The Last of the MVNO-hicans
When all you’re doing is reselling someone else’s service, you need to come up with a good shtick. For MVNO Virgin Mobile USA (NYSE:VM), the strategy has always been to build and leverage upon a strong, recognizable brand that appeals to the youth market. VM, which resells Sprint Nextel (NYSE:S) service, unabashedly targets the under-35 crowd with what had historically been a prepaid, voice-only service. With the acquisition of Helio, LLC in August 2008 (The Deal Advisor, 07/08, p.1), VM added postpay and data services to its portfolio.
VM has its share of challenges going forward. The company survived the initial shake-out of the MVNO market, but the long-term viability of the business model has yet to be determined. Subscriber and revenue growth over the last 15 months has been virtually nonexistent, even after factoring in the 170k subs picked up in the Helio acquisition. And its uncertain whether a revised deal between VM and Sprint, inked concurrent with the signing of the Helio deal, has resulted in any tangible bottom line benefit. Two years removed from its $350m IPO, VM is nothing more than treading water due to the razor-thin margins associated with the MVNO model and the absence of meaningful revenue or subscriber growth.
Fortunately for VM, its primary backers – Virgin Group, SK Telecom, EarthLink (Nasdaq:ELNK) and Sprint – have some pretty deep pockets. And with roughly 10% of its total subscribers coming through VM, Sprint, more than anyone else, has a strong strategic interest in keeping VM afloat. But both Virgin Group and SK Telecom already ponied up for an additional $25m of preferred equity last year, SK Telecom and ELNK had collectively invested more than $560m in Helio before it was folded into VM, and ELNK has indicated it has no interest in making further investments in the effort. Unless VM can start to gain some meaningful traction on both the top and bottom line, we suspect the only ones left hanging on will be Sprint…and a bunch of unfortunate public shareholders.