Telstra sale plans shaky as fixed-line customers hang up

Duncan Longmore, a property consultant in Australia's Gold Coast resort area, is one of 390,000 Telstra customers who have disconnected their fixed-line phone service in the past year.

"It was pointless to pay for a home phone I didn't need," said Longmore, 30, who matches real-estate agents with home buyers in the region, a 70km beachfront stretch on the country's east coast.

He is saving A$350 ($380) a month after cutting off his land line and using his Hutchison Telecommunications Australia mobile subscription instead.

He is just an example of how customer defections and growing competition are causing a "meltdown" in Telstra's A$7.7 billion fixed-line phone unit, the biggest part of Australia's No 1 phone company, and may cut overall earnings by 10 per cent this year.

And that decline may threaten the Government's plans to raise A$33.8 billion selling its 51.8 per cent stake in Melbourne-based Telstra next year.

"It's going to be a pretty hard task to sell when the future of the most profitable part of Telstra is so uncertain and risky," says Craig Young, of Tyndall Investment Management in Sydney.

Telstra shares have dropped almost 20 per cent since American Sol Trujillo became chief executive officer on July 1 - below the Government's A$5.25 target price for the sale. The shares closed at A$4.14 yesterday.

Trujillo raised Government hackles when he told ministers in August that the fixed-line unit, which generated more than a third of Telstra's A$22.2 billion in sales last year, was headed for a "meltdown". And those ominous comments were followed by more from chief financial officer John Stanhope who said last month that fixed-line sales may fall as much as 6.8 per cent this business year, following a 3.4 per cent decline to A$7.7 billion the previous year. Last year's sales decline was the unit's first.

Finance Minister Nick Minchin declined to comment on how Telstra's falling fixed-line sales might affect the Government's share-sale plan, which was approved by Parliament on September 15.

Minchin has said the "ideal" time for the sale would be October or November 2006 but the Government would make a final decision on the format and timing early next year, conditional on achieving an "appropriate return for taxpayers".

The Government plans to appoint investment banks to advise on the sale by the end of this year. The share sale would be the world's second-biggest after Nippon Telegraph & Telephone's 1987 offering, should the Government sell its stake in a single offer.

Telstra's network of copper wire and optic fibre linking 8.6 million homes and businesses has helped it maintain 65 per cent of Australia's A$35 billion telecommunications market, with a 72 per cent share of fixed-line subscriptions.

That advantage is starting to crumble as regulators force Telstra to give rivals cheaper access to its network and competitors such as Hutchison, Vodafone and Singapore Telecommunications introduce wireless and high-speed internet services.

Mobile-phone carriers offering cheaper plans with capped rates are luring Telstra's fixed-line customers. Telstra has lost 1.02 million retail fixed-line customers in the past three years, leaving it with 8.05 million lines as of June 30.

Hutchison, controlled by Hong Kong billionaire Li Ka-shing, and British-based Vodafone, the world's largest mobile-phone company, offer customers as much as A$230 worth of calls for a maximum A$49 a month.

Telstra's mobile unit, Australia's biggest with a 45 per cent market share, doesn't offer rates that low.

Investment adviser Charlie Lanchester, at Perpetual Investments, said growth at Telstra Mobile, whose sales rose 8.3 per cent last year, could not compensate for falling sales at the fixed-line unit.

"Mobile-phone prices are only going one direction and that's down," he said.

"Telstra faces a lot more competition in the wireless market, so the margins are nowhere near as impressive as those for fixed line."

Trujillo said slimmer margins meant Telstra would have to earn A$1.74 in its "growth" areas - mobile-phone and broadband internet subscriptions and advertising - to compensate for every A$1 it lost from its fixed-line business.

Domestic long-distance fixed-line calls have an 88 per cent profit margin, more than double the 42 per cent for mobile services.

There's plenty of room for further migration to cellphones.

Only 20 per cent of phone calls in Australia are made on mobile phones, compared with 35 per cent in the US and 37 per cent in France.

In the fixed-line market, competitors are threatening Telstra's dominance as Australia's competition regulator seeks to force Telstra to cut the fees it charges rivals to lease its copper wires.

SingTel's Optus unit, the No 2 phone company in Australia, said last month it would spend at least A$150 million on digital subscriber line technology that would allow it to use Telstra's copper wires to reach 2.9 million households. The technology will let Optus provide its own data and voice services to customers, rather than reselling Telstra's services as it does now.

Telstra estimates it will receive an average A$27.50 a month for each of its phone lines accessed by a competitor's DSL equipment, less than half the average A$66.50 it gets reselling its services to competitors.

Justin Braitling, of Wilson Asset Management, said to halt the fixed-line sales decline, Telstra must overhaul its network to cut costs as former phone monopolies such as the UK's BT had done.

London-based BT last year said it planned to save 1 billion ($2.5 billion) annually by 2008 by shifting 20 million fixed-line customers to a new internet-based network.

Even if Trujillo unveiled a similar plan when he announced the results of a Telstra strategic review next month, it probably wouldn't yield results fast enough to help the Government meet its share-sale targets.

"Telstra has to invest in its network to get its costs down," Braitling said.

"It may not help the share price in the short term or the Government's plans to sell it, but it's something Telstra has to do to stay in the game."

- BLOOMBERG