Virgin territory for Virgin

VirginHelioThey bought it. Both of them, in their own way.

Capping what is sure to be the end of the entertainment-based mobile operator (R.I.P. Disney Mobile, ESPN Mobile, Amp’d, etc.), Virgin Mobile agreed to acquire Helio last week. It’s a fascinating deal, for a number of reasons; although, first, maybe someone can help me make financial sense of it?

The purchase price was a meager $39 million–in stock, no less. Then, former owners EarthLink and SK Telecom effectively ate two-thirds of that amount by agreeing to invest $25 million of equity capital into Virgin. On top of this, as part of the deal, Virgin acquired inventory of 85,000 devices valued at $17 million. Plus it would’ve cost Virgin upwards of $20 million to build up Helio’s subscribership base from scratch… Meaning Virgin, at the end of this, is ahead by about $23 million bucks after “buying” its competitor, if my math is right.

Strategically, it only gets more interesting:

Virgin now has 170,000 postpaid subscribers, with an average revenue per user (ARPU) of $80. This is a fantastic figure (industry average across the major carriers, by comparison, is in the low- to mid-$50 range), and the company now has a 3G platform to offer mobile video, music, and GPS-based tools. Plus, since Virgin CEO Dan Schulman reports that 20 percent of the firm’s attrition–“churn” in industry parlance–comes from customers going to postpaid plans, this gives Virgin another retention tool to stay competitive with its entire subscriber base.

Everything’s coming up roses so far, right? Now here’s where it gets tricky.

Schulman is clear that Virgin doesn’t want to inundate prepaid users with postpaid offers. Rather, he believes the integration with Helio will help smooth out Virgin’s subscriber fluctuations, and appeal to those users who have a little more to spend. “We will focus on the quality of our base, rather than growing aggressively,” he said. “We have modest postpaid expectations.” Which starts by beginning to (modestly) close down Helio’s five retail stores and 50 mall kiosks.

Still, as a company who has survived in the cutthroat mobile space only by keeping a tight lock on its prepaid youth-market focus, what does this acquisition really mean for Virgin? At first blush, the strategy seems to make good sense, and the price was obviously right; but this move–along with its recent launch of an unlimited minutes plan for $80–may actually only distract and pull Virgin away from what’s kept it alive all this long: being cheap, easy, and fun.

Virgin is now going head-to-head with national operators for the deeper-pocketed consumers, which is a segment where the spotlight is brighter, and the competition has a lot more size and money to throw around. So if the big boys start to get concerned about Virgin nipping at their heels, they could outmaneuver them with little effort or thought. (Although 170,000 subscribers is pretty much a rounding error to guys like Verizon and AT&T). Still, Virgin doesn’t have the bargaining power to negotiate better terms with Sprint–whose network they piggyback on–or the size to really make a run at the premium postpaid market. Instead, what they’ve got is a brand.

What makes Virgin great, in all of the businesses it operates, is its fun, edgy, in-your-face personality. This is the same company that launched in 2002 with founder Sir Richard Branson half-naked in Times Square, promising no-BS pricing. This is the same company who rolled out a program called “Sugar Mama,” which actually pays users to watch ads. This is the heart of Virgin, and something that could quickly get lost in trying to position itself as a mobile content player. You could try asking one of the other MVNOs who’ve gone down this road about the risks…but they don’t answer their phones anymore.