As the winter winds blow across the UK’s high streets early next February, staff at Carphone Warehouse stores nationwide will be putting the final touches to in-store advertising materials announcing the retail chain’s audacious foray into a new area.
They will be preparing for the launch of the latest effort to loosen BT’s grip on the fixed-line telephone market, as Carphone Warehouse moves into residential telephony for the first time.
Following last week’s £90m acquisition of Opal Telecom, a fast-growing business provider of fixed-line telecoms services, Carphone will offer customers the chance to switch their fixed-line service from BT and save up to one-third on the price of calls. Carphone says that while people spend on average £150 to £180 a year on their phone bills, its service will cut this by £50. A brand name for the service will be unveiled nearer the launch.
Competition in its core residential market has not been too much of a worry for BT so far – it has been able to maintain its 73 per cent market share since June 2000 and has effectively seen off competition from the likes of Centrica.
But Carphone believes that there will be a new onslaught against BT as the pace of “Carrier Pre-selection” (CPS) picks up. First introduced in December 2000, under orders from regulator Oftel, CPS enables BT customers to route their local, national, international and other calls through their chosen (and presumably the cheapest) alternative telecoms providers. It replaces the need to dial a code to get into an alternative service, and does away with the need for an auto-dialler which is plugged into the phone socket. So, while paying line rental to BT, customers can use one provider for local calls and another for national or international calls, or can stick with one for all calls.
Fix up the fixed line
Any customer buying a mobile from Carphone will be able to give the go-ahead in store to switch from BT to the new service. The store will send through the order and BT will switch the account straight away. Carphone says this means it needs only limited take-up for the system to be profitable, and that it is simplicity itself for customers to change.
One BT insider plays down the significance of CPS: “There is a lot of inertia, people do not often change telecoms provider. We have CPS, which has not taken off significantly. People use it for certain services, but not for all calls.”
A BT spokesman even welcomes Carphone’s announcement: “We welcome competition, so that’s great. It is up to us to make sure that we have products in place that allow us to compete effectively.”
Carphone claims it will also slash the cost of calling mobiles from a fixed-line phone. The average cost of phoning a mobile from a land-line is 20p a minute, with 13p going to the mobile network and 7p to the land-line operator. There is some margin for Carphone to cut prices here.
Only the cable companies – now consolidated into NTL and Telewest – have managed to make a real dent in BT’s residential dominance, taking some 20 per cent of the market – about 5 million customers. But, if anything, BT’s market share is increasing: between April 2001 and April 2002, its share jumped from 73.1 per cent to 75.3 per cent, while NTL and Telewest’s combined share fell to 17.5 per cent.
Other challengers have managed to take about eight per cent of BT’s customers. Centrica, now owner of the largest non-cable rival to BT, has managed to attract just 400,000 customers to its British Gas Communications telephone service, although its purchase of One.Tel gave it an extra 878,000 telecoms customers.
Tapping BT’s land-line dominance
But the success of Carphone’s launch into land-lines will also be a measure of the ability of entrepreneurial marketing to challenge market dominance. Just as Sir Richard Branson’s Virgin has attacked established interests in markets from soft drinks to airlines, and Stelios Haji-Ioannou has taken similar steps in cutting prices on short-haul flights through easyJet, so Carphone founder and chief executive Charles Dunstone must show that BT can be challenged in the fixed-line telephone market.
He will not be alone. Last year, Virgin announced that it would be going into fixed line telephony, and indeed it has done so. The company, however, says that the venture is not being actively marketed, and that it is “early days”.
Carphone says it is too early to reveal any details of the residential package it will introduce in February, or how it will be marketed. But last week, announcing the Opal Telecom acquisition at the same time as the company’s financial results, Dunstone said: “The Opal business and the Opal management team will be an instrumental part of our stated strategy of driving growth through penetration of our existing geographical markets.”
Seeking new sources of income is a priority for Carphone. But while it has had successes in building the “lifetime value” of customers – trying to make money through after-sales service and selling additional services such as insurance – some of its other moves have been less successful. Its “virtual” network, Fresh – a mobile service run through the T-Mobile network
– has been hit by what it claims is “aggressive pricing” by Virgin Mobile. Its Mviva mobile Internet portal has been expensive and has failed to produce strong results, though the company says it is profitable.
In its core market, selling handsets, the 1,200-strong chain – which has stores across Europe – believes last year’s 40 per cent downturn in European handset sales has stabilised and that sales should improve as new generation phones, offering picture-messaging and Internet services, take off.
Strategy Analytics director of global wireless strategy Phil Kendall says: “In general, the mobile market seems to have got to the bottom of the curve.” But he adds: “There is not a huge history of players entering this (landline) market and being too successful. It is a market that BT and the cable operators have been very successful at dominating.” He calls it a “logical” move for Carphone, but sees it as “an unexpected, sideways step”.
Opal made Dunstone’s mouth water
Opal has shown that there are plenty of opportunities for expansion at the business end of the fixed-line market, where BT’s market share has fallen to just 45 per cent. Founded in 1995, Opal’s turnover has increased rapidly, rising from £40.5m in 2000 to £92.3m in 2001, when it made a profit of £3.2m before exceptional items, interest and tax. Opal offers fixed-line voice services to companies, and has 20,000 customers.
Dunstone believes that this strategy can be expanded in two directions to justify the £90m Carphone paid. Not only is he planning to use Opal’s 200 sales staff and its technical infrastructure to win residential customers from BT, he also intends to use the acquisition to sell mobile packages to Opal’s business customers. There will be further synergies here, as many of Carphone’s customers are from the business sector and there are opportunities for cross-selling.
The Opal acquisition has surprised stock market analysts, who see it as betraying a lack of confidence in the mobile market and perhaps throwing in doubt the whole strategy subscribed to by wire-free proponents. Carphone chairman Hans Snook, who as boss of mobile operator Orange articulated that network’s belief in a mobile-only future, said last week: “The acquisition is a logical evolution of Carphone Warehouse’s strategy and enables us to bring Opal’s services to the wide retail market as well as reinforcing its strength with corporate customers.”
But WestLB Panmure telecoms analyst John Tysoe says: “It is going to be difficult – I think it is a surprising move. Hans Snook of all people has been a champion of the wire-free world. It surprises me he should now be championing fixed-line.”
The experience of the past two years has shaken the confidence of those pushing for a wire-free future. Mobile ownership has quickly reached saturation-point and the future of the market now hangs on its ability to tempt customers with new technology. But even optimists believe it could be a good four or five years before the new generation services really take off.
In the meantime, BT’s dominance of fixed-line services must look like easy pickings to small entrepreneurs. BT’s huge margins leave plenty of room for price cuts. CPS allows consumers greater choice of telecoms providers. All that is missing is the marketing.