Prepay pays at Carphone

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The group, which is gearing up to offer Apple’s iPhone next month, said growth in the second quarter was driven by a strong performance from its retail outlets and strong demand in prepay.

Chief financial officer Roger Taylor reckons that with consumers having less to spend, due to higher interest rates, deals like Carphone’s current one, that offers a free £70 handset with a prepay deal where customers pay in arrears for their talk time, are pulling the punters in.

If more evidence were needed, Carphone’s prepay connections were up an impressive 26.8 per cent to 1.6 million. In contrast, the number taking out 18-month contracts was up just 9.3 per cent to 1.1 million.

Analysts at stockbrokers Landsbanki warned the slowdown in subscription customers – which are more lucrative for Carphone – was consistent with its “thesis that the retail market will get tougher’’ as the economy weakens and people tighten their belts.

In all, Carphone’s total connections were up 19.2 per cent to 2.8 million year-on-year in the 13 weeks to September 29. Analysts had called it totally wrong, forecasting total connections up just 13.3 per cent.

Perhaps that’s because they were so focused on Carphone’s broadband business, they took their eye off the shops.

As it was, the broadband business had a tough time in the second quarter, adding just 89,000 subscribers – compared with 126,000 in the previous quarter – and well below analysts’ forecasts of 103,000.

With TalkTalk, Carphone’s home-grown broadband unit, having launched its “free” broadband offer 18 months ago, some expert observers reckon many punters are now starting to churn.

Aamir Baloch, director of telecoms at Firsthelpline.com, made reference to the myriad of complaints about TalkTalk’s poor customer service.

“While its packages still compare well on price and product offering 18 months on, it’s been well documented that consumers suffered from poor customer service – something that may have been a significant contributor in the slowdown,’’ said Baloch. “Meanwhile, other providers are now snapping at its heels with their own offerings.

He continued: “Many customers who had a really bad time with TalkTalk will have already left by getting out of their contracts early. Those who had a bad experience but stuck with it will certainly start to look for other providers at this point.”

But despite slowing broadband growth, Carphone shares rose on the day it published its figures, partly because it showed improved profitability in the broadband business.

TalkTalk moved 411,000 customers in the quarter on to its own network to give it an on-net base of 1.4 million, or 55 per cent of its broadband base. It said it expects to add 200,000 to 250,000 broadband customers over the second half of the year.

The company has been concentrating less on adding new subscribers and focussing on unbundling exchanges to transfer customers from BT’s network onto its own to reduce overheads.

Collins Stewart analyst Mark James said the “unbundling rate’’ would be well received, as Carphone pays BT nearly three times as much for a wholesale line as it does for an unbundled one.

“Even allowing for extra costs and revenue deflation, an extra million unbundled subscribers could add £120 million to underlying profits this year alone,” James told his investor clients.
In the third quarter, Roger Taylor is expecting a customer boost from Carphone’s free laptop offer for new broadband subscribers to AOL UK, its recently acquired internet service provider.

Chief executive Charles Dunstone reckons free laptops are the future. His simple logic is that we all used to queue at home in the hallway waiting to use the phone, but now mobiles have changed all that. He sees the same pent up demand for laptops, because today we instead queue to use the family’s home PC to email friends or do homework.

Rival broadband providers are giving away free wireless routers or set-top boxes, but Dunstone reckons people would much rather have a laptop – after all, there’s so much more you can do with it.

You can’t fault his logic and I expect those AOL laptops will fly off the shelves. The question is, whether it’s sustainable to keep giving them away in the long-run.

The subsidy model has done a huge amount to popularise the mobile, but at what cost to the industry?

Also, TalkTalk and AOL have a new competitor to deal with now in the shape of O2; the network has finally launched its much-delayed broadband offering.

O2 has opted to offer heavily discounted broadband subscriptions to its contract customers. The move is an attempt to reduce churn as operators battle it out in an increasingly cut-throat mobile market.

The network’s mobile subscribers can pay from £7.50 a month for a connection of up to 8Mb per second, up to £15 a month for up to 20Mb, with all customer service calls being free. O2 prepay customers and non-O2 customers will pay £10 a month more on all packages.

The service will only cover 50 per cent of the country initially, but O2 has promised that any customers that sign up to a broadband speed that cannot be delivered will receive an email from O2 recommending they downgrade their package.

Chris Frost, of independent price comparison site uSwitch.com, said: “By taking this stance, O2 is tackling head-on the number one issue currently affecting consumer confidence in the broadband industry – our research shows 4.65m broadband customers are unaware of the broadband speed they are receiving.”

O2 is also offering its customers the chance to upload pictures to their MySpace page for free, the first operator to do so, during November and December. Matthew Key, O2 UK chief executive, confirmed that O2 has signed a similar deal with rival social networking site Facebook in the UK.

Key has taken a well thought out approach to all of this but, with the likes of Sky, Vodafone, Orange and of course Carphone already offering broadband, O2 is late to the party in a very crowded marketplace.

 

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