people, swiftel and crazy john!!!

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    Telstra's art of wine and dine
    By Michael Sainsbury
    June 30, 2004

    IF you were one of the lucky 200 or so who attended the Collingwood function in the Legends Room at the former Olympic Stadium on Saturday night – before the Magpies season was all but terminated by the Sydney Swans – you may have noticed an odd sight.

    Sitting on one of the clutch of Telstra-sponsored tables was Brendan Flieter, managing director of Telstra's biggest third-party mobile phone retailer, Crazy John's.

    Not so odd, you might think. Until you realise that this Friday, the Federal Court will hear a 35-page statement of claim brought by Crazy John's and chock full of allegations – denied by Telstra – about breaches of contract and the Trade Practices Act by the big carrier.

    Crazy John's, which only last October won Telstra's mobile dealer of the year award, is seeking tens of million of dollars in compensation.

    But the company holds a much bigger threat over Telstra's head than the court case alone.

    In its databases are the details and customer information for between 350,000 and 400,000 of Telstra's most valuable mobile customers – about 10 per cent of the telco's 4 million-strong GSM contract customer base.

    The implicit threat in the Crazy John's court case is the very real possibility that the company may try to take a large chunk of that customer base elsewhere – to a Telstra competitor or to a new venture under a Crazy John's branded mobile service.

    Such a move has the potential to blow a significant hole in Telstra's mobile business and its bottom line.

    And manoeuvrings in the Australian telecoms market in the past month – particularly the merger of Swiftel and the ambitious People Telecom, which has close ties to Crazy John's – have only escalated that threat.

    Observers at Telstra Stadium on Saturday night say Flieter chatted at length to Murray Bergin, Georgia Lee and Christine Holgate, senior lieutenants in the team of Telstra business and government chief David Thodey.

    Aside from the looming court case, there's good reason Telstra may have been feting Flieter. Yesterday, he quietly became the biggest shareholder in Australia's newest listed telecommunications company, People Telecom.

    People Telecom also got a new chairman, former Hudson Conway director Barry Fitzgerald. Fitzgerald is also the chairman of Crazy John's.

    John Ilhan, the Turkish-born entrepreneur who founded and still owns 100 per cent of Crazy John's, brought Fitzgerald on board for a float towards the end of the technology boom. The float was aborted, but Fitzgerald stayed.

    Neither Ilhan nor Crazy John's have any financial connection to People Telecom. But the presence on the People board of the chairman and chief executive of Crazy John's could prove unsettling for Telstra.

    People was founded with great hoo-hah in August 2000. The brains behind the business were Colin Marland and Ryan O'Hare, who had successfully sold their mobile phone retailer CorpTel to AAPT for $30 million.

    Second time around, the duo attracted a clutch of big names to add lustre to their enterprise -- former Liberal Party chairman and now Fairfax director Ron Walker, Qantas chairman Margaret Jackson, Village Roadshow, Uecomm, and Fitzgerald. All wanted to hitch a ride on the seemingly unstoppable telecommunications gravy-train.

    But it was way too late and stop it soon did, with a gut-wrenching lurch. Most of the investors in People wanted out.

    But not Fitzgerald. He brought in Flieter, who he met through Crazy John's, and they bought out the rest of the investors, except O'Hare and Marland.

    Flieter would not talk about the looming Telstra court case but said: "Barry and I thought that People Telecom represented a real opportunity. I saw it had tremendous growth potential."

    Earlier this year, O'Hare decided to merge with Perth-based service provider Swiftel. Shareholders agreed to what is effectively a backdoor listing on June 15 and the new structure was formally put in place yesterday. Between them, O'Hare, Marland, Flieter and Fitzgerald control about 66 per cent of the company.

    People Telecom's sales for 2002-03 were $42 million, with a slim profit of $150,000. O'Hare, chief executive, has promised $60 million this year – with a bigger profit – and is aiming for $110 million next year.

    The prospectus for a recent capital raising reveals heady ambitions: "The merger allows People Telecom to expand from its traditional small and medium enterprise market into the corporate markets with high-end data services and the consumer market with broadband (ADSL) and voice over the internet services."

    So what does this have to do with Crazy John's and Telstra? Potentially, plenty.

    First, back to this week's court case. Whatever the merits of Crazy John's claims, its relationship with Telstra is clearly fundamentally damaged.

    Telstra has already paid off the company once – a cheque as big as $30 million after similar legal threats in February 2002. This is bound to have left a bitter taste in the mouths of the two men who signed it, Telstra chief Ziggy Switkowski and then finance chief David Moffatt.

    All this comes in a rapidly changing mobile environment. Third-generation services are proving a competitive catalyst and in Europe over the past two years a new trend has emerged: the so-called mobile virtual network operator, or MVNO is starting to make real waves after more than half a decade of false starts.

    An MVNO buys wholesale air time from a mobile network and sells it to its customers using its own brand.

    In Australia, the strength of such a proposition can be seen in the reborn Virgin Mobile, which now accounts for one on every four new connections to the Optus network, a percentage that is growing. Vodafone has a similar deal, with Macquarie Corporate Telecommunications using its network.

    Crucially for Telstra, People Telecom already has a wholesale deal with a mobile phone network operator. And it's not with Telstra but Optus.

    The concern for Telstra is that the increasing links between People Telecom and Crazy John's – coupled with the deteriorating relationship between Telstra and Crazy John's – could see Crazy John's Telstra customer base shift to Optus or another mobile competitor such as Hutchison.

    Any move by Crazy John's – either by way of a friendly People Telecom alliance or merger – could punch a revenue hole of about $250 million in Telstra's profit and loss. It could hit Telstra's profit line by more than $125 million and further slow down its mobile growth.

    It's no wonder Flieter was being wined, and dined, by Telstra.
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