Media: All about ... Talk Talk's broadband campaign

Carphone Warehouse is chasing NTL and BT hard, Alasdair Reid writes.

There was a time when the joke in some quarters of the City was that Talk Talk was precisely that. Just talk. Since its launch in 2003 as a fixed-line telephony company, the Carphone Warehouse subsidiary has made slow but steady progress, given added stimulus now and then by the acquisition of rivals.

But Talk Talk hit the headlines back in April when it appeared to turn the UK consumer telecoms market on its head with the launch of a "free" broadband service. The offer for those signing up to the Talk 3 International package is unlimited calls in the UK and internationally to Europe, North America and Australia, plus unlimited 8 Megabit broadband usage, for an installation fee (then) of £19.99 a month.

This, observers said, was going to trigger a broadband price war and guarantee the much-vaunted great leap forward in UK internet usage. Wishful thinkers, not least in government, had been talking about "Broadband Britain" since the mid-90s - now it was surely on the verge of becoming a reality.

And indeed, the overall UK figures continue to give encouragement - even if Talk Talk's ability to deliver has, to date, been patchy to say the least. The company was quite unprepared for the level of demand and is still snowed under.

This explains the company's determination to acquire AOL's UK internet service provision business. The £370 million deal, which was signed last week, gives Talk Talk an additional 2.1 million subscribers (1.5 million of which are broadband) which, added to its own tally of 421,000, propels it to number three in the broadband internet service provision market behind the merged NTL-Telewest entity (2.9 million) and BT (2.3 million).

1. The company founder, Charles Dunstone, opened his first Carphone Warehouse shop in 1989. The company, now publicly quoted, has 1,700 retail outlets selling mobile handsets in ten countries. Having acquired Opal Telecom in 2002, it launched a telephony company, Talk Talk, in 2003. In 2005, it acquired two rival low-cost landline operators - Onetel and Tele2. This took its total telephony customer base to 2.5 million. In April 2006, it launched what is marketed a little misleadingly as a "free" broadband service - but it offers more service for less money than its rivals.

2. AOL also gets what it wanted from the deal. Since the dotcom crash more than five years ago (blame for which, in the minds of the public, is now laid at the door of AOL and its overvalued merger with Time Warner), the company lost direction. Having failed to see the importance of broadband, it now wants to get out of the connectivity business, while staying in the portal and content market. So, under the terms of the Carphone deal, Talk Talk's broadband customers will all be routed by default to an AOL portal.

3. Talk Talk will only be able to make sense of this deal if it retains former AOL customers, and also migrates them on to what are called "unbundled" networks. Until recently, BT owned all of the domestic telecoms infrastructure - telephone exchanges and the copper wires running from there to people's homes. Under new laws, BT must open up these exchanges and let suppliers such as Talk Talk install their own switching equipment. But this unbundling process is far from complete. Service providers who have customers still on unbundled exchanges have to pay BT to use BT equipment.

4. NTL and Telewest (recently merged, but still trading under their brand names) have no such infrastructure worries. The cable industry spent much of the 80s and 90s digging up roads to put their own wires in the ground. Their technology is also marginally more advanced, so they have fewer bandwidth management problems. Cable's 10 Megabit service costs just £17.49 a month.

5. BSkyB, seen by many as the most serious new entrant to this market, pulled out of the AOL auction, deterred not just by the price tag, but by AOL's insistence on staying the default portal for its former ISP customers. Sky Broadband, launched in July, builds on the £211 million acquisition last year of EasyNet, a company renowned for its expertise in building unbundled networks. Sky wants to concentrate on organic growth, focusing on its current customer base of SkyDigital subscribers. Its target is three million Sky Broadband homes by 2010, and says it is pleased with initial progress. It believes the future will be owned by the players who own distribution and content.

WHAT IT MEANS FOR ...

TALK TALK

- In the short term, the overheads will continue to mount up - it's effectively trying to "buy in" customers. Its gamble is that, in the long run, overheads will fall and it will then be in a powerful position as one of the more significant gatekeepers to the digital world.

- It needs to up its game when it comes to unbundling, however. Ambitious entrants to this market almost always underestimate the technological and project management issues involved in driving this forward, and this new deal will certainly put it under pressure to perform.

CARPHONE WAREHOUSE

- As the company's broadband customer base expands, the retailer risks alienating the phone operators it serves in its stores. Orange, for one, offers free broadband to its customers. Impartiality is key to Carphone's offer, and its suppliers and customers have to believe that it is not pushing its own products to the detriment of rival brands. Vodafone pulled out of Carphone stores last week, sending the retailer's share price south.

RIVAL INTERNET SERVICE PROVIDERS

- This deal shows Talk Talk's determination to shake up the broadband market - which will be viewed with mixed feelings by rivals. The competition is already cut-throat. This is not a business for the faint-hearted.

BROADBAND BRITAIN

- Pessimists worry that when the sums don't add up, there's bound to be trouble ahead. At the very least, they predict significant casualties. A rerun of a scenario in any way akin to the ITV Digital fiasco would benefit no-one. Optimists say that this period of ferocious competition can bring nothing but good. Total broadband penetration as of March this year was 11 million homes.