Flat broadband market a new challenge for ISPs, experts warn

The broadband market has reached a standstill with telcos only able to grab customers from each other in order to gain market share, prompting larger businesses to focus on acquisitions and new services in order to expand ahead of the National Broadband Network.

The comments come after iiNet managing director Michael Malone told analysts yesterday after the firm announced its half-year results that future growth will come from stealing customers from other ISPs.

“The raw broadband market is now pretty flat, so every new customer has to be won away from someone else,” Malone told analysts yesterday.

“We don’t want to follow Telstra into a hole, so we see most of the opportunity in selling additional products to existing customers.”

Malone also said the company’s cashflow will allow it to make acquisitions if it requires – iiNet already purchased both Netspace and the consumer division of AAPT last year.

Telsyte director of research consulting Chris Coughlan says the industry has now reached a turning point – most of the growth now will come from bringing on customers from other telcos, rather than connecting them outright.

“There has been a lot of movement in the industry with regard to the changing of categories. The number of ISPs has shrunk, but what you see are businesses offering a range of telecommunications services.”

iiNet confirmed three weeks ago that the number of ISPs operating in Australia has shrunk by 200 in the past 18 months or so. Coughlin says that number will continue to decrease as competition increases.

“It’s a scramble for market share, and we’ve seen Optus and Telstra very hungry to gain market share in this space,” he says.

Telstra recently said that it suffered a financial hit due to acquiring 900,000 new mobile customers – Coughlin says this type of capital expenditure will be common as telcos swap customers from one to another, especially as the NBN begins to roll out.

iiNet also confirmed yesterday it had spent $3.9 million in fees and stamp duty by acquiring the consumer division of AAPT.

“The NBN favours the incumbent provider. If you have a customer on a two-year contract, if the NBN passes that home you’re going to have the first go at transferring them to the new network.”

Coughlan says he expects some tier-two operators will fail due to their limited market share.

“You’ll have the opportunity to put them on another contract and then lock-them on. So the issue going forward for these telcos is to make sure they makes themselves different from the competition.”

Ovum research director David Kennedy says that will happen by the bundling of services and features. Telstra already offers additional services like the T-Box, and iiNet has added IPTV to keep existing customers on board.

“Studies show quite conclusively that the more services the customer buys, the less likely they are to move. In the future it’ll be services like T-Box, Foxtel and so on that we will see as parts of strategies for retention.”

Malone confirmed yesterday the company gained 7,000 new line subscribes in the six months to December – and that was down from 20,000 from the previous six months. He said the company’s focus will be on adding new services rather than chasing new customers.

“Before this, you had kind of a land-grab and you captured as much of the growth as possible to expand your customer base.”

“But as that growth has slowed, winning customers and holding onto them is becoming much more important. And this requires people to rethink their marketing, their pricing and to accommodate these changes.”

Yesterday iiNet reported revenue was up 45% to $329.7 million, and net profit after tax was up 16% to $17.2 million. The telco now has 1.3 million subscriber services.