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Monday, October 08, 2007

Carphone Home Division – The wheels on bus...

..appear to falling off.

Two interesting stories appearing in the press over the weekend.

First, we have the Daily Telegraph reporting from Charles Dunstones yacht in the South of France:
And this Tuesday, when Dunstone updates the City on trading, improved profitability in broadband should help soften concerns about lower numbers of sign-ups.
Hmmm that is interesting, because profitability was always planned to have a HUGE jump in this year, but sales were not planned to drop off.

Then we had the following comment in the Times:
is expected to disclose in a trading update on Wednesday that net additions for broadband in its second quarter have dropped to as little as 95,000, from 126,000 in the last quarter…
Carphone’s slowing customer numbers are expected to be offset by strong progress on transferring customers on to its own network – a key test of the profitability of the service. The communications group makes a loss of around £5 per month on each customer who takes on the BT wholesale product. It becomes profitable only when these customers are connected to Carphone’s own network.
These net add figures would be a huge disappointment to me especially as the Carphone broadband target is 3.5m customers by 2010. There has been much written this month about Carphone and its potential churn problem as the TalkTalk base start to come out of the 18-month contracts, but Carphone face a much bigger problem here and now and that is the churn on the AOL base. Carphone do not disclose the churn figure, but given that most of the AOL base is not unbundled, I expect the figure is huge. By huge, I mean much higher than mobile churn figures and of sufficient size to possibly make the acquisition of AOL look like a poor decision.

The other obvious question is how the Free Laptop offer is going for AOL? It is pretty obvious to me that it is not going as well as expected and I base this judgement on two key facts:
  • Carphone would not be investing as much in marketing if the offer was flying out of the door; and
  • Carphone would not be bundling a free laptop with mobile contracts if they were not worried about the stock levels.
Basically, if you cannot sell broadband with a free laptop with your premium brand (AOL) and with the lowest prices in the market on your value brand (TalkTalk) – how much trouble are you in?

If I was an investor in Carphone, I would be looking for real clarity in the home business going forward – not only with churn figures, but just as importantly with amortisation breakout of SAC costs and capitalised investments – because I would be extremely nervous.