Dunstone ups the ante with AOL acquisition

Carphone Warehouse continued to reshape the broadband market last week when it agreed to buy AOL’s UK division for £370m. The move will make Carphone the country’s number three high-speed internet provider and is sure to worry market leaders BT and NTL.

Carphone chief executive Charles Dunstone started a price war in April when he launched “free” internet access for customers of Talk Talk’s fixed-line phone service. BSkyB and Orange responded, but Carphone will be comfortably the biggest of the early adopters come December when the AOL deal is signed.

AOL has 1.5 million broadband subscribers in the UK, and 600,000 dial-up customers. By the end of September, 625,000 people had applied for Carphone’s broadband service, although 78,000 cancelled because of demand problems.

AOL’s customers will increase Carphone’s market share from 4% to 17%, according to Ovum, putting it just 7% behind BT and NTL, which have long been the dominant internet providers in the UK.

Dunstone described the deal as “transformational for our broadband business”. Ian Watt, senior analyst at Enders Analysis, adds: “Even if it had met its own broadband targets, Carphone was at risk of being a second-tier provider without this acquisition. But now it has secured itself a place at the top table.”

Content provider
Tiscali, which has a 10% share of the broadband market and recently bought digital television provider Homechoice to add content provision, predicts Carphone will be distracted by the AOL deal. “It will be stuck in the double-play arena and is well behind in the market despite this purchase,” says Tiscali chief executive Mary Turner. “Voice-play and broadband is old news.”

However, most analysts believe middle-market players like Tiscali and Pipex are most vulnerable. Watt says: “Tiscali is looking to bolster its position but we can’t really see that happening. We’ve never been fans of Homechoice and the action is now in user-generated content with the emergence of YouTube.”

Ovum’s Michael Philpott adds: “The deal puts added pressure on the bigger players and there will be further consolidation, more mergers and possibly some brands disappearing from the market.”

The AOL deal sees Carphone move into content and will provide a revenue stream from online content and advertising through a co-branded website. But AOL will also benefit according to Gartner senior research director Scott Morrison. “It is a Trojan horse into Carphone for AOL’s content,” he says. “I would expect the eventual broadband structure to be Talk Talk, but AOL will continue as a content brand.”

One possible risk for Dunstone is that AOL’s 2.1 million UK customers will choose to migrate to Carphone’s “free” offer. Although he would recoup the lost broadband revenue from the extra Talk Talk customers, it could add to the queue of customers waiting to be connected.

It has been a mixed week for Dunstone. News of the AOL deal was followed by an announcement from Vodafone that it has signed an exclusive deal to sell contract phones with rival Phones4U.

Further Consolidation
But Dunstone’s aggressive move for AOL is already making waves. BT has reportedly approached the UK’s eighth-biggest broadband provider, PlusNet, as bigger increasingly looks better in broadband. Morrison adds: “You basically have to have millions of subscribers in this market because it is hyper-competitive.”