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Is Helio's cool factor enough?

Initial results are in for the new cell phone service backed by SK Telecom and EarthLink, and they don't look pretty.

Is Helio's cool factor enough? Helio, the cell phone service for the mega-cool hipster crowd, is bleeding cash, a scenario that will likely force its deep-pocketed investors in one of two directions: either dig deeper still or bid the business adieu.

Helio, which launched in May, is backed by Korean mobile operator SK Telecom and U.S. Internet service provider EarthLink. The companies have each committed about $220 million to the venture, and EarthLink said during its fourth-quarter 2006 conference call on Tuesday it will likely pour an additional $50 million to $100 million into the company this year.

The additional infusion of cash comes as Helio is expected to lose $300 million to $360 million in 2007, according to EarthLink's chief financial officer, Kevin Dotts. Since its launch in May, EarthLink reported it lost $192.5 million, $74 million in the fourth quarter.

Dotts also said that Helio would likely be cash-flow-positive sometime in 2009. But with losses mounting and new competition entering the market such as Apple's new iPhone, which is also aimed at the same hip, music- and gadget-loving crowd, profitability in 2009 is far from a guarantee.

The real question is, how much are Helio's backers willing to spend to keep the venture afloat until they see big returns? Fortunately for Helio, both of its backers may have little choice but to continue pouring money into it.

"The thing that Helio has going for it is patient Korean money," said Dave Whetstone, co-founder of Virgin Mobile USA, an early mover in the mobile virtual network operator, or MVNO, market in which Helio operates. "If you're SK Telecom and you want to get into the U.S. mobile market, it might be less expensive to throw a couple hundred million dollars every year into Helio than to spend billions on spectrum or a nationwide operator."

EarthLink, Helio's other backer, also has little choice than to keep throwing money at the venture. Over the past couple of years, the company has been forced to rethink its strategy as a series of regulatory decisions drastically changed the market for the Internet service provider.

As a result, EarthLink is looking to new business models to drive revenue. It's using unlicensed wireless technology to build citywide Wi-Fi networks in several cities around the country. And it's hoping to cash in on the burgeoning cell phone business with its investment in Helio.

"Municipal Wi-Fi and Helio are high-risk bets," said Charles Golvin, a senior analyst with Forrester Research. "But they are risks that have to be placed. And with Helio, just being a 'me too' service won't cut it. They have to be unique."

Noble high-tech provenance
It also helps that Sky Dayton, Helio's chief executive officer, also founded EarthLink and still sits on the company's board of directors. Still, experts say, Helio has a long and tough road ahead as it works toward becoming a sustainable business.

After six months of aggressive marketing, it had only about 70,000 subscribers, as of December 31, 2006. That number is expected to increase to 100,000 by the second quarter of 2007. While these figures may be slightly better than other MVNOs, such as Amp'd, which signed up only 30,000 subscribers within eight months of full marketing, it's much less than what bigger carriers are adding on a quarterly basis and what other MVNOs reported in their early days.

"Seventy thousand subscribers after nine months of operation is pretty pathetic," said Iain Gillott, founder of iGillottResearch. "And given the level of investment, you'd think they'd be able to do better than 30,000 new subscribers a quarter."

Cingular Wireless, now owned entirely by the new AT&T, signed up 2.4 million new customers in the fourth quarter alone. Even Sprint Nextel, which has been struggling lately, netted 742,000 additions for the fourth quarter of 2006.

Of course, these are well-established brands that have been in the market for years. But Helio's numbers still fail to impress when compared with early subscriber rates for other successful MVNOs such as Virgin Mobile and Boost. Virgin Mobile had more than 350,000 U.S. subscribers within its first six months of operation in 2002 with about 1 million subscribers within its first year. And Boost, which is owned by Sprint Nextel, signed up roughly 250,000 subscribers within its first year of business.

"I think part of the challenge is they are going after the same subscribers that the big cell phone operators want to keep," Whetstone said. "There's no doubt the service is cool. But they're trying to get people to switch service providers, which is much harder to do than simply getting folks who've never even had a cell phone to sign up for a new service."

Still playing it cool
Helio representatives say they aren't worried. The venture reported monthly average revenue per user of about $100, well above the $40 to $50 a month the big carriers are reporting. The company also says that it is very focused on a highly profitable sliver of the overall cell phone market, which means it doesn't have to spend its marketing dollars on trying to reach every consumer.

"We are more confident today than ever before," said Rick Heineman, director of communications for Helio. "We know this is a cash-intensive business, but we are ramping quickly. And we don't need to get to tens of millions of subscribers before we start making money. We can do it with just a couple of million subscribers."

There's no doubt that the Helio products and services, which leverage technology from SK Telecom, strike a chord with early adopters. The three phones that Helio has released get high marks for design and functionality. It's also launched a bevy of new data services including mobile Myspace, a GPS friend locator and integrated Google maps, and, most recently, a new wireless music-download service.

And the company has already launched four hip cell phone "boutiques," in San Diego, Santa Monica, Palo Alto and Denver. More are slated to open in 2007, including a store in the chichi SoHo neighborhood in New York City later this year.

But large operators are also trying to court these consumers with their own music and video download services. The scheduled introduction of Apple's new iPhone on Cingular's network starting in June only intensifies the pressure. Apple has already established a loyal following of iPod lovers, and analysts have predicted a quick ramp-up for iPhone in its initial launch.

"Apple's iPhone validates our strategy of creating a premium brand," Helio's Heineman said. He also pointed out that some consumers may not be willing to spend the $600 on an iPhone when they can get a Helio phone for around $225.

But if Helio is forced to compete on price, which to this point it has tried to avoid, the company could see its strong average revenue per user drop off drastically, which ultimately could impact profitability.

"Sky Dayton is an amazing marketer," Whetstone said. "I wish them well. But the numbers speak to the challenge. It's not an easy business."