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Wednesday, May 02, 2007

UK Almost Free Broadband Progress Report

With the BSkyB quarterly reports out this morning, it is extremely interesting to compare how the various almost-free offerings are stacking up as at 31st March 2007.

In terms of overall broadband numbers Carphone is well in the lead with 2271k (AOL 1535k, TalkTalk Free 655k and TalkTalk Legacy 81k). Orange is in second place with 1095k (Mobile Bundle 254k and Standalone of 841k). BSkyB are well in the rear with 489k (Sky 457k and UKOnline approx 32k)

However, if we look at net adds in the quarter a different picture emerges with Carphone adding 116k (AOL 12k, TalkTalk Free 115k and Legacy a loss of 11k), Orange bringing up the rear with an anaemic 32k of net adds and Sky leading the pack with 264k adds.

I don’t think the fact that the Sky service is relatively new and therefore there will be extremely limited churn will account for the majority of difference. Perhaps more of the difference will be accounted for by the heavy publicity that Sky is investing not only to existing Sky customers in the form of TV ads and direct mail, but also to new customers in the form of the seemingly ubiquitous “See, Speak, Surf” campaign. TalkTalk has returned to the TV screens and is heavily advertising on the internet with banner ads, but not to the same degree as Sky. Orange seems to me to be promotional free zone.

In terms of value of the various offers, it is very difficult to ascertain who gives the best price because so much of it is dependant on personal circumstances. For instance, included within the Sky figures are (as at 29th April) 100k offnet customers who as far as I aware Sky charge £17 per month. This is a net increase from 28th Jan of 66k customers. SkyConnect is basically a resold BT Max package of up to 8meg with a 40GB Monthly Cap and a £40 activation charge. This can hardly be called cheap and probably the amount of subscribers is an indication of how many people truly value the convenience of a triple play from a company that they trust.

Similarly looking at the Sky figures as at 29th April, there is only 136k out of 553k who have adopted for the bundled option at no additional cost. There are 317k who are both unbundled and paying either £5/month or £10/month. James Murdoch said in the press conference that a slight majority of the 317k opted for the £10/month package. This was a surprise to me as I though more light internet users would have taken up the free offer.

With Carphone, again on the TalkTalk side there is more revenue upside than I expected with ARPUs of £28/month for an effective base £17.87 (ex-VAT) service. The difference is in additional voice services, such as calls to mobile and call features. TalkTalk is still making progress in the market in terms of net adds, although I would be slightly concerned about the AOL base remaining more or less static. I also think with TalkTalk unbundling 289k in the quarter they are making rapid progress on this vitally important front. James Murdoch said in the call that Sky are unbundling just under 30k customers a week and this accounts for around 33% of total UK unbundling activity. I expect TalkTalk are doing around the same. If I was Carphone I also would be looking at ramping up the AOL unbundling as with only 327k unbundled out of 1535k there is a lot to be unbundled with a lot of potential extra margin still on the table for Carphone.

With Orange, the numbers are a bit of disaster with only 254k on the Free Broadband if bundled with a >£35 per month contract. To be fair some of these will be on the £5 offer and therefore not strictly speaking on a “free” bundle. I do think that mobile and home broadband bundling doesn’t seem to be that attractive to the Great British Public. A greater insight on this should be gained with the release of the Virgin Media figures next week.

Obviously, it is hard to say who is winning on the financial side: the Sky residential losses of £120m for 9 months seem immense, although it should be remembered that they are writing off SACs immediately, whereas Carphone capitalise them and amortise them over the 18-month contract. Also a part of the Sky rationale of getting into broadband was reducing churn, whereas churn is currently on the way up. However, Sky’s overall churn figures of 13.7% is still a lot lower than the Virgin Media equivalent (around 20%) or the broadband industry in general (25%)

Overall, I think Carphone is still ahead of the curve with Sky catching up fast and Orange basically going backwards. James Murdoch refused to be drawn on when a fully unbundled and line rental service would be offered, but this to me is key is doing a meaningful like-for-like comparison in the future.