After months of speculation, Virgin Mobile USA has said it is to acquire the Helio, the US MVNO controlled by SK Telecom of South Korea. The idea is that their combined force will bring economies of scale to aid their struggling businesses.
According to the Financial Times, Virgin Mobile USA last month reported net income of â‚¬3 million (US$4.8 million) for the first quarter of the year, down 75% on the same period last year. It also said it expects to lose between 130,000 and 160,000 subscribers in the second quarter.
Unusually in the US, all of Virgin Mobile's 5.1 million customers are all pay-as-you-go whereas the norm is to tie customers into long contracts which are more profitable and predictable for operators. Helio brings almost 200,000 customers to the party, all of whom are on monthly contracts. The obvious thing for Virgin to do is build on this base and increase the number of contract customers.
While the merger won't be anything like the scale of the Sprint's buying Nextel back in 2005 for â‚¬22.47 billion (US$35 billion), the issues are the same. The failure to integrate the two businesses successfully, and thereby benefit from the economies of scale, are widely blamed for the dire straits Sprint is in. Appalling customer service in the interim has lead to it churning customers at staggering rate, losing 1.1 post paid subscribers in the first quarter of this year.
In addition, unlike in Europe, there are fundamental questions about whether the MVNO business model can work in the US - after all, even the mighty Disney pulled out after a few months.
On the plus side, the new entity will be known as Virgin, a strong brand by any standards, and SK Telecom will own about 20% of the merged business, which is thought to be worth about â‚¬32 million (US$50 million).