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Helio, which aimed to use souped-up mobile devices and spiffy services to build a virtual mobile phone company, instead has been sold off for a fraction of its backers’ investment. Helio thus becomes the latest reminder that the wireless industry remains a perilous place for startups.

“If you look at wireless as a whole, it’s represented a net destruction of capital for venture capitalists,” grumbles William Frezza, a general partner at the Boston venture capital firm Adams Capital Management.

Despite receiving some $710 million in capital, Helio was able to attract only about 170,000 customers, racking up significant losses in the process.

The trouble was not a lack of innovation. Helio’s May 2006 launch saw it put two twists on the market for virtual mobile phone companies: it offered high-end cell phones with unique services, like integration with MySpace and YouTube, and the ability to make micropayments via the phone. And where other virtual mobile providers (also called mobile virtual network operators, or MVNOs) went after underserved niches, Helio rented space on Sprint’s cellular network and then used it to go after a mainstream cellular market: young people. Helio had big backers in Earthlink, a successful Internet service provider, and South Korea’s SK Telecom, and it was headed by Sky Dayton, Earthlink’s wunderkind founder.

Helio entered a market filled with froth: less than a year earlier, Sean “Diddy” Combs gave a keynote to the 2005 Cellular Telephony Industry Association trade show and said, “I am an MVNO.”

One virtual phone company that has had success is Virgin Mobile USA, which bought Helio for perhaps $49 million–$39 million in stock and the assumption of as much as $10 million in debt. Helio itself is not dead: Virgin Mobile will continue to market its service. But observers say that the deal strikes a death blow to the idea that U.S. consumers will buy high-end mobile phones from someone other than a cellular carrier.

“The chapter closes on this market, and it’s turning the page,” says Chetan Sharma, president of Chetan Sharma Consulting, based in Issaquah, WA. Sharma says that Helio would have needed a million customers to get to a break-even point.

Apple’s iPhone might seem to fly in the face of this assertion. But the iPhone model stops short of being an MVNO, says Lewis Ward, an analyst at International Data Corp (IDC). While Apple has more control over its phones than any other phone maker in the U.S. cellular market, it shares branding with AT&T and is not renting airtime from AT&T. Ward also says that the sale of Helio probably marks the end of efforts to create a high-end virtual mobile phone operator in the United States.

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Credit: Photo by Toby Pederson, Illustration by Technology Review

Tagged: Business, iPhone, mobile phones, mobile devices, cellphone, Helio

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