Will Virgin Mobile really benefit from Helio?

Struggling MVNO Helio was able to avoid the humiliation of going out of business by finding a savior in Virgin Mobile, which announced its intention to purchase the company for a mere $39 million from EarthLink and SK Telecom for 13 million shares of Virgin Mobile stock. Moreover, the deal was even sweeter for Virgin because both EarthLink and SK Telecom agreed to invest $25 million in equity capital in Virgin.

Virgin says that the Helio deal will be good for the MVNO because it will allow the company to offer differentiated data applications and enter the postpaid market. Helio has approximately 170,000 subscribers with an ARPU of about $80 and a handset inventory of 85,000 devices valued at $17 million.

But you have to wonder how much of a difference such an acquisition will make on Virgin's competitive position in the long-run.

Virgin launched in the U.S. with a razor-sharp focus on the prepaid youth market, a strategy that CEO Dan Schulman himself in the past has said is a critical factor to the success of the MVNO because it differentiated the company from wireless competitors. Now Schulman says it is necessary to compete with a postpaid product with the help of the Helio acquisition because 20 percent of the firm's disconnects come from customers going to postpaid products.

But this move into the postpaid market, and it's recent launch of an unlimited minutes plan for $80, puts Virgin competing head-to-head with national operators for the higher class of consumers--a segment where the stakes are higher and competitors are even more fierce for these lucrative customers than in the prepaid market. Moreover, what if we see an all-out price war break out among the nation's operators? Can Virgin negotiate even better wholesale terms on Sprint's network? Plus, pushing into the postpaid market requires a better market presence, which translates into higher marketing costs.

These days, Virgin seems to be losing its differentiation by pitting itself against national operators. What happened to the edgy company that launched in 2002 with a half-naked Sir Richard Branson sliding into Times Square promising cool content and no BS pricing to the youth market? The Helio acquisition does bring 3G capability to Virgin, giving it the ability to differentiate itself once again with cool content such as video and music. But it has to tread carefully. Other MVNOs such as Amp'd Mobile that have tried to take on national carriers by differentiating themselves with content services have all gone out of business. 

If Virgin doesn't keep its original business plan in mind as it uses Helio's assets, the acquisition will have little impact on Virgin's competitive position. --Lynnette

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