As iiNet publicly confirms its A$60 million acquisition of TransACT, iiNet CEO Michael Malone sees no end in sight for the inexorable consolidation of the Australian telecoms industry – regardless of the ultimate fate of the NBN.

iiNet itself, of course, has been a very visible driving force in that consolidation, with the TransACT buy coming on the back of other major recent acquisitions including Netspace and AAPT’s consumer division. But Malone told CommsDay that the trend was far broader, and had been set in motion a long time previously.

“I know a lot of people keep on saying it’s because of the NBN… but the consolidation was happening for years before the NBN was even mentioned. This is now getting to be a scale game, and it’s happening all over the world,” he said. “As you get to the point where the market’s saturating, the things that matter right now [like] service, brand and product require you to have scale. Our ability to do things like manufacture the BOB in-house come from the simple fact that we’ve now got sufficient sales, we’re turning over enough new customers to do that. We couldn’t have done that if we were half the size. [Similarly,] being able to do the content deals that we are comes from scale.”

“I’m delighted about the NBN, because it provides customers with a faster, more reliable product for similar prices, and iiNet’s not funding the Capex for that – the taxpayer is! And it’s a level playing field for everyone else. But that’s not what’s driving consolidation. If you told me the NBN was being switched off tomorrow, and it was never going ahead, consolidation in this sector would still continue apace,” he continued. “Even today… Optus, iiNet, TPG, we’re all in roughly the same 400 exchanges, with the same regulated input costs and the same fibre going to all those exchanges. We’re all operating today already on a ubiquitous, commoditised cost base at home. A lot of people focus on the NBN and get overly worried about where it’s going – but whether it happens or not, the game’s still the same, you’ve got to win your customers, and you’ve got to hang onto the customers you’ve got. So the things we lie awake worrying about are growth, ARPUs, and additional products for the customer. We don’t even worry about the NBN.”

But while consolidation may stay on the cards, Malone still sees opportunities for smaller players to carve out specific geographic or vertical footholds in the market. “I think you’ll end up with two types of players: the big national players, who’ve got scale, and the niche players, who focus on either a geography or a segment,” he said.” “If small player that has A$100 million worth of revenue… wants to be a national player, they’re going to struggle, because the overheads for running a national network are high.”

Meanwhile, at the top end of town, the iiNet CEO anticipated some new competition entering the market via the NBN – in particular, large and well established brands keen to launch a fixed broadband offering. “You’re going to see new players like Vodafone entering; NBN’s the obvious entry [route] for Vodafone. They’ve already got the national network, so connecting to NBN, for them, is a relatively small incremental cost,” he said. “And Optus and AAPT have already said they’re going to have a white label wholesale product; so I wouldn’t be surprised to see companies like the Woolies and the Westpacs enter into the space if it made sense to them.”

TRANSACT DETAILS: iiNet has forged a binding agreement to acquire TransACT, with the deal expected to close at the end of this month subject to a number of procedural conditions. In return for iiNet’s A$60 million outlay, to be funded completely through existing cash and debt facilities, the Perth-based ISP will snap up TransACT’s 4,500km network, 40,000-strong subscriber base and growing corporate and government client roster – with Malone highlighting that last as the main draw of the deal.

“The infrastructure, for us, is a bonus; as always, what we’re buying here is a retail business,” said the iiNet CEO. “They have 40,000 customers; that’s wonderful, in profile those customers are very similar to iiNet’s. But in this case, as well, they’ve got a very strong corporate and government focus – and that’s something iiNet’s traditionally been weak on.”

“iiNet did A$57 million last year in business and government… out of A$700 million in total. I think of myself as a retail guy… but that’s as large as many of our direct B2B competitors. It’s something I think we haven’t paid enough attention to, and that we need to get a lot more serious about… we’re pretty good at the small business end of things, but TransACT brings in a bit more strength at the corporate and government level.”

With very little duplication of client base in key TransACT areas of operation like the ACT, regional Victoria and Queanbeyan, the firm’s brand will be retained in much the same way as was the case in iiNet’s earlier acquisition of WestNet. No redundancies are currently anticipated, and TransACT CEO Ivan Slavich will retain his role; iiNet is expecting most of the cost savings associated with the acquisition to come from bringing currently outsourced head office and IT systems in-house.

Malone was reasonably sanguine that the NBN rollout would not interfere with TransACT’s FTTP and VDSL networks. “The three options are that NBN overbuilds, which I think is fairly unlikely and inefficient; NBN buys the TransACT network, which to be honest would be fine at the right price but which I don’t see as likely; or more likely, they’ll regard the places that have been covered by TransACT as sufficiently [connected],” he said. “When you think about it politically, when a cable has already got fibre or HFC to the lounge room, where is the political benefit of putting in another fibre?”

The iiNet CEO also made it clear that TransACT would not be his last acquisition – though CFO David Buckingham noted that there were not any large purchases on the radar in the short term. That said, asked which areas of Australia he believed iiNet could still profitably explore, Malone responded “Adelaide we’re weak in, and there’s two strong locals in Adelaide… Internode and Adam Internet.”

“Obviously, I admire both businesses; if the time came where they were available at the right price we’d be very interested.”

Petroc Wilton