Here’s what moved the Google stock price 10% this week. And why it could cut 10% off the value of Telstra – published Australian Financial Review 28/1/2015

The Google stock price jumped 10% in early January, on well-sourced reports (now confirmed) that the company is partnering with the two US mobile phone companies to offer what’s known as a mobile virtual network. This is very bad news for Telstra’s largest cash cow, the mobile business, which accounts for 40% of the company’s value. But calling it news is an overstatement – Telstra has been aware of this emerging threat for some time. Its problem is that it can’t do much about it.

Telstra’s problem is that it can’t do much about it.

First, the background. Telephony customers are pretty much across Skype, What’sApp, Viber, WeChat and a host of other over-the-top phone services, which effectively convert expensive overseas and mobile calls into virtually free calls.

All of these operate using the same core principle, which is turning a voice call over one carrier (Telstra fixed, Optus mobile) into a voice-over-internet-protocol (VOIP) call, essentially a “data” call, on another. Turning a voice call into a data call dramatically lowers its cost, and it’s this price differential that Skype and a number of others in the US currently exploit, and Google is seeking to exploit.

(There is more than one process to convert a voice call into data. In some cases, the handset will use the data allowance on the mobile phone. In others, it will jump onto the wi-fi network – a highly disruptive, Australian invention, for which the CSIRO has already received $430m in royalties.)

How much cheaper is a data call?

How much cheaper is a data call? The spin-meisters in the phone companies will argue, but its anywhere between a half and a 90% reduction in the regular mobile bill. Put simply, using the monthly 2GB data allowance on many mobile phone plans would give you about 24 hours of phone calls – for me that’s around 4 months of actual talk time, and the “mobile” portion of the bill, which is most of it, would be redundant . Using the wi-fi network cuts the cost even further. Hence Google’s interest. (The calculation is one minute of talk time uses .75 of a megabyte of data, so one hour on the mobile is around 4.5% of a gigabyte of data, or 45 megabytes).

It isn’t just the companies already mentioned that are climbing into the data call business. Comcast, which is America’s largest and one of its most valuable cable tv companies, is rolling it out as well.

Its bundle was always voice + video + data, together considered the triple-play. This triple-play worked since it crammed all of these services into the one wire (whether copper, co-axial cable or fibre).

Triple-play cable companies (there are a heap of them) traditionally didn’t try to compete in mobile because doing so would have meant a separate, new, expensive network rollout of cellular towers and spectrum. But Comcast last year announced that it was rolling out this technology too, enabling it to offer virtually significant voice as data coverage for mobile phones for its 22 million subscribers. This will complete its royal flush in communications, since the only thing it was missing was cellular, turning the triple play into four-play. Very, very valuable.

US mobile investors are also taking this seriously.

US mobile investors are also taking this seriously – they sold down two competitors to Google –  Verizon and AT&T – in the past few days, at the same time rebooting the Google stock price to almost US$550, and bidding up some of Google’s US-listed helpers in this venture.

All of this is of paramount importance to Telstra. Changes to the regulatory model and the roll-out of the NBN mean that the company lost functional exclusivity of its landline voice and internet business years ago. What this means is that revenues from these businesses have been falling for a few years, and the multiple has been declining, leaving it with just one meaningful and growing contributor – mobile. In the year just passed, Telstra’s juicy mobile business contributed 40% of the company’s $25b in revenue. In valuation terms it’s the same.

This mobile business has the largest multiple of any of Telstra’s significant operating divisions, at 7x EBITDA of $4b expected in 2015. The point is that any revenue weakness in mobile (it stands at $9.7b now) will puncture that multiple, and earnings, with a very sharp bang. Taking just 5% of the revenue of the mobile business away would cut TLS shareprice by a least that much – and double if the multiple started to contract.

Remember the “Google, Schmoogle” comment?

The last time Telstra told its shareholders to ignore a technology threat was before the hole in its Yellow Pages/Sensis directory business was exposed. At the time, the CEO (David Thodey’s predecessor) rubbished its competitor with the now infamous “Google, Schmoogle” comment. This same Yellow Pages/Sensis was sold last year for $454m to a private equity firm – a reduction in value of 90%, or $9.5b, in ten years.

As noted, Telstra is taking this seriously. So seriously, in fact, that it is offering VOIP as a product on its rival network, the NBN. We know this because on the Telstra support community, the following gem is posted. “If you’re a Telstra customer on the NBN you can now turn your iPad or Android tablet into a home phone with the T-Voice app (NBN only)! The app is free to download and can be used to make and receive calls using your fixed voice service on the NBN… etc.” Just don’t try to buy it on the Telstra network – it is wisely exluded, since that would cannibalise Telstra’s own revenue and pricing. And bring on the cut in value the company so fears.