Vodafone’s decision to quit Carphone Warehouse’s contract sales, and put all its independent retail subscription business through rival chain Phones 4U,…

is a bombshell for the indirect channel and marks a key stage in the ongoing power struggle between the big networks and the powerful high street retailers.
The announcement by Vodafone was made to the City the day after it had celebrated Carphone’s auction win for AOL UK’s internet business for £370m.
Carphone had beaten off bids by Orange and BSkyB. That deal makes it the country’s third largest broadband provider. But Carphone’s share price, which had jumped on the AOL announcement, plummeted 14% on the Vodafone news.
In that context, the news was viewed as sharp rebuke for a mobile phone retailer that has fast become a major broadband service provider, an area which the networks consider their natural habitat. “Vodafone is pre-empting the fact that Carphone Warehouse will inevitably become a key competitor very soon now,” said one observer. The response from other networks appeared to confirm that Carphone’s interests are conflicted.
In response, Carphone played up the principles of independent retail. In a statement it said that Vodafone had offered Carphone the exclusive arrangement first. Carphone said it rejected the one-year deal on the grounds that it would have meant guaranteeing an inordinately high number of Vodafone subscriptions – reportedly 30,000 per month – which would have compromised its own claim of impartial customer advice. Moreover, it said that the contract business it currently writes to Vodafone is paltry because its consumer offers are not as competitive as its rivals.
“Vodafone approached Carphone Warehouse to enter into the same arrangement as they have announced with Phones 4U,” the statement said. “It would have meant guaranteeing to sell a high percentage of Vodafone subscriptions, no matter how competitive the offer was for consumers. We sell phones on the basis of what is right and best for our customers, not on the basis of guaranteeing volumes of sales for networks.
“Less than 10% of our subscription customers today choose Vodafone as their contract of choice. This is simply because 90% of customers feel they are getting a better deal from another network. It is a sad day for Phones 4U customers, to know that they are not being offered the best deal for them but instead the best deal for Phones 4U and Vodafone.”
Carphone said it would still be able to offer the best deal and impartial advice to consumers, despite offering one less network on contract, because Vodafone simply doesn’t measure up in the consumer market.
“Our customers will always receive impartial advice on the best deal for their individual needs and, rest assured, they will always have the best deal on offer,” it said.
But there were worrying messages for Carphone, and by extension all of independent retail, from other network operators. Orange and O2 issued veiled threats to Carphone on the news, remarking that indirect distribution costs were getting too high. According to stockbrokers Cazenove, Phones 4U has had to agree to a 20% cut in the commission per subscriber that Vodafone will pay.
“Our relationship with both Carphone Warehouse and Phones 4U remains unchanged,” said an Orange spokesperson said. “However, since our indirect distribution costs have gone up significantly over the last few years we are in the process of reviewing our independent strategy for 2007.”
O2 chief executive Peter Erskine described Vodafone’s decision to pull its contract business out of Carphone as an opportunity for it to broker better distribution terms. “Carphone will need us to stick in there and Phones 4U will need us not to walk away,” he told the Financial Times. “We want to stay a partner but there are always opportunities there.”
Meanwhile, T-Mobile appeared smug that the high street’s biggest retailer had cleared more shelf space to sell its value proposition. It has signed up a million customers to its Flext tariff in just seven months, and T-Mobile managing director Jim Hyde took the opportunity to plug T-Mobile’s contract offers as better value for money than its rivals’.
“Carphone Warehouse is a very important distribution channel partner. We are happy with the terms of business we have negotiated with Carphone and look forward to building further on the strong relationship we enjoy with it. We believe in competition and gaining customers on the basis of providing best value.
“Clearly, the success of our Flext contract has changed the UK mobile marketplace. We will continue to compete by providing great value and service to the customer, and our distribution partners support this approach,” said Hyde.
Commentators pointed out that it was risky for Vodafone to abandon the biggest mobile phone retailer in the UK and expect the same levels of business. Ovum analyst Jonathan Arber said: “We have to question if the savings are really worth shutting out the current high-street leader, Carphone Warehouse, and thus greatly reducing potential contract sale opportunities. Vodafone must be pretty confident in Phones 4U’s potential as a sales channel if it’s willing to turn its back on the rest of the High Street.”
Chris Frost, mobile telephony expert at the independent comparison service uSwitch.com thinks Vodafone made its move to stabilise profit margins and reduce costs. “One of the main opportunities to reduce the cost of acquiring new customers is to pay lower sales commissions. Revenue growth has plateaued across all European mobile operators and we wouldn’t be surprised if more exclusive retail partnerships develop over the next twelve months.”
“This is further evidence that network operators are increasing their control over retail channels, with the ultimate aim of pushing sales into their own company stores.”
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