Paul McIntyre: Optus drives spear into Telstra

Petrol is biting and so is Optus.

The industries are different but the chief executives of Coles Myer and Optus Telecommunications this week had plenty on their hands.

Coles Myer boss John Fletcher flagged a $45 million cost-cutting blitz at the Myer department store chain he's trying to flog just as the sprawling retail group posted a 17.6 per cent rise in net profit to A$678.1 million ($745 million).

Fletcher maintained his position that Coles Myer's profit would break through A$800 million this year despite consumer spending tightening in recent months because of soaring petrol prices.

"The consumer is generally cautious at the moment," Fletcher said on Thursday, estimating that petrol prices, which have hit A$1.40 a litre in recent weeks, had stripped A$20 to A$30 a week from household spending.

The separately listed fashion and footwear group, Colorado, also blamed high petrol prices for a public spending slump, reporting a 41 per cent fall in half-year net profit to A$7.6 million. Last month, consumer confidence hit a 2.5-year low.

Australia's second biggest telco, the Singapore Telecommunications-owned Optus, also flagged a profit downgrade on Monday but for different reasons.

Intense competition in the mobile phone sector, where Optus is heavily skewed, has hurt the company. On Thursday, however, Optus was back on the front foot, driving a spear into arch rival Telstra by announcing it was spending A$150 million to roll out a new national broadband network. "This represents the largest threat to Telstra's dominance of the residential fixed-line business since competition was introduced," chief executive Paul O'Sullivan said on Thursday. "It's the first time anyone has put a national network in place to rival what Telstra delivers today."

The new investment will allow Optus to reach an additional 2.9 million homes and businesses in addition to its cable network which already passes 1.4 million homes.

The move by Optus is another and probably most serious attack yet on Telstra's fixed-line business, with some analysts forecasting it could slash A$350 million in revenues from Telstra over the next three years.

"Though broadband revenues are still only a small proportion of group revenues they remain the largest growth driver in the [Telstra] business, given the slowdown in mobiles," said CSFB analyst Justin Cameron. "We estimate broadband revenues will account for over 60 per cent of Telstra's revenue growth in [the financial year] 06."

The move to ADSL high-speed internet capabilities by Optus will let the telco move from renting broadband services from Telstra and on-selling them to its own customer base to owning its own broadband equipment installed on Telstra's copper network.

Telstra slammed the Optus plan, saying it would allow the telco to cherry pick its best customers in metro areas while ignoring a more expensive rollout in rural regions.

"It's cheaper for Optus to ride on the back of our network than use its own fibre optic cable," Telstra said.

But that is the hard pill for Telstra, which last week finally got the green light for full privatisation after renegade National Party Senator Barnaby Joyce agreed to support the move. As part of the deal, Telstra must set aside at least A$2 billion to ensure services in regional and rural areas are on par with urban markets - a burden it's rivals can avoid.

Nevertheless, Optus was unrepentant. "This is a great time to be a customer," O'Sullivan said. "Optus is driving competition in yet another area of the market. Our entry to the market will drive better service. Getting competition and choice is a phenomenal thing."

Over at Coles Myer, however, too much competition and choice in retail is making it that much tougher for a real return to form for the Myer retail chain. John Fletcher acknowledged this week that a major cost-cutting drive at Myer was overdue but ensuring customers were actually walking into its 60 stores had been the priority for the past two years.

"The next challenge is we need to take the cost base down."

Telstra, with all the attacks on its revenues, is now looking at a similar plan.

Paul McIntyre is a Sydney journalist