Carphone Warehouse Now Major DSL Channel

The Carphone Warehouse Group (U.K. market), which might formerly have been thought of as an electronics retailer, now points out how much communications service distribution channels can change.

Carphone Warehouse now has 2.6 million Digital Subscriber Line customers. It is by no means certain that mass market retailers in other markets will do as well, but both Best Buy, Office Depot and Circuit City, for example, are distribution channels in the U.S. market, with differing degrees of active involvement in the integration and broadband access businesses. In the U.S. market, Best Buy has taken the boldest steps by buying Speakeasy, a national provider of DSL connections.

Carphone Warehouse in Play?

Shares of Carphone Warehouse Group, Europe's largest mobile handset retailer, rose the most in more than five years in London trading on speculation the company may receive a takeover offer, says the Bloomberg news service.

"Rumors about bid interest from Vodafone and Best Buy have been doing the rounds for some time," says Jimmy Yates, a London-based trader at CMC Markets.

What is interesting is the strategy context driving some of the rumored suitors. Best Buy has a small stake in Carphone Warehouse, which operates 2,400 stores across Europe. Best Buy also is collaborating with the U.K. chain to boost sales of mobile products in the U.S. Best Buy stores.

So you might argue that Carphone is simply a way for Best Buy to expand its footprint in its current business.

But keep in mind that Carphone also has 2.5 million Digital Subscriber Line customers. It also has a backbone network. Consider that Best Buy's Geek Squad is in the technology services business.

And recall that Best Buy owns Speakeasy, a provider of business-class broadband access and voice services in the U.S. market. Sure, Best Buy can grow its retail footprint. But by acquiring Carphone Warehouse, Best Buy makes an even bigger bet to become a more-significant provider of broadband access, business voice and mobile services.

For Best Buy, its core business is more than acting as a retail distribution channel. It is a service provider. Owning Carphone Warehouse would only deepen that commitment.

Now consider the possibility that Vodafone might acquire Carphone Warehouse. The idea there is not so much that Vodafone wants to become a mass market electronics retailer. Vodafone, long a dominant wireless service provider, now must also become a multiple-services provider, and broadband-based services provided over wireline networks are part of the vision.

Carphone Warehouse would give Vodafone much more heft, in that area. It might not strike you as significant that wireless and wireline services are converging. It might be a bit more surprising that retailers are moving from simple channel partners into the service provider business.

No Broadband Equality: Density Still Matters

Observers of both U.S. and U.K. efforts to stimulate innovation and competition in the core communications markets will note the vastly-different regulatory approaches. In the U.K. market, where satellite is a significant factor but cable is not, regulators have chosen an aggressive wholesale unbundled local loop regime.

The U.S. market has seen the same initial thrust, only to be followed by an alternate reliance on inter-modal competition between cable and telephone industries, rather than a primary reliance on wholesale, unbundled local loop.

So far, the U.K. market model has proven more friendly to competitors. But physical constraints still are an issue, irrespective of regulatory framework. In thinly-populated areas with low density, the cost of providing broadband remains hig

If BT’s 21st Century network provides evidence, it is that one does not change all access cost inputs simply because a network converts to IP in place of TDM protocols.

In fact, it appears that wholesale access cost for partners who want to use BT’s transmission network to serve rural or suburban customers will be as much as three times higher than similar features will cost in dense urban areas, says Keith McMahon, a U.K.-based blogger.

There’s nothing terribly surprising about this. Infrastructure always costs more, per household, per business or per person in lightly-populated areas.

There’s simply more construction cost and physical media to support, and less ability to share common costs (ports or software licenses, for example), in less-dense areas. IP doesn’t change that.

The implications for competitive providers who lease access from BT and provide retail services to customers under their own names (analogous to U.S. competitive local exchange carriers) are clear enough. Competitors will choose to place their own facilities where customer density is greatest.

The largest nationwide providers, including Carphone Warehouse, Sky, Tiscali, O2 and Orange will find it worthwhile to interoperate at the Tier 1 MSAN level, which gives them coverage of 1,200 exchanges and about 70 percent or 17.7 million of the 25.3 million U.K. homes.

U.K. cable networks largely overlap the areas served by Tier 1 MSANs, for obvious reasons: that is where most of the customers are. Cable networks pass by around 11.8 million homes or 47 percent of total U.K. homes. As McMahon lays out the competitive scenario, about seven companies will contest for customers in 11.8 million homes, or just half the market.

About six companies likely will compete to serve 5.9 million homes or 23 percent of the market. In all likelihood, just one company, BT, will be in position to serve 7.6 million homes, or about 30 percent of total homes.

Population density and loop length still are key impediments to high-bandwidth services, no matter what the regulatory framework.

Apple and RIM Offer a Model

According to Charles Dunstone, CEO of Carphone Warehouse, in order for the iPhone to function correctly there is a requirement for Apple servers to be placed deep in the operator's network. One might argue that something along the same lines is required for BlackBerry service to work (we will for the moment ignore the argument about whether app servers are "edge" or "core" devices: logical experience rather than physical placement is the issue).

Logically such servers will be used for authentication and email services--just as Research in Motion might. The point is that when an application provider can provide functionality which resembles a "network service," it can justify a share of the ongoing revenues.

This might be significant, as it suggests a broad model under which network access and transport providers can work with application providers to create a mutually-beneficial revenue-sharing arrangement. The point isn't so much where the servers physically reside but that BlackBerry and iPhone both are devices featuring applications that require the cooperation of a network services provider to provide an optimal experience. Not to mention that the way both applications work provides some "walled garden" features carriers prefer.

The point is that here are two devices and application providers that operate neither in complete "walled garden" or "over the top" fashion. It is a hybrid model where the transport services provider is centrally involved, and both application and access/transport providers are sharing revenue.

So the point might be: what other applications have relatively broad appeal, can be embodied in a physical device and require some degree of authentication? Where are other examples of applications that are neither "over the top" or "closed," but someplace in-between?