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Popularity contest

Prospects: can Carphone Warehouse beat BT in the broadband war?

What’s happened?

As Big Brother 7 kicks off, main sponsor Carphone Warehouse must be
hoping its ambitious attack on the broadband market will last longer than the
media careers of the Z-list wannabes.

Charles Dunstone, head honcho at The Carphone Warehouse, describes it as a
battle between David and Goliath – his finance chief Roger Taylor must hope it
won’t be a war of attrition. By launching a brave attack on the broadband
market, and BT in particular, Carphone has certainly shaken up the telecoms
industry with its ‘free for life’ broadband offer.

Of course, nothing in life is free, and in fact subscribers to the TalkTalk
service will face a £21 a month charge for broadband, line rental, unlimited UK
calls, plus unlimited calls to 28 international destinations. But the move has
shone a light on the premium rates charged for such services and also shows what
can be done with a bit of marketing imagination, helped by the ‘unbundling’ of
1,000 BT exchanges.

What’s next?

On Tuesday 6 June, Dunstone and Taylor will be revealing their full year
results, which will include an update on how the ‘free’ promotion is going.
There’s no doubt there will be a hit taken on the numbers. The offer will
require an initial investment of £110m, with the new broadband business to post
an operating loss of some £50m in the year ending in March 2007.

But Taylor believes the move will be money well spent. At the launch of the
service in April he said: ‘We believe the investment and short-term profit
impact are justified by the rapid recruitment of customers to ensure higher
penetration of our unbundled exchanges.’

In the year leading up to March 2008, Carphone Warehouse estimates that the
project will deliver an operating profit of £30m-£40m and be ‘free cash flow
positive’. It anticipates a total cash payback on the investment in the fourth
year.

So will BT return fire? Last month the telecoms giant claimed it had not
experienced any slowdown in its broadband business, but it is early days. The
first Carphone Warehouse packages will not come on line until July and it will
be then that customers will be able to judge whether or not the package is good
value. Just in time for subscribers to log on to, for many, the thrilling climax
of the Big Brother house.

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