Carphone Unveils Aggressive Broadband Plan

LONDON -(Dow Jones)- Carphone Warehouse, the UK mobile phone retailer and telecommunications service provider, Tuesday unveiled an aggressive plan to offer free broadband Internet to consumers who subscribe to its fixed-line voice packages.

The anticipated move kicks off a fresh round of price competition in the U.K. broadband sector with NTL and British Sky Broadcasting Group, also set to offer consumers a variety of bundled services to win market share.

Carphone Finance Director Roger Taylor told Dow Jones Newswires: "When we say free, we mean free forever. All you have to do is give us your voice calls."

Carphone said it will charge GBP9.99 a month for fixed-line voice calls and the price will include broadband Internet with speeds up to 8 megabits a second. An additional line rental charge of GBP11 a month will be payable.

The service will be made available immediately to customers in areas covered by Carphone's unbundled exchanges - around 70% of the population. Those outside the reach of its exchanges will be charged an additional GBP9.99 a month.

Customers will also be subject to a GBP29.99 connection fee and will have a 40 gigabit monthly download limit. Customers will also need to sign up for 18 months to take advantage of the bundle as those not wanting to take voice services will be charged GBP35 a month just for broadband.

In response, BT Group - the largest broadband provider in the U.K. - said: "BT welcomes the competition and is very used to it. The broadband market in the U.K. is the most competitive in the world and this offer from Carphone is yet one more offer in what is already a crowded market."

BT continued: "As for this being "free" broadband, it is only "free" if you pay them hundreds of pounds a year for other services. This is really just a clever marketing ploy from a clever marketing team."

Carphone Warehouse said the launch of broadband will result in an operating loss at its broadband business - after all related depreciation and subscriber acquisition cost amortization - of around GBP50 million in the year to March 2007. It will invest GBP110 million in its broadband service over the year.

The company expects to make an operating loss of GBP60 million in fiscal 2007 related to the launch of broadband and the launch of Virgin Mobile in France, in which it is involved. Carphone expects to record an operating profit between GBP30 million and GBP40 million on the back of its broadband offer in fiscal 2008.

"Broadband can make a reasonable return for us," Taylor said, adding: "There is a lot more scope for growth and price has been an issue for some people."

Seymour Pierce said this product will prove a serious challenge to established broadband providers like BT and Wanadoo, owned by France Telecom. However, the broker said the impact on BT is likely to be less onerous than it is on new entrant telecoms and Internet service providers as BT's disloyal customers will have likely jumped ship already.

It said Cable & Wirless is potentially the most likely loser although its Bulldog unit is also targeting business customers.

Carphone's Taylor said the company will look to offer small-medium sized businesses broadband over the next six months.

The company will increase its spending on local loop unbundling - whereby it installs its own equipment in BT Group's local exchanges - by around GBP50 million and expects to have unbundled 1,000 exchanges by the end of May.

Taylor said Carphone has fully unbundled exchanges to increase its margins not only on data traffic such as broadband, but also on voice. He said with a large voice customers base - around 2.6 million customers - Carphone is able to pass on the efficiency from LLU in the form of free broadband.

Although Taylor wouldn't provide details on its targets, it said that it expects to have 3.5 million residential voice customers by 2009, with over half of those taking broadband.

With BT, NTL and Sky all looking to offer television services over their networks, Taylor said; "There is no clarity yet on what customers want. We'll stand and see what the market actually wants over the next two to three years."

At 0950 GMT, shares in Carphone were up 7 pence, or 2%, at 362 pence.

An analyst who declined to be named said that at GBP20.99 a month, the offer compares to the cheapest mainstream equivalent product, which would be priced at around GBP35. A comparable BT product would be priced at GBP43.50 the analyst said.

"The offer looks very aggressive and in this respect, the overall losses expected may be somewhat optimistic," the analyst said.

Carphone Warehouse also updated investors on its trading Tuesday. The company said it has continued to perform well in the fourth quarter and said it expects to report pretax profit and earnings per share in line with market expectations for the year to March 31, 2006.

Taylor said Carphone expects to report pretax profit of GBP135 million in fiscal 2006 and before accounting for the loss on the back of its broadband rollout, a pretax profit of GBP170 million in fiscal 2007.

It said it had 1,778 stores at the year end and 3.1 million mobile customers. It expects to open a further 250 stores in 2007 and increase connections by 15% from 2.23 million at the end of fiscal 2006.

Company Web site: Http://www.carphonewarehouse.com

-By Nic Fildes, Dow Jones Newswires; 44-20-7842-9264; nicolas.fildes@dowjones.com

(END) Dow Jones Newswires "

Posted to the site on 11th April 2006