Telstra must cut mobile pricing: analyst

Summary:Following yesterday's earnings downgrade issue by Telecom New Zealand chief Paul Reynolds, analysts now doubt whether Telstra can meet its earnings guidance and have urged Telstra to drop its mobile pricing.

Following yesterday's earnings downgrade issue by Telecom New Zealand chief Paul Reynolds, analysts now doubt whether Telstra can meet its earnings guidance and have urged Telstra to drop its mobile pricing.

Telstra needs to cut its mobile pricing, according to a report released today by Goldman Sachs JBWere (GSJBW) Investment Research's Christian Guerra.

"Mobile remains the key segment where Telstra has not made material changes to its pricing," reported GSJBW, noting that Telstra lost 83,000 mobile customers in the first half of 2010.

"It would not be surprising to see this trend continue in 2H10," the report noted.

David Thodey and John Stanhope

Telstra CEO David Thodey and CFO John Stanhope
(Credit: Liam Tung/ZDNet.com.au)

Telstra had missed the boat on the massive switch from land lines to mobile, and while competitors such as Optus had picked up 40 per cent of that fixed line exodus, Telstra had captured just 5 per cent of the market, the analysts estimated.

GSJBW has predicted that Telstra's revenue for financial year 2010 will decline by about 3 per cent, and that it will fail to meet its $6 billion free cash flow target. Telstra's financial year 2009 revenues were $25.37 billion.

GSJBW noted that Telstra had dropped its 25GB product from $89.95 to $49.95 per month; however, this was still a premium over competitors, and therefore would only stem churn, but not win new customers.

The only shining star GSJBW's crystal ball held for Telstra was that it would increase its dominance in wireless broadband.

The predictions come off the back of Telecom New Zealand's sobering downward revision of expected earnings. The $1.8 billion revenue forecast was 4 to 6 per cent too high, according to the telco, which also flagged the potential for selling its Australian operation, AAPT.

BBY analyst Martin McDonnell said the problem that Telstra and its chief executive David Thodey faced was a lack of revenue growth, essentially the same conditions outlined by Telecom New Zealand's chief Paul Reynolds.

"What is absolutely clear is that the policies that Telstra has been pursuing are failing, and have been failing. They are losing market share, and they have lost revenue growth," said McDonnell.

"At the last half-year briefing, I put to David Thodey, using the example of Virgin [Mobile Australia] within Optus: Virgin targets the more cost-conscious consumer," he said.

"I put it to Thodey, Telstra doesn't have this, and even though it has quite a number of different brands, it doesn't have a brand that targets the price conscious consumer. I said it was an error in the way they were attacking the market. [Telstra] had given up on the price-conscious consumer."

"In response, [Thodey] said Telstra had no plans to change. So, we can draw from that ... that they are quite blinkered in only being a premium service provider."

McDonnell said Thodey should go back over the text book Competitive Strategy written in the 1980's by Harvard Professor Michael Porter, and research the strategic pitfalls of an industry in transition.

Topics: Telcos, Mobility, Optus, Telstra, TPG

About

Liam Tung is an Australian business technology journalist living a few too many Swedish miles north of Stockholm for his liking. He gained a bachelors degree in economics and arts (cultural studies) at Sydney's Macquarie University, but hacked (without Norse or malicious code for that matter) his way into a career as an enterprise tech, s... Full Bio

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Related Stories

The best of ZDNet, delivered

You have been successfully signed up. To sign up for more newsletters or to manage your account, visit the Newsletter Subscription Center.
Subscription failed.