Free Broadband Comes to the UK
The move takes advantage of local loop unbundling to undercut competitors like BT Group plc (NYSE: BT; London: BTA) and ntl group ltd. (Nasdaq: NTLI) by reducing its costs and generating interconnect revenues. That will allow it charge the standard £11 pounds for line rental plus £9.99 for unlimited calls, and throw in an 8-Mbit/s broadband connection for free. There will be a one-off connection charge of £29.99.
Carphone has 2.6 million customers signed up to its TalkTalk voice package after the acquisition of One.Tel and believes the aggressive pricing will help it reach 3.5 million by March 2009, with more than half of those taking the broadband service. It has accelerated plans to unbundle 1,000 exchanges over the next three years, now saying that target will be reached by May 2007 and give it 70 percent coverage of the U.K. population. (See Carphone Dials Up Rivals.) Its acquisition of Opal Telecom will provide the network capacity to route calls.
This system will enable fast and efficient transfer of customers from Announcing the launch in conjunction with its fourth quarter trading update, the company says the launch will result in a £50 million operating loss for this financial year. (See Carphone Provides Q4 Update.)
In a statement, CFO Roger Taylor said the long-term benefits justify taking the hit: “We believe that the investment and short term profit impact are fully justified by the rapid recruitment of customers to ensure higher penetration of our unbundled exchanges. The pricing reflects what we believe to be the real costs and benefits of providing residential telephony and broadband through unbundled exchanges.”
In a note to clients, Ovum Ltd. 's Mike Cansfield says Carphone Warehouse (CW) is in a strong position to pull this off thanks it to its strong position as a high street retailer and the simplicity of the package. He writes: “We see that consolidation (One.tel and Opal) has brought a new dimension to CW's business. Secondly, we see that strength in retail can be the springboard into the telecoms services industry. Successful retailers win because they know what customers want and give it to them. Thirdly, we see the pivotal importance of systems (not networks) in opening up new areas of competition in the communications sector.”
But Cansfield also notes that LLU has caused problems for the U.K.’s service providers in switching customers over from BT. “The biggest risk seems to be that it is dependent upon BT Openreach's new automatic bulk customer transfer system, due for release on 4 July,” he writes. “Openreach to CW's own systems. CW recognizes that without this it cannot deal with the quantity of orders expected (over 70,000). If its faith in this system is justified, then it may be able to avoid the LLU pitfalls experienced by Bulldog.”
According to the Times newspaper, Carphone Warehouse has threatened to sue BT for "every penny" it will lose if the incumbent fails to deliver on time.
This is set to be the year local loop unbundling takes off in the U.K., with competitors piling into the market. Among the investors are Cable and Wireless plc (NYSE: CWP), AOL (UK) Ltd. , Sky , Wanadoo UK , and Tiscali UK . (See Time Warner Invests in UK DSL, Murdoch's Sky Takes on BT, and Unbundling Heats Up in UK.)
— Nicole Willing, Reporter, Light Reading