CPW acquisition of AOL UK will boost its 'unbundling'

Carphone Warehouse, Europe's largest mobile retailer has agreed to buy Time Warner Inc.'s AOL Internet access business in the UK for 370 million pounds in cash. The addition of AOL UK's 1.5 million broadband customers combined with its own, will give Carphone Warehouse an 18 percent share of the UK broadband market behind BT's 20 percent share and cable group NTL's 26 percent. Since its controversial 'free broadband for life' offer to customers that agreed to sign up for its TalkTalk fixed-line service launched six months ago CPW has signed up 625,000 broadband customers. Demand has outsripped CPW's ability to deliver its unbundled broadband service with widely reported delays in rolling out the broadband service to customers in many parts of the country.

For Carphone Warehouse, the acquisition of the AOL's UK customer base provides a significant boost to its plan to 'unbundle' 1,000 telephone exchanges owned by BT Group. Under the tems of Ofcom regulatory requirements, new entrants can install their own local loop equipment alongside that operated by BT for its own retail customers.

Until Carphone unbundles BT lines and can offer its own broadband product, it is forced to provide them using BT wholesale broadband and make a loss. Connections only become profitable when customers use Carphone's own broadband product. Only 20,000 of Carphone's 625,000 broadband customers were on unbundled lines at the end of the second quarter.

A few months ago, Cable & Wireless sold its Bulldog Communications retail customer base to Pipex claiming that the acquisition costs for new retail broadband customers were too high. It was reported that in many cases, Bulldog did not have sufficient numbers of retail customers to make local lopp unbundling viable in BT local exchanges.

As a business, telecoms is all about scale to drive operational efficiencies. AOL UK offers CPW a large, fairly stable customer base consisting mainly of former dial-up subscribers that have upgraded to broadband. The AOL UK customer base is reported to be older and less technically savvy than most other broadband services but for CPW represents an opportunity to cross-sell other services, particularly fixed line. For any new entrant, the most valuable asset is having access to an established customer base. In any utility supply business, the value of a billing relationship - no matter how transactionally based - should not be underestimated.

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