Telstra's double-barrelled deals push

Telstra’s deals with Adam Internet and Boost Mobile are closely related as the telco finally gets serious about developing viable low-cost sub-brands.

Telstra’s has signed off on two deals this week and while the acquisition of Adam Internet that has garnered plenty of attention, the telco’s decision to come to the aid of pre-paid operator Boost Mobile also sheds some new light on Telstra’s strategy. 

The fact that Adam Internet has been snapped up shouldn’t come as a surprise to the market given that the South Australian internet service provider (ISP) has been seen as a target for quite some time. The inception of the NBN has seen the likes of iiNet pursue scale through acquisition and Telstra has now evidently decided that it doesn’t want to be left out. But why Adam Internet and what will the ACCC have to say about it?

Adam is a fairly small operator with a faithful band of customers in South Australia, so this is a pretty small fry for Telstra with regards to the scalability equation and doesn’t really make a lot of sense as a pure scale play. 

Telstra’s real interest seemingly lies in Adam Co’s low cost online customer service model and Ovum analyst David Kennedy reckons that Telstra is spending the money to pick up expertise. The continued involvement of Adam Co’s founder Greg Hicks as a consultant certainly suggests that. Hicks and Internode’s Simon Hackett have been two stalwarts in the Australian ISP space.

Now perhaps a player like Optus should have also been in the mix here and it’s fair to assume that iiNet had at some point had a chat with Hicks. So I suspect that Telstra has put a reasonably enticing offer in front Hicks. The reported figure doing the rounds is somewhere between $50 million to $60 million but the number is really of no consequence to Telstra. 

Interestingly, the takeover has already sparked a characteristically cheeky response from iiNet-owned Internode’s Hackett, who sas not only labelled the sale “a pretty substantial shift in the orientation of Adam” but also used the opportunity to poach those Adam's customers,  reluctant to acquiesce to Telstra’ yoke.

Boosting presence in the pre-paid space

Meanwhile, Telstra wasted little time in making the most of Optus’ decision to cut ties with prepaid carrier Boost Mobile. Telstra will take over the license at the end of January 2013 allowing Boost to market its mobile branded products on the Telstra Next G network.

The Boost agreement might not be as grandstand as the Adam Co one but it does follow a very similar dynamic. According to Ovum’s Kennedy, the two deals are related and Telstra is finally showing signs of getting serious about developing low-cost sub-brands.

“There’s been a lot of talk in the past about Telstra needing a ‘Jetstar’ to address the price sensitive segments of the market,” Kennedy says.

That’s certainly the chatter coming out of Telstra and truth be told the telco hasn’t really had too many reasons to consider such a move until now. The travails of Vodafone Australia sent many customers into the arms of Telstra but with that situation stabilising Telstra is seemingly keen to make its presence felt in areas that it has traditionally neglected.

Telstra has always done poorly in the mobile pre-paid market and it is probably better off making a wholesale play in the market joining forces with an experienced outfit like Boost. So both moves bring plenty of valuable talent on to Telstra's roster 

“Both of these moves would indicate that Telstra is keen to take a more segmented approach.” Kennedy says.

The one potential hitch for the Adam Internet sale could come from the ACCC. However, there is every chance that the South Australian ISP might not be big enough, when it comes to scale, to ring too many alarm bells for the competition regulator.

The other positive for Telstra is that it will essentially put forward two offerings to the market, which it will point out as a positive competition outcome to the ACCC. 

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