Virgin Mobile USA and Helio in merger talks?

Virtual cell phone operators Virgin Mobile USA and Helio are rumored to be in merger talks, a move that could bring a lot of benefits to both companies.

The tie-up between the two MVNOs, or mobile virtual network operators, was first reported Thursday by the wireless blog MocoNews. According to the blog, SK Telecom, one of Helio's parent companies, would buy out Virgin Mobile USA and then Virgin Mobile would buy Helio in an all-stock transaction.

(Credit: Helio)

As the economy tightens and other larger wireless carriers look to consolidate, it makes sense for these smaller players, who essentially resell service from Sprint Nextel, to look for alternatives. The companies are also rumored to be in talks with private equity firms.

Over the past 18 months, Helio and Virgin Mobile USA have seen many of their MVNO brethren die. ESPN Mobile, Disney Mobile and youth-targeted Amp'd Mobile have all closed shop.

And even though Virgin Mobile USA and Helio are still in business, the companies have not been immune to the increasingly competitive market place. For the first quarter of 2008, Virgin Mobile USA reported that its earnings fell 75 percent compared to a year ago. Meanwhile Helio, which is jointly owned by South Korean carrier SK Telecom and Internet service provider EarthLink, lost $327 million in 2007 on $171 million of revenue. All told, the company has lost more than $560 million since it was started in 2005.

While combining the two companies won't magically solve all their problems, they may fare better as a combined entity rather than individually.

The main reason is that the companies' businesses compliment each other nicely. Helio was originally created by Sky Dayton, EarthLink's founder, to bring cool and cutting edge devices and services to the U.S. market. The original idea behind the company was to target a young technically savvy crowd. Virgin Mobile USA, a subsidiary of the European-based phone company, has made a name for itself as a hip brand also focused on the youth market.

But it's the companies' differences that could really benefit a merged company. Even though both companies are going after a younger demographic, they are really addressing different segments of this population. For example, Virgin Mobile is a prepaid service that targets users who don't have a lot of money to spend and who have poor credit or no credit history at all. By contrast, Helio is targeting high-end users, who spend an average of $85 a month on their cell phone service. Most wireless users only spend $50 a month on service from bigger carriers like AT&T and Verizon Wireless.

Virgin Mobile could greatly benefit from Helio's high-end customers, who are voracious data users. In 2007, Helio subscribers sent an average of 550 text messages per month. And 95 percent of the company's subscribers accessed the Web through their mobile device compared the industry average of just 13 percent.

On the flip side, Virgin Mobile USA gives Helio the opportunity to expand its customer base. Initially, Helio only tried wooing a small niche of technology elite, a set of high-end consumers who wanted cool phones and were willing to spend a lot on new services and devices. But then came Apple's iPhone, which literally changed the game overnight. And the very people Helio wanted to entice with cool devices, such as the Ocean, were instead more interested in an iPhone.

Now Helio has shifted its strategy to appeal to a wider audience. And Virgin Mobile, which has relationships with a wide circle of retailers and over 5 million subscribers, could significantly improve Helio's reach.

Even if the companies merged, it will still be a difficult market for them to survive. More than 84 percent of the U.S. population already subscribes to a cell phone service. And as the bigger carriers more aggressively address both the high end and low end of the market, it could be harder for Virgin Mobile USA and Helio to compete.