Telstra Faces Threat to Sales From Australia's Internet...

Telstra Faces Threat to Sales From Australia's Internet Phones

July 4 (Bloomberg) -- Kevin Higgins, a draftsman in Sydney, says he feels closer to his brother in Dublin since he hung up on Telstra Corp., Australia's biggest telephone company, and started using an Internet calling service.

``I can speak to him whenever I like for free even though he's on the other side of the planet,'' said Higgins, 42, who's reduced his monthly telephone bill more than 75 percent to less than A$200 ($150) after connecting a handset to his computer and signing with Freshtel Holdings Ltd.

The growth of so-called Voice-Over-Internet-Protocol providers threatens sales at Telstra's fixed-line unit, its most profitable division. It also may be a turnoff for investors as the government prepares to sell its remaining A$25 billion stake in the company later this year.

Fixed-line revenue dropped 7.6 percent in the first half, to A$3.8 billion, as consumers switched to mobile phones and e- mail. Now Melbourne-based Telstra stands to lose 58 percent of its revenue on average for every customer who shifts voice calls to a VoIP service, according to an analysis by UBS AG.

The number of Australians using Internet telephony services will increase to 6 million from 600,000 over the next five years, according to Sydney-based telecommunications research company Market Clarity. Telstra plans to offer Internet phone services but hasn't said when.

Unlike traditional telephony, Internet telephony converts voice signals into packets of data and sends them over an Internet connection. It lets companies without their own network sell telephone services directly to consumers.

Call Quality

``VoIP providers don't have to spend billions of dollars laying copper wires or building mobile-phone towers,'' said Simon Smiles, a telecommunications analyst at UBS AG in Sydney. ``This allows them to offer much lower call prices.''

Telstra says the technology is still complex to use and has inconsistent call quality.

``It's not a mainstream service at this point,'' said Warwick Ponder, a Telstra spokesman.

The company's stock has slumped 27 percent over the past year. Freshtel's shares have almost tripled, as have those of Engin Ltd., the only other Internet telephony company listed on the Australian Stock Exchange.

Freshtel's Firefly software provides free calls between computers, and charges, mostly less than 10 Australian cents a minute, for computer-to-landline calls. It sells handsets and other telephone hardware through its Web site.

Its 270,000 customers are dwarfed by the 100 million people, mostly in Europe, using a service developed by Luxembourg-based Skype Technologies SA.

Wholesale Market

Still, Freshtel is expanding beyond Australia, focusing on wholesale transactions including one it signed with Tesco Plc, the U.K.'s largest supermarket chain.

Four-year-old Freshtel provides the retailer with a Tesco- branded handset and software kit. Tesco, which has a 6 percent stake in the Melbourne-based company, will sell the 19-pound ($35) kit through most of its 1,780 U.K. stores by next year.

Freshtel receives a share of call costs and hardware sales and charges Tesco fees for its technology. It's negotiating similar deals with major retailers in Australia.

Selling Internet telephony to consumers is unlikely to be profitable on its own in the long term due to shrinking profit margins, said Freshtel's commercial director, Peter Warner.

``It makes a lot more sense for us to form partnerships with companies that have existing relationships with customers,'' Warner said.

French Connection

Sydney-based Engin, which has about 40,000 customers, offers calls across the country for 10 Australian cents and free calls between Engin users. Telstra charges up to A$2.50 for national calls on one of its most popular plans.

``The incumbents have been too slow to change their cost base and too slow to change their technology,'' said Engin Chief Executive Officer Ilkka Tales.

The impact of Internet calling on France Telecom SA is an indication of what's in store for other carriers, Tales said.

Europe's second-biggest phone company estimates about 40 percent of the French fixed-line retail market will move to Internet phone calls this year, from about 15 percent in 2005 and ``almost zero'' in 2004. To retain customers, France Telecom began offering unlimited Internet calls via its broadband service in June 2004.

In Australia, the arrival of companies such as Engin and Freshtel comes as the government is planning to sell its 51.8 percent stake in Telstra this year. The government yesterday said it may stop a retail offering from the sale as the company continues to clash with the competition regulator.

Land Lines

The number of Telstra's land lines fell 1.7 percent to 10 million in 2005. Singapore Telecommunications Ltd.'s network in Australia booked a 3.9 percent decline to 478,000 customers.

Still, traditional phone companies aren't about to be wiped out overnight. To use a VoIP service, most consumers need an Internet connection and a phone line. Telstra is the biggest provider of both in Australia.

It introduced fixed-line plans this year offering unlimited local and national calls for A$89.90 a month to reduce the attractiveness of VoIP services.

Higgins, the draftsman, isn't buying. He's already canceled two of three Telstra telephone lines in his home office.

``Telstra will have to cut their prices a long, long way if they want to hang on to their customers,'' he said.

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