Buckets tip mobile market into war
By Michael Sainsbury
October 14, 2004
<http://finance.news.com.au/common/story_page/0,4057,11065157%255E521,00.html>

FIERCE mobile phone price competition has come finally, and swiftly.

Like a tsunami, it is enveloping all in its path and it's not going
away. It is tearing down margins in the mobile sector and now it's
starting to seriously corrode Telstra's fixed-line business.

For Telstra chief executive Ziggy Switkowski and his federal
government masters, who at last have the full privatisation of Telstra
at the tips of their grasping fingers, the timing could not have been
worse.

In April last year, Hutchison Telecommunications kicked off its $3
billion foray into the Australian mobile market with its
third-generation network known as "3". No one gave it much chance.

Third-generation networks have been heralded for years as the mobile
messiah - with fast, always-on data services that have been tried and
failed on slower 2G networks.

The hidden gem in 3G, however, is vastly more efficient voice
services, up to six times, Hutchison boss Kevin Russell reckons. A
cost base Telstra and Optus would die for.

''3" made everyone sit up and take notice straight away by offering
$99-cap monthly call plans for voice services when it launched. It was
the first time that so-called "bucket" plans had been seen in the
Australian market.

Barely 18 months later, Russell has the whole industry dancing to his
tune. Can he really believe it has been so easy?

In July, Vodafone joined the bucket brigade with $79 a month and has
made a Lazarus-like return to health, now the others are reluctantly
having to follow.

And in only four months, the capped-price model has replaced
subsidised handsets as the market hot button.

In the process, a fresh wave of increased mobile usage is threatening
not only the cosy 40 to 50 per cent margins of Telstra and Optus's
mobile businesses but Telstra's once impregnable fixed-line business.

Put simply, mobile prices are getting so cheap that people are
wondering why they pay Telstra $30 each month for a big fat zero. It's
called, ladies and gentlemen, fixed-to-mobile substitution, it's
happening all over the world and it keeps the good doctor awake at
night.

Analysts at Citigroup this week said it would punch a nasty $850
million revenue hole in Telstra's P&L over the next three years - and
this is a conservative estimate. Optus has already shown how much it
is hurting, playing ball with its own heavily promoted $79 per cap
last week.

Telstra will join the party within weeks at, let's say, $69, then
someone, probably Vodafone, will hit the market with a $49 cap. At
this point - a market sweet spot - a medium-term death spiral will
savage the margins of Australia's mobile players forever.

Bad news for Telstra, and to a slightly lesser extent Optus. They pay
large upfront fees for customer connections - as high as $285 - and
average handset subsidies of about $100.

As well, the two market leaders are giving away between 12 and 20 per
cent of their sales to their channel partners. Again, quite simply,
unsustainable in the much lower margin dog-eat-dog world of monthly
capped calls.

sainsburym@theaustralian.com.au

The Australian