Our take...
The reasons behind the formal split can be broadly divided into two parts:

• The different nature of the communications/retail industries and associated operational and strategic requirements.

Since CPW's entry in early 2005, the UK broadband market has become fiercely competitive, with several well-backed larger ISPs battling each other with price discounts, multi-play bundles and a range of value-added services to attract customers. Leaving aside the different structures and processes required for the day-to-day running of an ISP/fixed line communications business as opposed to a consumer retail business, for the TalkTalk unit to be successful requires high-level management teams with experience of these industry trends to come up with relevant strategies. The different strategies needed by both units hinges on a core distinction between the retail and communications industries – the former, often considered as consumer-driven and cyclical, the latter provider-led and subscription-based.

• The level of shareholding, scale of investment and business directions for TalkTalk and Best Buy Europe.

Since CPW began investing heavily in rolling out a proprietary LLU fixed network in mid-2006, TalkTalk has shifted from being an after-market, bolt-on business for its main retail operations, to becoming an important focus for the company. This is supported by CPW's decision to maintain full ownership of TalkTalk (100% shareholder), while releasing some control of its retail business, Best Buy Europe (50% shareholder). Moreover, the two divisions are now headed in different directions: TalkTalk plans a period of cash generation after several years of heavy investment, while Best Buy Europe is entering an investment phase to roll out stores throughout Europe. The distinct nature and direction of both units is also likely to hold different attractions for external investors – and in this sense the formal split seems suitable.

In terms of strategy, the focus of TalkTalk has been to expand its retail customer base via a string of acquisitions: Tele2 and Onetel (Q4 2005, adding 0.1m broadband subscribers combined), AOL (Q4 2006, 1.5m broadband subscribers) and Tiscali (due for completion Q2 2009, ~1.6m broadband subscribers). The ISP has also used the tactic of marketing broadband as a "free" additional service for landline phone customers (a tactic, however, it has since rethought).

Recently, TalkTalk has looked to boost margins by i) introducing a basic £6.49/month charge for its base broadband product (previously offered "free" to landline customers); ii) building a proprietary core network to bring down backhaul costs; iii) migrating end users onto LLU lines connected to this core network to reduce access fees paid to BT.

Once high set up costs have been repaid, building out a proprietary core network and using the LLU strategy brings with it greatly reduced running costs compared to the wholesale DSL model used by smaller ISPs that lack the financial resources to set up their own network. Unlike LLU operators, these smaller ISPs using wholesale DSL typically pay higher recurring fees to the incumbent to use its backhaul and core infrastructure (data transport costs) and to use its equipment in the local exchange to serve end users (access line costs). Consequently, as LLU operators pay off their initial network investment, they gain a competitive advantage over smaller ISPs by passing their operational savings on to consumers in the form of lower package prices.

A key driver behind TalkTalk's margin reduction strategy has been the rising bandwidth demand of TalkTalk's customers: the ISP claims that average monthly consumption increased from 2.4GB per month in March 2008 to 4.1GB per month in March 2009. Peak user demand has similarly risen from ~25kbit/s to ~35kbit/s over the same period. The total annual operating cost for TalkTalk's backhaul network was ~£27m in March 2008-March 2009 period, while the average annual backhaul cost per subscriber came down from ~£27 to ~£23 in the same timeframe. The company expects this to drop further to ~£13 by March 2010.

For Best Buy Europe, the focus has been to diversify the product range previously offered by CPW in Europe and further strengthen the business' presence in consumer electronics that CPW has been developing. The group has moved beyond mobile phones to laptops (bundled with mobile broadband contracts) and other connected devices. The group's "Wireless World" initiative looks to promote wireless TV, music and gaming systems and devices in specific store areas, while Geek Squad technology support teams, which have seen strong success in Best Buy's US stores, have also been introduced into the Europe to help bolster revenue. From a retail perspective, Best Buy Europe may be well placed to execute the same "assisted sales" strategy used to sell mobiles (their original core business) when promoting this new set of wireless products. The specialist knowledge of trained Geek Squad staff on hand to educate consumers on how the new wireless technologies work, while also swaying them to buy devices, is likely to be a central factor in making the "Wireless World" a success.