Sprint to Help Virgin Mobile-Helio

Now that Virgin Mobile is all set to buy Helio, their network provider, Sprint Nextel, has offered to reduce the combined company's network fees and to pay Virgin for acquiring new subscribers. Was that a smart move for Sprint? I am not so sure.

After months of speculation, Virgin Mobile USA and Helio — two mobile virtual network operators (MVNOs) struggling to make it in the U.S. market — are all set to combine. The Virgin Group and SK Telecom will contribute $25 million each to the new venture. What’s gotten less press is Sprint Nextel’s unusual contribution to the deal.

Shareholder Sprint Nextel has agreed to dramatically lower fees the combined company will pay to use its network. Just how deep is the cut? Virgin expects “to achieve a minimum of an 8% reduction in its effective cost per minute in 2009, with further reductions over the next three years.” Apparently, under the new agreement, “Virgin Mobile USA’s cost per minute is tied directly to the volume of network traffic it generates, and will no longer be dependent on Sprint’s network costs.”

That’s all very well for Virgin, but troubling for Sprint. Once Sprint changes its pricing policies for one MVNO, chances are, dozens of other MVNOs that live on its network will ask for similar treatment. It sounds to me like Sprint is giving up on a chunk of its revenues, at a time when it’s doing far from well financially already.

What’s even more troubling are incentives Sprint has offered Virgin. According to Virgin’s press release, Sprint has promised that, “effective July 1, 2008, Sprint will provide a $2.50 network usage credit to Virgin Mobile USA for each gross customer addition, with a cap at $10 million.” Clearly, Sprint is trying to stem the tide of customer losses it’s suffered in the past year. But is paying your own MVNOs for adding subscribers — some of whom may be sub-prime — the answer? I am not so sure.