By Pierre Joo*
Virgin Mobile USA, one of the biggest US Mobile Virtual Network Operator (MVNO) confirmed preliminary talks with Korea’s largest wireless carrier SK Telecom “to explore possible strategic opportunities.” These are surely related to Helio, another troubled US MVNO that SK Telecom controls through a 69% stake (Earthlink being the other shareholder). One possible scenario according to mocoNews.net, which first broke the news, would be for SK Telecom to buy out VM, inject some fresh cash in the newly bought company, which would in turn buy Helio in an all-share transaction. SK Telecom’s move comes as no surprise. Sure, Korean high school kids switch cellphones every four months, and probably represent the earliest of early adopters of new mobile applications. Yet, the Korean giant can expect no exciting future from a saturated market of only 42 million subscribers, more than half of whom already are frenetic 3G, or 3.5G users. SK Telecom’s future growth obviously depends on overseas expansion. SK Telecom launched Helio in the US market in 2006, expecting that its superior technology (among many other innovations, it was the world’s first carrier to launch 3G, or broadcast TV on mobiles, significant investment capacity, and local partnership with well-established Earthlink, would give it enough competitive edge to attract all the tech savvy, high-ARPU driving users, starting with the Korean American community. Yet in a mature market such as the US, it was simply not enough to convince users to massively switch to Helio. With a mere 200,000 customer base, Helio has not been able to lure enough users, in spite of significant investments from its shareholders (last September, SK Telecom threw in another $270 million). SK Telecom lacked two key assets: a larger customer base to start with, and its own network. Last year, it approached Sprint Nextel, the very carrier which sells wholesale airtime to Helio, with a USD 5bln bid along with PE firm Providence Equity Partners, an offer Sprint turned down last November.
Virgin Mobile appears to be SK Telecom’s second pick, but can it be the right one? A Helio-VM merger could make sense: both run on the Sprint network and target different users. VM has focused on prepaid services aimed at young users different from the tech-savvy crowd Helio has been busy luring with high-end handsets and innovative services inspired from those offered in Korea. Yet, VM is badly hit by the US market downturn and experiences increasing pressure from investors: the company has lost more than 75% of its IPO value a year ago, and its earnings are heading south. Some would argue that taking advantage of VM’s shrinking market cap is a good opportunity, but can two troubled MVNOs make a right mobile operator? — Pierre Joo
*partner at Attali & Associés specialized in asian affairs