“Virtual” mobile carriers Virgin Mobile USA and Helio each have something the other doesn’t: Helio has cool phones and high-end subscribers happy to pay $85 a month on mobile phone service, and Virgin Mobile has a real business, where it has more than 5 million subscribers and makes a profit.
So would they work better together than alone? We think so. Virgin and Helio are in talks to combine, Moconews’ Rafat Ali reports, citing anonymous sources. One deal Rafat has heard about has Helio majority owner SK Telecom (SKM) buying Virgin Mobile (VM), which would then buy Helio in an all-stock transaction.
Why would a Virgin-Helio deal make sense?
- Scale: Both operate using Sprint Nextel’s (S) network. So more subscribers means more wholesale service they could buy in bulk, on one bill. And, a nice touch, their phones are more compatible than if one of the two used AT&T (T) for its network.
- Complementary, not competitive services: Virgin Mobile targets the low- and mid-level of the prepaid wireless business. Its average subscriber spends $20 a month on service. It’s also aiming at people who want to spend about $40 a month. Helio’s subscribers, meanwhile, spend $85 a month for lots of goodies, including video, 3G Internet access, etc. Minimal overlap, and a good opportunity to upsell to Virgin customers who want to upgrade.
- Distribution: We don’t expect to see many of Helio’s high-end phones next to Virgin’s on the shelf at Sears or Wal-Mart. But Virgin has plenty of distribution, and Helio needs more of it.
- Cool phones and software: Helio’s phones are pretty slick, and the Helio Ocean YouTube app is excellent.
- Profitability: Virgin Mobile’s stock has not fared well since its IPO: It’s down 80% from its 52-week high. But Virgin made $4.2 million of profit on $1.3 billion of revenue last year, while Helio lost $327 million on $171 million of revenue. We imagine there’s quite a bit of synergy and cost-cutting that could occur if the companies joined up.