Customer decline hurts Telstra

Telstra's cash flow was likely to be $400 million less than forecast this financial year, at $5.6 billion, because of the decline in fixed-line customers and uncompetitive mobile and broadband plans, GoldmanSachs JBWere analyst Christian Guerra said in a research note.

"The [first half of the 2009-10 financial year] result highlighted some of the most concerning operating trends seen in Telstra's recent history," Mr Guerra said.

Its mobile phone plans were the least competitive, and its customer growth declined by 83,000 in the last six months of last year.

"Telstra's dilemma is clear. It does not want to lower its mobile pricing to accelerate the shift of high-margin traffic away from its fixed network and on to Australia's three mobile networks," Mr Guerra said.

Telstra's recent attempts improve fixed and wireless broadband packages would slow customer attrition rates, but the prices were still uncompetitive, he said.

On December 18, Telstra warned sales revenue in 2009-10 would be lower than previously forecast because customers were leaving its fixed-phone and broadband services faster than expected.

But the long-term trend was a more significant threat to Telstra's profitability than the government's proposed broadband network, according to Perennial Growth partner Richard Macdougall.

And institutional investors could expect Telstra's share price to weaken further if it does not make a deal with NBN Co, because it adds even more uncertainty to the telecommunication giant's future.

The government has threatened to forcibly split Telstra's retail network, divest its interest in Foxtel and deny it wireless spectrum if it does not migrate its fixed-line traffic to the national broadband network.

Mr Guerra noted that a deal between the government was nearing and this probably would boost Telstra's share price.

Meanwhile, the Federal Court in Melbourne will hear a case this morning between Telstra and the ACCC on alleged breaches of the Trade Practices Act and Telecommunications Act. The regulator alleges Telstra denied its competitors access to seven key metropolitan exchanges to connect equipment to the copper wires running to customers' homes. The ACCC believes Telstra could have found capacity on its system for phone and broadband services.