Orange threatens to join exodus from Carphone

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The Independent Online

Orange is threatening to become the second top-tier mobile phone operator to stop lucrative contract sales in Carphone Warehouse stores following Vodafone's decision yesterday to strike an exclusive deal with Carphone's arch rival, Phones4U.

Shares in Carphone Warehouse plunged 14 per cent to 310p yesterday as Vodafone's move sparked fears that independent mobile phone retailers will come under significant pressure to lower commissions as operators look to lower costs. After the market close, Orange revealed it is also reviewing its "indirect sales strategy" for next year as a result of reseller commissions rising over the past few years. An industry source, however, dismissed Orange's comments as "sabre rattling" and said the operator had just signed a new deal with Carphone.

Morten Singleton, an analyst at the investment bank WestLB, said: "The market is spooked that other operators may follow this trend, which could mean the death of the independent mobile phone retailer."

The five mobile phone operators in the UK have spent the past year expanding direct sales channels by increasing the number of own-branded stores and investing in internet and telesales functions. Mobile phone companies save costs by handling sales directly as third-party retailers charge a hefty commission between £350 and £500 to sell a contract on an operator's behalf. There is also no guarantee that the third-party retailer will promote a specific operator's products if a rival network pays higher commissions or offers more popular handsets.

The move represents a further shift in the mobile retail market. Carphone Warehouse has invested heavily in building a broadband and telecoms business, and acquired AOL's UK business for £370m this week as it diversifies its business. Earlier this year, the billionaire John Caudwell sold his Phones4U chain to Providence Equity Partners, while The Link chain has been broken up and sold off to various parties.

Vodafone now sells two-thirds of its products through its own channel. It is less reliant on companies such as Carphone to promote its services than it was two years ago when third-party retailers accounted for about 60 per cent of sales. The operator has been considering ways to lower its costs in the UK to offset declining voice prices, and has struck a deal with Phones4U to cut commissions to the same level as a year ago. The investment bank UBS said that this should result in commissions some 20 per cent lower than current levels, which should boost margins and equate to a £40m profit uplift.

Phones4U has agreed to make up any shortfall in volumes as a result of Vodafone contracts no longer being available in Carphone Warehouse stores. Carphone Warehouse will still sell Vodafone's pay-as-you-go deals through its stores. Prepay deals make up the bulk of sales through third-party channels, and account for 60 per cent of Vodafone's UK customer base.

Carphone Warehouse was unfazed by Vodafone's defection and said that it does not expect any financial impact on market forecasts for this or future years.

The retailer said that it had discussed a similar deal with Vodafone but rejected it on the grounds that it would have to guarantee specific sales volumes. A spokeswoman said: "Less than 10 per cent of our subscription customers choose Vodafone as their contract of choice. This is simply because 90 per cent of customers feel they are getting a better deal from another network. It is a sad day for Phones4U customers, to know that they are not being offered the best deal for them but instead the best deal for Phones4U and Vodafone."