'FREE broadband, forever' is a compelling offer, but The Carphone Warehouse will need more than clever marketing if their new broadband plus phone service is to herald a successful new era in low-cost telephony.
Last week the company's chief executive Charles Dunstone launched an ambitious £110m gamble which will see the company install its own equipment in 1,000 of BT's local exchanges by May 2007. This will allow Carphone to wrestle control from BT of the
'local loop' connecting customers to their local exchange. This process of 'local loop unbundling' (LLU) enables Carphone to offer the competitive package that attracted so many headlines last week.
Of course, the package is not completely free. TalkTalk customers will pay a monthly subscription of £21 for unlimited free calls to land lines within the UK and to 28 other countries. The 8Mbps high-speed broadband may be marketed as a 'free' extra, but it is inextricably bundled with the phone package. Nonetheless, most analysts agree it is a good deal, especially as customers will no longer have to pay their monthly line rental to BT.
What makes the move so risky is that Carphone is offering LLU prices 13 months before its conversion of BT exchanges is complete. Indeed, Carphone has yet to convert a single exchange.
"The biggest risk seems to be that it is dependent upon BT's new automatic bulk customer transfer system, due for release on July 4," says Mike Cansfield, research director at telecoms and technology consultants Ovum.
"This system will enable fast and efficient transfer of customers from BT to Carphone's own systems. If its faith in this system is justified, then it may be able to avoid the pitfalls experienced by other providers," says Cansfield.
History does not augur well. Only last week the Office of the Telecommunications Adjudicator (OTA) - the body which oversees the development of the LLU market - reported that BT's performance in migrating lines to new providers was "still unacceptable", adding "this has been an outstanding issue for some time".
The Cable & Wireless-owned LLU provider Bulldog has faced technical hurdles since launching its unbundled service last year. Similar to Carphone, Bulldog launched in a blaze of publicity and with ambitious aims. However, staff failed to cope with the high number of customer enquiries and complaints, sparking a formal investigation from the communications regulator Ofcom. As a result, Bulldog has only attracted 80,000 users to its broadband and telephony service - a minnow in the broadband market.
Similarly, Wanadoo recently admitted its transition to LLU was not going ahead as planned, with some customers being left without any broadband service for almost three months.
Many industry figures blame BT. As Scotland on Sunday revealed in November, the former chief executive of Cable & Wireless, Francesco Caio, said BT's service was "not up to scratch" in comments made at a telecoms conference in Edinburgh.
Carphone's Dunstone is likely to take an even more robust stance with BT, with reports suggesting the company is prepared to sue the telco if it fails to meet its deadline for its new migration system. Carphone expects to lose around £5 per customer per month until its own network is ready, due to The extra costs of renting BT equipment in the interim. Carphone is prepared to withstand a £50m loss to cover this but is unlikely to stand for any further delay.
According to Ian Fogg of Jupiter Research, the pressure on BT will only increase as competitors seek to match Carphone's prices.
"Carphone's announcement is a major conflict escalation which will force the other major providers - especially those leading with value-centric propositions - to respond," says Fogg.
Even before the events of last week, the OTA tripled its previous forecasts, predicting that as many as three million phone lines could be unbundled from BT this year.
Sky's £211m purchase of LLU broadband provider Easynet upped the ante. Easynet has unbundled 232 exchanges, giving it access to a fifth of UK homes, and by the end of 2007 it expects to offer a service to seven in 10 UK households.
NTL/Telewest has no need to invest in LLU as it has its own cable network with more than three million broadband subscribers, making it the UK's largest provider of broadband services. The group's £962.4m takeover of Virgin Mobile last month also gives it a strong "quad-play" proposition - that is, an offering which includes cable TV, internet, land line calls and mobile telephony.
According to Ian Fogg, firms such as Sky, BT and NTL/Telewest are in a position to offer value-added products. "It's only really in the last 18 months that various providers have decided that there are additional products which they want to offer, which they'd be better able to do through LLU with its capacity for higher-speed broadband, voiceover IP, video on demand, and so on."
Indeed, BT is due to unveil its broadband TV service this autumn, and has managed to sign up content from the BBC, National Geographic Channel, Paramount and Warner Music Group.
BT's broadband network also has the advantage that it is available in nearly all UK homes. Carphone's Dunstone may have claimed last week that broadband is now "a right, not a privilege", but it appears that he and his competitors are only prepared to convert those exchanges serving the most populous towns and cities. With 30% of homes unlikely to benefit from LLU, a new digital divide looks set to open up.
The full article contains 951 words and appears in Scotland On Sunday newspaper.
