Why Helio Didn’t Connect

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.

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.