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Virtual cell phone operators Virgin Mobile USA and Helio are rumored to be in merger talks, a move that could bring a lot of benefits to both companies.

The tie-up between the two MVNOs, or mobile virtual network operators, was first reported Thursday by the wireless blog MocoNews. According to the blog, SK Telecom, one of Helio's parent companies, would buy out Virgin Mobile USA and then Virgin Mobile would buy Helio in an all-stock transaction.

(Credit: Helio)

As the economy tightens and other larger wireless carriers look to consolidate, it makes sense for these smaller players, who essentially resell service from Sprint Nextel, to look for alternatives. The companies are also rumored to be in talks with private equity firms.

Over the past 18 months, Helio and Virgin Mobile USA have seen many of their MVNO brethren die. ESPN Mobile, Disney Mobile and youth-targeted Amp'd Mobile have all closed shop.

And even though Virgin Mobile USA and Helio are still in business, the companies have not been immune to the increasingly competitive market place. For the first quarter of 2008, Virgin Mobile USA reported that its earnings fell 75 percent compared to a year ago. Meanwhile Helio, which is jointly owned by South Korean carrier SK Telecom and Internet service provider EarthLink, lost $327 million in 2007 on $171 million of revenue. All told, the company has lost more than $560 million since it was started in 2005.

While combining the two companies won't magically solve all their problems, they may fare better as a combined entity rather than individually.

The main reason is that the companies' businesses compliment each other nicely. Helio was originally created by Sky Dayton, EarthLink's founder, to bring cool and cutting edge devices and services to the U.S. market. The original idea behind the company was to target a young technically savvy crowd. Virgin Mobile USA, a subsidiary of the European-based phone company, has made a name for itself as a hip brand also focused on the youth market.

But it's the companies' differences that could really benefit a merged company. Even though both companies are going after a younger demographic, they are really addressing different segments of this population. For example, Virgin Mobile is a prepaid service that targets users who don't have a lot of money to spend and who have poor credit or no credit history at all. By contrast, Helio is targeting high-end users, who spend an average of $85 a month on their cell phone service. Most wireless users only spend $50 a month on service from bigger carriers like AT&T and Verizon Wireless.

Virgin Mobile could greatly benefit from Helio's high-end customers, who are voracious data users. In 2007, Helio subscribers sent an average of 550 text messages per month. And 95 percent of the company's subscribers accessed the Web through their mobile device compared the industry average of just 13 percent.

On the flip side, Virgin Mobile USA gives Helio the opportunity to expand its customer base. Initially, Helio only tried wooing a small niche of technology elite, a set of high-end consumers who wanted cool phones and were willing to spend a lot on new services and devices. But then came Apple's iPhone, which literally changed the game overnight. And the very people Helio wanted to entice with cool devices, such as the Ocean, were instead more interested in an iPhone.

Now Helio has shifted its strategy to appeal to a wider audience. And Virgin Mobile, which has relationships with a wide circle of retailers and over 5 million subscribers, could significantly improve Helio's reach.

Even if the companies merged, it will still be a difficult market for them to survive. More than 84 percent of the U.S. population already subscribes to a cell phone service. And as the bigger carriers more aggressively address both the high end and low end of the market, it could be harder for Virgin Mobile USA and Helio to compete.

Sky Dayton, the founder and CEO of Helio, is stepping down as the top executive of the hip cell phone company.

The company sent out a press release late Monday saying that Dayton, who also founded the Internet service provider EarthLink and Wi-Fi hotspot provider Boingo, would relinquish his CEO position. Wonhee Sull, formerly Helio's president and chief operating officer, will take over as CEO. And Dayton will become chairman of the company, replacing Jinwoo So, president of global business at SK Telecom.

Helio, a joint venture of EarthLink and the South Korean phone company SK Telecom, officially launched its service in May 2006. The company, which doesn't have its own network but instead leases capacity from Sprint Nextel, is supposed to appeal to a hip, tech-savvy youth market. The original idea for the company was to bring cutting-edge handsets and feature-rich data applications already available in Korea to the U.S.

Helio has been downplaying Dayton's departure. Brook Hammerling, Helio's spokeswoman said in an e-mail that Dayton's departure should not come as surprise, since he "loves to start things, build teams and brands and then pass the reigns onto a more day to day ops person."

The company pointed out that Dayton typically leaves his start-ups after three years. He supposedly followed similar timelines with EarthLink and Boingo Wireless. Now three years into the Helio venture, Dayton is handing the day-to-day operational reins over to someone else.

"Helio has reached a point in its development where I feel the timing is right for this change," Dayton said in a statement.

Because Helio is a privately held joint venture, it's been difficult to tell how well it's been performing financially. For the most part, the company has kept quiet about subscriber numbers and other details of its performance.

EarthLink and SK Telecom each put in $220 million into the project in the beginning. But last year, the companies agreed to contribute another $50 million to $100 million to the company.

In what appears to be an effort to deflect any speculation that Dayton is leaving because the company is in trouble, Helio has decided to share some information about its business. In today's press release it claimed that the company now has more than 200,000 subscribers. And while this is tiny compared with the millions of customers who subscribe to Verizon Wireless or AT&T, the company claims to have some of the highest average revenue per user (ARPU) in the industry, with users spending more than $85 a month. The company said it closed its first full year of operation, which was 2007, with a revenue run rate of more than $240 million based on financial figures available in December.

The company also claims its subscribers are "voracious users of its data services." For example, users send on average more than 550 text messages per month. And roughly 95 percent of Helio subscribers access the Web from their mobile phones. The company also claims that it is seeing strong uptake in customized services for its users. For instance, 60 percent of Helio customers access MySpace via their Helio phone each month. And Helio claims that 57 percent of subscribers who had the Ocean handset downloaded Helio's exclusive YouTube application within two weeks of the launch.

More detailed financial information could become available when EarthLink reports its fourth-quarter earnings on February 7.

The Walt Disney Co. pulled the plug Thursday on its Disney Mobile phone service.

Disney said the service will no longer be available after December 31, but it might offer some of the specially designed software and applications through another wireless operator.

Disney came on the mobile scene about 18 months ago with a special phone service designed to disseminate its content and create a slew of applications designed for parents and families. Its Family Center allows parents to track their kids and limit how and when they can use their phones. It also allows parents to set spending limits on text messages and downloadable content.

Unlike major carriers like AT&T, Sprint Nextel or Verizon Wireless, Disney Mobile did not own its own network. It was a mobile virtual network operator or MVNO that leased capacity from another carrier (Sprint Nextel) and built a service around different applications.

Several companies have leveraged their brands in the mobile arena. Virgin Mobile is among the success stories. But there have also been several companies that have failed in this model. For example, Mobile ESPN, which was owned by the same parent company as Disney Mobile, discontinued its MVNO service last year after only about six months of offering the service. ESPN now offers its content and applications on Verizon Wireless' network.

Other MVNOs say they are doing just fine. Helio, the cellular phone company owned by Korean carrier SK Telecom and EarthLink, said it now has 140,000 subscribers, up 40 percent in the past 90 days. The company, which has a slew of "cool" phones targeted at young hipsters, also claims to have generated about $200 million in revenue in the first 15 months it has offered its service. And it claims to have one of the highest average revenue-per-user metrics, or ARPUs, in the industry, about $90 per customer.

Helio attributes its success to the fact that it has provided cutting-edge devices and services to its customers.

"Disney is not a mobile company, they are a media company, and this is an expected realization that being a mobile company never really made sense," said Rick Heineman, a spokesman for Helio. "Helio is a mobile company, not some other business, and our continued success is a reflection of this."

Heineman went on to say that the demise of Disney Mobile and other MVNOs like it helps "clear the field for healthy players like Helio to grow even faster with less clutter in retail channels and competition for shelf space."

"Fewer poorly conceived new competitors will be funded as people realize its not enough to sell off-the-shelf devices," he said. "True innovation and differentiators across the entire business model are necessary."

Internet service provider EarthLink said Tuesday that it would lay off approximately 900 employees as the company restructures in an attempt to boost its sagging stock price.

EarthLink will lose about half its staff in the restructuring as it shuts down operations in Orlando, Fla.; Knoxville, Tenn.; Harrisburg, Pa., and San Francisco. It will also substantially reduce its presence in Pasadena, Calif., and Atlanta, the company said in a press release Tuesday.

The reductions are expected to cost the company $60 million to $70 million. But it will save EarthLink $25 million to $35 million through the remainder of 2007, the company said.

And these cuts may only be the tip of the iceberg, according to statements made by EarthLink's new CEO, Rolla Huff.

"While we see this as an important first step in unlocking the underlying value that we believe is in our company, we are only eight weeks into the process of repositioning EarthLink for the future," he said in a statement. "These changes get our cost structure in line, but there is much more to do. We expect to announce additional steps as we continue our work over the coming weeks and months."

The shake-up comes as EarthLink struggles to find ways to balance losses in its traditional Internet service provider business with the high cost of building its municipal Wi-Fi and cellular phone businesses.

The company has won several citywide Wi-Fi contracts with cities such as Anaheim, Philadelphia and San Francisco. The way these deals are structured, EarthLink builds and runs the networks in exchange for using city-owned infrastructure like utility poles.

But the Wi-Fi projects haven't gone as smoothly as EarthLink had hoped. For example, EarthLink is still in contract negotiations in San Francisco for its planned citywide Wi-Fi network. And projects in Arlington, Va., and St. Petersburg, Fla., are supposedly on hold.

The GigaOm blog has also reported that Don Berryman, head of EarthLink's Muni Wi-Fi business, left the company three weeks ago. I haven't confirmed Berryman's departure yet, but I will be talking to EarthLink's CEO later Tuesday.

EarthLink is also pouring huge amounts of money into Helio, a cellular joint venture it started with Korean cell phone provider SK Telecom. The mobile virtual network operator, or MVNO, started with $440 million from both partners. But recently, each of the partners agreed to contribute another $50 million to $100 million to the company.

And all of this comes while EarthLink continues to lose subscribers in its traditional dial-up Internet business. At the end of the day, EarthLink has some very hard choices to make as it moves forward. Look for a news analysis later Tuesday on CNET News.com.