Competition between Australia’s biggest internet providers is heating up with Telstra launching cheaper broadband plans with more added features that could reduce its profits.

Telstra on Tuesday will start selling new broadband bundles that offer cheaper internet and Foxtel Pay TV services as part of a package. Where Telstra users previously paid $130 per month on a two-year contract for a 200 gigabyte plan with Foxtel services, the same plan will now cost $109 per month – a 16 per cent discount.

Telstra will also launch a commercial version of its national Wi-Fi hotspot network, which has been rebranded as Telstra Air. The only customers able to use it free of charge are existing broadband subscribers who offer to turn their own home networks into a hotspot.

But while customers will welcome the lower prices and bigger inclusions, shareholders could be less enthused. The new prices could result in lower average revenues per user and smaller profit margins thanks to rising competition.

For the first time the company will also offer 1 terabyte plans, equivalent to 1000 gigabytes, for $149 per month. It has also eliminated a 100GB plan that will force some users to pay more to upgrade to Telstra’s pricier 200GB plans or get cheaper 50GB options.

Telstra’s move is likely, partly, in response to Singtel-Optus’ aggressive move to offer cheaper services that came with internet television provider Fetch TV and free subscriptions to video streaming service Netflix.

Those packages have allowed Optus to turn around its stalled fixed-line internet division and increase the number of broadband customers from 1.014 million users in December 2014 to 1.032 million as of March 2015.

Telstra was forced to sacrifice earnings to make similar concessions in its mobile phone business earlier this year because of discounts and data boosts from Optus and Vodafone Hutchison Australia.

That move led to Telstra’s now-chief financial officer Warwick Bray to warn of potential cuts the the average revenue earned per user.

“On ARPUs it is early days but the recent change in competitive dynamics may have some impact,” Mr Bray said at the time. “We’ve previously talked about EBITDA margins around the high 30 [per cent] and there’s no change to that today.”

The prices are still higher than those of Telstra’s rivals, Optus and TPG Telecom. But Telstra’s Group managing director of consumer and products, Karsten Wildberger, said he was confident it would win over new customers.

“I’m personally very, very confident that our customers will like it,” he said. “As of Tuesday we will have a differentiator [in Telstra Air] that others don’t have, which we are very excited about.

“We hope with those new offers … we will get even more new customers and our existing customers will stay longer with us and that’s what is behind it.”

Telstra Air aims to get two million hotspots up and running throughout the country over the next five years. Non-Telstra users can buy access to the service through its Spain-based partner, Fon.

The company’s initial hotspot trial, using converted payphones, saw 1.5 million people use its free Wi-Fi hotspots to download 500 terabytes – or 500,000 gigabytes – of data.

The telco giant has previously been able to use its ownership of copper phone networks and infrastructure investments to dominate the mobile and fixed-line markets. But its rivals have spent billions of dollars catching up and the $41 billion national broadband network is designed to level the industry’s playing field for everyone.

This will force Telstra to become far more competitive at the cost of its long-term profitability – a key reason why the company was paid $11.2 billion in compensation by the Federal Government to lease its copper network for the NBN.