Telstra's new game plan

It is now very obvious that Telstra has regained its competitive instincts. Not surprisingly, the competitors that were tearing chunks from its customer base aren't pleased.

There have been two developments in the past few days that indicate that Telstra is now very serious about halting the erosion of its market share in key segments. One was the weekend announcement of a slashing of its fixed line broadband prices and the other was the release – alongside its competitors – of the pricing for its iPhone 4 capped plans.

The halving of the cost of its top end fixed line broadband offer and a 25 per cent cut to its entry level product has particularly infuriated its smaller competitors, who have run to the Australian Competition and Consumer Commission accusing Telstra of undertaking a price squeeze, with retailer prices that are below its wholesale offering.

Telstra has responded by saying that competitors can get line sharing or unconditioned local loop access for as little as $2.50 a month if they install their own infrastructure in its exchanges – presumably a process made rather easier by today's $18.55 million fine for denying competitors access to exchanges where there was room for their equipment.

After being blind-sided by the extraordinary take-up of the original iPhone in 2008, which gifted a more consumer-savvy Optus significant market share and momentum, Telstra was not going to be caught out again.

While its plans offer less value than Optus or the Vodafone/3 plans – primarily because they have significantly smaller data allowances – they are competitive, given the superior quality of Telstra's Next G network.

Both developments confirm what has become steadily apparent as this year has progressed. With most of the technology issues that frustrated Telstra's ability to respond quickly to developments in the market now behind it, David Thodey is steadily shifting the group's stance to one where it doesn't necessarily compete on price but is far more price-competitive.

There is both opportunity and necessity behind that shift.

The necessity relates to the continuing and accelerating erosion of its customer and revenue bases on its copper network and the extent of the incursions smaller internet service providers have made into its fixed line broadband share with their very low cost offerings.

In wireless, the release of the iPhone 4 coincides with the expiry of the 24-month plans up to four million customers entered into when the iPhone 3 was first launched. There are a lot of customers up for grabs and Telstra needs to get more than its existing share if it is to reverse last year's decline in its wireless customer base.

With the advent of the NBN, of course, wireless, where it controls its own infrastructure, will become an even more critical part of the Telstra portfolio.

More broadly, while the fate of the national broadband network might rest on the outcome of the federal election, having agreed to a deal in principle that would see Telstra progressively exit fixed line telecommunications, migrating its customers to the NBN in the process, Telstra needs and wants to build its retailing capabilities and customer bases.

Indeed the $11 billion deal with NBN Co provides it with a major incentive to maximise its fixed line customer base, even if it sacrifices margin today, because it will get paid by NBN Co for every customer it hands over. That component of the deal is broadly estimated to be worth about $4 billion in net present value terms, which is more than sufficient to galvanise Telstra into doing whatever it takes to maintain or grow its fixed-line business.

That incentive isn't necessarily helpful to the initial phases of the NBN's roll-out – it will condition customers to lower broadband prices while inflating the cost of acquiring those customers from Telstra – and will clearly have implications for the smaller ISPs that have profited from Telstra's lack of price competitiveness in the past.