Virgin, Helio and SK -- Some Say "Why Not?", I Say "Why?"
What had been rumored for some time has been acknowledged. Today, Virgin Mobile USA said it is in preliminary talks with South Korea's SK Telecom, majority holder of Helio, about possible strategic options.
This is not surprising. Both companies have been struggling, although I’d rather be struggling with Virgin’s nearly 5 million subscribers than Helio’s quarter million or so. When Virgin first launched its MVNO in 2002, there was considerable pent-up demand for prepaid service. Yes, TracFone was a large and successful prepaid provider even then, but Virgin targeted the youth market with a then-fresh approach, fun features and a wide open market.
Others came along, most notably Boost Mobile, which partnered with Nextel (and was later acquired by Nextel, now part of Sprint). Like Virgin, Boost targeted the youth market. Amp’d (RIP) and Helio came later, with postpaid offerings also geared to the youth market. By now, it was getting crowded.
The US prepaid market faces real challenges today. Besides being crowded, prepaid subscribers have alternatives. Prepaid subs spending more than $30/month who are credit-challenged start looking at metroPCS and Cricket offerings, which include all-you-can-eat calling for as low as $35/month. Boost has recently focused on its Boost Unlimited offering, which has put additional pressure on Virgin. If not credit challenged, prepaid subs simply outgrow Virgin and sign-up for the carriers’ popular $39.95 monthly bucket plans (or glom onto family plans).
So Virgin needs to have a migration path – a postpaid option – to hold on to subscribers who see usage growing and are tempted by Boost Unlimited, metroPCS and Cricket, and carrier entry-level $39.95 monthly plans.
Enter Helio, the postpaid offering geared to the same market as Virgin, with a focus on the youth technophile. Helio has some of the coolest handsets around, and a fresh product set. But Helio has a more fundamental problem that presents big challenges in any combination with Virgin.
Have you ever been at a company that, in hindsight, made a costly, even fatal, decision, the implications of which were not apparent at the time? Helio made such a mistake, early on, in deciding to use SK’s proprietary back-office solution rather than outsourcing or using off-the-shelf technology. The development of this proprietary back-office cost the SK-Earthlink partnership tens if not hundreds of millions of dollars, delayed market entry, and diverted funds to back-office development rather than getting the service into the marketplace. With this proprietary back-office, custom interfaces are needed for any new product or service. Meanwhile, Earthlink, which needed a mobile play to drive growth, got to invest in SK’s back-office instead. By the time the service launched, Earthlink was rethinking its investment, and began diluting down rather than sinking more money in.
While strategically it makes sense for Virgin to try to broaden its prepaid product set with a postpaid solution, integrating Helio’s proprietary back-office with Virgin’s platform will be costly at a time when Virgin can ill-afford IT costs. Further, I see Virgin’s and Helio’s subscribers at opposite ends of the scale. There’s a lot more in the middle that should be Virgin’s bread and butter.
Bottom line: Thumbs down on this deal. It won’t solve either’s problems.
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