Carphone faces mounting broadband losses

Carphone Warehouse looks set to become the victim of its own success by racking up a bigger-than-expected loss in its broadband business, industry analysts said on Friday.

Analysts estimated the operating loss in Carphone’s broadband business would be £70m in 2007, against the £50m forecast by the group last April.

Carphone’s “free” broadband deal has proved extremely popular and analysts said their projected £70m loss was partly the result of the higher-than-anticipated demand.

For example, Carphone has had to hire hundreds of additional staff for its call centres after admitting it was struggling to cope with demand.

Charles Dunstone, chief executive, will provide a trading statement for the group and a progress report on its broadband business on Wednesday.

People can get “free” broadband if they pay £20 per month for Carphone’s fixed-line phone service, known as Talk Talk.

Analysts estimated that more than 600,000 people had signed up to Carphone’s bundled voice and broadband deal since it was launched last April.

Christian Maher, analyst at Investec Securities, said in a research note that the operating loss in Carphone’s broadband business would be £70m in the group’s 2007 fiscal year ending on March 31, partly because of the demand. Fanos Hira, analyst at Bear Stearns, also said in a note that the loss could be £70m.

Another analyst, who declined to be named, said the loss could be up to £90m. He also raised questions as to whether Carphone could hit its target for the broadband business to make an operating profit of between £30m and £40m in 2008.

The operating loss in 2007 could also result from difficulties in Carphone taking control of the landlines that run from BT phone exchanges to people’s homes: a process known as local loop unbundling. Some of Carphone’s broadband customers are initially getting their high-speed internet access through a BT product called IP Stream.

Carphone is providing customers with its own broadband product, but it can only do so after BT engineers have connected their landlines to Carphone’s telecoms network at the exchanges.

Carphone said in April that while its customers use IP Stream they would be loss-making. They will become profitable when they use Carphone’s broadband product.

Mr Maher said the projected £70m loss was partly because of the “slow migration” of Carphone’s broadband customers from IP Stream.

Carphone declined to comment yesterday. Mr Dunstone admitted on his blog last month that Carphone had found the difficulties in providing “free” broadband a “bruising experience”, but added Talk Talk was “back on track”.