As a mobile-heavy company, Optus needs to perform well in the mobile market.  Over the last twelve months, it has accomplished some crucial goals. Optus' aggressive marketing of the iPhone appears to be paying off, with subscribers up 8.6 percent and mobile ARPU increasing by nearly 2 percent. In contrast, Telstra is treading water, with its retail mobile subscribers increasing by just 3.6 percent, pummeled by flat ARPU. Optus however cannot afford to rest on its laurels.

Telstra can no longer continue to lose market share to its rivals, and is gearing up to unveil more aggressive mobile tariffs to win back lost market share from its mobile rivals, including Optus. It is also being aggressive in fixed broadband, putting downward pressure on prices. That means that its costs must fall in order to support margins and cashflow.  There is no single cost measure that will achieve this, and Telstra plans to implement a raft of initiatives to squeeze savings out of its business. We expect more cost savings announcements in the next few months. In short, we can expect to see a leaner, meaner Telstra emerge over the next 12 months.  This is a smart strategic decision for Telstra which is battling to balance shrinking PSTN revenues and lost mobile market share.

But even assuming that these cost measures are all successful, Telstra's margin performance will depend on how successfully Telstra can differentiate itself through better customer experience and improved customer service.  If it can invest wisely and differentiate itself, it will be able to grow market share without too much pressure on prices and revenue.  If it fails, a price war and margin declines across the industry may result.