In a bid to curb an exodus of customers to Optus and Vodafone, Telstra last week announced that it would be reducing by $100 the cost of iPhone handsets until Christmas. The move comes as customers flee Telstra’s expensive data and voice plans, in favour of the relatively generous bundles offered by competitors.

The declaration came days after Telstra CEO David Thodey announced a reshuffle of management in which long-time consumer managing director David Moffat (who was previously a CEO candidate) and product management director Holly Kramer resigned from their roles.

However, even the carrot of a $100 voucher does little to correct the fact that Telstra’s phone places are substantially more expensive than Optus’ and Vodafone’s. For example, Telstra offers the iPhone 3GS on an $80 per month plan with a $49 up-front fee. Under this plan, customers receive 150MB of data each month and a miserly $70 per month of included calls and texts (which are charged at usually 25¢ each). By contrast, Optus $79 cap gives users 1GB of data and $1250 worth of calls, as well as unlimited SMSs.

If a user opts for a $100 plan on Telstra, they receive $90 of included calls and SMS and only 150MB of data (to obtain 1GB of data, Telstra users need to pay an additional $59 per month). By contrast, Optus’ $99 plan gives unlimited mobile and landline calls and SMSs and 1.5GB of data for only an additional $15 per month. For a heavy user, Telstra’s costs would be more than double (and in many cases, triple) that of an Optus user.

Even worse, Telstra’s much vaunted 3G data network (which was lauded by former CEO Sol Trujillo as being world leading) has sagged under the weight of increased data use. We tested an iPhone using the Telstra network, comparing it to an iPhone running on Vodafone’s network (in the Melbourne CBD). Remarkably, the Vodafone network loaded web pages quicker than the Telstra network. It appears that Telstra’s world-beating 3G network can’t even beat its local, budget competitors.

Smartphones, and especially the iPhone, have been major profit generators for phone companies. The Financial Review noted that Vodafone CEO Vittorio Colao claimed the iPhone had “a massive impact on the UK market and regretted that Vodafone’s struggling business there had not been able to offer the phone because of an exclusive deal between Apple and … O2.” In November, SingTel Optus reported that the iPhone had spurred strong growth in mobile revenues, which rose 16.2% to $2.72 billion. Optus noted that “post-paid customers grew due to strong demand for iPhones”.

By contrast, Telstra has been selling iPhones but foolishly priced its plans at a substantial premium to Optus and Vodafone, resulting in substantial market share gained by its rivals in the high-spending smart-phone sector. Telstra reported growth in mobile revenues of only 8.7% for year ending June 30, 2009 — about half the growth rate reported by Optus.

It continues to mystify that Telstra’s hundreds of highly paid executives and millions of dollars in marketing and research budgets were unable to realise the extent of demand elasticity and sophistication of consumers. While it is possible that the high pricing may well be a throwback to the Trujillo regime of arrogance and disregard for consumers and regulators, the fix has been too little, too late. And while Thodey appears to be correcting some of the errors committed by his predecessor, including abandoning many of Trujillo’s overly-ambitious growth forecasts, it appears that he has a long way to go.

Peter Fray

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