Telstra charts the future of yellow door stoppers

When the decline began it was incremental for maybe five years. Telstra was desperate to dam the flow and went to great lengths to make the fixed line phone service more attractive - using pricing and adding lots of services like bundling with internet and mobiles.

But a few years back the tide was too strong and the use of fixed-line phone revenue started to cascade.

Telstra has now reached a proposed agreement to sell its copper network infrastructure for $11 billion to NBN Co - thus abandoning the wholesale market completely.

The information technology revolution stormed ahead, leaving the old copper network behind.

In the 2010 financial year another of Telstra's businesses - Sensis - known better as the Yellow and White Pages or directories business, showed all the signs of going the same way as the copper network.

Like the copper network, Sensis' main business, the Yellow Pages print directory, is a monopoly with fat profit margins but is now finding itself challenged by technology.

Revenue and profits are falling because the new digital world is allowing online competitors into this space. In the cyber world Telstra's printed and online product butts up against other online providers. In the end fewer people read the printed version and they are less prepared to pay for advertising in it.

Telstra's response is to attempt to plug up the leaks by offering its service as a bundle and offering a more sophisticated product, using partners like Google, Yahoo and Bingle to deliver a listing on new devices like smart phones and iPads. Social media like Facebook and Twitter will also become part of the Sensis arsenal. They call this the multi-platform approach.

All these bells and whistles might not increase customer spending on directories advertising but the plan is to retain them and even attract some additional users.

The customers (essentially small to medium business advertisers) should, in theory, get features like click throughs to their websites, google maps to show their business locations and better online placement in broader internet searches.

It sounds great, in theory. But even if the execution is textbook perfect there is no guarantee that the monopoly part of this directory business, the printed Yellow Pages, will survive over time.

It could be akin to the horse and buggy company offering a car service as well - when its competitors are offering only cars.

Telstra is not alone in its structural dilemma. Most media companies around the world are suffering the same problems.

Newspapers are struggling to compete with cheap online content and discounted online ad rates. Most have migrated a part of their offering to the internet and are using other means of distribution like reading tablets and smart phones. But margins continue to erode. In the medium term, newspapers have used the cost lever in an attempt to curb the erosion of profits.

Sensis is doing the same, but it didn't provide much detail about how this will be done.

What the company did say yesterday is that for the next couple of years revenue and earnings from this business will continue to decline.

Shareholders will need to take a leap of faith that beyond this point Telstra is correct in its expectations that the tide will turn and the Sensis business will improve revenue and earnings.

It is fair to assume that the Yellow Pages product offer will improve and may appeal to the small business that does not have the time or the expertise to navigate and measure in the multi-channel directories world.

But the often cash-constrained small business is always looking for ways to reduce their own costs. Sensis is offering a better service rather than a better price.

The market will probably want to see some runs on the board before it is convinced this strategy will be enough to revive the business.

But in the words of the Sensis chief executive, Bruce Akhurst, "Reports of our death are exaggerated".

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Investment bank UBS yesterday played host to the travelling Premier Investments caravan, featuring chairman Solomon Lew and his newest recruit, former David Jones chief executive Mark McInnes.

The trip to Sydney involved Lew taking meetings with a number of institutional shareholders and McInnes joining for an introductory lunch.

Reports suggested that McInnes had little to say about the inner workings and strategy for Premier's main asset, Just Group.

This is hardly surprising given he has only been on board for a week and has yet to become intimately acquainted with the issues facing some of its underperforming brands.

A big focus of attention during the Lew meetings with shareholders appeared to be Premier's potential acquisitions. He has made no secret of the fact that he will be using the soft retail market to pick up any injured assets for a bargain price.

In an interview last Friday with the Herald he noted that "the gun is loaded".

The targets most often mooted include the ailing Colorado Group (although the smart money predicts Lew would rather pick up the good parts from receivers), Pacific Brands and Witchery, which Sol's son Peter sold to Gresham Private Equity some years ago.