Telstra debacle forces Fone Zone to diversify

Mobile reseller Fone Zone's recent AU$30 million move on Apple specialty chain Next Byte was spurred on by Telstra's decision to launch its Next G network early, the company revealed.

The reseller forked out AU$21 million in cash plus 16.1 million shares to purchase Next Byte, Australia's largest specialty chain for Apple products and accessories.

The acquisition, valued at over AU$30 million on paper, will see the mobile phone reseller diversify into the provision of Apple's computing products.

Next Byte operates 17 retailers around the country -- seven in New South Wales, three in Victoria, two each in Queensland, South Australia and Western Australia and one in Hobart.

Fone Zone chief executive officer David McMahon told ZDNet Australia Fone Zone has been looking to "diversify its options" after being burnt by its major supplier, Telstra.

Telstra surprised its retail partner when it announced its Next G network earlier than expected.

"We were told it would be released in March 2007," McMahon said. "Then they surprised us by releasing in October 2006, with only four or five handsets. It was a major change in our sales mix to higher volumes and lower profit margin. It was not very positive from a short-term perspective."

The Telstra debacle forced Fone Zone into announcing a profit downgrade in December 2006.

McMahon said Fone Zone identified the Apple range of products as an opportunity to "broaden our earnings base and the profitability of the business".

Fone Zone discussed working with existing Apple distributors to resell Apple products from its existing network of stores, and also considered approaching Apple to buy from the vendor direct.

At "around about the same time", McMahon said Next Byte had appointed a professional advisor to review its options.

"We decided that it made sense to get the experience of an existing player," McMahon said. "Particularly as Next Byte are the largest reseller -- it immediately gives us scale and size in that market."

A spokesperson for Apple told ZDNet Australia that Next Byte was an important reseller, but not necessarily its biggest reseller. The spokesperson also refused to say whether the vendor had any discussions with Fone Zone prior to the transaction.

However, McMahon confirmed that Fone Zone has had discussions with Apple, and that Apple is "supportive of our involvement in the market".

The vendor has given Fone Zone no indication of their distribution strategy for the much-hyped upcoming Australian release of the iPhone, McMahon said.

In the United States, distribution of the iPhone was restricted to direct sales from the stores of Apple and its carrier partner AT&T for the first six weeks of being on sale. The device has since been rolled out to several mass market retailers.

McMahon said he is well aware of Apple's intention to compete with its own reseller partners by opening an Apple branded store in the Sydney CBD.

Apple has already secured real estate in the Sydney CBD for a store to sell its products direct to the public. The proposed site is within walking distance of several Next Byte stores.

"We also wouldn't be surprised to see Apple open stores in other cities such as Melbourne or Brisbane," McMahon said. "That didn't deter us from making this acquisition."

"In the US market, the strongest resellers continue to do well in conjunction with the rollout of Apple's direct stores."

"A big opening of an Apple store in Sydney is only going to heighten the awareness of their brand in Australia."

The acquisition is expected to close by the end of the month.