The gist: Virgin will take over Helio’s subscriber base and keep its own brand. Helio’s majority owner SK Telecom (SKM) will invest a “nominal sum” in Virgin. (Financial details not yet reported.)
When we first heard about this deal in May, we thought it made sense — we said the two operators could benefit from better scale, complementary services, better distribution, etc. Why wouldn’t Virgin want Helio’s cool phones and subscribers that spend $80 a month on service?
But after thinking about it some more — and watching Apple (AAPL) announce a $199 3G iPhone that’s better than anything Helio’s ever offered, and watching interest in Helio continue to drop — we’re more inclined to agree with Pali Research analyst Walter Piecyk, who ripped the deal to shreds yesterday in a research note (registration required).
It always concerns us when companies move out of their comfort zone with a new strategy, particularly one as challenging as wireless resale. The unlimited rate plans and high end phones that Helio sells are now competing with unlimited rate plans recently launched by the major operators and high end phones like the iPhone, Blackberry and Instinct that are not available on Helio.
The biggest problems, outlined by Piecyk: Virgin Mobile is having a hard enough time eking out a profit in its existing business of selling cheap, pre-paid phone service, which is only going to get more competitive. (Virgin made $4.2 million on $1.2 billion of revenue last year.) And even once Helio is worked into Virgin’s distribution network, it doesn’t add much.
With only about 200,000 subscribers, Helio isn’t going to do much to increase Virgin’s 5 million subscribers, which means it won’t have much more leverage when it tries to negotiate with wholesaler Sprint Nextel (S). So there goes the theoretical “scale” benefit. And Helio’s P&L certainly won’t help Virgin’s numbers: Helio lost $327 million last year on $171 million of revenue.
Bottom line: Unless we’re missing something huge, we don’t see what Virgin is getting out of this — other than the goodwill of Helio investors — SK Telecom and EarthLink (ELNK) — who’ve been watching their money disappear at an alarming rate.