solid company, page-18

re: voip 7:30 report :-) Telstra boss outlines new threat to core business
Reporter: Emma Alberici


KERRY O'BRIEN: Telstra's new boss, Sol Trujillo seems determined to win a reputation for telling unpalatable truths about the giant telco he now runs. First, it was to the government, telling them the phone company in which they're still majority shareholder is in pretty poor shape, and that he couldn't guarantee to hold its share value. Today, he fronted the rest of Telstra's shareholders at the annual general meeting, with the assessment that the 'golden heart' of Telstra - the fixed line phone business - is under growing threat. In fact, it's going to take a masterful magician's act to deal with the enemy: internet competitors offering free calls to the world.

Finance editor Emma Alberici reports.

EMMA ALBERICI: We've come a long way in a relatively short period, from a time when humans directed telephone traffic in a frenzy of plugs and wires on a manual switchboard and phones weren't going anywhere. They were big and clunky, fixed to a wall or sitting immobile on a table. As always, though, over the course of remarkable technical development, the longer the distance and the longer the call, the higher the price. Now even that telephone truism is becoming ancient history.

It's a sunny Sydney morning on Manly Beach. Resident Luke Pearce is calling his mate Alex Hooker in London over his broadband Internet connection.

(Phone rings)

LUKE PEARCE : Hello?

ALEX HOOKER: Hi, Alex. How are you doing?

LUKE PEARCE Very good, very good.

ALEX HOOKER: We had a visit from your nephew the other day, young Callum.

LUKE PEARCE Ah, and how is the little lad?

EMMA ALBERICI: Is this the end of the line for traditional telephone calls? The software costs nothing to download, there are no rental fees and depending on who Luke Pearce calls, he'll either pay nothing, or in this case, just a few cents a minute.

LUKE PEARCE Okay, bye-bye.

The computer seems the be like the central part of a lot of households now. It's delivering entertainment, it's delivering communication, so it just seems a natural progression now to move your telephone on to your computer.

SOL TRUJILLO, CHIEF EXECUTIVE, TELSTRA: The world of the telecommunications business is changing, and it's changing fast. And no more so than in relation to our fixed line business, where revenues are falling due to increasing migration to other services - mobile services, email, Internet and things that some of you may or may not have heard of, like voice over the Internet.

EMMA ALBERICI: As customers of Telstra, the crowd here will probably welcome voice over the Internet, but as shareholders, the rise of this new technology is all bad news.

SOL TRUJILLO: Increasing usage of these new telecommunication services at the expense of the traditional fixed line is now happening not just in Australia, but all over the world.

EMMA ALBERICI: The heart and soul of Telstra's business has been the fixed line. The hard-wired home and business phone delivers a 50% profit margin and that's precisely what's under attack here. What future is there for STD and ISD when more and more customers start to realise they can make a call to anywhere in the world for free or next to nothing? Sol Trujillo has already presided over a $10 billion plunge in the value of the Telstra business. How the company plugs into this latest phenomenon is critical to its future.

SOL TRUJILLO: The reality is, is that the game in which we compete, the markets in which we play, are changing. There are no free kicks anymore, for any of us in the market place. But it's no use my standing here and kind of wringing my hands about all of this. We need to change with the game.

EMMA ALBERICI: How do you balance the need to protect your profit margins with the emergence of voice over Internet, free voice over Internet offerings?

PAUL FLETCHER, REGULATORY AFFAIRS, OPTUS: Well again, Emma, the issue that Voice over Internet Protocol telephony represents is no different to the issue that Optus has faced throughout its 12-year life.

EMMA ALBERICI: Well, it's different in so far as it's free.

PAUL FLETCHER: The point is really this: new technologies are coming along all the time and our job is to make decisions about which ones we invest in and which ones we roll out in our network.

EMMA ALBERICI: Australia's No. 2 telco, Optus is in denial. Regulatory chief Paul Fletcher says his company doesn't have any plans to offer free Internet phone calls to consumers. He's not concerned about the drift to VoIP, despite the fact that Luxembourg-based Skype has already managed to attract 282,000 Australian users without having ever advertised here.

You can't compete against free calls, though, can you?

PAUL FLETCHER: Clearly, any business is going to struggle to make money if you're selling products for free. I think it's also worth making the point, though, that any sustainable business model, for an Internet-based telephony operator, is also going to involve them needing to charge their customers at some point. Nothing can stay free forever.

INTERNET ANIMATION: Hello. This short film is about how easy it is to use Skype.

EMMA ALBERICI: Skype and other Internet telcos provide the ultimate in free speech - VoIP.

INTERNET ANIMATION: Calls between Skype users do not cost a thing.

EMMA ALBERICI: The world's biggest provider of Voice over Internet Protocol allows people to make free calls to other Skype users anywhere in the world. It's just two years old, but last month eBay, the giant online auction house, paid $3.5 billion to buy Skype. eBay is arguably the shrewdest predator on the Web, but it was a staggering sum to pay for a company that last year brought in only $60 million in revenue you and hasn't yet made a profit.

NEALE ANDERSON, RESEARCH DIRECTOR, OVUM: We were surprised, frankly, at the valuation that eBay put on it. Given the fact that most Skype users don't actually pay Skype any money, it seems an incredibly high sum to pay for the company.

EMMA ALBERICI: For many analysts it's no longer a question of whether voice over the Internet will wipe out traditional telephony, but a question of how quickly it will do so. Telstra already offers the service to its business customers. Westpac is the biggest user in Australia, with 3,000 staff online and all 27,000 due to hook up to the system next year. Next year Telstra's residential customers will be invited to join up, but analyst Neale Anderson says the company will be sure to bundle the service up, rather than risk cannibalising the money it makes from other, more lucrative sources.

NEALE ANDERSON: This is more of a defensive strategy. Telstra and Optus have no interest in driving the adoption of this, as they have a lot of existing revenue streams to protect.

EMMA ALBERICI: eBay already has 3 million members in Australia. As they integrate Skype into their business, each one of them will be offered the service. Potentially, that means everyone with a broadband connection be will making free phone calls over the Internet and saving themselves $40 a month or so in line rentals. It's a compelling offer, and one that Sol Trujillo will have to match when he announces the results of the Telstra strategic review next month.

KERRY O'BRIEN: Get used to the new language - VoIP, for instance, something we're going to obviously hear a lot more of in the future. That report from Finance editor Emma Alberici.