Wireless Federation

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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