Operations

TalkTalk Group

• Residential (including Non-UK fixed Line which was reallocated to the Telecoms business as of Sept 2008)
• Business to Business

Best Buy Europe

Note: As a result of the transaction with Best Buy, Best Buy Europe numbers are consolidated in Best Buy Co., Inc financials but CPW's share of the post-tax income of the JV falls under Associates.

1) Best Buy Europe (50%)

• Retail (incl. Online)
• Insurance
• Ongoing
• Mobile
• Dealer

2) Virgin Mobile France (48.5%)

Carphone Warehouse Group PLC structure and assetsclick here

* Last year’s numbers have been restated to reflect the reallocation of £25m of revenues from non-UK fixed line operations which were previously included within retail and distribution, but which were excluded from the Best Buy transaction. In addition, 2008 EBIT now reflects the inclusion of £3m of central costs previously recorded at the Group level, as a result of our reorganisation earlier this year. Prior year results have also been restated to reflect a change in the Group’s accounting policy for subscriber acquisition costs, which are now expensed as incurred (see note 1).
** Comprises residential customers and small business customers with similar profiles.

TalkTalk Group is our UK fixed line telecoms division, serving over 3.9m fixed line customers comprising
2.8m broadband and 1.1m voice-only and narrowband customers. It is currently the number 3 player in the UK broadband market, with by far the most extensive unbundled network in the UK, which supports a low-cost operating model that enables strong profitability even on market-leading tariffs. Its B2B operation, branded Opal, is a major player in the small business market.
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CPW's venture into the fixed line telecoms market began in November 2002, when CPW acquired Opal Telecom PLC, a fixed line, voice telecommunications network provider. The acquisition took place at a time when there were changes in regulations within the Carrier Pre-Select ("CPS") market, which gave customers the freedom to switch fixed line providers with ease. Ofcom, who began to regulate the UK telecoms industry after the passing of the Communications Act 2003, brought on these regulatory changes.

CPW launched a new residential fixed line service across the UK in February 2003 under the TalkTalk brand. TalkTalk became the fastest growing CPS service provider in the UK and by September 2005 gained 5% of the UK residential fixed line market with a customer base of 1.06m. TalkTalk's success story created an opportunity to acquire Onetel and Tele2 in December 2005, which doubled our market share.

Towards the end of 2005 Local loop unbundling (read our LLU guide for more information) was encouraged by Ofcom, enabling fair competition, price flexibility for customers and more innovation in products and services from new telecoms entrants. CPW's growing customer base and the relaxation of barriers to entry enabled TalkTalk to be the pioneers of free broadband in April 2006, and by September 2006, we began migrating customers to our own exchanges.

BskyB, Orange, and other media and telecoms companies began to invest in LLU following TalkTalk's launch of free broadband, offering similar services and pricing. We acquired the AOL Internet access business in the UK in October 2006, which enlarged our broadband customer base by 1.5m customers, making us the third largest broadband provider in the UK.

In May 2009, we announced the acquisition of Tiscali's UK operations which includes 1.45m broadband customers and was completed at the end of June 2009. Post completion TalkTalk Group became one of the UK's largest residential broadband provider with over 4.1m customers.

*Last year’s numbers have been restated to reflect the reallocation to TalkTalk Group of £25m of revenues from non-UK fixed line operations which were previously included within retail and distribution, but which were excluded from the Best Buy transaction. In addition, 2008 EBIT now reflects the inclusion of £19m of central costs and £1m of losses on joint ventures, both of which were previously recorded at the Group level, as a result of our reorganisation earlier in the year. Prior year results have also been restated to reflect a change in the Group’s accounting policy for subscriber acquisition costs, which are now expensed as incurred

Best Buy Europe, in which the Group has had a 50% share since 1 July 2008, encompasses our retail operations across Europe and our share of profits in Best Buy Mobile in the US. After the transaction, the Group's share of its results are reflected within joint ventures and associates as part of continuing operations, as Best Buy Europe. Also included within the joint ventures and associates in the income statement are our share of post-tax losses from Virgin Mobile, our French MVNO.

Best Buy Europe's operations generate revenues from the highlighted operation streams below. Following the transaction with Best Buy in June 2008 we do not disclose the separate operation streams going forward.

The retail division sells mobile phones and network connections through a portfolio of over 2,400 stores spread across 9 European countries. In addition we sell a wide range of accessories and fixed line telephony products. In the UK and the Republic of Ireland we trade under the Carphone Warehouse fascia and elsewhere we trade as Phone House.

Connections split into two main categories: subscription (or contract) connections and pre-pay connections. We also sell a number of handsets 'SIM free', that is, without a network SIM. Typically these are bought by pre-pay customers looking to upgrade their handsets to more modern models. Clearly there is no subsidy on these handsets because there is no new network connection.

Our online operations comprise all our direct business, selling products and services to our customers via a UK call centre and transactional websites in a number of countries.

A mobile phone is stolen every minute in the UK but according to our research, over 80% of standard household policies do not cover mobile phones. Through our store network we offer a variety of insurance products to protect customers from loss, damage or theft of their mobile phone. We also cover customers for their outstanding contractual liability.

The insurance service was launched in the UK back in 1994 and is managed through a subsidiary in Dublin. The main driver is growth in subscription connections, with insurance sold as an ancillary service to these customers.

During 2008, we benefited from the introduction of the laptop proposition into the stores, and also the development of a combined insurance and Geek Squad assurance policy, giving customers not only protection against loss, but also access to technology assistance from the Geek Squad. (Read below for further information on the Geek Squad)

We have agreements in place with an increasing number (currently around 75%) of network operators in our markets whereby we receive a share of airtime revenue (ongoing) from customers we have connected in our stores. The share of these revenues generates significant recurring cash flows with no associated direct cost.

The mobile telecom services business primarily encompasses The Phone House Telecom (mobile), our German service provider, our MVNO operations, and our Facilities Management ("FM") operations.

In June 2003 we acquired Hutchison Telecommunications GmbH, a German service provider ('SP') with 500,000 high quality subscription customers. The business has been renamed The Phone House Telecom ('TPHT'). As a service provider in the regulated German market, TPHT buys discounted tariffs from the networks and sells them to its own customers, either as a network tariff or repackaged as its own tariff. 30% of TPHT's subscribers are business users and the base has an average ARPU much higher than that of the German market overall. We recruit customers onto the TPHT base both through our own stores and other retailers and distributors.

Fresh, our original MVNO, buys excess network capacity at wholesale prices from T-Mobile which allows us to develop attractively-priced packages.

Fresh tends to prosper when there is little network appetite for the pre-pay market. This makes the product attractively priced on a relative basis without us having to subsidise the handset unprofitably. However it becomes less competitive when subsidy is present in the pre-pay market because we are not prepared to let Fresh compete on price if it means profitability becomes marginal.

In July 2004 we launched Breizh Mobile, a French MVNO on the Orange network addressing the under-penetrated region of Brittany; and in April 2005 we launched Mobile World in the UK. Mobile World is a unique proposition leveraging a number of our core assets - the store base, our network relationships and our Opal fixed line network - to provide very cheap calls from a mobile phone to international destinations. Both businesses reflect our strategy of identifying attractive niches in the market.

In October 2007, we launched a new proposition in the UK, Talk Mobile, after agreeing a new wholesale airtime deal with Vodafone.

The dealer division encompasses a number of non-core operations. We act as a wholesale distributor of handsets and airtime vouchers, using our scale to achieve good prices for other distributors and retailers. We also ship new and used handsets to other parts of the world.

During 2006, we also launched new MVNO operations in Spain, Portugal, Switzerland and Belgium.

Joint ventures
In April 2006, we took our French MVNO operations nationwide and signed a joint venture agreement with Virgin Group Investments Limited. The MVNO operates under the Virgin Mobile brand, and continues to utilise our relationship with the Orange network. Virgin Mobile France offers both pre-pay and subscription services through the Phone House stores, Virgin Megastore outlets, and other retailers. The business is currently focused on brand-building, customer recruitment and developing sales channels.

We entered into two commercial agreements with Best Buy, a leading US consumer electronics retailer at the end of 2006. Firstly, we launched Best Buy Mobile, an independent retail format in the US. The initial launch phase was successful and originally we announced by the end of 2008 there will be 150-200 stores but due to excellent progress during 2007 we aimed to have the whole of Best Buy's US store portfolio converted by the end of calendar 2008, which was successful. Secondly, we launched the Geek Squad, a home technology support business, in the UK, to assist customers with their increasingly complex home technology needs. In January 2008 we launched services in Spain, and we expect the Geek Squad to be a key part of the future of the retail and distribution business.