Derailed acquisition poses problems for Telstra

Eisa's successful rival bid for OzEmail leaves it virtually neck-and-neck with Telstra in terms of residential Internet subscribers.

Instead of an 800,000-customer behemoth dwarfing all comers, Telstra will now level peg with eisa/OzEmail at around 400,000 subscribers each.

"It is fantastic for those who want to see competition," says telecomms consulant Paul Budde. That presumably includes the ACCC (Australian Competition and Consumer Commission) which had "significant concerns" with Telstra's bid for OzEmail. The two sides met repeatedly in the past two weeks and Telstra was becoming "more and more optimistic" as the talks went on, according to a Telstra spokesperson.

She said Telstra was "disappointed" at being out of the running for OzEmail.

With OzEmail removed from play, Telstra's alternative plans for growing its Internet base have yet to be revealed.

"This creates a huge problem for Telstra...it hasn't got anything that could really boost its market share," says Budde.

"Its next step might be to get into the high speed Internet access market but it has been pushed into a corner because it won't have ADSL ready before the end of this year.

"And it has a totally out-of-date cable modem service that needs a substantial overhaul."

Budde is among those critical of Telstra for neglecting its core telecomms infrastructure business while pursuing Internet content deals.

"Its Internet strategy seems to consists of a number of scattered activities rather than a central vision."

To replace its quick-hit strategy for building massive residential market share by buying its largest rival, Telstra could still achieve the same goal by acquiring a number of small competitors.

However it doesn't appear to rank high on Telstra's list of options at the moment. Telstra's confidence it could swing the ACCC around to its views on the acquisition was "very naive," said Budde.

"Its belief that the ACCC could acept this deal is a clear indicator they haven't got a clue what is happening in this market.

"They've spent double the advertising dollars and have only got a 25 per cent residential market share. They are a fantastic wholesale company and have 70 per cent of that market but they don't know enough about consumer marketing."

Still to be tested is whether eisa can ramp up fast enough to digest the huge numbers of new subscriibers it will now service.

Budde believes it stands a good chance of doing so and perhaps passing Telstra to gain an outright market lead. "Eisa is an aggressive company and UUnet will offer good backbone technology so there will be joint benefits between them."

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