Jeremy Warner's Outlook: In a blow for Carphone Warehouse, Vodafone attempts to reclaim control of contract sales

Climate change: not such a costly problem; Ashmore: don't call us a hedge fund
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The Independent Online

Shares in Carphone Warehouse have conformed to the old cliché of a roller-coaster ride over the past few days. Down they went in response to confirmation that the company's broadband launch would cost £20m more than forecast, back up they soared on news of the company's £370m acquisition of AOL's internet access business in the UK, then down they plummeted again on the news that Vodafone is axing Carphone as an outlet for its contract sales.

On balance, the bad news has more than cancelled out the good. Was the timing of the AOL deal deliberately massaged to sugar the pill of all the negative stuff, or is that just too cynical? Whatever the answer, the bottom line is that although the AOL deal is unambiguously positive for Carphone, it is hard to see the Vodafone initiative as anything other than significantly negative, notwithstanding the company's attempt to spin it as otherwise.

The backdrop to all this is that Vodafone has been losing market share for years now. Whether or not this is because of uncompetitive tariffs is arguable, but certainly it has been dislodged from its once market-leading position in the UK. Both T-Mobile and O2 now have more subscribers.

All the main operators including Vodafone sell a significant proportion of their contracts through independent retailers such as Carphone. Vodafone's gripe with Carphone is that it charges high commissions, but it doesn't seem to do terribly well for Vodafone in terms of sales. Rivals have done a lot better.

What's more, the commission structure gives Carphone a positive incentive to encourage churn. Vodafone claims that since taking back management of contracts sold through Carphone, it has seen a marked reduction in the churn rate on those contracts. By agreeing exclusive terms with Phones 4U, Vodafone gets as a quid pro quo both lower commissions and a guarantee from Phones 4U that it will sell at least 30,000 Vodafone contracts a month - equal to the total amount Vodafone at present sells through independent outlets.

Just as important, insists Vodafone, Phones 4U has a more complementary customer profile to its own than does Carphone. Customers of Carphone are quite similar in their characteristics to Vodafone's own proprietary retail network. Phones 4U are a generally younger crowd.

All this is no doubt of huge interest to the cognoscenti of the mobile phones market, but it hardly explains yesterday's calamitous 14 per cent drop in the Carphone Warehouse. Fewer than 15 per cent of Vodafone's independently sold contracts are through Carphone, which is a big chunk of business to lose, but hardly the end of the world.

All the same, to claim, as Carphone did, that the initiative will be far more damaging in the long term to Vodafone than to Carphone because the public will recognise that the company has opted for force-feeding of sales rather than competing for them, is just a little bit spurious.

The big danger for Carphone is not so much the direct loss of business involved, which no doubt can be compensated for by higher sales of rival networks, but that others will follow Vodafone's lead. As if on cue, Orange last night confirmed that it was considering its options on indirect sales. This, after all, is the model used in some parts of Europe and the US, where exclusive deals with independents are common.

Carphone might be able to weather the loss of one of the big operators, but its whole business model as an independent supermarket for mobile telephony would be seriously undermined by the loss of two.

Fortunately for Carphone, there are few other independents after Carphone and Phones 4U that other networks can turn to for exclusive deals. These two are far and away the largest independents. Even so, the big mobile operators are bound to use the Vodafone news as a way of driving a harder bargain with Carphone, who they in part blame for high levels of churn.

Few mobile phone sales these days are genuinely new. It's nearly all about stealing customers from each other. Most of us would call that healthy competition. Some mobile operators see it as a mischief, which Carphone is at the centre of. Small wonder that Charles Dunstone, Carphone's founder and chief executive, is trying to transmogrify his company from retailer into a fully fledged telecoms operator. The goose that laid the golden egg is looking decidedly vulnerable, as the Vodafones of this world try to reclaim control of the marketplace.

Climate change: not such a costly problem

Unless something is done soon, we are all doomed, or at least our children are. That message was being hammered home again yesterday by Friends of the Earth, whose latest research finds that never mind the social and environmental costs of failure to address climate change, the economic cost may run to trillions of pounds. The report paints an apocalyptic view of what might happen if global warming is left unchecked.

At two degrees centigrade above pre-industrial levels, there will be decreased crop yields in the developing world, widespread drought and water shortages, a near total loss of coral reefs, and the extinction of the polar bear. At three degrees, there will be increased disease, widespread species extinction, increased desertification, and a wholesale collapse of the Amazonian and Alpine ecosystems. At four degrees, melting polar icecaps would put vast tracts of land under water, and equally vast areas of the world will become incapable of agricultural production. At more than four degrees... well, you get the picture.

So far, so dire. The good news is that virtually all respectable estimates of the costs of fixing the problem are relatively small. In 2003, the Department of Trade and Industry put the cost of a 60 per cent reduction in UK emissions by 2050 as between 0.3 and 2 per cent of GDP.

Most modelling since is in broad agreement that there is a read across in these estimates to the world economy as a whole. Significantly reducing emissions from present levels will require some curtailment of economic growth, but not much, even in China and India.

The trouble with global warming is that the science is still fuzzy. We know that climate change is man-made, but we don't really know how far it might accelerate if we do nothing about it. In this sense, it is a bit like the millennium bug. Spending heavily to reduce emissions might be a complete waste of money. We'll only know for sure if we spend nothing and see what happens. What we can be sure of is that the economic, environmental and social cost of climate change rises exponentially with each one degree of warming.

Spending on curtailment therefore has to be seen as a form of insurance. If insurance is inexpensive, most of us regard it as a small price to pay against the unlikely prospect of calamity. Climate change is already big business, and as you might expect with any new sector, there is also already evidence of a bubble building around its investment opportunities. Yet it is surely better that too much capital is invested in bringing climate change to heel than too little.

Ashmore: don't call us a hedge fund

I'm instructed not to refer to Ashmore Group, which floated yesterday with a stock market value of £1.2bn, as a hedge fund manager. In fact, says Mark Coombs, its managing director and the chief beneficiary of yesterday's share placing, it is a manager of emerging market assets.

The fact that many of its clients think of it as a hedge fund, that it remunerates itself on the same performance-related basis as most hedge funds, and that many of those who are buying shares in the company think of it as a hedge fund, should not apparently mislead us into thinking that it is in fact a hedge fund.

So now we know. The truth of the matter is that although some still dislike being referred to as hedge fund managers, the term these days covers a multitude of sins. The uniting characteristic is the remuneration structure - typically a 2 per cent management charge, 20 per cent of any upside, but none of the downside.

Traditional long fund managers who bought into yesterday's offer must be wondering why they cannot get away with charging like that. It's called being in the right place at the right time. Emerging markets are the fashion of the moment, but they will not always be so.

j.warner@independent.co.uk

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