Carphone Warehouse rescued with AOL buy
There's method behind the madness
Analysis Mobile phone operator Carphone Warehouse (CPW) has now moved into fixed line telecoms and broadband.
Originally, the company's phone offerings were based on a system known as IDA (Indirect Access) whereby customers dialled a prefix and then the number they actually wanted. All the real work was done by another provider and CPW just did the marketing and billing (and took a cut of revenues).
It then acquired Opal Telecoms who was (and still is) a provider of business telephony services. This gave it the ability to handle calls on its own network and it started offering Carrier PreSelect (CPS) services so customers no longer had to dial a prefix to utilise CPW's tarrifs.
CPW then acquired OneTel and Tele2 which gave it scale in voice customers (around 1.3 million new customers). As all the customers would be on CPW's network, they could all call each other for free.
However, CPW's broadband base was low and the acquisitions only gave it around 60,000 new customers.
CPW also has a growing mobile base of its own as it set-up a UK MVNO (mobile virtual network operator) - known as TalkTalk Mobile. It is also setting up MVNOs in other countries directly as TalkTalk or combined with other brands (with Virgin Mobile in France, for example).
Though fixed line telecoms offers short term revenue, it's not a long-term winner as phone calls are becoming free. CPW currently wins because BT has been so uncompetitive for so long (partly from being regulated and partly because it's BT). Times are changing and the market has become much more competitive, so CPW needed another hook to win customers, and broadband was the answer.
Though CPW's goal was to roll-out a service based on local loop unbundling (LLU) putting its own equipment in BT exchanges, it takes a long time to do this (anywhere over six months, but considerably longer if the exchange needs any work doing to it). LLU has only recently proven to be economic due to price cuts from BT (which have been forced upon it by regulator Ofcom). However, LLU relies on massive scale for those economies to come into play.
Due to the delay in deploying LLU, CPW actually utilises BT Wholesale's IPStream service for broadband (the majority of broadband in the UK is actually on IPStream). There's a fixed cost to connect end-users and then further costs to connect the users back to CPW.
CPW offer "free" broadband as part of a package, whereby the user signs up for a talk package (TalkTalk3) and a line rental package. The line rental is a service known as WLR (wholesale line rental) whereby CPW takes over the copper wires that go into the customer's premises. This also removes the "blue bill" so the customer is now completely owned by CPW and BT can not market to them.
Scale and then there's scale
Carphone Warehouse (CPW) recently bought AOL UK for £370m, which may seem a huge amount for its 1.3m users (about £285 per user), but that's only half the picture.
If you add all the costs together (WLR, broadband etc) it actually costs CPW around £22.17 per month per customer (there's several assumptions here, see the end of the article for more information).
CPW's TalkTalk3 package (broadband and phone) is sold at £19.99 per month, including VAT, which means it actually gets £16.49 per customer.
Putting the two scenarios together means CPW is losing £5.69 per month per customer. Assuming 800,000 customers, that's a whopping £4,542,919.44 per month and the more customers they get, the bigger that loss gets.
The only way to reduce those costs is to move those customers onto its own unbundled broadband solution.
Even if CPW had a workable LLU plan, it is using Chinese broadband kit vendor Huawei, which makes cost effective equipment that tends to be very feature rich. Huawei, however, has little resource in the UK to do CPW's roll-out. Many other broadband vendors do the complete install and maintenance for the broadband provider.
The second major problem is the delay in getting the equipment into the exchanges.
The third problem CPW has is provisioning, or actually the lack of a workable, scalable provisioning system - so customers have been left without service for days, or even weeks.