19/07/2005 - 22:00

Further rationalisation likely for small ISPs

19/07/2005 - 22:00

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More than a decade ago, Western Australia had the highest number of Internet service providers (ISPs) in the country.

Further rationalisation likely for small ISPs

More than a decade ago, Western Australia had the highest number of Internet service providers (ISPs) in the country.
But a maturation of the sector has led to a period of consolidation, with larger players coming to the end of their organic growth and smaller groups struggling to keep up with the cost of higher speed broadband offerings.
Earlier this month, local player Datafast Telecommunications, which trades as Eftel, announced its intention to merge with Adelaide-based Chariot.
The new entity will have 275,000 subscribers, making it the nation’s fifth largest ISP.
Datafast, which will contribute 125,000 subscribers to the merger, says the new group expects annual revenue of about $60 million.
In Datafast’s statement to the market the company said the “merger of Datafast with Chariot continues the strong growth of both businesses over the past two years, in which Chariot and Datafast have acquired more than 20 other ISPs”.
Datafast general manager John Raftis said there were “new ones popping up all the time”, but that didn’t necessarily mean they were competitive.
‘[The merger with Chariot] achieves the strength and commercial scale needed to sustain and grow market share at a time leading telcos are increasingly bundling dial-up and broadband products and services,” the Datafast statement said.
Datafast has not been alone in its growth strategy, with many other operators also looking to capitalise on those struggling in a higher cost market.
One player to feel the effects of increased competition is Comdek, which recently survived a winding-up application filed against it in the Supreme Court.
The company, chaired by former National Party leader Hendy Cowan, avoided the appointment of administrators by reaching a confidential agreement with creditors.
Comdek will now focus on supplying IT services to regional Australia as well as corporate voice and data services to national and international mining clients.
Its ISP arm, VianetAIP, was sold to Datafast earlier this month.
The next two years are expected to be a period of increased consolidation in the local market, according to Patersons Securities analyst Robert Gee.
“I don’t think there’s any doubt the larger players are looking to do this,” he said.
“If you speak to guys like iiNet, you find they get smaller players talking to them all the time.”
iiNet managing director Michael Malone believes there has to be more rationalisation in the industry.
The company has managed more than 40 acquisitions and now has 620,000 subscribers.
“There were about 60 ISPs in Perth in 1994. It was the largest number of ISPs of any city in Australia, including Sydney. Even if there isn’t a rapid consolidation, there has to be an even more dramatic polarisation,” Mr Malone said.
This polarisation will boil down to which businesses have the right infrastructure, he said.
“You’ll end up with these guys who own their own networks and can hold their own in that market,” Mr Malone told WA Business News.
But others in the market will end up having to be a customer of these groups, he added.
“For the entry level into broadband, you’re talking six digits, even to play as a reseller, and you’re talking significant amounts of cash if you want to build your own infrastructure, and that’s tens of millions,” Mr Malone said.
One of those in the network game is local listed company Amcom, which has recently committed to a $2.6 million DSL rollout at 20 exchanges throughout Perth and Adelaide.
The company expects to be generating voice and DSL revenue by the fourth quarter next year from this infrastructure.
Amcom is also believed to be bidding for Western Power’s Bright Telecommunications venture, as reported recently by WA Business News.
But for smaller ISPs, Mr Malone said, the next two to three years were a dangerous time, and those that tried to compete directly on cost against the top three nationally (Telstra, Optus and iiNet) would lose.
“The companies which try and value add or niche … they’re the ones who can actually find themselves an area,” he said.
“The country ISPs still do pretty well. I’ve seen an ISP here that services the graphic designers – Macintosh users’ graphics – advertising people, that sort of thing. And because they know and understand the needs of that community, then they’re able to charge above market rates and still retain that customer base.
“Westnet, I think, is a great example of a local company that’s really differentiating with service. So if you compare their products with the products of the iiNets they’re having a really hard going, and yet they’re growing.”
Patersons Securities’ Robert Gee said the key area of differentiation was in customer service, where Westnet had rated well.

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