So, after the dust settled this week it looks like Carphone Warehouse is no longer a mobile phone retailing warehouse cum Telco but a major ISP and network comms warehouse cum Telco. What is going on?
We came up with 3 possibilities for the AOL deal:
(i) Dumb money chasing an (apparently) cheap asset
(ii) An attempt to get out of their current hole
(iii) A cunning strategy that we have yet to grasp
Dumb money thesis first - on the surface, the AOL access business looks fairly cheap - £370m for 1.6 m customers, 2/3 of whom are broadband, all paying at least fifteen quid a month each in theory, so about 1 - 1.5 x revenue. Problem is that (i) a lot of this revenue goes out the door as cost already, and (ii) this market is only going one direction, and thats towards free - led by Carphone Warehouse among others. Even though AOL typically has the "family" market who traditionally are fairly 'net naive and slow to move, Free service will eventually triumph. This is so glaringly obvious that even the densest strategists must have seen it, so I rule out the dumb money option on that basis - for now, anyway - and assume they are trying to solve a wider problem.
So, that brings us to the second option - getting out of the current hole. Carphone started a Free (so long as you buy an £20+ per month bundled phone service) broadband service, which has been so succesful that they apparently are signing 15,000 people a week - only problem is they can't connect them, 200,000 out of 620,000 subs are still not connected. Those they can connect they annoy with lousy customer service in those fraught early setup times, hardly a smart play in a commodity game with low switching costs. The broadband service is expected to have lost £70m this year, and is subsidised by the juicy margins of its mobile customers. And, if its lost £70m on 400,000 broadband customers its not clear that doubling or trebling that is a Good Thing with their current infrastructure.
Right now this is being subsidised by the healthy nargins of flogging cellphones and voice telephony - but mobile is no longer a growth business,
Vodafone has just pulled its distributor deal with Carphone and Orange will allegedly pull its deal later in the year, no doubt to get their hands on that revenue as they face leaner times. Ditto voice....VoiP is coming - so the margin money may well disappear fairly fast. Acquiring all those AOL users adds scale, short term revenue gain and no doubt the business case shows Significant Synergies, and margins of £30-40m are predicted by Carphone (which in practice are much, much harder to get of course ).
But access is a low margin business at best now, and neither AOL nor Carphone own the backbone side yet so are paying others for bulk haulage. So, after the dust is settled that is one huge future cash sink acquired and one huge cash source lost. Seems like this is at best an "if I dig fast enough maybe the old hole will fill in before anyone notices I have a bigger new one here" strategy.
Or is there actually a cunning plan behind all this. On Carphone's website, Charles Dunstone, CEO of Carphone Warehouse, said:
“The acquisition of AOL's UK Internet access business is transformational for our broadband business. This deal gives us significant scale to complement the rapid organic growth of our free broadband proposition. In addition, the joint development of AOL's already successful audience platform will bring us new advertising and content revenues in a proven and low risk manner.”
Ummmm.....but AOL still keeps all the content and thus the advertising power, so this is at best a point-through to Another Guy's Portal, guys. And who is this new revenue coming from - AOL takes but a small share of all the Ad money, Google, MSN and Yahoo take a lot more of it. The
TechCrunch UK team have similar questions, comparing this deal with BT's position with BT Yahoo. (In defense of BT though, as the Previous Management had just spent all the family silver on Mobile licences it was having to flog whatever it could to keep the Manor in the family). Or did Carphone know the Voda blow was coming and were determined to Do Something before it happened?
At any rate, if there is a cunning plan I don't think its in the access business *as such*.
No, I think the cunning plan has been more about a bundle and sell strategy. Carphone Warehouse is rumoured to be in the sights of a number of
Private Equity dealmeisters, and in PE land there are a lot of people looking, but far fewer decent deals, so even half decent ones get big premiums - how about a nice big triple play story?
Does it get sexier with a video play I wonder.....?
