Three's a crowd

Morris Kaplan

Morris Kaplan is a guest blogger.

Morris Kaplan, one-time stockbroker and venture capitalist, brings his finance skills and recent experience as a business journalist and writer to IT, with a special interest in telecoms and how communications is being transformed by technology.

Signs are emerging that the big three internet service providers (ISPs), Telstra, Optus and iiNet, are concentrating their power. Will this affect consumer pricing? Yes; if Australia’s experience with its supermarket chains is anything to go by.

The news in the retail (supermarket) sector that US giant Costco is opening up stores in Australia has more than likely sent shivers down the spine of senior executives in Woolworths and Wesfarmers, owner of the Coles and Target chains.

Aldi, still a minnow is flexing its muscles, while Metcash has a firm grip on wholesale and is also eyeing off retail space. When two players have 80 per cent of this space you could only call it a cosy oligopoly.

The ACCC always casts an eye over this landscape as it affects every man, woman and child in Australia. What then do we make of the ISP space where Telstra and Optus have had so much of the market share — at least until recent times?

Every industry has its economic characteristics and economies of scale are the goal of operators who see the competitive landscape ahead as being unrelenting. In the ISP industry, the very acquisitive iiNet has leapfrogged its competitors in recent years — in particular the July acquisition of AAPT — and currently is operating with a market share of 15 per cent for ADSL customers and 12 per cent for all fixed broadband services. In the chief executive’s own words “that’s the type of scale, compared to overseas markets, that you need to be a successful third player.”

iiNet, a listed company, has been on the acquisition trail since its early days in 2003. In the last seven years it has acquired nine ISPs including OzEmail and more recently Netspace in March 2010 for $40 million.

In 18 months the company has invested $200 million and has stated it will “keep the doors open” for more acquisitions. Of its purchases so far some 113,000 subscribers in the case if AAPT, 70,000 in the case of Netspace and 130,000 from Westnet have been gained. That gives iiNet a total of about 650,000 subscribers compared to Telstra’s 2.4 million.

Is there a risk of a cosy oligopoly amongst the (now) big three ISPs similar to that enjoyed by Woollies and Coles? In the grocery and supermarket space there is no shortage of accusation against the major players ranging from aggressive practices against suppliers to high prices for consumers. Costco, no doubt, will have done its sums and decided that there is room perhaps for a “number three”.

In the ISP market Telstra is investing $1 billion in winning back some of its market share. Economies of scale deliver cost efficiencies to operators; in an ever increasing competitive environment, the big three will need it as churn rates are bound to rise and hit operators with increased billing costs. Consumers may well be the winners in both industries.

Tags: ISP, Telstra, subscribers, market share, iiNet

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