Vodafone enters broadband age with BT tie-up

Vodafone will make its long-awaited entry into the broadband internet market this week through a strategic tie-up with BT.

The mobile phone giant has decided to lease wholesale capacity from BT, rather than putting its own equipment into local telephone exchanges, in a move which will give it immediate nationwide coverage. Vodafone's decision to team up with BT is a serious blow to Cable & Wireles, which had hoped to pick up the business itself as it attempts to become a major wholesale supplier of broadband services in the UK.

C&W quit the broadband consumer market last week by selling its retail business, which traded under the Bulldog brand, to Pipex.

The deal between Vodafone and BT on broadband mirrors the tie-up between the two telecoms companies on mobile. In that case, however, it is Vodafone which sells wholesale capacity on its GSM network to BT's fledgling mobile division, which began offering a service last year.

The Vodafone contract is thought to be worth £300m to £500m to BT. But more important than that, it marks a big strategic departure from the approach that rival mobile operators have taken to offering their customers high-speed internet connections.

Orange and O2 have chosen to add broadband to their existing mobile service by installing their own kit at BT exchanges - a process known as local loop unbundling. BSkyB and Carphone Warehouse have adopted a similar strategy. T-Mobile is yet to decide how it will graft broadband on to its existing mobile service.

Vodafone is buying BT's IP Stream product, which will allow it to provide a broadband service to its subscribers without the need for expensive investment in a fixed-line network of its own.

The potential disadvantage to Vodafone of buying wholesale capacity from BT is that it is the country's dominant broadband supplier itself and so will be a direct rival. However, the advantage is that it will enable Vodafone to offer broadband to customers in any part of the country rather than being limited to big conurbations.

"This represents a big strategic departure for Vodafone," said one source close to the deal. "It raises the whole question of whether the approach adopted by the likes of Carphone is the right one."