Australians Shun Home Phones for Mobiles, Harming Telstra Sales...

Australians Shun Home Phones for Mobiles, Harming Telstra Sales

Oct. 12 (Bloomberg) -- Duncan Longmore, a property consultant in Australia's Gold Coast resort area, is one of 390,000 Telstra Corp. customers who've 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 Gold Coast, a 70-kilometer (44-mile) beachfront stretch on Australia's east coast. He's saving A$350 ($265) a month after cutting off his land line and using his Hutchison Telecommunications Australia Ltd. mobile subscription instead.

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 percent this year, according to Chief Executive Officer Sol Trujillo. The sales decline may threaten the government's plans to raise A$33.8 billion selling its 51.8 percent 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,'' said Craig Young, who helps manage the equivalent of $1.2 billion, including Telstra shares, at Tyndall Investment Management Ltd. in Sydney. ``Its main business is in decline, and the downside is hard to ascertain.''

Telstra shares have dropped 20 percent to A$4.06 since Trujillo became CEO on July 1 -- below the government's A$5.25 target price for the sale.

Fixed-Line `Meltdown'

The fixed-line unit, which generated more than a third of Telstra's A$22.2 billion in sales last year, is headed for a ``meltdown,'' Trujillo said in a presentation to government ministers in August.

Fixed-line sales may fall as much as 6.8 percent this business year, following a 3.4 percent decline to A$7.7 billion the previous year, Chief Financial Officer John Stanhope said on Sept. 5. 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 may affect the government's share-sale plan, said Matthew Doman, Minchin's spokesman. Parliament approved the sale on Sept. 15.

Minchin said in an Aug. 26 statement that the ``ideal'' time for the sale would be October or November 2006. He said last month that the government would make a final decision on the format and timing early next year, conditional on achieving an ``appropriate return for taxpayers.''

65 Percent Market Share

The government plans to appoint investment banks to advise on the sale by the end of 2005. The share sale would be the world's second-biggest after Nippon Telegraph & Telephone Corp.'s 1987 offering, should the government sell its stake in a single offer.

Telstra's network of copper wire and optic fiber linking 8.6 million homes and businesses has helped it maintain 65 percent of Australia's A$35 billion telecommunications market, with a 72 percent 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 Group Plc and Singapore Telecommunications Ltd. 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.

`A Dying Habit'

``Having a home phone is a dying habit,'' says Longmore, the property consultant. ``People are now realizing it's simpler, cheaper and more convenient to just use a mobile.''

Hutchison, controlled by Hong Kong billionaire Li Ka-shing, and Newbury, England-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 percent market share, doesn't offer rates that low.

Growth at Telstra Mobile, whose sales rose 8.3 percent last year, can't compensate for falling sales at the more profitable fixed-line unit, said investor Charlie Lanchester.

``Mobile-phone prices are only going one direction, and that's down,'' said Lanchester, who helps manage the equivalent of $12 billion, including Telstra stock, at Perpetual Investments Ltd. in Sydney. ``Telstra faces a lot more competition in the wireless market, so the margins are nowhere near as impressive as those for fixed-line.''

Slimmer Margins

Slimmer margins mean 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 loses from its fixed-line business, Trujillo said on Sept. 5. Domestic long-distance fixed-line calls have an 88 percent profit margin, more than double the 42 percent for mobile services, according to Telstra.

There's plenty of room for further migration to cell phones. Only 20 percent of phone calls in Australia are made on mobile phones, compared with 35 percent in the U.S. and 37 percent in France, according to data from Citigroup Inc.

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.

`Stay in the Game'

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 currently gets reselling its services to competitors.

To halt the fixed-line sales decline, Telstra must overhaul its network to cut costs as former phone monopolies such as the U.K.'s BT Group Plc have done, investor Justin Braitling said. London-based BT last year said it planned to save 1 billion pounds ($1.75 billion) annually by 2008 by shifting 20 million fixed-line customers to a new Internet-based network.

Even if Trujillo unveils a similar plan when he announces 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, said Braitling, who helps manage the equivalent of $350 million at Wilson Asset Management in Sydney.

``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.''