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Carphone Warehouse rescued with AOL buy

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AOL to the rescue

AOL has 1.3m broadband customers, which gives scale (and LLU is all about economies of scale). It also has 400 DLEs unbundled with a roll-out plan to 1,000. This is all based on Fujitsu kit, and it has an engineering base in the UK and has been doing the roll-out for AOL.

Now CPW can instantly migrate its users onto its own unbundled DLEs (the 400 will be in the most population heavy areas, so probably most of CPW's customers too) and turn that £5.68 per month loss into a profit (albeit a small one).

Though the above figures are accurate in terms of costs (see assumptions below), it's very difficult to know what CPW is actually doing and how it loads the pipes, etc. According to its half-year results it made a (six month) loss of £37.7m (for the broadband service) and had 461,000 broadband customers, which works out to a loss of £14.94 per user per month. However, that loss probably covers LLU roll-out and other factors.

A big advantage in buying AOL (apart from maybe making some money out of LLU migrations) is that it has a working, scalable provisioning system. You don't hear of problems with AOL users losing connections when they sign-up.

So though £370m may initially seem a lot, its saved CPW probably a year's worth of unbundling and a provisioning system that works. It just needs to migrate its customers over to the AOL platforms as soon as possible.

Of course, now CPW has to go the whole hog and start running triple or quad plays, internet and free calls won't cut it for long. It'll be video and mobile integration and other services which make consumers pay and allow CPW to generate a profit for its shareholders. AOL brings a part of the solution with it, content which puts it in a strong position against the likes of BSkyB. Given it also has a mobile solution, this should give it the ability to offer a strong quad play solution of voice, video, mobile and broadband - which means it may well be able to offer competitive competition to players such as NTL:Telewest (soon to be Virgin Media) and BT.

Consolidation is going to continue within the internet and telecoms industry, but it looks like Carphone Warehouse is going to be one of the survivors. ®

Assumptions

IPStream is BT Wholesale's broadband service that allows an ISP to offer IP connectivity to their backbone. There are two elements to the service, the end-user connection, which is a fixed cost per user, and the connection (or connections) "fat-pipe(s)" to the ISP which are based on bandwidth (known as capacity based charging).

A BT 622Mb/s "fat pipe" costs £124,000 per month with a set-up £150,000 fee. These are limited to 32,000 sessions (ie, simultaneous users). Though the ISP can decide their own contention, it's likely that each pipe will be max'ed out (CPW encourages the sale of a modem. When someone switches off their PC, the connection will go down and the session can be re-used).

Unfortunately, this means that if everyone is using their connection at full speed (or trying to), they'll only get a usable 20Kb/s or so of bandwidth. However, it's assumed CPW is loading them to the full, which means it needs 25 pipes for 800,000 customers. They'll also get about 1.5% per cent discount for the volume.

The cost of the ADSL connection is £8.40 rental and £12.40 set-up.

Wholesale Line Rental costs CPW £8.95 per month.

It can be assumed that the set-up charges are absorbed over 18 months (which is the length of the customer contract).

Therefore, the total costs per month are the ADSL and WLR costs (including the part of the set-up costs) and the split of the fat-pipes -which is where the £5.69 loss comes in.

There are various other costs that have been completely ignored, they include any ISP infrastructure (mail/web/etc.), transit costs (ie, the costs associated with getting traffic off CPW's network - with 25 fat-pipes, that means potentially 15Gb/s of bandwidth).

Revenue which has been ignored are things like phone call revenue. CPW must be making some money from people making calls to mobiles/premium rate numbers etc.

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