IPO Time for Virgin Mobile USA?

The market for tech offerings is stronger and other youth-oriented carriers are cutting into Virgin's lead, so there might not be a better opportunity

Is the clock ticking on a Virgin Mobile USA public offering?

Talk that Virgin Mobile USA would go public has swirled almost since the company debuted in 2002 as the first prepaid wireless service for young people. A joint venture between Richard Branson's Virgin Group and Sprint Nextel, the business has 4.6 million subscribers and became profitable on an operating basis last year.

But now other mobile phone upstarts are chipping away at Virgin's popularity with young subscribers, offering inexpensive service plans, innovative features, and cool phones. Their initial success is fueling speculation that Virgin Mobile USA must file for an initial public offering (IPO) soon—or it might not be able to go public at all, trampled by the other youth brands.

The timing might be good for Virgin Mobile owners to take it public. After a bit of a subscriber slowdown in 2006, its growth is accelerating again. (The company adds about 1 million users per year.) Besides, Sprint Nextel (S) could use the extra cash to fund an anticipated $8.5 billion in capital expenditures this year.

Stronger Market

Virgin Mobile USA declined to comment on its IPO plans. "As we've grown, [our parents] are looking at what the various alternatives are," says Dan Schulman, CEO of Virgin Mobile USA. "They always look at what might be the best path for us."

Analysts don't rule out the possibility of Virgin Mobile USA being rolled into Sprint or sold to another carrier, but most believe the IPO route makes more sense. The tech IPO market is stronger than it has been in years, and so is the stock market. In addition, investors have few pure-play wireless service providers to choose from. Shares of one player, Leap (LEAP), have risen by more than 70% in the past year. Clearwire, a next-generation wireless company, has recently refiled to go public (see BusinessWeek.com, 12/20/06, "WiMAX IPOs Are on the Way").

Just how much might Virgin Mobile USA be worth? One point of reference is Leap, which, with about 2 million subscribers, has a market cap of $4.31 billion. How many shares might be offered is uncertain, but Virgin Mobile U.K., another of Branson's wireless ventures that was started three years earlier than its U.S. cousin, floated 25% of its business on the London Stock Exchange in 2004, raising $243 million. At the time, the British outfit, acquired by NTL for $1.6 billion last year, also boasted a little over 4 million customers.

Back to Basics

If Virgin Mobile USA does go public, investors aren't likely to look at it with the same starry eyes they might have a year ago. For starters, the company's focus has changed. While it began by targeting 18- to 24-year-olds, it currently goes after a broader, 18- to 34-year-old demographic. Appealing to teens and people in their 30s may prove to be a difficult balancing act. By trying to be everything to everyone, Virgin risks losing its once razor-sharp focus.

The company isn't as interested as it once was in developing the next hot application. Virgin Mobile had a reputation for offering the latest applications and services like the rescue ring (a preprogrammed phone ring that functions as an excuse to escape a bad date). But that's changing. Virgin Mobile USA is paying more attention to offering inexpensive short-text messaging (SMS) and early availability of night minutes. "The more advanced applications, they cost a lot of money," says Schulman. "And most of the youth market doesn't have that kind of money. We're going to focus on the basics."

Clearly, many of Virgin's competitors disagree. Larger wireless carriers are increasingly going after the youth market with new, innovative offerings. Last November, Verizon Wireless launched special mobile content for Latino youth. This summer, Cingular/AT&T (T) will start offering Apple's (AAPL) iPhone (see BusinessWeek.com, 1/12/07, "The Real Genius of Apple's iPhone").

Rival Innovators

No doubt the iPhone will resonate with the same young crowd that other carriers are going after, says Michael Mahoney, managing director at EGM Capital hedge funds, which, he says, might consider investing in Virgin if it goes public. "I don't think Virgin's brand is as strong as Apple's brand," he says. "Apple has the strength as a technology leader and a strong brand."

What's more, newcomers to youth-oriented wireless services appear to have grabbed Virgin's spot as wireless-services innovator. Amp'd Mobile, financed by the likes of chipmakers Intel (INTC) and Qualcomm (QCOM), as well as MTV, began offering its services in January, 2006. Helio, a joint venture between Internet service provider (ISP) EarthLink (ELINK) and Korea's SK Telecom, debuted last May. Both companies focus on a tighter age range than Virgin, and on pricey but cool applications and content.

"We've reached the state of the industry where the large wireless brands are like large department stores, and we're like Urban Outfitters," says Sky Dayton, CEO of Helio and the founder of EarthLink.

Helio, for instance, offers its users exclusive phones (see BusinessWeek.com, 5/3/06, "Helio's Hot New Line"). One handset, the Drift, announced in November, is a slim slider phone with a global positioning system (GPS) powering Google Maps for mobile. Armed with this phone, users can figure out where they are and get directions and information on how to avoid traffic jams. Helio has some 70,000 users who pay an average of more than $100 a month for the service. Mainstream mobile carriers manage to eke out a little more than half that much in revenue per user.

Instant Access

Amp'd, which offers prepaid and postpaid plans, provides users with exclusive content, such as the popular Lil' Bush: Resident of the United States cartoon (see BusinessWeek.com, 11/1/06, "Amp'd to Tap Japan's Mobile Market"). Amp'd recently inked deals for exclusive content with Hollywood heavyweights like comedian Jack Black and Icebox, a Web animation company co-founded by Howard Gordon, the executive producer of 24 and The X-Files.

Amp'd's 100,000 subscribers buy up to 10 times more content than users of most major U.S. carriers—and more than 30% of the music and video they buy is original content vs. clips available elsewhere. "We're seeing tremendous traction," says Bill Stone, president of Amp'd, which hopes to gain hundreds of thousands of new subscribers this year. Many of these users are coming from "other youth carriers," he says.

Another rival in the under-24-year-old category, Boost, also is gaining on Virgin thanks to several popular features. Wholly owned by Sprint, Boost markets a service called CHIRP—a walkie-talkie function allowing customers to instantly reach other Boost and Sprint users. "We're the largest youth brand now," claims Darryl Cobbin, chief marketing officer at Boost.

Swimming with Sharks

Virgin says its young subscribers get among the lowest prices in the industry, and that its users don't want many of the bells and whistles other carriers offer. Virgin uses focus groups to evaluate new product ideas, and the company's offerings are based on that feedback, says Schulman.

Schulman says Virgin Mobile USA continues to innovate: It became among the industry's first to offer customers free minutes for watching relevant mobile ads. It's expanding its lineup of plans and retail partners and making its phones easier to recycle. Indeed, surveys show that 95% of Virgin's customers would recommend the service to a family member or a friend, and 75% of them have done so. "So far, so good," says Schulman.

Some of Virgin's rivals brag of similar metrics, but Schulman warns that they won't have clear sailing ahead. "These waters are cold, with a lot of sharks," he says. "It's not as easy as it looks." But so far, it seems, Virgin's rivals haven't hit any shark-infested waters.

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