news Exetel chief executive John Linton has labelled as “the sheerest nonsense” the claim by Internode chief Simon Hackett that ISPs will need to gain scale to compete when the National Broadband Network is rolled out around Australia.
In the days before Christmas, Hackett said Internode’s inability to gain sufficient scale to compete in an NBN world was a core reason why he decided to sell the company to rival ISP iiNet. 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. By merging with iiNet, Hackett said, Internode would avoid the NBN precipice.
However, in a blog post published several days later (paywalled), Linton — whose company Exetel is smaller than Internode and is one of a handful of second-tier ISPs left in Australia — criticised Hackett’s claim. “The other nonsense talked about the “NBN making it imperative to be very large to compete in the future” is equally the sheerest nonsense,” he wrote. Linton pointed out the NBN had not been built, and it was “anyone’s guess” as to how many years it would take before the network was rolled out, and what industry changes would take place, “when/if there is one”.
Linton’s words echo comments by fellow second-tier ISP Adam Internet, which issued a statement in the wake of the Internode buyout stating that it was confident about its future in the NBN environment, despite Hackett’s claims. A number of mid-tier telcos are planning to offer aggregated NBN services to allow smaller ISPs to offer a national presence in the NBN environment, although the pricing of such options has not yet become clear.
Asked via email before Christmas to comment on the idea that the need to achieve scale under the NBN was a premature concept, given the fact that the Coalition might cancel or substantially modify the policy if it won the next Federal Election, Hackett emphasised the fact that the need to scale up for the NBN was “only one motivating factor” in his company’s buyout. “The industry is consolidating regardless of the NBN, and the deal makes enormous sense for all concerned whether the NBN proceeds, changes form, or even stops. In all those futures, this company group has a bright future.”
In his blog post, Linton wrote that he very much doubted that Internode selling to iiNet was for the reasons publicly stated. “It was simply money, as always; that and the slight fear for the future of residential services and the sheer burden of running an ISP these days … after 18 years of easy times with the last three being an increasing pressure,” he wrote.
Internode and iiNet representatives — using forums such as Whirlpool — have consistently emphasised since the buyout was announced before Christmas that things would be business as usual with the company, with no immediate plans to change Internode’s service offerings or re-align then along the lines of similar acquisitions by iiNet of companies like Netspace and Westnet.
However, Linton wrote that he believed it “went beyond naivete” to suggest that Internode could continue to operate as a separate entity and that no changes would be made at the company. “To more than naively suggest that “look at Westnet” — still operating independently after almost 4 years” is just a laughable lie — as any Westnet employee or customer would attest to,” he added.
“Not that it matters — no-one shells out money to pay for something they don’t intend to change and there is no need to say such a thing.”
In a broader sense, Linton noted that he didn’t see anything changing in Australia’s telecommunications industry as a result of the buyout. “The reality is that Internode was/is a high priced residential ADSL provider with perhaps 3 percent of the residential marketplace being bought by another high-priced supplier with perhaps 10 percent of of the residential marketplace,” he wrote. “What changes? Nothing at all.”
Linton also discounted the possibility that the Internode buyout would affect any possible interest in acquiring iiNet that rival ISP TPG might have. The company recently bought around 7.24 percent of iiNet, but has stated it has no specific intention regarding the company, other than to own the shares as a strategic investment.
“The mumblings about “protecting iiNet from being taken over by TPG” are nonsensical – it can’t possibly affect such a scenario if in fact it exists,” wrote Linton. “Why TPG is buying up iiNet shares suggests that TPG is interested in acquiring iinet but that scenario, if it is correct, has a long way to go and would be of no interest to anyone other than the iiNet directors/senior management who would lose their toys and have to find new jobs.”
With respect to a possible TPG buyout of iiNet, Linton noted in another blog post that he did expect such a transaction to take place before the end of 2012. In his conversation with another party — who has expressed interest in buying Exetel in the past — Linton said: “we both agreed that there was simply no ‘room’ in the Australian marketplace for iiNet as either a standalone entity and that if TPG did take it over it would probably also see TPG’s demise trying to assimilate the over charging/over staffed iiNet in to it’s strangely arranged company.” It appeared that Linton primarily viewed Australia’s telecommunications marketplace in future as continuing to be dominated by existing giants Telstra and Optus — possibly with Foxtel playing a major role as a content player.
And as for his own company? “If I had any ambitions relating to money then now would be a good time to look for a buyer for our small company,” wrote Linton. “But I don’t. I also have no ambitions for ‘Australian market domination’ that, apparently, are at least part of the rationale for some people; those with no understanding of commercial or any other history.”
He tends to exaggerate and you can’t always take what he says at face value, but you can always trust John Linton to loudly say what many others in Australia’s telecommunications sector are thinking. And in his blog posts over the past few weeks he has done just that.
I, like Linton, don’t entirely believe the public rhetoric which both iiNet and Internode have been bandying around as the rationale for the Internode buyout, and like Linton I also suspect that it will become clear over the next year or so that Australia’s telecommunications market will continue to be dominated by Telstra and its little brother Optus for the foreseeable future. The clearest sign of this is the mega-deals which NBN Co has already signed with both. I disagree, however, with Linton — as I will further explore in other articles this week — that the acquisition of Internode will have no impact on the sector as a whole. Clearly, it will have a large impact; and I believe one that will be largely negative.
In addition, as Linton noted, the threat that TPG will buy iiNet hangs over the entire sector at the moment. It’s something which iiNet hates talking about. But it’s the biggest issue in our sector at the moment. With iiNet’s recent acquisitions, a TPG buyout of iiNet would likely destroy much of the competition in the sector and cause TPG itself a mega-integration headache.
In short, if you set aside some of the bluster, it’s hard to disagree with much of what Linton is saying here, although I am not quite as cynical as he is about the future of this market.
Image credit: Delimiter