THE huge demand for Talk Talk’s “free” broadband service has created a customer service “nightmare”, the chief executive of Carphone Warehouse admitted this weekend.

Charles Dunstone admitted that Carphone’s Talk Talk business was “struggling to cope” with the more than 400,000 customers who have signed up for high-speed internet access since the service launched in April.

Many are still waiting for their broadband connection, and are finding it difficult to get through to call-centre staff for help and advice.

“It drives me to absolute distraction,” said Dunstone. “The thing about Carphone Warehouse is we offer the best value with the best service. We’ve done half of it so far. We’ve got work to do to sort out the other half.”

Dunstone said resolving the customer-service problems at Talk Talk was the group’s “number one issue”.

He has introduced a daily 8.30am conference call of senior management in order to discuss “what are we going to change? And what happened with the changes we made yesterday?” He admitted there have been times when he has wondered whether Talk Talk had bitten off more than it could chew. The level of demand for broadband has been significantly higher than Talk Talk had planned for in April.

“Free is such a powerful word,” said Dunstone. “It’s a £250-a-year saving for most people. In hindsight, maybe I should have anticipated that a bit more.”

He compared the broadband business to “our own little sister, a little baby who’s waking up every two hours and is disturbing the family and making our lives a nightmare.

“We must not lose sight of the fact that quite soon she will grow up into a beautiful young girl and we’ll love her dearly.”

Carphone will update the City on the progress of its broadband business on Thursday, when it holds its annual meeting of shareholders.

Carphone’s bold ambitions in broadband, and its early success, caused a near-doubling of its shares from last autumn.

However, the shares have fallen back sharply over the past two months, from 360p to 280½p. This is partly because of the challenge from BSkyB, the satellite broadcaster, which launched its own broadband service last week. BSkyB is 38% owned by News Corporation, the owner of The Sunday Times.

Sky is offering a free, 2Mb per second connection to its existing television customers. However, Dunstone estimates that only about 9% of UK homes will be able to take advantage of the Sky deal initially, because of the current limitations of its broadband network.

“We are the only mass market free broadband provider,” he claimed.

Dunstone said Talk Talk’s biggest problem was a lack of call-centre capacity. The average caller has to wait three-and-a-half minutes for an answer, but many have to wait much longer. Talk Talk now has 1,550 people working in its call centres. It is adding another 400 this month, and should have 2,200 by September. “If it was a question of money, I’d spend it,” said Dunstone. “You just can’t do it overnight. There’s no point putting people in until they’re trained.”

Carphone hopes to make money from monthly line rental and call charges — a condition of receiving the “free” broadband. Talk Talk was forced to cut its prices by £1 a month last week after the Advertising Standards Authority ruled that its “free broadband forever” promotion was misleading.

Some analysts are concerned that this will damage what are already wafer-thin profit margins. One telecoms analyst said: “£1 off the margin is pretty significant. We think their costs are going to be higher than they think they are.”

Meanwhile, Microsoft has entered the bidding for AOL, the UK internet company put up for sale partly because of the cut-throat competition in the broadband market.

Microsoft may also be interested in acquiring the smaller AOL subsidiaries in France and Germany. Sky, Orange and Carphone Warehouse have also expressed an interest in AOL and Citigroup, the bank advising on the AOL sale, is also trying to encourage BT to bid.