Virgin Mobile Wants More Money; Think Twice Before Providing It

Virgin Mobile USA has quintupled the amount of money it hopes to raise in its IPO, according to forms filed Friday with the SEC. Warren, N.J.-based Virgin Mobile, a “virtual” wireless carrier that re-sells service on Sprint Nextel’s network, now hopes to raise $506 million , a sharp increase from the $100 million it filed to raise on June 18.

In Friday’s filing, Virgin says it expects to net $333 million from the offering after expenses; $150 million will go toward paying back a loan and $161 million will go toward buying assets from Sprint. (We don’t know how much of the company Sprint will own after the IPO.)

Is Virgin a good investment? The five-year-old company has almost 5 million subscribers, lured by its inexpensive, mostly pre-paid service, cheap phones and quirky promotions, such as offering customers free airtime if they look at ads on their computer or mobile phone. And in this year’s first quarter, Virgin Mobile managed to squeak out a profit, making $15 million on $339 million of revenue.

But last year, the company lost $36.7 million on $1 billion of sales. And its operating metrics are poor compared to those of larger rivals. Virgin Mobile customers spent an average $22.41 per month during the first quarter, about half as much as customers spend at AT&T, Verizon Wireless, Sprint or T-Mobile. And because its pre-paid users are not on service contracts, they can leave at any time without penalty: in the first quarter, Virgin attracted 882,000 new customers (gross), but more than 500,000 left the service–leaving them with a net gain of only 310,000.  This equates to monthly churn of 4%, more than twice AT&T’s 1.7%.

Virgin’s challenges are not unique, and, indeed, the virtual operator business model is looking more and more suspect. True, virtual operators have start-up benefits, such as not needing to buy government airspace licenses and not having to build out mobile phone towers. But they must cut deals for wholesale service, compete with much larger rivals on deals for handsets and entertainment content, attract customers who are often on multi-year contracts or family plans, and spend a ton on marketing.

Virgin has survived so far, but its prospects could be iffy–especially considering the ill-health of similar companies: Amp’d Mobile filed for bankruptcy last month, Helio, co-owned by EarthLink and Korea’s SK Telecom, is burning through cash, and Disney closed its Mobile ESPN service last fall after only months of operation.

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