Wednesday, November 03, 2004

More Q3 data points - UK

Carphone Warehouse reported its results for the half-year to 30th September, and of interest to us is the growth in users of its TalkTalk carrier preselection service, and its new bundling strategy with DSL. TalkTalk added 137k users in the quarter, which means weekly net adds have broken well above 10k again, following a slowdown in the June quarter. This time last year Carphone was adding around 7,000 per week. In the most recent quarter, sequential growth of 23.8% was very close to double the rate of growth in the CPS market as a whole (now 4.2m lines, or 15% of BT's line base), expanding Carphone's CPS market share by 1.5 percentage points, to 15.4%.

The UK was the first market to introduce indirect access services back in the mid-80's, but takeup of preselection services has previously lagged the rest of Europe (25% of lines is not uncommon), though that is changing rapidly, and the bundling of CPS with broadband should add momentum. We expect to see this approach replicated across the Carphone Warehouse European footprint on the heels of TalkTalk rollout. In the UK, the 512kbps product includes free evening and weekend calls, which normally costs GBP4.99 per month for customers on TalkTalk's lower-usage Talk 1 and Talk 2 plans. In other words, taking this into account, the underlying price of the DSL product is arguably GBP15 per month, making this among the cheapest in terms of total cost of ownership. Moreover, this is a product with no bandwidth cap, unlike the other low-cost offerings in the market (including BT's Basic product).

All of this seems to be a pretty strong validation of the company's dual in-store/online acquisition approach, its network ownership strategy (which has progressively lowered interconnect costs - 72% incoming and 80% outgoing interconnect now occurs at the local exchange level), as well as the decision to sponsor Big Brother over the summer, after O2 got cold feet over sexual content and pulled out. Moreover, the company claims that TalkTalk as a product is profitable in August and September after all costs (including marketing, obviously), leading us to believe that a stronger push is on the cards, especially as the service is rolled out in France, Spain, Germany and Switzerland. Recall that Carphone Warehouse intends to make on-net calls between international TalkTalk users free, borrowing a page from the VoIP book.

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