A Winner's Curse???

Whose Driving Helio?

The joint ownership of Helio Wireless by South Korea Telecom and Earthlink has been a tale of continuing growth in equity commitments to the high-end Mobile Virtual Network Operator (MVNO) that come in multiples of tens of millions of dollars.

South Korea Telecom followed through with its July commitment of $100 million by allocating $70 million and has taken management control of Helio Wireless as of November 9th. SK Telecom committed another $200 million to Helio in September, but an executive told Reuters "the timing and size of that commitment have not yet been decided."

Earthlink and SK Telecom have been in talks to amend to joint venture agreement to transfer control to SK Telecom and Earthlink is unwilling to commit further funds.

Helio is lagging with significant debt, struggling profitability, and less than a million subscribers. In a quarter when AT&T Wireless added 2.1 million subscribers (including 1.1 million driven by the iPhone), and Verizon Wireless added 1.9 million new subscribers, this places significant doubt in Helio.

SK Telecom CEO expects the company to turn a profit by the end of 2009 on rising data service usage according to Reuters, but it is expected to lose at least $330 million in 2007.

Wither MVNO's?

Helio got a bit of attention in July when Amp'd mobile filed for bankruptcy. More than 80,000 of Amp'd's sbscribers were not paying their bills. The company folded when Verizon Wireless demanded $4.5 million from Amp'd within ten days, which was the straw that broke the camel's back - the camel owing $100 million - according to Business Week.

Amp'd had been incredibly successful in getting its subscriber base to seal long term 18-month contracts, but it was underwriting bad credit risk with a premium product. In other words, the company was providing premium service with payment in arrears. Confused? Think of the mortgage industry.

Helio also has a premium offering, but the problem does not seem to be collections, but subscriptions. If the company can grow subscribers and data usage, perhaps it can be profitable.


Perhaps Helio will need to take a page from Virgin Mobile's playbook, which is to keep customer acquisition costs way down. As desribed in their Prospectus:

As an
illustration, Virgin Mobile's average advertising expenditure per gross addition
is less than $10, compared to $100 for Verizon Wireless (based on Verizon's
reported gross additions and media spending reported by TNS Media Intelligence
for year ending September 2006). Our overall cost per gross addition, which
includes all handset promotion, retail compensation, advertising and other
marketing expenses is also significantly less than that of the larger postpaid
industry participants (approximately $120 for Virgin Mobile compared to
approximately $300 to $350 for the four largest carriers based on their 2006
financial reports).