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Telstra launches low-cost internet carrier

Telstra Corporation (ASX: TLS) is reported to have launched a new cheap broadband service called ‘Belong’, to compete with other low-cost internet providers.

TMwatch.net has reported that the Belong website went live on October 18, and describes itself as “Simple ADSL2+ broadband with no lock-in contracts.” Belong is a standalone fixed broadband service provider, offering just two plans currently ranging from $50 per month with 70 Gb of data to $65 a month with 250Gb of data. The company says that customers can use their existing phone lines and that all services will be on the Telstra network.

The giant Telco has moved to setup its own low cost provider after the Australian Competition and Consumer Commission (ACCC) knocked back Telstra’s bid for South Australian internet provider Adam Internet. Telstra wanted to turn Adam into its lower cost brand to compete against the likes of iiNet (ASX: IIN), TPG Telecom (ASX: TPM) as well as Dodo and iPrimus –brands owned by M2 Telecommunications (ASX: MTU). iiNet eventually ended up buying Adam Internet.

Creating a different brand is essential, so Telstra wouldn’t cannibalise its existing premium BigPond broadband service. It’s a common occurrence in other industries, including airlines, with Qantas Airways (ASX: QAN) owning low-cost carrier Jetstar, and Virgin Australia holding a substantial stake in Tiger Airways.

ACCC chairman Rod Sims voiced his concerns when Telstra said it would look to setup its own cheap carrier if the ACCC knocked the deal back. Mr Sims said at the time that any broadband offering from Telstra would face significant scrutiny. While he said the ACCC could not prevent Telstra from launching new brands, both the government and the regulator would change laws if required, to make sure any spin-off would not get special treatment.

Foolish takeaway

The ACCC has said it would allow Telstra to spin-off a cheaper brand, on the condition that it was treated like any other retailer, with no special access to pricing or repair services. As long as Telstra abides by the ACCC concerns, this could be a good move by the company and a driver of growth in future years.

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Motley Fool writer/analyst Mike King owns shares in Telstra, TPG Telecom and M2 Telecommunications.

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