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Implications: Virgin Mobile USA’s acquisition of Helio is favorable for platform efficiencies, handset inventories and cash infusion, but the saturated teen market trends are questionable for retention and growth.
Analysis:
With the acquisition of Helio, Virgin Mobile USA gains scale in the youth market or millennial generation. The article’s research by MultiMedia Intelligence analyzes the growth of the youth segment.MultiMedia research implies the saturation of the teen market providing 16 million subscribers in 2007, but only growing to 17 million by 2012.Virgin Mobile’s CEO has pointed out the attractive return on the $39 million buyout of Helio with the $17 million of handset inventory, $25 million in platform savings, and the $50 million cash infusion from the Virgin Group and SK Telecom.At the same time, the CEO commented about the problem of postpaid migration with 20% of Virgin Mobile disconnects choosing postpaid.The Helio acquisition provides the cash and systems for Virgin to improve on the current 30% postpaid of total subscribers.And Virgin’s margins on the recently announced $80 unlimited plan are improved by the new deal with Sprint Nextel that reduces the reseller rate by 8%.
The CEO also described the “sweet spot of prepaid in the $40-$70 range” for ARPU.For 1Q2008, the ARPU was only $19.93 while the previous year’s same quarter was higher at $22.41.And the churn ran 5.1% compared to other non-contract carriers like Leap and MetroPCS at 3.6% and 4.0%.Virgin Mobile USA has the challenge of acquiring higher value subscribers through cost-efficient distribution channels.Helio previously announced closing its own retail stores, and the MVNO Kajeet is foregoing retail distribution for online marketing except for the major retailers of Best Buy, Target and Toys R Us.MultiMedia Intelligence research also shows the seasonality of teen mobile sales being strong in the third and fourth quarters.Virgin Mobile will need competitive handsets and pricing to develop retailer loyalty for consistent year-round distribution.The $39 million acquisition of Helio was cheap considering that EarthLink and SK Telecom had invested $600 million.But Virgin’s MVNO model might take more than a shrinking youth market to control churn replacement costs and find high ARPU customers.
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