Carphone Warehouse 2008 Annual Report Download - page 21

258.3
149.5
141.8
105.2
‘05 ‘06 ‘07 ‘08
www.cpwplc.com 9
Today, most customers who come into our stores have owned several
mobile phones before; they understand the market much better and
come to us because we offer choice and impartiality. However, there are
new areas of technology and services which are just beginning to reach
critical mass, but where consumer knowledge and awareness remains
relatively low. The strong growth we have seen in mobile broadband and
smartphones over the last 12 months is the first tangible evidence of this;
but at the same time, homes are increasingly host to wireless broadband
networks with a multiplying array of devices and services that connect to
them. We think this is a potentially huge new market that we should own.
In the short term, this means evolving the retail business in two clear and
practical ways. Firstly, we are going to stock a range of laptop computers
alongside mobile phones. The logic is simple: if we had only ever been
a retailer of SIM cards rather than mobile phones, we would never have
created a business of the scale of The Carphone Warehouse; we believe
the same will be true of mobile broadband. By bundling a subsidised
device (a laptop rather than a mobile phone) with a mobile broadband
subscription, we are giving customers an all-in-one solution and
significantly increasing the scale of the potential market. The cost of
laptops has fallen so dramatically that the overall economics for us
and the network operators are not materially different from the traditional
subsidised handset model.
Secondly, we are going to establish the same proposition in fixed line
broadband (cable and DSL) as we have had for many years in mobile.
Last year we began to offer a range of fixed broadband providers’
services in our stores across Europe. This year we are making a much
greater commitment to it and also bringing the hardware model into it –
so that laptops will be available on either fixed or mobile broadband.
For the next 12 months we will focus the bulk of our attention on
developing the UK retail business towards this model, with the rest
of Europe to follow in the medium term. This is a major undertaking,
which will involve not only a comprehensive programme of refits, but
also a big investment in employee training and raising awareness with
our customers of the changing nature of our proposition. Importantly,
we have also announced plans to create greater operational autonomy
for the two divisions, with lower shared resource and central overhead.
This delivers not only a more efficient group structure, but also allows
the Distribution business to provide a more clearly impartial broadband
offer to its customers. The planned formation of a new company with
Best Buy is going to be a key part of this strategy and we will give a
detailed update on progress in next year’s annual report.
In the medium term, we foresee further radical developments. As new
products and services proliferate, we will trial new formats that allow
customers to experience and test a range of in-home and on-the-move
devices that will enable them to seamlessly capture, store, share and
interact with content across multiple platforms – mobile phone, TV,
computer – wherever they are and whenever they like.
Becoming the leading alternative fixed line provider in the UK
Nearly six years ago, when we acquired Opal Telecom in November
2002, we set ourselves the ambitious goal of becoming the number one
alternative residential telecoms provider in the UK. We believed that the
combination of high consumer prices, a high incumbent market share,
meaningful regulatory change and our own unique distribution network
was a powerful one; the network infrastructure and telco know-how we
acquired with Opal completed the jigsaw.
Today, this unique formula has proved to be a winning one. We are now
the clear number three in the market for both telephony and broadband
access services, and we have built a next generation telecoms network
that delivers a level of operating efficiency and technical superiority that
none of our competitors has managed to emulate.
Our journey has not been without its challenges, and this time last year we
were still struggling under the burden of acute customer service problems
caused by the massive success of our free broadband launch and the
uneven reliability of the network migration process. This undoubtedly
damaged the TalkTalk brand, lost us many thousands of customers,
and put off thousands more from signing up to us despite the
demonstrable value of our proposition.
Thus I am delighted and relieved to say that the past year has been a
period of great success for our UK Fixed Line division. Customer service
has improved steadily throughout the year; we can still do much better,
and our ambition is to be famous for good service, but the trend is
positive. From an operational and financial perspective, we have delivered
everything we promised when we embarked on our local loop unbundling
project two years ago. We now have nearly 70% of our customers on our
own network, creating significant operating efficiencies; and only a small
handful of customers are still losing us money each month. As a result,
our operating margin has increased from barely 2% to around 9%, with
further good progress expected in the coming year.
At the same time, we have continued to grow our broadband base
successfully, with nearly 450,000 customers added during the year. This
puts us firmly on target to hit our goal of 3.5m customers by March 2010.
Churn is falling as customer service improves and our network becomes
more stable; and the improvement in brand perception and TalkTalk’s
positioning at the value end of the market should support customer
growth in the medium term.
It has also been an important year for the AOL Broadband base we
acquired in December 2006. The integration process will be completed
in the coming months, delivering significant cost savings and a common
operating platform with TalkTalk. We have also used the brand to innovate,
and launched a very successful free laptop offer on AOL during the year.
We expect further developments in the coming months, although the
final integration processes do present some execution risk.
The Carphone Warehouse Networks, the telecoms platform over which
we deliver our services to customers, has made further outstanding
progress. We now have the widest coverage of any unbundler in the
UK, with over 1,600 exchanges covering around 80% of the population.
Crucially, the Next Generation Network we have developed allows us to
deliver voice and data over a single technology platform, making us highly
efficient and allowing us to lead the market on price while still making
Headline EBIT up 73%
(£m)
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