Virgin Mobile USA LP has agreed to hire International Business Machines Corp. to handle information technology operations and develop new applications.
Under the Friday agreement, New York-based IBM will hire 44 Virgin Mobile employees at current pay levels for two years.
The companies expect a five-year initial term for the agreement, from May 15, 2008, according to a Monday filing with the Securities and Exchange Commission. New Jersey-based Virgin Mobile can extend the agreement, which also includes engineering services, for one year. The agreement will provide undisclosed IT-related operational cost savings and help the company compete in new product and service delivery, according to a release.
Virgin Mobile will pay IBM through fixed and variable charges, the latter of which will change depending on Virgin Mobile’s need for services. Fees for operations and infrastructure will depend on factors such as the number of servers or workstations needed, the filing said. Network operations center, application development and certain other fees will be hourly. Charges will be adjusted beginning in 2010 based on general economic indicators.
Financial terms of the agreement are not being released.
Virgin Mobile can cancel the agreement with 180 days’ notice plus a fee and deferred transition costs. It may also have to pay wind-down charges for canceling third-party agreements, ending leases or firing employees. The charges wouldn’t apply if IBM didn’t meet certain service levels or violated the agreement.
If either party ended the agreement, Virgin Mobile could ask IBM to provide continuing services for one year to 15 months.
Virgin Mobile plans to file the agreement with the SEC in conjunction with its second-quarter financial report.
On June 27 , Virgin Mobile agreed to buy Helio for about $39 million in equity.
United Kingdom-based Virgin Group and Sprint Corp., the predecessor of Overland Park-based Sprint Nextel Corp, each invested as much as $150 million in mid-2002 to form Virgin Mobile.
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Virgin Mobile said Friday that it will pay $39 million in stock for mobile phone carrier Helio, which has 170,000 subscribers.
Moreover, Virgin Group and SK Telecom, the South Korean carrier that is majority owner of Helio, will each invest $25 million in Virgin Mobile. That will give SK Telecom a 17% stake in the mobile phone company.
Virgin Mobile said it will continue Helio’s advanced data services and its customer-service plans.
However, critics say Virgin Mobile reported net customer additions fell 94% during the first quarter. The mobile company continues to be hard hit by the economic downturn. Helio has struggled to turn a profit and increase its own customer base. Its phones - a strong suit of the company - have lagged behind rivals such as Apple Inc’s iPhone.
At the end of March, Virgin Mobile had 5.1 million customers, making it one of the largest mobile network operators in the US.
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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 €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 €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 €32 million (US$50 million).
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Korean telecommunications provider SK Telecom has long wanted a bigger beachhead in the U.S. Last year the company went so far as to make an audacious attempt to buy a stake in Sprint Nextel (S), according to reports. That deal didn’t pan out, but SK Telecom is once again combing the sands on this side of the Pacific.
SK Telecom has confirmed reports that it’s in preliminary discussions to buy Virgin Mobile USA, the wireless carrier initially formed as a joint venture between Sprint Nextel and Virgin Group. The discussions extend to Helio, a wireless carrier that’s 70% owned by SK Telecom and 30% owned by EarthLink (ELNK), a telecommunications service provider. “These discussions are in early stages,” Helio spokesman Rick Heineman wrote in an e-mail. “There are no assurances that any transaction will result.” (An inquiry sent to EarthLink was forwarded to Helio.)
Extending reach
If the companies do get together, it’s not clear how the resulting entity would be structured. SK Telecom could combine the smaller carriers, reducing expenses by eliminating overlapping operations and boosting revenue by catering to a larger U.S. customer base.
Together, Virgin Mobile and Helio have 5.4 million subscribers. South Korea is years ahead of the U.S. in terms of wireless technology, and SK Telecom could tap its expertise to introduce advanced mobile applications to Virgin Mobile’s and Helio’s mostly younger customers, who tend to be early adopters of new technology. “Virgin Mobile will give SK a bigger user base with which it could experiment on various mobile Internet services,” says Stan Jung, telecom analyst at Seoul-based brokerage Woori Investment & Securities.
Other efforts to widen SK Telecom’s U.S. base include the creation last year of a $110 million U.S. holding company, SKT Holdings America, which is headed by Yoo Hyun-Oh, who until last year was the CEO of SK Communications, a subsidiary of SK Telecom that runs the popular social network Cyworld. “We are interested in entertainment and other content businesses as well as mobile financial services,” SK spokesman Weon Hong Sik says. “An acquisition is in our cards for our content business.”
SK also recently formed Mobile Money Ventures, a joint venture with Citigroup (C), to develop global mobile financial services. Each will invest $8 million to begin testing the services with Citi customers in selected Asian countries and North America.
Sprint’s say
To clinch the Virgin Mobile deal, SK Telecom may need buy-in from Sprint Nextel, which still owns a small sliver of Virgin Mobile through its Sprint Ventures arm. Sprint rebuffed SK Telecom’s attempt last year to buy a stake in Sprint, according to published reports. (Neither company would comment.)
But Sprint may not veto a Virgin Mobile deal. Sprint is hemorrhaging customers who are disaffected by poor customer service and low network quality (BusinessWeek.com, 5/13/08), and the company has said it might sell “noncore assets” or take other measures to remain in compliance with financial covenants with lenders. In May, Sprint also lost big customers in Embarq (EQ) and Qwest (Q).
Helio and Virgin both use Sprint’s network to provide wireless service and account for about 10% of Sprint’s subscribers and more than half of its wholesale users. “Sprint is in a very different spot within the slowing wireless industry,” says Chris King, an analyst with Stifel Nicolaus & Co.
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Korean telecommunications provider SK Telecom has long wanted a bigger beachhead in the U.S. Last year the company went so far as to make an audacious attempt to buy a stake in Sprint Nextel (S), according to reports. That deal didn’t pan out, but SK Telecom is once again combing the sands on this side of the Pacific.
SK Telecom has confirmed reports that it’s in preliminary discussions to buy Virgin Mobile USA, the wireless carrier initially formed as a joint venture between Sprint Nextel and Virgin Group. The discussions extend to Helio, a wireless carrier that’s 70% owned by SK Telecom and 30% owned by EarthLink (ELNK), a telecommunications service provider. “These discussions are in early stages,” Helio spokesman Rick Heineman wrote in an e-mail. “There are no assurances that any transaction will result.” (An inquiry sent to EarthLink was forwarded to Helio.)
Extending reach
If the companies do get together, it’s not clear how the resulting entity would be structured. SK Telecom could combine the smaller carriers, reducing expenses by eliminating overlapping operations and boosting revenue by catering to a larger U.S. customer base.
Together, Virgin Mobile and Helio have 5.4 million subscribers. South Korea is years ahead of the U.S. in terms of wireless technology, and SK Telecom could tap its expertise to introduce advanced mobile applications to Virgin Mobile’s and Helio’s mostly younger customers, who tend to be early adopters of new technology. “Virgin Mobile will give SK a bigger user base with which it could experiment on various mobile Internet services,” says Stan Jung, telecom analyst at Seoul-based brokerage Woori Investment & Securities.
Other efforts to widen SK Telecom’s U.S. base include the creation last year of a $110 million U.S. holding company, SKT Holdings America, which is headed by Yoo Hyun-Oh, who until last year was the CEO of SK Communications, a subsidiary of SK Telecom that runs the popular social network Cyworld. “We are interested in entertainment and other content businesses as well as mobile financial services,” SK spokesman Weon Hong Sik says. “An acquisition is in our cards for our content business.”
SK also recently formed Mobile Money Ventures, a joint venture with Citigroup (C), to develop global mobile financial services. Each will invest $8 million to begin testing the services with Citi customers in selected Asian countries and North America.
Sprint’s say
To clinch the Virgin Mobile deal, SK Telecom may need buy-in from Sprint Nextel, which still owns a small sliver of Virgin Mobile through its Sprint Ventures arm. Sprint rebuffed SK Telecom’s attempt last year to buy a stake in Sprint, according to published reports. (Neither company would comment.)
But Sprint may not veto a Virgin Mobile deal. Sprint is hemorrhaging customers who are disaffected by poor customer service and low network quality (BusinessWeek.com, 5/13/08), and the company has said it might sell “noncore assets” or take other measures to remain in compliance with financial covenants with lenders. In May, Sprint also lost big customers in Embarq (EQ) and Qwest (Q).
Helio and Virgin both use Sprint’s network to provide wireless service and account for about 10% of Sprint’s subscribers and more than half of its wholesale users. “Sprint is in a very different spot within the slowing wireless industry,” says Chris King, an analyst with Stifel Nicolaus & Co.
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Mobile service reseller Virgin Mobile USA on Wednesday confirmed reports that it is in talks with South Korea’s SK Telecom about a strategic deal involving Helio, SK’s high-end U.S. mobile service reseller.
The parties are seeking a deal that could alter the fortunes of both Virgin Mobile and Helio, two firms that have faced tough times financially in the disappointing mobile virtual network operator, or MVNO, business.
Confirmation of the talks between SK Telecom and Virgin Mobile about a possible merger of the two MVNOs sent Virgin Mobile’s stock soaring more than 20 percent.
Both Helio and Virgin are jointly owned by SK Telecom and EarthLink. Virgin Mobile, which resells services from Sprint Nextel, went public in May 2007.
Virgin Mobile targets pre-paid phone service customers with relatively inexpensive service plans, while Helio aims at the youth market with more expensive services and high-end phones.
“Helio and Virgin Mobile make a very bad match,” said Alex Besen, president of The Besen Group. “Certainly a merger does not make sense either financially or operationally for either company, but particularly so for Virgin.”
The main goal of a merger of the two firms, he said, would involve the migration of many of Virgin’s five million customers to post-paid plans and would offer them enhanced services marketed by Helio.
Kajeet is a Bethesda, Maryland, MVNO, which began reselling Sprint mobile services in March 2007 aimed at “tweens,” young people between 12 and 14 years old.
Mr. Besen believes that Virgin, which has had problems adding new subscribers, should target attractive, rapidly growing cultural niches in the U.S. market such as Hispanics.
He said that Virgin, which woos Hispanics, should have at least investigated the purchase of Movida Communications, a Kansas City, Missouri-based MVNO which targets the U.S. Hispanic market.
Movida, which was backed by Sprint a Venezuelan conglomerate and a group of former Sprint executives, filed for Chapter 11 bankruptcy in March.
Cozac Wireless, a subsidiary of APC Wireless of Rockville, Maryland, bought Movida for $2.8 million in April.
“Virgin will not get the benefits of scale with Helio that it will get from Kajeet, Movida or some of the other players targeting cost-conscious consumers,” Mr. Besen said.
Topics: Earthlink, Virgin Mobile, Sk Telecom, MVNO, Sprint Nextel, Movida, Cassimir Medford, Alex Besen, Kajeet, Cozac Wireless.
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Three years ago, everyone from Mickey Mouse to Sean “P. Diddy” Combs said they wanted to get into the business of reselling wireless service.
Nowadays, those resellers left should consider themselves lucky to still be operating.
The latest signal of the trying times is the potential merger between Virgin Mobile USA Inc. (VM) and SK Telecom Co.’s (SKM) Helio. While they are in early talks, a deal would combine their complementary youth focus and improve their prospects of survival. It is an illustration of the pressures they face and the need for wireless resellers to either shutter their business or consolidate.
“The (wireless reseller) market in this country can be summed in one word: disaster,” said Eddie Hold, an analyst at Current Analysis. “It’s been a complete and utter failure.”
The wireless resellers - who lease time from cellphone carriers - went after niche segments, such as youths, sports fanatics or Hispanics. The hope was to use an existing brand such as Walt Disney Co. (DIS) or its ESPN unit to push the service. But too many competitors, unclear business strategies and an inadequate retail presence sealed the fate of many players early in the game.
There are roughly 13 million customers who use a wireless reseller, according to Roger Entner, head of the communications practice at IAG Research. Over the next two years, he expects the number to grow to 15 million to 17 million. A few years ago, he had projected 25 million users by 2010. The estimate, however, assumed several key players would remain in business.
Helio and Virgin Mobile confirmed on Wednesday that they were in talks over a potential deal, although they declined to specify further. A combination would bring together Virgin Mobile’s lower-end prepaid youth market with Helio’s limited higher-end contract customers.
Both companies have experienced their share of problems. Last week, Virgin Mobile said it had added nearly 18,000 net new customers in the first quarter, a dramatic drop from the 310,000 customers it signed up in the first quarter a year ago. Its revenue fell 3.7% to $326.8 million, while net income plunged 75% as the company faces intense competition in the prepaid market.
Helio spokesman Rick Heineman said the company continues to boast attractive metrics, such as the high average revenue per customer it garners. The company has roughly 200,000 subscribers, but Heineman declined to comment on whether customer growth was slowing or accelerating. Helio isn’t profitable, and Heineman would not speculate as to when the business would turn a profit.
Late last year, EarthLink Inc. (ELNK) reduced its stake in the Helio joint venture, ceding control to SK Telecom after disappointingly nabbing only a small customer base. In January, Helio founder Sky Dayton stepped down as CEO. A spokesman for Helio wasn’t immediately available for comment.
The two have lasted much longer than their similarly ambitious peers.
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Virgin Mobile USA Inc. said Wednesday it is in preliminary talks with South Korea’s SK Telecom Co. about possible “strategic options,” a phrase that usually suggests a buyout or major investment.
Shares of Virgin Mobile rose 33 cents, or 11 percent, to close at $3.37 after initially jumping 47 percent on the news.
The U.S. wireless unit of Richard Branson’s Virgin Group, which went public at $15 per share last October, said the talks are in early stages and it will have no further comments until a deal is reached.
SK Telecom is South Korea’s largest mobile phone service operator by subscriber numbers. It’s also the majority owner of Helio LLC, another U.S. cell-phone company, which could be combined with Virgin Mobile. Helio spokesman Rick Heineman confirmed that SK Telecom, Virgin Mobile and Helio are all in discussions.
Virgin Mobile had 5.1 million customers at the end of March, making it one of the largest U.S. “mobile virtual network operators,” or MVNOs. Rather than owning their own network, MVNOs buy wholesale airtime from other carriers. Virgin Mobile uses the Sprint Nextel Corp. network, as does Helio.
Virgin Mobile specializes in marketing prepaid plans and postpaid plans without contracts to younger customers.
Last week, Virgin Mobile’s stock tumbled after it posted lower first-quarter earnings and said it expects to lose between 130,000 and 160,000 net subscribers in the second quarter.
Helio started out in 2006 as joint venture of EarthLink Corp. and SK Telecom. Its aim was to bring the sophisticated features of Korean phones to the U.S., but the venture has had a slow start. It January, it said it had “nearly” 200,000 subscribers.
A number of other companies have tried the MVNO business model, and success stories are few. Amp’d Mobile, ESPN Mobile and Disney Mobile have all shut down.
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Virgin Mobile USA is in talks with SK Telecom over a possible deal involving Helio, the U.S. mobile operator that gears itself toward affluent youngsters but has struggled to make a profit since its launch.
The talks, which could potentially lead to an acquisition or an investment, are in the early stages, and Virgin said Wednesday that it didn’t expect to comment further unless an agreement is reached.
Helio was founded by SK Telecom and EarthLink in 2005 and launched the following year. It is known as a mobile virtual network operator (MVNO) because it rents capacity from a third party rather than owning its own network. SK Telecom became the majority owner after EarthLink reduced its ownership to 22 percent last year.
Both SK Telecom and EarthLink have sunk hundreds of millions of dollars into Helio, which continues to post losses despite boasting some of the best customer spending and usage metrics in the mobile industry.
At the end of last year, Helio said its users spent more than US$85 per month, compared with an industry average of $50. Helio customers send an average of 550 text messages per month, and 95 percent of Helio users access the Web from their phones, the company said at the time.
Still, EarthLink expected Helio to report a year-end loss for 2007 of as much as $360 million on revenue of as much as $170 million. That’s after SK Telecom and EarthLink started the company with a combined $440 million. Since then, both companies have made additional investments in Helio.
Virgin Mobile USA’s earnings for the first quarter were down from the same period a year earlier. It had 5.1 million subscribers in the first quarter, compared to Helio’s 200,000 at the end of 2007. Like Helio, Virgin Mobile USA is also an MVNO, and both use Sprint’s network to deliver their service.
The companies have different types of customers, however. While Helio is after big-spending mobile users, Virgin offers only prepaid services and targets people looking for a lower-cost service. Combining the companies could allow the new entity to offer both pre- and post-paid service and attract a wider spectrum of the market.
Helio and Virgin aren’t the only struggling MVNOs. Amp’d, which was also geared toward young mobile users, filed for bankruptcy and then shut down last year. Other MVNOs such as ESPN Mobile and Disney Mobile have suffered similar fates. In addition, Qwest dealt a blow to the concept of MVNOs earlier this month when it decided to stop selling its own branded mobile service, using Sprint’s network, and begin selling service branded by Verizon.
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- September 25th, 2007
- 1:21 pm
Struggling US internet service provider EarthLink has opted not to pump additional funds into its mobile virtual network operator (MVNO) subsidiary Helio, despite its partner in the venture, South Korea’s SK Telecom, recently announcing a new investment of USD270 million. EarthLink says it will not be investing any more in Helio ‘for the time being’ and says that it is in negotiations with SK Telecom over the ‘future governance’ of the firm. The ISP has not confirmed, however, whether or not it is looking to downsize its stake in Helio from the current level of 50%. Helio had 130,000 subscribers at the end of August and is aiming for between 200,000 and 250,000 by the end of the year.
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Virgin Mobile, IBM enter IT service agreement (USA)
