Global Insight Perspective | |
Significance | Barely six months into the market, Carphone Warehouse has bought its way to the position of third-largest broadband provider in the U.K. market. |
Implications | Apart from launching it solidly into the broadband market, Carphone Warehouse's free broadband offer helped unsettle the market, effectively knocking down the price it paid for AOL. |
Outlook | The burden of operating two units with different pricing structures and the uncertainties surrounding local loop unbundling will remain major concerns for the company in the near term. |
Twin Landmark Achievements
Carphone Warehouse yesterday announced two different landmarks that have ultimately catapulted it to the number three position in the United Kingdom's retail broadband market behind NTL and BT. Firstly, the company stated that its third quarter broadband customer base has soared to 625,000 although about 200,000 remain unconnected. Soon afterwards, Carphone Warehouse announced that it has won the bid to take over AOL's U.K. operations for £370 million (US$688.2 million), thereby taking control of a further 1.5 million broadband customers and 600,000 dial-up subscriptions. Carphone Warehouse said it plans to run the units separately, retaining AOL's paying structure.
Beyond Expectations
Inadvertently, Carphone Warehouse has become a victim of its own success. By offering free broadband services to customers, the company triggered a revolution that has drawn Orange and BSkyB to consider similar deals. The company has barely been able to cope with the numbers signing up for the free broadband offer, with about 200,000 signed-up customers yet to be connected. Chief Executive Charles Dunstone has had to publicly apologise for "getting it wrong" by underestimating the interest the product has generated. "The unprecedented take-up of our free broadband offer means we have accelerated our customer service recruitment plans and incurred additional wholesale broadband costs," he said (see United Kingdom: 19 July 2006: Uncertain Future Awaits BSkyB Broadband Offer, World: 1 June 2006: France Telecom Adopts Orange Brand for Internet, TV and Mobile Services and United Kingdom:11 April 2006: Carphone Warehouse Unsettles Market with 'Free' Broadband Service).
This has caused a financial headache for the company. When the service was launched in April, the company had planned for a loss of £50 million. But with the added operational expenses, the company said it now expects that figure to rise to £70 million in the financial year (see United Kingdom: 27 July 2006: Carphone Warehouse Signs Up 476,000 Broadband Customers Since April and United Kingdom:6 June 2006: Carphone Warehouse Free Broadband Service Achieves340,000 Customers).
More Financial Troubles
Besides its extra operational expenditure, the company may yet fall into another big miscalculation. Carphone Warehouse's plan to use unbundled local loop lines to connect its customers has not really taken off. Plagued by the slow pace of LLU, the company has managed to only transfer 20,000 of its 421,000 broadband customers onto unbundled lines. The firm indicates that it has unbundled 370 exchanges and was on track to meet its target of 1,000 exchanges by May 2007. However, with the U.K.'s independent telecoms adjudicator sternly reprimanding BT for slowing the pace of LLU, Carphone Warehouse's LLU plans may need a rethink.
Broadband is "Not" Free
Worried by what it regarded as a distortion of the truth about broadband services, Carphone Warehouse's rivals have succeeded in getting the United Kingdom's Advertising Standards Authority (ASA) to demand the company drops the claim of offering free broadband. The ASA ruled in July that since the company required customers to sign up for the TalkTalk service and pay a monthly fee, it could not be described as free. Somehow, the ruling has not metamorphosed into a major clampdown and the "free" broadband concept is still widely used (see United Kingdom: 19 July 2006: British Advertising Watchdog Clamps Down on Carphone Warehouse's "Free" Broadband Adverts).
United Kingdom vs France vs Germany
Beyond firmly putting the company into the United Kingdom's broadband market, the free broadband offer has helped to slash the cost of AOL's U.K. operations. From the start, AOL signalled it wanted £1 billion for its U.K. unit. Unfortunately, the £370 million paid by Carphone Warehouse is a confirmation that the free broadband offer, compounded by the lack of interest of mobile operators (Vodafone, O2) and the lukewarm interest from BSkyB and Orange, knocked down the price for AOL's U.K. assets. In contrast, a bidding frenzy in Germany led to Telecom Italia paying 675 million euro (US$846.7 million) for AOL Germany. Carphone Warehouse effectively paid US$458.8 dollars for each AOL broadband customer in the United Kingdom compared to the US$769.7 paid by Telecom Italia for a broadband customer in Germany and US$722.4 paid by Neuf Cegetel for an AOL broadband customer in France. KPN paid an even higher sum of US$1159.1 for each broadband subscriber from Tiscali in Netherlands (see France: 22 September 2006: Neuf Cegetel Pays US$369 mil. for AOL France, Europe: 18 September 2006: Telecom Italia Acquires AOL Germany for US$856 mil., Netherlands: 18 September 2006: KPN Buys Tiscali Dutch Unit for US$323 mil.And United Kingdom: 2 June 2006: AOL Seeks Buyer for U.K. Operation).
Sale of Selected European ISPs (September – October 2006) | |||||
Country | Target – Acquiring Company | Acquisition Price (US$) | Total Customers (000) | Broadband Customers (000) | Price per Broadband Customers |
France | AOL—Neuf Cegetel | 361.2 | 500 | 722.4 | |
Germany | AOL— Telecom Italia | 846.7 | 2400 | 1100 | 769.7 |
Netherlands | Tiscali—KPN | 319.9 | 402 | 276 | 1159.1 |
United Kingdom | AOL— Carphone Warehouse | 688.2 | 2100 | 1500 | 458.8 |
Source: Global Insight | |||||
Outlook and Implications
The acquisition of AOL has added to Carphone Warehouse's worries. The company is now faced with the task of fusing two different units with vastly different pricing models. Beyond that, the company's ongoing concerns about LLU and its inability to cope with unexpected interest still remain.
Although its public acknowledgement that it has blundered through the underestimation of public interest may have bought it a reprieve for the short term, any further fiasco in its customer relations management, including connecting the 200,000 waiting customers, is a potential disaster that could see Carphone Warehouse suffer the same fate as Bulldog.