Virgin Mobile USA's $39 million offer for struggling mobile virtual network operator Helio, a joint venture of SK Telecom and EarthLink, is a play to attract more upmarket postpaid customers in a rapidly consolidating wireless carrier market.

Per the deal, Virgin Mobile USA's British parent Virgin Group and South Korea's SK Telecom will each invest $25 million in Virgin Mobile USA equity. Both companies will provide an additional $60 million to increase Virgin Mobile USA's existing revolving debt facility which will more than double the company's liquidity and support its growth strategy.

"The acquisition of Helio allows us to offer a new suite of products to our subscribers, and we are delighted to gain an important strategic partner in SK Telecom," said Dan Schulman, CEO of Virgin Mobile USA, Warren, NJ, on a conference call Friday. "The key to success in this business is, in a word, scale, and this deal improves our scale and substantially reduces our costs."

The cost benefits he cited include immediate operational synergies such as reducing costs due to increased handset volume and improved network rates from Sprint.

Post the deal, Sprint will offer an 8 percent discount totaling about $10 million based on Virgin Mobile USA's gross ad performance and $30 million in incremental benefits in 2009.

Virgin Mobile USA will also gain Helio's inventory of 85,000 3G handsets, its customer base of 170,000 post-paid subscribers with $80 average revenue per user, its partnerships with YouTube, Google and MySpace and its real-time billing and credit checks that will help them compete in the post-pay market.

"While these customers were not profiting Helio, we feel confident that we will make them profitable for Virgin Mobile," Mr. Schulman said. "Following our successful expansion into the hybrid space, we intend to target an additional 140 million post-pay customers in the $40-to-$70 range, which represents 60 percent of the market.

"These will be among our most profitable customers," he said.

Mr. Schulman estimated that the cash flow benefit for his company would be between $6 million and $7 million annually, allowing for accelerated growth. He said it would be able to add a total of 150,000 post-paid customers over the next 12 months.

Friday's announcement follows closely on the heels of Virgin Mobile USA's unveiling of its "Totally Everything" unlimited minutes plan for $79.99, which competes with similar recent offerings from carriers Verizon Wireless and AT&T Wireless.

"I think this is a natural evolution of our product strategy of targeting the youth market," Mr. Schulman said. "Mobility has become central to the youth market. It's how they connect to their friends, their social networks, they use it for entertainment, and it's become central to their lives.

"If we didn't do something like this, we'd start falling further behind," he said. "Our customer base needs higher-functionality handsets, more capabilities and highly differentiated user applications, and Helio's fully-integrated product suite improves our ability to retain our highest-value customers and to grow."

Virgin Mobile USA will repay Helio's outstanding debts. The Helio brand name will be phased out. Many of the 1,250 Helio-owned stores and kiosks have already begun to shut down, and only the 250 most profitable stores will stay open.

Not surprisingly, Virgin Mobile USA focused on the positive, citing Helio's technology platform and data offerings, as well as its success in the Korean-American market.

However, given that SK Telecom and EarthLink invested about $600 million in Helio over the past three years, the $39 million price tag represents a fire sale and an admission that Helio's strategy simply wasn't working.

With this deal, both SK Telecom and EarthLink will be losing money and subscribers.

A couple of years ago the MVNO model was widely touted and every major brand was talking about launching one.

But after failures by ESPN, Disney, Amp'd Mobile and now Helio, Virgin Mobile USA is the last major MVNO standing in the U.S. market, raising serious questions about the viability of that model. In fact, market researcher ABI Research said it doesn't even cover MVNOs anymore.

"SK Telecom wanted to get out from under this, since they've invested a lot of money into the effort, but Helio still doesn't have a significant base of customers," said Charles Golvin, Santa Cruz, CA-based analyst for Forrester Research. "Their growth strategy hasn't really proven successful, and this an admission of the failure of their approach.

"They're cutting their losses," he said. "Earthlink has other challenges in its businesses right now, and this was SK Telecom's first try to expand out of their core market, but at this point both companies are chalking that up to experience and moving on to focus on other parts of their businesses."

Many analysts see this as an attempt to join the postpaid fray with AT&T and Verizon, which recently announced plans to acquire Alltel Wireless (see story). Virgin is entering into competition with these incumbents with its unlimited postpaid offering.

"Virgin's prepaid approach appeals to the young adult market, but one of the things their strategy has lacked is how do you retain them as a customer and not lose them to a Verizon or AT&T postpaid calling plan," Mr. Golvin said.

"This give them an answer to that quandary now they have a way to attract and build messaging with this youth audience as they grow up," he said. "Virgin can retain them by graduating their customers to a postpaid model that makes more sense for them as they develop economically."

This move could also increase Virgin Mobile USA's attraction for marketers and brands seeking to reach consumers through the mobile channel.

"Virgin has been forward-looking with new ways to reach their customers, with such features as its Sugar Mama platform being more receptive to advertising as a medium," Mr. Golvin said. "It has a very attractive base demographic as far as suitability of reaching them through the normal ad channels.

"This is good news for marketers, because they're getting an additional set of attractive customers, and it bodes well for the future if Virgin is able to grow this segment and reach well-heeled prepaid customers," he said. "If they can, then Virgin will become a more attractive partner."

Virgin's main competitor to date has been the Boost division of Sprint, which also has targeted the youth prepaid market with similar messaging.

However, Boost has also been trying to go more upmarket, and Helio's customers are sought-after by the other major providers as well.

"While the acquisition of Helio doesn't make Virgin Mobile's customer base significantly larger, it is adding higher-value customers with more disposable income who are paying quite a bit more than Virgin's customer base," Mr. Golvin said.

"Virgin is trying to move out of that prepaid space, which puts them more in competition with the large, more traditional carrier," he said. "That's a natural outcome of the MVNO model: If you're successful, then you need to look grow out of that market."

All the different mergers that have happened in the last couple of years indicate that scale is important. However, this deal seems to be more about technology and repositioning the Virgin Mobile USA brand.

"I'm not sure Helio brings a lot in terms of scale, since they don't have a huge customer base," said Susan Welsh de Grimaldo, a senior analyst for Strategy Analytics, Newton, MA. "They do have more higher-end devices at a lower price point, which Virgin Mobile's customers will be interested in."

Many analysts say that the motivations behind the Helio acquisition are partly financial and partly with an eye on positioning.

In effect, Virgin Mobile and SK Telecom become allies in their play for the U.S. market.

"There are a lot of challenges in the MVNO space, but Virgin has been one of the most successful in the U.S. market," Ms. Welsh de Grimaldo said. "They've been sticking around much better than most.

"That said, with this move Virgin Mobile is trying to regain their traction in a very competitive space," she said. "Sprint has been losing a lot of its companies, and the two biggest companies, Verizon and AT&T, are doing very well despite the recession."

Ms. Welsh de Grimaldo said that in order to better compete with the large carriers, Virgin Mobile USA's strategy will be to launch new plans and new phones to gain traction in niche segments such as underpenetrated ethnic groups and the teen and tween demographics. The company will push for growth upmarket, while hanging onto its current customer base.

"Helio is a more hip and interesting brand to help Virgin compete with the iPhone and iPhone's competitors around the $199 price point," Ms. Welsh de Grimaldo said. "Helio hasn't been performing well, so this won't take a competitor off the market, but Virgin gets some cash and SK Telecom's backing."