There were signals today that Carphone Warehouse’s plunge into the broadband market risks stalling after the mobile phone retailer unveiled a sharp slowdown in the take-up of its “free” fast internet service amid fierce competition.

The group, which unveiled “free” broadband for customers who sign up for its TalkTalk phone package in April 2006, said that it had added 89,000 broadband customers in the three months to the end of September, down from 126,000 in the previous quarter.

The figures were well below analysts' forecasts, which had pencilled in about 100,000 new customers.

Since Carphone entered the broadband market a host of competitors, including Sky, the pay-TV group that is 39.1 per cent owned by News Corporation, parent company of Times Online, have also waded in.

Last week O2, the mobile group owned by Telefónica, became the latest company to throw its hat into the broadband ring, announcing another rival service.

Michael J Williams, the Citi analyst, said that from the third quarter of 2008, customer churn in Carphone’s broadband business could “surprise negatively” as the first wave of 18-month contracts come up for renewal in the coming weeks.

There was more positive news, however, from Carphone’s high-street mobile phone distribution business, which reported a 19.2 per cent rise in connections from the same period last year, to 2.8 million in the quarter, beating forecasts.

Much of the gains came from low-commission pre-paid handsets.

The company expects a further boost next month after its selection as distributor of the much-hyped Apple iPhone in the UK.

Mark James, the Collins Stewart analyst, said: “A year ago, investors were concerned that the wheels had fallen off the bus of the distribution business. So connections up 19 per cent [year-on-year] … should go a long way to assuage concerns.”

In a trading update, Carphone said that its total broadband customer base stood at 2.5 million. It said that it expected new customer numbers to bounce back for the rest of the year, with additions of between 200,000 and 250,000 customers over the period.

The company is now the UK’s third-largest broadband provider, behind BT and Virgin Mobile.

Its customer base was boosted by the £380 million acquisition of AOL UK.

Carphone added that 80 per cent of its new broadband customers were connected directly to its network, rather than through a BT line. Having customers directly attached to its network reduces costs for the company, and it said that it was ahead of schedule with plans to migrate more existing customers to its network.

First-half profits are expected to be between £53 million and £56 million, down slightly on the first half of 2006.

The group has been hit by costs linked to improving customer service on its TalkTalk service.

Charles Dunstone, the chief executive, said that he was confident about the company’s full-year outlook.

Shares in Carphone Warehouse were up 1 per cent, at 346p, in mid-morning deals, valuing the company at about £3.2 billion.

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