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Monday, June 18, 2007

TalkTalk: Why Unbundle VoiceOnly Customers?

A couple of readers were confused as to why TalkTalk would begin unbundling voice only customers – the answer of course is in (potential) profit.

Monthly Rental for a Fully Unbundled Line is £6.67/month whereas Wholesale Line Rental is £8.39/month. TalkTalk charge £8.51/month line rental (£10 inc.VAT) so the ongoing margins are quite different.

Additionally, TalkTalk will get:
• all the voice termination fees if the line is unbundled – this can be as much as £1/month;
• retain all the call feature revenues (eg 1471 services) at a nearly 100% margin; and
• presumably the cost of operation of the TalkTalk VOIP platform is lower than circuit switched one.

I would estimate the cost of back office support of the customer would be broadly similar. Therefore the approximate profit difference would be about £3/month on an average spend of about £18/month.

On the downside, TalkTalk have to make some upfront investments: the Openreach cost of line provision is £34.86 as opposed to £2 for WLR. Also, an unbundled line will use a tie-cable and a line card in the TalkTalk MSAN. I would estimate that the incremental setup fees are around £60.

In other words, I guesstimate the breakeven for the service is around 20 months. This is quite a bit in excess of the normal TalkTalk voice contract length of 12 months.

And this assumes everything goes perfectly and the customer doesn’t become upset and cancels within the 30-day period and doesn’t ask for the money back. The Openreach price for MPF is a minimum 12-month period.

Of course, this discounts the biggest benefit which is TalkTalk on an unbundled line becomes the ONLY potential supplier of broadband - a customer can’t go to a third party for broadband services.

Personally, I can how TalkTalk would believe the economics would work. However, they run a big risk in a big churn environment and also are running the risk of a big backlash in the press. It will also be extremely interesting to see what if anything OFCOM does about this.