news Internode’s inability to gain sufficient scale to compete in a National Broadband Network world was a core reason why he decided to sell the company to rival Internet service provider iiNet, Internode supremo Simon Hackett said this afternoon.
In a media conference held after the $105 million deal was unexpectedly announced this afternoon, Hackett responded to questions about his decision to sell the company by pointing out that he had made a number of public presentations over the past year or so about the difficulty of mid-level ISPs such as Internode competing as Labor’s National Broadband Network was rolled out nationally.
In a landmark speech in March this year, Hackett described the NBN’s pricing model as “insane” for small internet service providers, warning that none will survive their walk through the “valley of death” transition from the current copper network to the fibre future envisioned by the Federal Government.
According to Hackett, the NBN’s pricing model will only be feasible for ISPs with larger than 250,000 customers – which only five retail ISPs in Australia can boast – Telstra, Optus, TPG, iiNet and Internode itself, which will just reach the cut-off mark. At the heart of the problem as Hackett sees it is the number of points of interconnect which the NBN will support — too many for small and medium-sized ISPs to connect to nationally, as well as the cost of trafficking data to each region.
Today, Hackett said Internode, with some 260,000 active services, was “right at the bottom edge” of viability to be a player in an NBN world. “It would be a dangerous thing for us to enter the next era being not quite big enough,” he said.
As part of the larger iiNet group, however, the Internode chief said his company would wind up with a scale three or four times larger than previously. With the Internode acquisition, iiNet will take a clear third position in Australia’s broadband market with some 900,000 services — just behind Optus, which has about a million, and far ahead of the next largest player, TPG.
iiNet chief executive Michael Malone agreed with Hackett that the NBN policy had contributed to the decision. “Scale does matter in that respect,” he said.
Hackett’s comments will also call into question the future of a number of other ISPs still existing in the sector which have smaller customer bases even that it has, with the major ones being Adam Internet, Dodo, Primus and Exetel.
Asked whether he believed those ISPs believed his argument about their inability to compete in an NBN world, Hackett said he believed they all do, “because it’s based on year 12-level mathematics.” The smaller ISPs, he said, would all end up working through telcos producing a service aggregating access to the NBN.
“Bigger is better here,” he said. “The point is that you can stay in the market if you’re smaller, but you’ll be doing it through a mid-tier wholesale aggregator.”
The Internode acquisition is just the latest that iiNet has landed over the past several years. The company has also recently snapped up most of the other mid-tier ISPs in Australia’s broadband market, with names like Netspace, AAPT, TransACT and previously, OzEmail and others having fallen to the company. The steep pace of consolidation in the sector has led to questions about how many ISPs will actually act as retail providers on the NBN infrastructure.
NBN Co has previously addressed Hackett’s criticism of its pricing model several ways. Firstly, the fledgling broadband monopoly has offered its ISP customers a rebate on pricing for the ‘Connectivity Virtual Circuit’ pricing which they buy from it. In August, the company said it planned to “rebate” its charges for the first 150Mbps per month served to ISPs through the CVC connection until there were 30,000 premises passed in what it described as “a connectivity serving area” — which connects to one of its planned 121 points of interconnect.
NBN Co has also made a number of public attempts to further explain its pricing model, going into great detail about why it had chosen the specific mix, as well as publishing an online calculator that allows users to calculate projected wholesale costs for providing services to its planned network. It has also discussed the issue directly with Hackett.
Image credit: NBN Co