Bloodbath expected in broadband market as Carphone joins battle

The heads of Carphone Warehouse, BSkyB and BT - and they aren't alone - think that the days when consumers bought a phone from one company, an internet connection from another and television services from a third will soon seem as quaint as good manners.

By offering a range of services from one magic box, about the size of a CD player, the companies aim to get greater control of the public's entertainment and communications than ever before. The industry calls this "triple-play" - broadband, voice and television all in one.

There are gaps in what each company offers but they are all going in roughly the same direction. NTL, which bought Virgin Mobile last week, is going a step further with "quadruple-play", planning to include a mobile phone in one package.

Today Carphone Warehouse is expected to unveil its own offer - a "free" broadband internet connection for customers who sign up for the TalkTalk landline service (a "double-play", for now). Mr Dunstone would like us to see this as the most significant development in the telecoms industry since Alexander Graham Bell, ready to test his new invention, said: "Watson, come here. I want you."

Industry insiders are more sceptical. Ian Livingston, the chief executive of BT's Retail arm, says: "It is a clever marketing ploy from a clever marketing team. But the UK is probably the most competitive market for broadband in the world. This is just another offer."

Consumer groups are already advising people to check the small print for hidden termination fees or charges for calls to help desks. (When Carphone's "free" service breaks down, will Dunstone come round to fix it?)

Those who switched energy supplier to chase cheap up-front deals have since seen prices rise and may be wondering if it was worth the trouble. Public inertia when it comes to swapping internet provider is probably less than for, say, banking.

But it still seems likely that a large part of the population will choose to stick with the working system they have rather than swapping to an untested unit for the sake of a £5-a-month saving.

While talk of a price war grows, the question for the providers is how much they have to charge to make money and for how long they are prepared to offer loss leaders in the fight for market share.

Analysts think telecoms companies need to take £25 a month from every customer with broadband and a home phone before profit can be contemplated.

So far, Carphone Warehouse has only 75,000 broadband customers, compared to 2.3 million for BT and 2.8 million for NTL, but it is aiming to take a much larger share of the spoils.

BT is still subject to price controls imposed by Ofcom, the regulator, a legacy from its days as a monopoly. At the moment BT isn't allowed to bundle - it can't offer fixed line and broadband in one package. This could hamper its ability to respond competitively, but it seems likely that Ofcom will free it from restrictions as the market opens up.

Carphone Warehouse is clearly targeting BT, having invested £60m to install its own broadband equipment in BT exchanges, giving it more control over the product it can offer.

After the three-month "free" period, it is expected that Carphone will offer broadband for £4.99 a month.

Blair Wadman at uSwitch.com says: "This move will dramatically change the telecommunications market. So far Carphone Warehouse has failed to make any serious inroads into the broadband market.... If Carphone offers free broadband as part of a bundle, it will create a real challenge to its competitors."

The City is watching developments with interest. So far, BT's profit forecasts haven't been downgraded. Some are reminded of the fuss Freeserve created when it first offered a "free" internet connection back when dot.coms were going "boom". In the end, the big players with the long-term plan won that battle.

Citigroup told clients: "Making big announcements is one thing. Executing a profitable plan is quite another. The threat to BT from Carphone is real, but mass migration is unlikely." Carphone shares put on 6.75p to 313.5p yesterday, though this seemed to be a function of market buzz rather than certainty that it will soon make more money.

Cable & Wireless once promised to make a similar splash with Bulldog, its retail broadband company. It first expected Bulldog to lose £30m a year while it established itself. For the 12 months to March, a loss of £100m looks more likely - a poor return on some tough talking. BT Retail is profitable - but the consumer broadband arm is not.

If BT can't make money at this, can the smaller players? At the moment you can get broadband from about 200 suppliers. The market was betting yesterday that some will soon go to the wall.

Sky is going to come in later this year with its own broadband offering, though it will not compete just on price. Richard Ireland, head of telecoms at Ernst & Young, says: "Price wars do not always work in favour of the cheapest players. Convenience is a driver for bundled services."

It remains to be seen whether the media moguls are right that consumers will want an all-in-one solution to their entertainment needs. People who get a mobile phone from their employer, for example, won't be interested in the quad-play deal, however convenient it may be. And what if one part of the package is not up to scratch?

Still, one consequence of bundling is that major players could choose to give away one of the products (a free mobile phone, say) to customers who sign up for the more expensive packages. Of course, the phone will be free in name only. Murdoch, Dunstone and the rest didn't get rich by being fools. If they claim to be offering something for nothing, the correct response is always: Pull the other one.