Telstra considers capping smartphone downloads as customer bad debts soar 44%

Telstra is struggling to manage $364 million of bad debts, with more smartphone users suffering “bill shock”, refusing to pay as they rack up huge amounts of data and voice usage.

The move has prompted the company to consider a number of options to stop those bad debts from occurring, including switching off mobile broadband services when caps are breached.

While offending users might not like the idea, consumer group the Australian Communications Consumer Action Network says such a move will finally educate users about data caps and how to actually use them.

Telstra chief financial officer John Stanhope said yesterday the company has about $364 million in bad debts for the 2009-10 year, a 44% increase from the previous year.

He says up to $90 million of that has been “self-inflicted” by users who do not understand their contractual obligations and have refused to pay up.

“We have had an increase in bad debt as customers’ expectation of what they purchase and what they get isn’t quite right,” Telstra chief David Thodey said yesterday at the results presentation.

“We have seen some bill shock through larger wireless data costs, and people say, ‘hey, what’s going on here?’ So there’s a lot of work to do in that area.”

But it’s a problem that needs to be fixed sooner rather than later, because Telstra is placing a huge emphasis on its smartphone products. Yesterday’s financial results showed a 7.4% drop in revenue from fixed-line telephone services, and a 7.1% growth in wireless services in the second half of the year.

The emphasis on mobile services is especially important considering the company lost 19,000 fixed-line broadband customers during the year, and fixed-line internet revenue dropped 0.7%.

But Ovum research director David Kennedy says Telstra’s mobile services division hasn’t delivered the same amount of revenue growth compared to other telcos like Optus, and changing strategies to focus on mobile products is hard because of the company’s relatively high costs.

“Because Telstra’s got the biggest fixed base, it’s the most vulnerable to these fixed-to-mobile substitution. What this means is that in order to avoid losing too much revenue, it needs to capture the lion’s share of any fixed loss.”

“The sharemarket’s reaction to the situation yesterday, it’s now recognised that this is going to be an industry where there is going to be a lot of price competition, and that of course is going to squeeze margins.”

Telstra shares lost over 9.5% yesterday after the company’s financials were announced. This morning shares were down 2% to $2.80, an all-time low.

But the problem of bad debts still remains. Stanhope says the company needs to do more to educate users about what they can do to stop bill-shock from occurring.

“We call it a ‘self-inflicted’ bad debt, but then there are other things like excess usage charges and so on that occur and sometimes they can end up in dispute,” he told reporters yesterday.

“That is part of the $364 million and has been mostly in our consumer area. The rest is the normal delinquency of debt.”

“What I mean by that is that… The customer may be described a plan and when they get the first bill it is hard to understand or it doesn’t match the plan they thought they were going to get as described by somebody at the front of our house, or our agents… Then, a dispute occurs with the bill.”

He even suggested a method whereby Telstra would actually shut down the internet services of those mobile users who go over their download limits.

While this has been reported today as a key part of Telstra’s new bad debt’s strategy, a company spokesperson has told SmartCompany that the measure is only an option.

“We appreciate this is an issue, we have a number of initiatives in place, our CEO David Thodey mentioned another one we’re looking at is to introduce a cap.”

The spokespersons says only 17% of those bad debts occurred during the second half the year, with the majority occurring in the first half as users become more accustomed to their plan limits.

But Elissa Freeman, director policy at the Australian Communications Consumer Action Network, says Telstra should implement the “app cap” immediately.

“This is the sort of reform that customers have been crying out for, for years. Bill shock isn’t new, but the advent of smartphones has created a new wave of bill shock, not just for industry, but they have a detrimental impact on customers. We’d like to see real caps, but customers in controls of bills.”

Freeman says users should be able to not only have the internet services cut off once they breach a cap, but be able to set a cap themselves for both voice and data usage. “The power needs to be with the customer to make a decision for a bill.”

While Freeman says there is an argument to be had that users should just watch out for what they’re doing, she points out the telcos’ tools to monitor data usage isn’t always accurate.

“These so-called real-time tools are sub-standard. We have cases studies where these tools are two days behind, and people are gaining huge debt because of it. We want to see more accurate real-time tools.”

However, Telstra insists it’s working on the problem. Thodey said the company is working on a simplification program designed to break down a user’s bill and show them exactly where they have spent their money, while a simplification program is also designed to put all users on a single billing system.

“The IT transformation has taken longer and hasn’t delivered quite as quickly as we would have liked,” Thodey said yesterday. “We still have more work to do there.”