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Tesco is serious about building a profitable telco

It&rsquo;s hard to think of two brands more different than Apple and Tesco. One is famed for its sleek gadgets, while the other piles high and sells cheap the kind of electronic goods that wouldn&rsquo;t look out of place in a Latvian discount store. A Lodus television and a Technika DVD player might be cheap, but you&rsquo;re unlikely to find them in the living rooms of style-conscious Apple fans. <br /><br />Despite this, the two are teaming up and Tesco will soon sell the phenomenally successful iPhone in its stores, almost certainly before Christmas. Quite how newcomer Tesco managed to cut a deal that will allow it to capitalise on the festive period, while Vodafone &ndash; the world&rsquo;s biggest network operator by revenues &ndash; must wait until the new year remains unclear. But it&rsquo;s sure to be a question that shareholders will be asking chief executive Vittorio Colao in the coming days.<br /><br />Tesco&rsquo;s iPhone will be slightly cheaper than the offering from existing players O2 and Orange, which have remarkably similar tariffs. Customers who are hoping for a massive price war will be disappointed, however; the main area where Tesco thinks it can compete is on customer experience. It believes that the UK market is already very competitive when it comes to price, but that consumers are fed up with complex tariffs, long contract tie-ins and hidden costs. Expect it to offer simple, rounded monthly tariffs (&pound;30, 40, &pound;50) with unlimited texts, minutes and data. <br /><br />A secondary winner from Tesco&rsquo;s contract win is O2. The supermarket&rsquo;s mobile network, Tesco Mobile, is actually a mobile virtual network operator (MVNO) that piggybacks on O2&rsquo;s network. In exchange, O2 gets 50 per cent of all voice, text and data revenues. A massive increase in Tesco Mobile&rsquo;s customer numbers will add a welcome sum to O2&rsquo;s top line. <br /><br />The supermarket is not going to sell the iPhone as a loss leader in a bid to get punters through its doors in the run up to Christmas. It is serious about making this pay. According to its interim results, its telecoms business has around 2m customers and is already profitable.<br /><br />And Tesco Telecoms chief executive Lance Batchelor last week told investors that he expects the division to have profits of &pound;200m on revenues of &pound;2bn in the &ldquo;medium term&rdquo;.<br /><br />Batchelor&rsquo;s plans don&rsquo;t end there. He has said he will open a further 40 standalone Tesco Phone Shops by the end of the year, bringing the total to around 100. <br /><br />Alongside its mobile offering, the supermarket recently announced a deal with Cable and Wireless that will see the telecoms firm wholesale broadband and fixed line telephone services to be sold under the Tesco brand. That will allow it to offer so-called triple play deals (mobile, broadband, home phone) to compete with Carphone Warehouse et al. The only thing that is now missing is television. Maybe we&rsquo;ll see a deal in this area soon too. <br /><br />The supermarket has said it is planning to bring a little Tesco value to the iPhone. But the real question is whether it can bring a bit of Tesco growth and profits to the already saturated telecoms market. <br />david.crow@cityam.com<br />