opinion Right now, there’s a nice little spread of products and services available in Australia’s fixed broadband market. Like the bustling food court in Sydney’s Pitt Street Mall, virtually everything is on offer. Burgers and chips, fried rice, Thai stir-fries and Indian curries, and even deluxe muffins baked with chocolatey goodness.
Most Australian broadband customers will be looking for a somewhat mainstream option. They want a reasonably priced broadband package, with fairly decent customer service and some value-added options as a bonus on top. So they pick iiNet. As households get larger and consume more services, they often seek to save money by bundling packages together. So they go with a bigger telco like Telstra or Optus.
For the more technically minded, companies like Internode are going strong, and you can even complain directly to tech-savvy managing directors like Simon Hackett on Twitter if your ping time isn’t the best. And of course, if you’re pinching pennies the bottom of the barrel you’ve got the option of TPG or Dodo, both of which offer an acceptable service at a steep discount.
Although acquisitions such as the buyout of AAPT, PIPE Networks, Netspace, Westnet and more have shaken this schema up a bit over the past few years, the broader landscape hasn’t really changed all that much. You’ve still got your discount players to keep mainstream prices down, your innovators to keep the big guns developing their products, and the bigger players to highlight the benefit of bundled packages.
However, there is no doubt that all this will dramatically change if serial acquirer TPG ever succeeds in acquiring the only player with any real scale left for it to buy. I speak, of course, of iiNet.
It has long been suspected that with major shareholders Telecom NZ and Amcom leaving iiNet’s registry, that Michael Malone’s Perth-based baby would come into play. And, for the longest time, TPG has really been the only likely acquirer of this prize jewel.
The reasons for this are pretty obvious. The ACCC would likely restrain Telstra from buying a major rival like iiNet and consolidating its market power further. Optus has starkly demonstrated its lack of interest in the low margin fixed broadband market over the past few years, preferring to focus on its mobile business. Vodafone is still struggling to ingest Hutchison right now, and Internode? Well, it’s probably too small to buy iiNet, and probably not interested.
That just leaves TPG … a rapacious beast of a company which, like iiNet itself, has primarily grown over the past decade through insatiable acquisition and blanketing Australia with a universal cozy haze of purple and yellow marketing material promising the nation’s cheapest broadband prices.
TPG’s covert move over the past few months to sneak onto iiNet’s share registry, sparking iiNet’s dramatic revelation of its hulking presence yesterday, was just confirmation of what everyone in Australia’s telco sector already knows. Yesterday TPG said it had no specific intention regarding iiNet other than to own some of its shares as a “strategic investment”.
But an open secret right now is that TPG has in fact been making eyes at iiNet’s luscious legs across the smoky bar that is Australia’s ISP market for some time, licking its lips and taking another sip of its double bourbon as graphic images of the inevitable steamy consummation run through its fevered imagination. And, should iiNet prove to be a difficult prize to capture, of course, TPG is already preparing the Rohypnol.
“Strategic investment”? Yup. TPG is about as subtle as a sledgehammer. It may only own five percent of iiNet now. But that’s just the cost of dinner on the first date.
Should this occur — and I have no doubt that this little dance will play out in one form or another over the next six months — it would be a disaster of epic proportions for Australia’s broadband market in general, and Labor’s vaunted National Broadband Network policy specifically. The reason for this is clear: iiNet has an unusual and crucial position in Australia’s broadband market, which sees it take the middle ground, keeping both ends of the ISP spectrum honest.
When it comes to cut-rate rivals like TPG and Dodo, iiNet provides customers with the equivalent of a safety valve. Many of my friends have flirted with the discount kings, taking six months or a year out of their long-term Internode or iiNet ADSL contracts to see if they can get an acceptable service for a massively cheaper price. But eventually most end up coming back. The low-priced players might be fine for many end users in the market, but their comparatively poorer levels of customer service, network reliability and innovation (think the launch of ADSL2+, IP telephony and IPTV) give iiNet a position sitting pretty above the bottom of the market which customers relish.
It’s a similar scenario when it comes to the top end of town: Telstra and Optus.
The dynamic duo’s broadband solutions are overpriced and stagnant — and have been for years. They get away with it to a certain extent by packaging bundles together. Anything they sell, you can get in a bundle: Mobile, pay TV, extra lines, a fancy touch-screen telephone based on Linux, and probably even the kitchen sink.
Telstra and Optus call it ‘bundling’. I call it ‘lock-in’. The terrible twins of Australian telecommunications know that if you sign up for more than one service, they’ve likely got you for life. Against this behaviour, iiNet again keeps the pair honest through price differentiation. Customers know they can get a cheaper plan from iiNet with much of the same features which Telstra and Optus offer. When stellar customer service is added into the mix, iiNet’s offer often starts to look unbeatable. And this stops Telstra and Optus from going too far.
Now, let’s assume for a moment that TPG’s advances towards iiNet are eventually successful and Don Malone is forced to marry his beautiful daughter off to the invading barbarian king. In this scenario, the middle-ground of Australia’s broadband market would collapse. TPG and Dodo would have no real competition at the low end of the market, and Telstra and Optus would have no real competition at the top end. Prices at the bottom would inflate; and so would prices at the top.
Worse, the level of innovation in Australia’s broadband sector would also slow to a snail’s pace.
Throughout the past decade, it has repeatedly been iiNet, primarily, which has generated innovation in Australia’s broadband market. The rollout of competitive DSLAMs leading to ADSL2+ speeds, the deployment of IP telephony, participation in peering and quota-free servers and above all, a constant regulatory war with Telstra which forced some semblance of competition upon a formerly monopolistic telco sphere?
Yup, it’s been iiNet which has fuelled all of that.
“But wait,” I hear you say. “What about the great hope of South Australia? That gallant white knight of the skies? The pinnacle of princely men? The Gordon Freeman of the telecommunications sector? The noble Simon Hackett and his thousand sturdy Internode companions?”
Yes, it is true. iiNet has not been alone in its quest for innovation in Australia’s telco sector over the past several decades. Internode has fought side by side with iiNet on all fronts. Simon Hackett has been the Gandalf to Michael Malone’s Aragorn: Charging into battle clad in shining mail upon his electric horse, or plunging screaming from the skies to the attack on his silent eagle of steel. And, like iiNet, Internode also occupies the mainstream position in the market.
And yet, as Malone himself has pointed out, with much less than half the market presence of the top four companies, Internode is not currently one of the major players in Australia’s broadband sector. It is not well positioned to fight companies more than twice its size (TPG), three times its size (iiNet) and god knows how many times its size (Telstra and Optus).
If TPG buys iiNet, Internode will not be squashed. In fact, it will thrive, as myself and tens of thousands of other iiNet customers run screaming to its warm embrace and away from David Teoh’s mailed fist. However, neither will it be anywhere near the market force that iiNet currently is.
All of this leaves organisations like the Australian Competition and Consumer Commission in an uncomfortable spot. When mobile players Vodafone and Hutchison announced their merger several years ago, turning a four-cornered market into a triopoly, the regulator eventually grudgingly allowed the deal, as it would allow a major third player to gain infrastructure scale against Telstra and Optus — despite the fact that Vodafone has a reputation globally as a bit of a grouchy incumbent itself.
We’ve seen how that has worked out — not well — but in the fixed market things would be even worse.
The rollout of the NBN makes the argument that a merged iiNet/TPG entity could better invest in infrastructure redundant; the government is doing that for everyone. Innovation would be stifled, consumers would be presented with one less major option — and one of the best — to choose from in terms of their broadband connection, and any future government would be faced with just three major fixed-line players to debate the future of the sector with — with one loud, intelligent voice instantly silenced.
It’s this kind of nightmare scenario which the NBN is supposed to help Australia avoid. The rollout of the infrastructure is supposed to engender a massive variety of retail options when it comes to broadband. And yet, ironically, amidst all the jubilation at the shareholder accord to Telstra’s NBN deal yesterday … the future decrepitude of competition in the sector may have quietly been foreshadowed.
A war cry for competition must now be loudly raised. TPG cannot be allowed to buy iiNet. A future without one of the most innovative, vocal, competitive companies in Australia’s telecommunications sector would be an incredibly dim future indeed.
Image credit: Guido Giardino, royalty free
*TPG has in fact been making eyes at iiNet’s luscious legs across the smoky bar that is Australia’s ISP market for some time, licking its lips and taking another sip of its double bourbon as graphic images of the inevitable steamy consummation run through its fevered imagination.*
when you said you were a frustrated novelist… now we know what kind of novellas you like to write… female erotica ;)
*And, should iiNet prove to be a difficult prize to capture, of course, TPG is already preparing the Rohypnol.*
or is it Chester Himes…
If you know a book publisher who’s into that kind of fiction, give them my details :)
The title of my first novel: ‘Tender is the ‘Node’.
as your literary agent, i strongly advise you to rename the tentative title of your manuscript to:
‘the small dog with the loudest bark’.
Excellent idea. To fulfil this commission I will need $300 in cash, most of which I intend to spend on extremely dangerous DSLAMs. Once you get locked into a serious DSLAM collection, the tendency is to push it as far as you can.
$300 cash? no problems. just forward me the first draft your manuscript. (uh, three copies please, if you don’t mind. A4 format, spiral bound with wide margin pagination for commenting.)
(the tendency of DT is to keep quiet and just let the “business”* do the talking instead of generating a hot air plume of misplaced corporate hatred directed towards your one and only supplier.)
* amassing an even bigger collection of DSLAMs
is it possible or likely that if tpg were to buy iinet that they might actually maintain the iinet brand in it’s current form in order to capture a section of the market that they currently do not hold?
No. Soul had just over half a million services when TPG swallowed it. Now people barely remember it even existed.
My phone bill still says soul on it…
I wonder how much business iiNet already does with TPG care of PIPE Networks? I imagine iiNet would use a fair bit of PIPE’s fibre.
Would be a bit scary for everyone else who uses them (dark fibre, PPC-1, colocation)..
Competition is a means to an end, not an end in itself. In the phone market we basically have IOS, Android, Windows & RIM, possibly Palm and then all the ones that will no longer exist in a couple of years. That’s healthy right.
So why do we need a gazillion ISPs in a market of 7 million connections, just to provide an internet connection?
It’s quite likely we’ll end up with a triumvirate of national wholesalers, about 6 retail ISPs, and a bunch of others who just re-sell the wholesalers.
The current arrangement is an anachronism due to the ridiculous difficulties in supporting the copper network and all the crap equipment that tries to strain out the last ounce of performance from it.
The goal is differentiation in a level playing field, not sustaining the existing ISPs. It’s no different to my own industry of publishing where half the existing publishers won’t exist in a few years time as they fail to make the transition from print to ebook business models.
I’m sorry but what the hell? TPG has only ever aquired one ISP that had any residential internet customers (Soul) – even then, the drivers for said aquisition were Soul’s network inherited from COMindico combined with a okay Fiber footprint and above-average sized DSLAM rollout, meanwhile iiNet has been buying up every residential ISP under the sun and TPG and iiNet are very close to one another for customer count with iiNet taking the lead by 100,000 or so.
How can you even call TPG a “serial acquirer” when you are talking about them aquiring the godfather of aquirers – iiNet? :P
I strongly believe that TPG only bother with aquisitions for infrastructure, whereas iiNet buy for customers.
I don’t think either company is in any position to aquire one another, they are both too far in debt to think about it – the debt is healthy, and will be paid off – but there is no way TPG could throw Michael enough, take on the debt of both companies, and have even a remote chance of paying it off.
Personally if anything I’d believe TPG purchased the shares in iiNet as a defensive move, so in the future if iiNet is ever in a position to take over TPG, they cannot.
—–
In regards to network reliability, I moved from about 4-5 years with iiNet to TPG – probably not far off a year in so far and no regrets, in my experiance I’m actually getting a better quality service with TPG and honest to god I think the support is better. Plus I have seen more plan upgrades in the short time I have been with TPG than I ever did on iiNet.
Personally however I do value network quality, and I’d be with Internode if they could sell me the Easy plans – no comparison when comparing Internode’s network to TPG – but iiNet to TPG… Hmm… iiNet just let Vocus and Reach handle everything and don’t have domestic transit in each state – still a way to go :)
What about AAPT? TPG was widely reported to have been involved in the bidding process there. TPG also recently bought cloud computing player IntraPower.
And yes, I agree TPG’s iiNet stake is so far defensive — but I view it differently. I view it as more the case that it’s taking a foothold to stop other companies acquiring iiNet. iiNet stock is cheap right now, and it makes sense.
As for debt, you’re right — TPG does have a lot. Its 31 July 2011 balance sheet shows $76 million of short-term loans and $149 million of long-term loans. Total liabilities are $398 million, and cash, at that stage, was very much in short supply.
However, the company also made a net profit of $78 million. I’m sure what TPG is doing right now, and has been doing for some time, is paying down its debt as fast as possible. This is not a company which will stand still and let things happen around it. TPG is an aggressor — and its move on iiNet demonstrates that fact yet again.
Could iiNet buy TPG?
The financials show iiNet has $100 million in long-term loans, with total liabilities of $213 million. Again, cash is short, but there’s a critical difference here … iiNet only pulled in $33 million in net profits over the previous financial year.
An interesting fact here is that the revenue of TPG and iiNet are not that dissimilar — $574 million for TPG and $700 million for iiNet. However, TPG appears to be making a great deal more profit. Sure, it’s also loaded up with debt. However, it could pay off that debt a great deal faster than iiNet could.
It’s an interesting situation :)
As mentioned I strongly believe TPG only buy for infrastructure which is not necesarrily bad for competition, PIPE for example have not raised prices at all since the TPG buyout and from what I hear have even lowered them.
In regards to IntraPower – they had a working Cloud Computing platform and AAPT had a bunch of DSLAM’s combined with metro and inter state fiber. I’m pretty sure TPG gave up when AAPT decided it was only going to offload residential customers. Owning AAPT’s Fiber network linking all capital cities excl Hobart and Darwin would have given TPG the next leg up in the infrastructure race – they just have Metro fiber and a international cable at the moment (lol, ‘just’)
But why would buying infrastructure at this point make any sense? The NBN is about to make much of it obsolete. In an NBN world, it will be customer scale, not infrastructure, which will be important.
I could not disagree more! The only infrastructure that will entirely become obsolete is DSLAM’s, everything else is still going to be very useful – the only other infrastructure I can feel that ~might~ be stranded is the back haul to locations that don’t make up the 121 points of interconnect – but even then, they can still sell it directly to business, or patch it into mobile phone towers.
I was mostly talking about;
* Datacenters
* International cables
* Interstate cables
* Metro fiber (to POI’s)
This is where I think iiNet will have a hard time, they more or less rent everything.
The ones to watch are Optus and Telstra without doubt, when they no longer have the ACCC breathing down their throat their infrastructure would allow them to release plans that blow TPG out of the water – all Telstra and Optus would need to do is unmeter data within Australia and instantly all of their competitors have their expensive GoF interconnects flooded – $20 per megabit of CVC is a decent trade-off for $300 plus per megabit GoF access ;)
With that said, I agree customer scale is extremely important, but feel when you get to a certain size (say, 100,000+) you really should be looking at infrastructure – so far we only really have 3 ISP’s (TPG, Telstra, Optus) that have infrastructure assets.
theres only 2 things that TPG would have been interested in from AAPT: GoF entry and that glassy substance that runs up the east coast.
We must be the only 2 users on TPG that don’t get bad service.
My dslam is full apparently, and those on it must not be high volume users because I don’t get any of the afternoon slowdown complaints I hear directed at TPG…
Not all Telstra dslams are congested either, but it happens and people complain long and loud on forums too about Telstra infrastructure.
Typo in the story Renai – along should be alone.
Cheers – fixed.
I very much doubt TPG would shoot itself in the foot by endangering the NBN’s competitive shakeup by doing this. They HAVE to be smarter then that.
the biggest problem with the premise of this article is that Labor’s NBN isn’t really about competition.
sure, Labor likes to sell the NBN as bringing about more “retail competition”. however, you don’t need to spend $50bln to create the so-called “even retail playing field”. you also don’t need to re-embed a massive national cross-subsidy which was dismantled when the ACCC decided to implement geographically de-averaged ULL pricing amongst other regulatory reforms. to achieve the so-called “even retail playing field” that people talk about, all you have to do is force Telstra to structurally separate.
the real reason why Labor is pursuing this project is that they know no sane telco operator will lay fibre to the home in places like rural Tasmania. on the other hand, it’s not inconceivable that residences in metro areas may eventually get upgraded to fibre by market operators without any government intervention. it’s a longer-term, social equity issue. they don’t want the regional areas to be left out of the NBN equation for decades to come.
that’s why they want to roll-out FTTH nationwide in “one hit”* and stamp a onerous, retrograde cross-subsidy on top of it by implementing uniform wholesale pricing.** it’s the only way that all those regional, white elephant fibre networks can ever be “funded”. that’s why they have to enmesh the roll-out and pricing of NBN infrastructure in regional areas with metro infrastructure roll-outs. that’s Labor’s “NBN”.
if “retail competition” was really the main objective of Labor’s NBN, the Government would have insisted on 14 POIs as a non-negotiable component of NBNco’s mandate in the same way that uniform wholesale pricing and 90% FTTH were pre-determined policy parameters for NBNco. if you think about it, stranding all those private fibre backhaul is relatively trivial in both significance and cost of financial compensation to the political decision to buy-out and mothball both the copper and HFC networks. also, the Government would have dealt decisively with the “CVC issue” and the disadvantage it imposes on smaller RSPs, instead of just offering a temporary rebate which expires eventually.
the Government knows that the NBN will further accelerate industry consolidation.*** in fact, it’s already happening and Labor isn’t troubled by it. in terms of the retail segment of the value chain, the way to bring about cheaper and lower prices for consumers is not to have a proliferation of hundreds of small ISPs. instead, like the grocery, alcohol, hardware and other retail markets, the way to reduce costs and lower retail prices is to allow further industry rationalisation and better leverage fixed costs. in fact, this is an absolute imperative given how overcapitalised the wholesale segment of the value chain is.
so, if your idea of “retail competition” is a teeming multitude of different RSPs, Labor’s NBN is not about “retail competition”. it’s about bringing expensive, white elephant communications infrastructure to the regional areas to pursue vague, ideological notions of creating “social equity” and “social fairness” in infrastructure outcomes.
* if they could get it done within 5 years as opposed to a decade, they probably would, but obviously, 10 years is viewed as the most feasible, aggressive target.
** in past pricing determinations, the ACCC actually argued strongly against geographically averaged ULL pricing as being economically inefficient!
*** even P Budde, a huge supporter of Labor’s NBN, argues this.
No, it just means more of a threat to any other provider out there, including Optus, Vodaphone, Telstra….
Also Renai, you’re attracting ANTI-NBNers…….. If NBN is canned Major Compensation to Telstra. Tosh is a great example, sighting numbers 50 Billion and doesn’t need to, the alternative argument is that Telstra will get monopoly.
I would say this is pretty narrow minded, if iiNet was to be bought out it’d be an investor or supa company that would buy them out, you also forget that the NBN might buy them out as well.
Seeing as they are looking at retail as well.
I don’t think it is strictly correct to say that the ACCC would not allow Telstra to acquire iiNet – competition would still be there in the form of Optus and TPG, as both Optus and TPG are likely to be available wherever iiNet is. Telstra, if it does acquire iiNet, would have more market share, but not more market power. I don’t think Telstra can increase prices anymore if it eliminated iiNet as competition.
Whats the problem? We are on track for ‘rights’ holders to take over regulation of the web here anyway, can’t see why whichever pack of stooges is running the holy city asylum in a few years won’t flog the whole shebang to Verizon anyway…
You really do not like David Teoh. This is incomprehensible as he is an astute business man and, in my experience, an affable and sincere man. The several AGMs I have attended have shown me that his staff are very fond of him.
Because he has refused your requests for interviews in the past you now rely on poorly expressed pique.
Grow up AND be a journalist.
Your good friend Alburyman may be able to assist you.
his staff are fond of him? what staff? i didnt think TPG employed any support staff. Or do you mean just his accountant?
get used it.
Mr T is persona non grata in the eyes of the Big3 gangbangers of the Infrastructure Rapers’ Coalition. they don’t like him because he’s not a “team player”.
to his “discredit” (or “immense credit” in my opinion), he’s not an exponent of the well-honed, Australian art of sledging and doesn’t pull his weight in slandering and defaming Telstra’s corporate image in public fora and to the press like the Big3 gangbangers do on a daily basis.
Mr T just keeps his head down and focuses diligently on running his business. a most admirable man. i mean, even as a casual reader of the tech press, i can reel off the names of the Big3 reg chiefs in the wink of an eye — however, i haven’t got a f–kin’ clue who the reg chief of TPG is… never ever seen him/her mentioned in the press… i mean, does TPG even have a reg chief?
i guess TPG’s business focus is more on “doing business” as opposed to dumping shit on the incumbent like untreated diarrhetics. good on him — his business strategy sure has served him well ;)
“A war cry for competition must now be loudly raised. TPG cannot be allowed to buy iiNet. A future without one of the most innovative, vocal, competitive companies in Australia’s telecommunications sector would be an incredibly dim future indeed.”
Renai it’s debatable who is the ‘most innovative’ here, iiNet rolls out DSLAMs so does TPG, iiNet has VoIP so does TPG, iiNet has Naked DSL so does TPG and both have IPTV products.
TPG has quite innovative and better value plans relative to iiNet don’t you think?
In the past iiNet has bought out Netspace, AAPT and Westnet, I assume that was ok because those ISP’s were not ‘innovative and vocal’ like iiNet is?
iiNet has also primarly grown by acquiring other ISPs; it bought Flow (which itself had just finshed buying iGreen – remember them, the first DSL provider to offer a static IP to home users?) some eight years ago, then it took over OzEmail and more recently there was Netspace.
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