Paul McIntyre: Telstra feels heat of competition

Telstra this week reported its worst financial results since floating its first tranche of shares nine years ago, dumped grand plans to spend A$4 billion ($4.8 billion) building a new high-speed broadband network and sparked fear and trembling among Coalition MPs about a disastrous final sell-off of the telco to the public if it goes ahead.

And that was just the start of the bad news this week. The 26 per cent slump in net profit to A$3.2 billion for the 12 months to June was matched by another A$500 million in revenues vanishing from Telstra's traditional phone business in the past year.

Telstra shares were steady around A$3.80 after Thursday's results announcement although they are now just half the 1999 issue price, when the Government last sold stock.

It's been a year since Telstra's chief executive, Sol Trujillo, was appointed and it's been a rocky road for him and the Government which is desperately keen to flog the company but increasingly worried about the return and political fallout.

Trujillo has presided over more than A$13 billion being wiped off the company's market capitalisation - this time last year Telstra was worth about A$63 billion and the Government was sitting on a A$30 billion-plus windfall. Today the Government's remaining stake is worth around A$24 billion.

Trujillo has been sober about Telstra's prospects unless it reinvents itself and is unshackled from what he argues is stifling regulatory requirements.

Both the Federal Government and the Australian Competition and Consumer Commission beg to differ on the regulatory front with the two parties at loggerheads for months.

It culminated in Telstra's announcement on Monday that it was dumping its plans for a high-speed fibre optic broadband network because of clashes with the ACCC.

"I don't think we should be held hostage by Telstra on high speed broadband," ACCC chairman Graeme Samuel said this week.

"There's an assumption here that Telstra is the only game in town. Well we know that's not the case."

Trujillo said instead of introducing a full high-speed fibre network, Telstra would focus on broadband upgrades to its copper and hybrid fibre coaxial cable networks and push its 3G mobile network capacity and speeds much harder.

Broadband and 3G mobile were the future, Trujillo preached on Thursday, and it's very clear why he stuck to that line - it was those two areas in Telstra's results that saved Trujillo from a real pasting.

Despite declines in the company's traditional phone business and a A$1 billion charge from restructuring costs in the past year, overall revenues grew 2.9 per cent to A$23.1 billion.

Broadband added A$467 million to total group revenue as Australians embraced Telstra's internet services. At the end of June, the telco had 1.47 million retail broadband subscribers, up 72 per cent over the year, and the company said it was adding new customers at a rate three times faster than its nearest rival, Optus.

Retail broadband was the company's second-biggest source of extra revenue after mobiles, adding A$267 million over the year to an annual total of A$730 million. Wholesale broadband services, in which Telstra resells access to its network, added A$200 million to contribute A$461 million to annual revenue.

Trujillo singled out Telstra's internet unit, BigPond, as one of the company's strongest brands and talked up more investment in content and innovative applications, a strategy which he might find increasingly difficult to deliver as media groups with online portals intensify their expansion into online content offers.

BigPond has used exclusive TV-style broadband content as a carrot to lure and keep broadband subscribers, a tactic that PricewaterhouseCoopers last week predicted would become standard fare among internet service providers.

Another name for it is "content fodder", in which ISPs offer deeply discounted content to customers and prospects but charge full rates for internet access. PricewaterhouseCoopers forecasts internet access revenues in Australia will jump from A$1.57 billion in 2005 to A$3.5 billion in 2010.

Trujillo might be banking on content for BigPond as a revenue driver but in the past couple of weeks the two big TV networks, which also have leading internet portals, have unveiled plans to make it much harder for the likes of Telstra.

The internet joint venture between Microsoft and the Packer-controlled PBL, for instance, indicated last week it would make a bid to poach the online rights for the National Rugby League competition off Telstra's BigPond unit.

And on Wednesday Yahoo!7 staked its claim for a leading role in the frenzied battle for broadband delivered movie and TV content, unveiling an exclusive alliance with listed digital content distributor ReelTime.TV which has agreements with more than 30 Hollywood and independent film and TV studios.

The new alliance will pit Yahoo!7 in direct competition with Telstra's BigPond Movie download service and Foxtel's pay-per-view product.

A week earlier Network Nine boss Eddie McGuire officially surrendered to the internet, unveiling a flurry of online content joint ventures between the TV broadcaster and ninemsn which include imminent plans for late afternoon video podcasts of National Nine News bulletin and more TV shows to be sold online for A$1.95 an episode.

McGuire said public interest in online video viewing on ninemsn was booming.

All of that spells a big slog for Sol Trujillo trying to reset the big telco tanker's direction.