Schadenfreude for UK mobile networks over the tumult at Carphone

That's what you get for selling unlocked phones

Analysis UK mobile networks will be eyeing Carphone Warehouse's current woes with some glee.

Carphone issued a profits warning last week and warned of a year of difficulty ahead. It will promptly close 92 stores.

Why the glee? It's because Charles Dunstone's retail operation is an exception in mobile retail, rather than the norm. Carphone's success in inserting itself as a middleman into the mobile supply chain transformed the UK retail sector, and is considered a factor in keeping it such a keenly competitive marketplace.

The norm, worldwide, is for networks to retain close control over retail, either through their own stores or through relationships with big box retailers. Instead, Carphone actually encouraged consumers to act like consumers.

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This was what the utopians of the mobile industry who designed GSM had in mind in the 1980s – although their bosses may not have shared the enthusiasm. The mobile industry was designed to create a discrete "terminal" market (in industry parlance the terminal is the phone) that was separate from the market for "airtime". As a consumer you'd take your SIM and shop around – both for the best phone and the best network deal. For a perfect market to work the consumer needs information, the ability to evaluate such deals, and Carphone provided just that.

At the other extreme is the US mobile market, where the networks weren't even compatible, and phones were strictly part of the network's offering. A Best Buy might negotiate specials with the networks, but it wasn't even pretending to be a dispassionate broker.

Carphone convinced the public that it was, even though the reality was a little bit more complicated. Carphone and Phones4U were formally independent, but they were fundamentally brokerages, with nice (and completely legal, of course) kickbacks for the networks, as this 2005 company profile in The Telegraph explained. The company could discount handsets then make it up on the airtime commission.

The public didn't see this as a swindle - and why should it? In what had been a Wild West industry, Carphone's point of sales service was stellar, and it was selling unlocked phones – something that particularly infuriated the networks.

The networks retaliated by throwing a strop now and again. Vodafone blocked sales to Carphone in 2006, signing up with Phones4U (RIP), and returning in 2009. Three pulled out in 2013, and hasn't returned.

Mindful that the 2G explosion would be hard to repeat, Carphone diversified into network services, launching TalkTalk as a consumer brand in 2003, and flogged the story to considerable scepticism throughout the 2000s. It spun it out seven years later. The networks, for their part, built up their own high street presence.

Carphone finally merged with big box white goods in 2014, creating Dixons Carphone – "a merger of equals", the twosome called it; "two drunks propping each other up at the bar", sneered critics. Phones4U threw in the towel, giving Carphone some breathing space.

But several factors have made the old brokerage business much more challenging. As Carphone acknowledged last week, the market is mature and now a commodity business. You don't need a guru's advice choosing a phone. What new features handset makers throw in neither attract nor bewilder punters. Everything is familiar. People retain their handsets for longer.

In addition, the unlocked phone that Carphone helped flog by the million helped its undoing. When choosing an upgrade, buyers can stick the replacement on a credit card and buy it on the internet. Amazon's growing presence in white goods that hurt the Dixons part of Dixons Carphone has increasingly hurt the walk-in mobile buyer.

It's unlikely that the UK will ever resemble the US market. But as Dunstone told the Financial Times five years ago: "It's over. They* sell things people don't buy any more in stores." Dunstone was talking about CDs and DVDs.

But soon enough, it might be phones. ®

*HMV




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