Sky Dayton and the Next Wave of Mobile Phones

High rates, low tech—when it comes to cell phones, the US is the third world. The trend surfer who started EarthLink wants to sell you a fully loaded device from the wiredest place on the planet.

March 14, 2006

AS THE FOUNDER OF TWO INTERNET ACCESS COMPANIES, EarthLink and Boingo Wireless, Sky Dayton thought he was connected. Then he went to South Korea. It was fall 2004, and as he and his wife, Arwen, were walking around Seoul, they stopped to watch some break dancers spinning on their heads. That’s when Dayton noticed that everyone else in the crowd was carrying cell phones unlike any he’d seen before. Some people were listening to music on their phones, some were watching videos, some were deep in multiplayer games; a few were even talking. Back in Los Angeles, most people he knew were happy simply to get a signal. “There’s this massive group of young, tech-savvy consumers, and they’re just living in the Dark Ages,” Dayton declares, sitting in his new office, which has expansive views of UCLA and the Hollywood Hills. “The idea of taking all this technology and deploying it here—it’s not for everybody, right? But it’s what I want. And there’s a lot of people like me.”
Which is more or less the point of Dayton’s latest startup, Helio. A joint venture of EarthLink and SK Telecom, Korea’s leading wireless carrier, Helio aims to bring the latest in mobile phones and services to people like Dayton—would-be early adopters who are itching for something to adopt. Dayton has parlayed his frustra­tions into new ventures before: Hanging on the wall is a framed copy of his 1994 business plan for EarthLink, “An On-Ramp for the Informa­tion Super­highway,” written, he says, after he spent a week trying to configure his computer to access the Internet. Just as EarthLink typified the ISP explosion in the mid-’90s, Helio epitomizes the latest trend in mobile communications.
In the parlance of the trade, Helio is a mobile virtual network operator. MVNOs sell phones and service plans just like ordinary mobile network operators, but they don’t own cell towers and spectrum and all the other baggage that makes up a network. Instead, they lease all that from companies that do, creating virtual networks. They’re hot because established mobile operators like Cingular and Verizon Wireless have been too busy selling plain-vanilla plans to Middle America to worry about niche markets. With a virtual setup, a startup can pick any market that’s not adequately served, rent capacity from an existing network operator, come up with phones and services that appeal to its niche, and go.
And so ESPN has just launched an MVNO that feeds news and video clips to sports nuts. Disney is establishing one that aims to keep parents better connected to their kids. MTV and Universal Music are backing Amp’d Mobile, a startup offering lots of jackass content to the 18-to-24 crowd. A group of former Sprint execs have set up Movida, which courts Latinos with slogans like “For English, press 2.” In Denmark, there’s a new MVNO called Gaymobile. Dutch pot smokers have PePtalk, which exhorts them to “pep your addiction.” “It’s the me-too strategy of the month,” says Michael Grossi, who worked as a consultant with many such operations before becoming Helio’s head of business development. “Wouldn’t you like to be an MVNO, too?”
The concept was pioneered by Virgin Mobile, which was launched nearly four years ago in the US by Sprint and Richard Branson’s Virgin Group. With 3.5 million customers in the States and 4 million more in the UK, Virgin is a leader in the youth market in both countries. But early MVNOs like Virgin and Boost Mobile, which targets the hip hop crowd, have focused on selling inexpensive phones and pay-as-you-go service plans to young people on a budget—a group that’s hard to wring much profit from. Newer MVNOs like Helio and Amp’d have bigger ambitions.
Launched in December, Amp’d plans to carve out its own 3 million-subscriber niche somewhere between Virgin’s and the more upmarket youth crowd that Helio will target. Amp’d doesn’t have particularly exciting phones, but it offers edgy content, 99-cent music downloads, and sensibly organized services: Search for Tony Hawk and you get not just videogames but ring tones, blog entries, and screensavers. “And all this without any Koreans,” quips Amp’d CEO Peter Adderton, an exec not overly concerned with niceties.
Helio, set to begin service this spring, is going after a niche that’s broader in age—18 to 32—but narrower in focus: trendsetters, gadget geeks, gotta-have-it-now guys with credit to burn. It will operate on the high-speed 3G networks that are essential for music, video, and games. It’s also promising handsets that haven’t been seen in the US and services that go beyond the basic music and video offerings from Sprint Nextel and Verizon. And while the company is as much a marketing ploy as any other MVNO, it feels almost like a cause.
Helio’s top ranks are populated by people with something to prove: former SK Telecom execs eager to show off their country’s technological prowess, and veterans of the US mobile industry frustrated by the carriers’ resistance to innovation and grasping for a chance to do it right. Rob Gelick, who’s putting together Helio’s music service, quit Motorola after helping develop the star-crossed iTunes phone with Apple. Stu Redsun, Helio’s marketing chief, ran global marketing at Motorola, where he lobbied to bring to the US some of the amazing phones Moto was exporting to the Korean market. Sorry, he was told, the carriers weren’t interested. Just before he started at Helio, Redsun wrote Dayton a memo comparing the new company to a gang of militant consumers who barricade themselves inside a carrier’s headquarters and refuse to leave until they get what they want. Exactly, Dayton told him.
Every MVNO is created to make up in some way for the shortcomings of the major carriers. Helio intends to be the one for people who love having a cell phone but would like to chuck their phone company in the ditch. “We’re tired of a lot of stuff,” Dayton says. “Confusing rate plans, yesterday’s technology, the lack of thinking about design, all these really basic things. All right, great—let’s create a carrier to do it the way we want.”


Team Helio (from left): marketing head Stu Redsun, COO Wonhee Sull, CEO Sky Dayton, and design chief Matias Duarte

SEVEN O’CLOCK on a chill November morning finds Dayton at Zuma Beach, the legendary Malibu break. It’s an hour’s drive back to the office, he’s got a product meeting at 9:30, and the waves are barely three feet high, but no matter—it’s been two weeks since he last hit the surf, and he was so excited that he barely slept the night before. Dayton took up surfing about six years ago, and he’s thrown himself into it with the zeal only a tech millionaire could afford. Twice in the past two years he’s journeyed to remote beaches in Indonesia to test himself against the 15-footers that roll in there—perfect, curling tubes with sharp coral below. Today, with pelicans flying low and tight over the gray water, Dayton catches a ripple and rides it nimbly for a few moments, then paddles back out for the next one. The entrepreneurial metaphors are obvious—timing, agility, quick response in a fluid environment—but really beside the point. The thing about surfing, even in conditions this tame, is how physical it is.
“When you’re surfing, you can’t do anything else,” he says, driving back to town in his brand-new Range Rover. (Arwen made him get rid of the old one after it began to stink from dank wetsuits.) “I did a BusinessWeek story once—they tried to say you’re out there thinking about business and stuff. Well, yeah, but actually you can’t. The other thing—” He hesitates for a moment, flashing his large brown eyes to check for a sympathetic response. “I’ve explained this to people before, and they look at me funny. But waves are like perfect energy moving through the ocean. The water itself isn’t moving—it’s the waveform, pushing the water up. You actually are riding the waveform. So you’re riding, like, pure energy, right?” He breaks into a huge grin. “I love that!”
He would. Helio is where the MVNO trend, born of congenital sluggishness in the US mobile industry, meets the so-called Korean Wave, the sudden sweep of Korean pop culture across Asia and beyond. Korean pop groups are huge in China and Southeast Asia; Korean movies win awards at Cannes; Korean cell phones are top sellers worldwide. Yet the Samsung and LG handsets for sale in the US don’t begin to measure up to those sold in Korea, where $700 models are available that have 8-megapixel cameras or get satellite TV. Helio won’t be selling phones like that, but it does plan to narrow the gap.
The company will offer two handsets initially, both from manufacturers new to the US. Thanks to SK Telecom’s clout with Korean manufacturers, each model is not only exclusive to Helio but customized for it. One, codenamed YT (after the female skateboarder in Neal Stephenson’s Snow Crash), comes in a pearly-white case that flicks open like a gravity knife. It has a video port to connect to your TV for big-screen viewing, whether it’s footage you’ve downloaded to your phone or shot yourself. The other handset, called Hero, is a black slider that’s bristling with buttons and has a graphics coprocessor inside to supercharge its video display. It’s based on Pantech’s Sky IM-8300, one of the most popular models in Korea since its introduction last year. (“All the hot phones over there are called Sky,” Dayton deadpans.) Both handsets will include an MP3 player, stereo speakers, a 2-megapixel camera with zoom lens, a QVGA screen for hi-res video and gameplay, a USB connection, and a removable TransFlash memory card that can store up to 1 gig of music, video, and games. They will sell for less than $300.
Fortunately, these phones will not come with the usual Korean-style screen menu, a candy-colored collage of flashing lights and cutesy-poo cartoon characters. “We didn’t want something that’s constantly pulsating,” says Helio’s design chief, Matias Duarte, who led the team that created the Danger hiptop mobile device. Helio’s user interface has a sleek, sophisticated look and comes in two contrasting color schemes: “day,” for the white YT, and “night,” for the black Hero. “It’s a yin-yang approach,” Duarte offers.


The Helio Hero, Coming Soon

Starting with two new handsets aimed at trendsetters—the Hero and its pearly sib­ling, YT—Helio will sell phones in­spired by Korean models. Among the fea­­tures de­buting in the coming months:

  • Location-activated photo sharing and blog entries
  • Music streams, downloads, and sharing
  • “Gifting” to and “begging” from other subscribers
  • Direct link to MySpace for mobile updates
  • Customizable, self-updating wallpaper
  • Graphics coprocessor for hardcore gamers
  • Hi-res QVGA video screens
  • 3G and Wi-Fi connections
  • Up to 1 Gbyte removable memory
In addition to the handsets themselves, Helio will provide custom­ized services. Thanks to an exclusive deal with MySpace, customers will be able to post photos and blog entries to the site directly from their handsets. Helio’s music service will offer streaming as well as down­loads and easy syncing with your PC. Eventu­ally it will let you rate artists and songs so you hear what you like and not what you don’t, and it will enable you to share music with friends who use Helio. Dynamic wall­paper will let you pick your interests—music, fashion, sports, finan­cial news—and direct the handset to update itself hourly with new info. One click will take you to the Web for the full story.
Months before anyone at the company started thinking about services, Dayton and his marketing chief tried to define the people who’d use them. The age group was a no-brainer: Young adults were first to adopt text messaging and camera phones, are most likely to pick out their own phones rather than take what they’re given at work, and have the most influence over other users. But there are 61 million 18- to 32-year-olds in the US, and they’re not all alike. Helio’s research company method­ically divided them into eight psycho­graphic segments, five of which lacked either the money or the tech savvy to go for what Dayton had in mind. But three groups did fit the profile. There was the growing number of young people who live with their parents for years after college: Redsun dubbed them the “spoil-me” bunch. Then there were the show-offs who like to slap their handset on the table as soon as they sit down: the “see-me” types. And finally, the high-income young professionals hungry for the latest tech: the “feed-me” group. Spoil me, see me, feed me—catchy shorthand for the 3 million souls Helio hopes to sign up by 2010.
The company will sell its phones and services on the Web, of course, but it will have a presence in the physical world as well. The handsets will be carried at retailers that don’t normally sell mobile phones, like college bookstores and surf shops. And in university towns and major cities like New York and LA, Helio plans stores of its own.
Ali Zanjani, Helio’s sales and distribution chief, was inspired by the lounges set up by TTL—SK Telecom’s phenomenally successful youth brand—as hangouts for its subscribers. TTL was created in 1999, when SK Telecom had only 17 percent of the youth market; a year later, it had more than 70 percent. The name is deliberately enigmatic. “There is no meaning—it’s up to you,” says one of its architects, Jay Lee, who left SK Telecom to become Helio’s head of products and services. “Someone said ‘Time to Love.’ It could be ‘Tango Twist La Bamba.’” TTL Zones are equally open to inter­pretation. Think of them as VIP Internet cafes for mall-weary young initiates, or as the physical manifestation of the TTL brand—a place where members of the tribe can go for live concerts, fashion shows, DVD viewing, gameplay, Internet access, free coffee, and a blower and wipes to clean their phones.
“TTL Zones are a lifestyle depiction of what the brand is supposed to mean,” says Zanjani, who spent 10 years building the consumer wireless business at Sprint. “We want our stores to be the embodiment of our brand. At the center of the brand is the whole notion of a connected community, which is represented by an artifact that happens to be a phone. But it’s not the artifact that matters—it’s the lifestyle.”


SIX THOUSAND MILES AWAY IN SEOUL, Wonhee Sull, Helio’s COO, is visiting “Wonhee’s Cyber Residence” on his mobile phone. An American-educated computer engineer who headed one of SK Telecom’s key R&D groups before joining Helio, Sull is back in Korea for a week to meet with handset manufacturers. The Cyber Residence is his minihompy (minihomepage) on Cyworld, the country’s leading online community. Cyworld—cy means “relationship” in Korean—is MySpace squared: a site where one-third of all South Koreans maintain their avatars and blogs in elaborately decorated cyberquarters. Sull’s minihompy opens to the tune of Maroon 5’s “This Love” and displays photos from college 20 years ago and in LA today, a tad plumper and flanked by his beaming wife and children. Sitting in his former office near the top of SK Telecom’s recently completed headquarters, Sull is feeling expansive. As is SK Telecom, which is why it’s teaming up with EarthLink to launch an American MVNO.
SK Telecom rivals Japan’s NTT DoCoMo as one of the world’s most advanced mobile carriers. Its success has made it a key component of the SK Group (formerly Sun Kyung), Korea’s third-largest conglomerate. In 1996, it deployed the world’s first commercial cellular network to use Qualcomm’s CDMA technology, which promised not just better voice quality but a faster, cheaper path to 3G. SK Telecom raced DoCoMo to deploy the first 3G network, launched music and video-on-demand services in 2001, and in 2005 became the first carrier to broadcast satellite TV to mobile phones. The new SKT Tower—33 floors of undulating blue glass in a shape that vaguely suggests a handset—is a dramatic expression of its prowess. “Have you seen the men’s room?” Sull asks.
Interesting question. The building’s office floors are spartan—a grid of cubicles for worker drones—but step inside the lavatory and suddenly you’re Trump. Floor-to-ceiling windows yield spectacular views of downtown Seoul and the rugged mountains beyond. Against a window-wall, a row of urinals is embedded in a waist-high block of marble. Step up to them and you find yourself astride a city of more than 10 million people. Soar like an eagle! And pee like one, too.
Because it already controls 51 percent of South Korea’s tightly regulated mobile market, SK Telecom has to look beyond its home territory if it’s to keep growing. It could acquire minority stakes in foreign carriers, as DoCoMo did after its success with i-mode, but DoCoMo’s $10 billion investment in AT&T Wireless bought it nothing but embarrassment. The joint venture with EarthLink gives SK Telecom a foothold in the US for only $220 million.


The New Niche Phone Networks

Mobile virtual network operators aim their services at precise demographic slices:

AMP’D MOBILE 18- to 24-year-olds 3G speeds, 99-cent music down­loads
7-ELEVEN SPEAK OUT WIRE­LESS Budget-con­scious con­sumers Very little
MOBILE ESPN Sports fans Game scores, trivia, video clips, news
MOVIDA Latinos Para ser­vicio en inglés, oprima el numero dos.
VIRGIN MOBILE 12- to 24-year-olds Games, rescue ring to escape blind dates
Source: Companies listed


Market research showed that many US con­sum­ers were tired of the one-size-fits-all ap­proach of the major carriers. Two over­lapping market op­portunities stood out in particular, says J. H. Kah, SK Telecom’s global strategy chief: “The ultrahip crowd and the ultrageek crowd. That’s the target SK Telecom was dream­ing of. I call it techno­sexual.”
The hookup with Earth­Link was fortui­tous. While SK Telecom was working with con­sultants to find an MVNO partner, Earth­Link was working with the same con­sultants to help grow its wire­less data business, which sells Black­­Berries and PDAs to Internet subscribers. Like AOL, EarthLink has been losing cus­tomers as people switch to broadband, where access is dominated by the cable and telco behe­moths that own the wires. “We’ve done a better job of man­aging the tran­sition than any of our com­petitors,” says Garry Betty, Earth­Link’s CEO. “Our profits are fine, and we can keep generating $1.3 billion in revenue for the next three or four years. But then what do we do?”
Eager—some might say desperate—to diversify beyond its legacy ISP business, Earth­Link has moved ag­gressively into Wi-Fi, winning bids to provide wireless Internet access in Anaheim and Phila­delphia. Since the company was al­ready leasing 3G capacity from Sprint and Verizon for its wireless data offering, expanding that into a full-fledged MVNO was an obvious next step.
MVNOs make sense to the big US carriers as well. Companies like Sprint and Verizon can foresee the day when everyone who can pick up a mobile phone will already have one. Increasingly, new subscribers have to be wooed from other carriers. By subcontracting that job to an MVNO, a carrier can let someone else spend the $400 or so it costs to wrest a customer from one of its competitors. The MVNO pays the carrier around a fifth of what the carrier typically gets from people it signs up directly, but that money is almost pure profit to the carrier. Sprint is particularly reliant on MVNOs: It hosts Virgin, ESPN, Disney, Movida, Boost (now a wholly owned subsidiary), as well as Helio on its network. “It’s a way to capture a lot of customers we would never have gotten otherwise,” says David Bottoms, VP for strategic partnerships. Best of all, it’s up to the MVNO to find a niche that makes sense and a marketing strategy that does the job.
Because Helio is positioning itself as the gadget geek’s MVNO, Dayton says, “carriers see us as a showcase for new technologies and a proving ground to see what works.” Take Wi-Fi, which Helio plans to make available on its handsets within the year. For Dayton, it represents a career-encompassing harmonic convergence, the place where EarthLink, Helio, and Boingo (which he still chairs), all come together. The problem with Wi-Fi hot spots today is that they’re just spots—isolated bubbles of connectivity with vast dead zones in between. However, put them together with slower but more ubiquitous 3G cellular networks in a dual-mode handset, and you get a pretty whizzy device. Out on the street, you’ll be connected via 3G; walk into your Wi-Fi-enabled house or onto a Wi-Fi-enabled campus and you’ll suddenly be getting five or six times the bandwidth at a tiny fraction of the cost.
But Helio isn’t the only company chasing this idea; it’s facing competition from carriers and other MVNOs alike. Traditionally, the carriers have been loath to let their customers wander off their cellular networks, which they built at vast expense and are determined to extract every nickel from. Yet T-Mobile, which lags in 3G but claims some 25,000 Wi-Fi hot spots around the planet, has just introduced its own dual-mode handsets to the US. Meanwhile, both Amp’d and Disney have been talking with Boingo, which has even more hot spots than T-Mobile, about incorporating Wi-Fi into their MVNO offerings. “Our strategy is to be an enabler to big brands and service providers,” says Boingo’s CEO, Dave Hagan, “not just to companies where Sky is.”
In other words, the competition is getting intense, and it won’t be restricted to Wi-Fi-equipped handsets. The research firm Yankee Group projects that in four years there will be more than twice as many MVNO customers in the US as there are today—but it also warns that of the dozen MVNOs now entering the fray, only a couple will get more than 1 million subscribers. Carriers and MVNOs alike will have to offer something different—cheaper plans, better services, cooler gadgets, or all three—if they’re to compete.
That should give Dayton more impetus than ever to pursue his passions—not just for high tech phones, but for the connectedness they engender. At 34, he’s a little older than his target demo, but he shares their obsession. “Not being connected—it’s like your oxygen is being cut off,” he says, sprawled in a chair in his office, wearing an old pair of corduroy jeans and a scruffy brown sweater. The question is, connected to what? Dayton sees little difference between the mobile downloads offered by Sprint or Verizon and something you’d get from iTunes: They’re both about consuming media, which is fine, but a phone should do more.
Helio aims to be the first mobile company outside South Korea to offer “gifting” and “begging”—the ability to pay for, say, a music track that goes to a friend’s phone, or to ask a friend to buy one for you. And instead of simply enabling subscribers to upload photos and blog entries to the Web, Helio plans to let people tag their postings with geocodes that activate them on handsets when they reach a specific location. Walk into a concert venue, the thinking goes, and you’ll suddenly have access to photos and blog entries from Helio subscribers who have been there before—the collective memories of hundreds, maybe thousands of people.
“Music and video should be communications fodder,” Dayton asserts. “It’s not about downloading Desperate Housewives and watching it at the doctor’s office. We’re your connection to your com­munity of friends.” He stares at the device, glowing with electronic life. “All of your friends, in the palm of your hand.” ◆

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