Why Helio Didn't Connect

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In 2006, Helio was part of a spate of companies trying to offer high-end services and cell phones without operating their own networks. Disney's Disney Mobile and Mobile ESPN were out there, as were startups like Voce and Amp'd Mobile. All failed, for various reasons.

But there is still life in the concept of renting cellular network capacity. Virgin Mobile and Tracfone are the biggest of at least a dozen firms that sell prepaid phone messaging services to niche markets. Such firms hold about 8 percent of the overall U.S. cellular market, according to data from Chetan Sharma Consulting.

Still, it's a very low-margin market built on selling prepaid calls. Tracfone--with nine million customers, it's the biggest of these firms--pulls in only about $12 per customer per month. Virgin Mobile has five million customers and sees revenues of about $21 each per month. Helio, meanwhile, made about $80 in revenue per month from its typical customer, a far more lucrative market. Still, IDC says that MVNOs represent only 2 percent of the overall mobile phone revenues in the United States.

At least one analyst thinks that Helio's fall may foreshadow problems for phones that use Google's Android platform, which will allow for phones that can be attached to any network. If consumers buy phones and then shop for networks, "the wholesaler can't make any money, and the person reselling it can't make any money," says Andrew M. Seybold, a veteran wireless analyst in Santa Barbara, CA.

Helio has found a welcome parent in Virgin Mobile. Buying Helio seems unquestionably a good deal for the company. It gets the Helio brand, its services, its infrastructure--which Virgin Mobile will adopt as its own--and its customer base, plus approximately 85,000 handsets (Virgin Mobile will eliminate Helio's retail stores and kiosks). It also gets $50 million in cash from Virgin Group and SK Telecom, and an extra $60 million for its credit line. What's more, Sprint lowered Virgin Mobile's pricing.

"It's a terrific deal for us," says Jayne Wallace, a Virgin Mobile spokeswoman. It will treat Helio as its entry into the traditional cell-phone market and operate it to compete with the high-end offerings of traditional cellular carriers. Virgin Mobile's ultimate hope: that the 20 percent of its customers who leave for traditional cell-phone companies, in search of better phones and services, will now stick with it.