Optus making up lost ground on the 3G battlefield

Not "challenger", not "value", not even "Singapore" (much to the disappointment of Telstra chief promoter Phil Burgess), but "Telstra".

So what causes so many people hearing the name of the No.2 telco to think instinctively of the No.1?

Perhaps it has something to do with five of the major speeches and interviews given by Optus chief executive Paul O'Sullivan in the past year. Instead of focusing on what Optus was doing to close the gap on Telstra, O'Sullivan lingered on what Telstra had done to his company, and how Telstra was sabotaging the industry - and that a government-enforced separation of the telco was the only solution.

The perception of Optus being preoccupied with Telstra is a shame, because the Singapore Telecommunications-owned company has made important strides in the past year to peg back Telstra in market share and profitability that were much more consequential than the anti-Telstra tirades.

O'Sullivan enthusiastically spruiks some of those new strides, including an expanding 3G network and unlimited call plans for mobiles, but staunchly denies that he talks about Telstra too much.

"I think we're in an environment that it's inevitable that a company that is so large and so public and has been so aggressive is something that people want us to talk about and want us to comment on," he says.

Telstra and Optus are clearly the biggest players in the sector, but both face similar problems - Telstra to replace dwindling revenue from its fixed-line telephone network, and Optus having to cope with lower margins and increased competition for its crucial mobiles division.

A Telstra masterstroke was its risky decision in late 2005 to build a 3G network to 98% of the population capable of both voice calling and broadband, on a frequency - 850 megahertz - barely used anywhere else. It allowed Telstra to vault ahead of 3G pioneer 3 Mobile and corner the wireless broadband market.

All the while, Optus maintained its insistence that the masses did not yet want 3G, and that it would not promote 3G until handsets got cheaper.

Telstra's head start allowed it to lift its 3G penetration dramatically in just two years. Of its 9million-plus customers, 46.6% are using the faster technology, up from under 4% in June 2006.

What made that important is that Telstra's 3G customers spend an average of $73.74 a month compared to $29.22 for 2G.

While Optus subsequently announced an expanded 3G network to rival Telstra's - using the rival 900MHz frequency - the Irish-born Australian insists holding back was not a blunder.

"I don't think it's as easy as saying, 'Why didn't we copy?'," O'Sullivan says. "At the time the investment was being made by our competitor most industry analysts - particularly in Europe - were writing as to whether 3G would be a bust, (and) 'What are people going to use 3G for?'."

Once Optus realised the theory was wrong, it sought to make up lost ground by undercutting wireless broadband prices and extending generous capped plans - and heavily subsidised handsets - to its 3G network.

And it is belatedly working - in the year to June, Optus' 3G base soared 174% to 1.87million, or 26% of its 7.24million mobile customers.

Optus is still just over 2 million mobile customers shy of No.1, but O'Sullivan insists it can eventually overtake Telstra.

"This is a war. Anybody who thinks it's a walk in the park is kidding themselves," he says. "It's not about nice product launches, it's not about having sexy technology - it's a war."

The war will be made easier once Optus completes its rural 3G network by the end of next year.

In the meantime the company hopes to increase sales momentum with its Timeless untimed capped plans and Wireless fusion package, which allow anyone to make unlimited fixed-line calls from a home phone, with internet access thrown in.

One hurdle is Optus' reliance on lower-spending prepaid customers who, according to results last week, spent an average $24 a month, compared to $70 for postpaid customers.

What makes that pricing gap more significant is that these prepaid customers make up 56.4% of all its customers (compared to 34.8% for Telstra) - all of whom can switch telcos at any time because they are not contracted.

The emerging sector battleground, broadband, is good and bad for Optus - good because its focus on installing its own broadband equipment in Telstra exchanges is proving much more lucrative than traditional wholesale internet services, bad because the No.1, Telstra's BigPond, keeps extending its retail market share - to an extraordinary 49%, as of June 30.

In the year since Optus refused to serve telephone and broadband customers unless they lived within reach of Optus equipment, its fixed-line revenue fell 9.6% to $363 million. The sweetener was that its earnings margin increased from 9% to 17%, allowing Optus to lift fixed-line earnings 72.4% to $60 million - and despite the 9.6% revenue slump.

Those results are indicative of why Optus and the telcos below them are so edgy about their broadband equipment being bypassed by a national broadband network.

The only thing O'Sullivan will predict about the telco sector is change, that "business models in this industry are probably going to go through two or three somersaults between now and the next five years".

Whatever happens, he points to Optus' recent performance, amid the takeover of PowerTel and collapse of Commander Communications as the reason he is so confident.

"You look at the top end of the industry, our competitor, three times our size, is reporting profits $1billion a year lower than when they (Telstra's executives) started."

"I take a certain amount of pleasure that in the middle of all of that we've been to sail through the storm."