Alarm bells ring for UK’s broadband providers

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The Carphone Warehouse website blared out an offer of “free broadband forever” but, for the industry, the assault could be anything but free.

Predictions of a savage price war preceded Carphone’s announcement of an aggressive push into the retail broadband market.

Christian Maher, an analyst at Investec Securities, warned that the likelihood that Carphone’s landline and broadband service would be “very popular with potential customers” meant the industry was facing a “broadband bloodbath”.

The City immediately started to look for potential victims, with share prices easing across the telecommunications and media sectors, from BT to BSkyB.

BT put a brave face on Carphone’s announcement, insisting it welcomed the competition.

But it is constrained by regulation from offering a “bundled” service of landline calls and broadband at a price that could compete with Carphone, hampering its ability to respond.

Charles Dunstone, Carphone’s chief executive, declared that he wanted the company to become the “number one alternative” to BT for residential users.

At present, Carphone is the number three in the residential market.

BT has 18.4m fixed-line customers and NTL, the cable company that recently merged with Telewest, has 4.3m, ahead of Carphone with 2.6m.

Carphone hopes its bundled service of landline calls and broadband access will lift its customer base to 3.5m by March 2009 – a figure Numis Securities called “reasonably conservative”.

BT is by no means the most threatened of Carphone’s rivals. Many of its most disloyal customers have already switched, notes Jim McCafferty, an analyst at Seymour Pierce, and the rapid adoption of broadband services has attracted scores of new entrants to the market, many that find themselves far more vulnerable.

The competition falls into three categories, according to Ian Watt of Enders Analysis. This includes the 100-plus small resellers of BT’s broadband product; the few established broadband operators that have already begun to take control of the lines running into customers’ homes, such as Bulldog; and the largest broadband providers such as Tiscali, Wanadoo or AOL.

The most vulnerable, Mr Watt said, would be the resellers as many have tiny profit margins and have no alternative revenue to fall back on. The likes of Wanadoo would struggle to compete with Carphone because they had insufficient numbers of telephony customers.

The larger internet service providers, by contrast, had the capacity to respond.

Wanadoo’s relationship with Orange and Tiscali’s substantial base of voice customers would allow them to discount their broadband offering, Mr Watt said.

Carphone’s land-grab comes as the traditional lines between the communications and media industries are blurring, with new entrants making equally aggressive plans to join the broadband market.

BSkyB, which last year bought Easynet, will unveil its plans for the broadband provider later this year and a BSkyB spokesman would not comment yesterday on whether it could offer free broadband to help compete with NTL and other rivals.

However, he said: “Broadband represents a real opportunity for Sky to drive growth and offer more value to customers . . .we fully intend to be one of the new breed of broadband providers that will challenge the incumbent players.”

BSkyB was in a different position from other competitors to Carphone, Mr Watt argued, at it had a large customer base but not for broadband or telephony. “Sky may well offer free broadband but not until the autumn,” he added.

Chad Raube, director of internet at NTL, signalled that the cable operator was wary of joining in a straight-out price war, saying: “Value is not just about price and we have become the UK’s biggest broadband provider by offering quality and reliability.”

Carphone’s plans are being scrutinised as a signal of how media and telecoms companies are likely to market the “bundled” services that many are now offering. While Carphone offers voice and broadband services, NTL last week formed the first “quadruple play” offering, with television, mobile, landline voice and broadband.

The risk that rivals could respond to Carphone’s offer of free broadband by advertising free television or voice calls as part of a bundled service, leading to a far broader price war, “causes us some concern”, said Tony Cooper, head of Deloitte’s telecoms practice. “But the industry is aware of the risk.”

The key to Carphone’s strategy is a process specific to the development of the broadband market, known as “local loop unbundling”.

The local loop is the final connection from a BT telephone exchange to a customer and Carphone has so far been constrained by having to resell BT’s wholesale broadband product.

Ofcom, the regulator, is now breaking BT’s stranglehold on the local loop, however. Carphone is installing its broadband equipment into BT exchanges to take greater control over the price, speed and service that it can offer.

Yesterday, it announced plans to accelerate this process to achieve “full local loop unbundling” at 1,000 BT exchanges by May 2007, which would allow it to reach almost 70 per cent of the population.

Mr Dunstone acknowledged risks in Carphone’s strategy, not least because of its reliance on BT. If BT is unable to meet Carphone’s timetable, it could dent its aim of making an operating profit in the broadband business by 2007-08.

If BT fails to deliver, Mr Dunstone said: “I will chase them to the end of the world for my money.”

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