of
MVNO service to pay to MNO are critical issue between MNO and MVNO that is a main reason to study a rational
compensation method that obtains regulatory objective of fair competition and user protection. In section 2 we
examine MVNO concept and types shortly, section 3 proposes several methods to calculate compensation of MVNO
to pay to MNO including pros and cons of each method and practical example, and we conclude in section 4.

Ninth Annual IBER & TLC Conference Proceedings 2009

Las Vegas, NV, USA

2. MVNO concept and types


MVNO is an organization that offers mobile subscriptions in its own brand name, controlling the billing
relationship with the customer, but who does not hold its own frequency license in the market. So MVNO, by
nature, has to utilize such facilities of the existing mobile network operator as base stations, switching system and
radio frequency, etc. MVNO can be distinguished into 4 types by the degree of dependence on MNOs facilities.
The first type, type A, is the simplest pure reseller, as just reselling of the existing MNOs mobile service to
customers with his own brand or MNOs brand, which is totally dependent on MNOs telecommunications facilities.
The second type is the simple MVNO that hold HLR (Home Location Register) to manage the customers
information and his own brand but uses MNOs network code and SIM (Subscriber Identification Module) card. So
the type B can provide the value-added service to his own customers although some parts of voice mobile service
depend on the MNO. The type C is an MVNO that added switching facilities to the type B. So the type C includes
the every feature of B type. Lastly, D type in figure 1 is called full MVNO because the type has almost mobile
facilities including switching, transmission without radio frequency and some base transmission stations. Thus, the
type D is the most independent operator among 4 types, which can provide mobile services including the several
value-added services to his own customers with independent marketing strategies such as pricing, brand, SIM card,
etc. In the 4 type cases of real world, the wholesale compensation for using MNOs facilities has been usually
calculated by cost base (so-called cost-plus method), or retail-price base (so-called retail-minus method).

<Figure 1> MVNO (type D case)

3. The compensation methods of MVNO service for MNO


3.1 The compensation criteria of MVNO service
The criteria to calculate compensation for the provision of network facilities of MNOs can be divided into 3
types; commercial negotiation, distribution of revenue from MVNO service and rate per minute. Commercial
bilateral negotiation between MNO and MVNO determines the compensation of MVNO service. Distribution of
revenue is a method that allocates the incomes from the provision of MVNO service to both of MNO and MVNO
based on the ex-ante allocating rate. The case of new service, which cant easily estimated cost or isnt approved the
trend of cost to provide, usually adopts this method. In practical, the revenue of MVNO service has been allocated to
MNO and MVNO at a certain ratio. As an example, the compensation for access line of Internet in Korea is based
on this distribution method of revenue. Lastly, the rate per minute method is usually applied, when disagreed on the
negotiation between MNO and MVNO, by regulators mediation and distinguished into cost plus pricing and retailminus pricing mechanism.
A popular compensation method is cost plus pricing mechanism that is based on consideration of the cost to the
MNO to complete a call and includes interconnection and a percentage of network infrastructure cost in the charge
calculation. Since based on cost, it has the most economic efficiency, but a particular problem with this method is
the immense difficulty in estimating network infrastructure costs appropriate to the MVNO that at best will be
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Ninth Annual IBER & TLC Conference Proceedings 2009

Las Vegas, NV, USA

imprecise and at worst pure conjecture. Otherwise, Retail minus pricing is calculated by discounting retail price permin of the MNO, the price per minute the subscriber pays, by the proportion of that price that covers avoidable
costs. Avoidable costs include CRM, marketing billing and provisioning costs for VAS etc. The most important
issue with this type of compensation is the MVNO must endeavor to continuously undercut the operator costs for
delivering these avoidable elements in order to protect their own profit margin. Many operators support these
avoidable elements by subsidizing the customer-facing business. This causes problems for MVNOs that do not have
deep financial resources to absorb or match subsidization. MNOs have an ongoing interest in minimizing
environment avoidable costs in addition to subsidies. An MVNO working within such an environment must
therefore concentrate on the provision of VAS as the best mechanism for generating revenue, pure transmission
charges being relatively inexpensive
3.2. The alternative compensation methods of MVNO service
3.2.1 Assumptions for compensation of MVNO service
In this study, assumptions to calculate the compensation of MVNO service, especially rate per minute, for MNO
are as follows. The first, as related to using operators on MNO, i.e. MVNO, assumes that the network to provide an
MVNO service is only 2G although the proposed method can apply to 3G, but every types of MNVO mentioned
will be considered. And this approach focuses on only voice telecommunications service of 2G including
interconnection service between telephony services. Furthermore, only a wholesale call rate for compensation of
MVNO, the most important issue between interested parties, is considered although the compensation usually
consists of wholesale cost for facilities, wholesale call rate and other service cost. The table 1 summarizes the types
of MVNO and their main characteristics including the sorts of facilities utilized by each MVNO.
[Table 1] The characteristics and obtaining facilities by MVNO type
Type A
Type B
Type C
Radio Frequency

none
none

SIM card
MNC
Number
Telecommunications facilities

NSC
CGS or GMSC
HLR
BSC
BS
BTS
to
Antenna
MSC
Backbone
MSC to MSC
RF license fee
Trans. circuits
VAS platform
CRM & Billing
Pricing design
Brand

none
Obtainable from
MNO
none
none
none
none
none
none
none
none
payable
none
obtainable
obtainable
feasible
use ones own

none
Issuing
by
MNOs
SIM
card
none
Obtainable
fromMNO
none
none
obtainable
none
none
none
none
none
payable
none
obtainable
obtainable
feasible
use ones own

Type D

none
Issuing by MNOs
SIM card

none
Issuing by MNOs
SIM card

Self-establishment
Obtainable from
MNO
obtainable
obtainable
obtainable
none
none
none
obtainable
obtainable
payable
none
obtainable
obtainable
feasible
use ones own

Self-establishment
Obtainable from
MNO
obtainable
obtainable
obtainable
none
none
none
obtainable
obtainable
payable
obtainable
obtainable
obtainable
feasible
use ones own

We propose 3 alternative methods to calculate the compensation of MVNO service based on the existing pricing
mechanism and considering Korean country-specific regulation situation; benchmark of interconnection cost model,
using by retail-minus method and trade-off method between interconnection cost model and retail-minus. The
Korean regulator has regulated the mobile termination charge by LRIC (Long Run Incremental Cost) that calculated
by every 2 year on every MNOs network including telecommunications facilities, circuits, and sections, etc. Costplus method for MVNO service on MNO network, therefore, can be applied by using this cost information for
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Ninth Annual IBER & TLC Conference Proceedings 2009

Las Vegas, NV, USA

mobile termination charge. And through estimating avoidable cost of MNOs and their retail price we can propose
retail-minus method to calculate the compensation of MVNO service. After calculating the compensation by costplus and retail-minus method, the third method is very simple as the compensations from two methods give a
guideline to negotiate between the two interested parties, MNO and MVNO.
3.2.2 Compensation using cost-plus: a benchmark of interconnection cost model
Calculation of compensation using cost-plus method is based on the public announcement of interconnection
of telecommunications facilities by Korean Communication Commission. As mentioned, cost-plus method is the
most economically efficient as well as matched up regulation objective through reduction effect on the retail price of
mobile telecommunications service in Korean market that is far higher than providing cost. In Korea, nowadays, the
calculation of compensation for wholesale service, for example interconnection charge between MNOs and/or
FNOs, has been regulated by cost model such as standard cost, LRIC model, etc. Despite of the practical difficulty
of cost calculation on telecommunications networks, diverse methodologies to estimate the cost has been developed
as well as many experiences to calculate and apply to market has been accumulated. Since the MNOs have much
adaptability to the diverse cost regulation, the compensation calculation of MVNO service and its application to
wholesale market are not likely to give a big shock to them. The cost information of mobile and wired voice service
based on the public announcement, furthermore, enables to reduce the regulation cost.
Meanwhile, the most important problem that can be expected when cost-plus method applied in wholesale
market is possibility decreasing MNOs investment-incentive (WIK, 2004). And when applied by the information of
interconnection regulation as a cost-plus approach, the differences of facilities between interconnection and MNVO
service under providing the same service on a unique network can make a practical issue. Furthermore, the
allocation of expense to verify the cost calculation of MNOs network and operation elements of by the public
announcement of interconnection of telecommunications facilities will leave another problem among interested
parties.
Figure 2 shows an example of wholesale call rate based on cost-plus method by each MVNO type. Since based
on LRIC for interconnection charge, the wholesale call rates by MVNO types are different from the degree of access
sections and using facilities of MNO. That means the wholesale call rates of MVNO type are based on the MNOs
facilities that MVNO uses. For instance, if simply supposed the access rate of RF section is , that of base station
section , that of transmission circuit section and lastly that of mobile switching center section , type D MVNO,
which obtains most of facilities to provide a mobile service except RF, pays to MNO as a wholesale call rate.
Similarly, other types of MVNO pay access rates totaled up by using MNOs sections to the MNO as shown in
figure 2. In Korean case, KCC has announced access charge (terminating charge) based on LRIC model every 2year including access rates by sections or facilities, for example in 2008, terminating charge on SKtelecom, 32.78
Won per minute, 39.60 Won per minute on KTF, and 45.13 Won per minute on LGtelecom.

<Figure 2> Wholesale call rate based on cost-plus method by MVNO type

3.2.3 Compensation using retail-minus method


The process of compensation calculation based on retail-minus is much easier and so cheaper from regulation
cost than that based on cost-plus method. Moreover, wholesale call rate regulation based on retail-minus method
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Ninth Annual IBER & TLC Conference Proceedings 2009

Las Vegas, NV, USA

enables an MVNO, which obtains much more efficiency in marketing and sales rather than network element cost
perspective, to entry the mobile market more easily and to be sustainable in that market for a long time and therefore
it is effective to activate MVNOs. And MNO has an investment-incentive when comparing the cost-plus method.
There are several pitfalls, however, to decrease the number of MVNOs to entry market because MVNOs under
retail-minus regulation have a high possibility paying higher than cost-plus regulation and to be ambiguous in
determining the criteria, range and object of avoidable costs, which is the critical element to decide the minus part of
retail-minus method. Avoidable costs are the costs that an access provider such as MNO could avoid if it ceased
retail operations completely, for example, marketing, selling, billing, accounting and customer support costs directly
associated with serving a retail customer (FCC, 1996). So, the compensation based on retail-minus depends directly
on the range and object of avoidable costs that is a main reason to be necessary to verify MNOs avoidable costs.
And also, on the types of MVNO, the difference of range of avoidable costs exists as well as allocation of the
avoidable costs to every facility must be considered.
In this study, for simplification, we examine the case of type A MVNO. Wholesale call revenue is usually
calculated by wholesale call rate multiplied by wholesale total traffics. Wholesale total call traffics means the
traffics totaled up every on-net and off-net traffic providing MVNOs customers. After all, to determine the
wholesale call revenue depends on how to measure the wholesale call rate.
The wholesale call rate of voice service on mobile network is calculated by retail revenue of voice service
except avoidable costs divided by total traffic of voice service. The retail revenue of voice service consists of basic
fee revenue and call revenue. The avoidable costs of voice service is costs that can be avoidable in providing voice
service as mentioned above and is calculated by using the allocating ratios to avoidable cost objects. For the
allocating ratio to avoidable cost object, we use operation cost for general support assets, cost for sales, cost for
customer services and general management in accounting report of mobile operator in Korea and further use
allocation ratio based on traffic.
The basic process of compensation calculation to pay to MNO for a mobile-to-mobile service (MM service) by
MVNO is to exclude MNOs avoidable costs from retail revenue of MM service. To understand the process of
compensation calculation based on retail-minus method, figure 6 shows an example of wholesale call rate based on
retail-minus method for MM service. The figure 6 assumes that total call traffics are 30 billion minutes including the
MM traffic of 10 billion minutes. If the total revenue by basic fee is 900 billion won, then the allocation of revenue
to MM service is 300 billion won at a ratio of MM traffic. Otherwise, it is relatively easier to calculate call revenue
of MM service from the MNOs. Simply let it 320 billion won, then the total retail revenue for MM service is 620
billion won. And the avoidable costs come from the each MNOs accounting report, for simplicity set them 100
billion won. The avoidable costs corresponding to the MM service can be calculated as the total avoidable costs, i.e.,
100 billion won multiplied by avoidable rate by that is based on the call traffic. In this example the avoidable rate is
20%, i.e., MM wholesale traffic divided by total MM traffic, if we assume that the forecasting call traffic of MM
wholesale service is 2 billon minutes. Therefore, wholesale call rate based on retail-minus method for MM service is
60 won calculated by retail revenue of voice service except avoidable costs divided by total traffic of voice service.
In case of off-net service such as mobile-to-other mobile (MM call), mobile-to-land (ML call), the calculating
procedure of wholesale call rate is also similar to the above MM call case. Or simply set it the half of wholesale call
rate for MM service, but this off-net case should follow the interconnection regulation because other mobile or fixed
network operators are involved.

Ninth Annual IBER & TLC Conference Proceedings 2009

Las Vegas, NV, USA

<Figure 3> Wholesale call rate based on retail-minus method


3.2.4 Trade-off compensation between cost-plus and retail-minus method
We examine the pros and cons of cost-plus and retail-minus method as well as the compensation calculating
process and example of both methods. According to MNOs and MVNOs internal and external circumstances, a
specific method can be preferred to the other. Thus, it is more practical and reasonable for MNO and MVNO to
make a compromise with each other through trade-off between cost-plus and retail-minus method. Trade-off method
is very simple as set the low bound and upper bound of compensation level the values from two methods and
mediated it by the regulator. If the gap between low and upper bound is very large, the mediation to converge unique
compensation level could dangle without much progress. Furthermore, such a trade-off method includes also every
problem of two methods in spite of practical advantages.
4. Concluding remarks
The cost-plus method for compensation has been used by several countries such as Hong Kong, Japan,
Denmark, Norway, Finland and Australia, etc while the US, UK and Iceland use the retail-minus method for
calculation of compensation. In particular, UKs regulator decided to apply retail-minus approach to calculate the
compensation of indirect access service on BT Cellnet and Vodafone. The several regulators using wholesale service
regulation has judged that the SBC policy like an MVNO institution has much contributed to price reduction of
mobile service and to employment effect (FCC, 2006). And also Nordic countries such as Denmark, Norway and
Finland have hold the lowest price of mobile service comparing other OECD countries price (ITU, 2004).
Korean MVNO service is now getting to start. The National Assembly of Korea has approved the
Telecommunications Business Act including wholesale service regulation in February 2009. Thus when enacting the
subsequent enforcement decree or related public announcement pursuant to the Act, the method to calculate the
compensation of MVNO service is a very critical issue to all interested parties such as MVNO, MNO, regulator and
users, etc.
This paper proposed 3 methods to calculate the compensation of MVNO service considering Korean mobile
market, regulation situation and types of MVNO: benchmark of interconnection cost model, using by retail-minus
method and trade-off method between interconnection cost model and retail-minus. The proposed methods will be
expected a useful guideline when setting a wholesale compensation rule by regulator in near future. In particular,
some issues such as discount in the on-net service, the trend of interconnection rate, type of call, share of
terminating traffic by operators, excess profit level of MNO, etc should be considered when applied the cost-plus
method using interconnection cost model.

Ninth Annual IBER & TLC Conference Proceedings 2009

Las Vegas, NV, USA

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