02/07/2008 - 22:00

Malone touts innovation as key for iiNet growth

02/07/2008 - 22:00

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Fifteen years after establishing Perth's first internet service provider, iiNet boss Michael Malone retains a disarming honesty and humour that is rarely found in chief executives.

CONSEQUENCES: When a business pushes innovation, sometimes leading edge becomes a \'bleeding edge\', according to Michael MAlone. Photo: Grant Currall.

Fifteen years after establishing Perth's first internet service provider, iiNet boss Michael Malone retains a disarming honesty and humour that is rarely found in chief executives.

Speaking at a WA Business News Success & Leadership breakfast last week, Mr Malone made a few admissions that would make other chief executives blush.

With his tongue only slightly in cheek, he characterised iiNet's strategy of constantly pursuing innovation as follows: "Fail often but fail cheaply".

The company's strategy has helped it become the third largest internet service provider in Australia, but that's not how Mr Malone describes the business.

"iiNet is a broadband supplier first and foremost," the WA Business News 40under40 award winner said.

Mr Malone said iiNet was focused on customer service as the best way to differentiate his company from competitors such as Telstra, which he frankly admits has substantially lifted its game in recent years.

However, he also acknowledges that some customers have stayed with iiNet because it was "less crap".

iiNet has come a long way since Mr Malone and a university friend established the business in the garage of his parent's suburban home.

"The sole aim was to keep internet access after I left uni," he said.

The initial target of the business was to get 200 customers, which the founders thought would allow it to continue operating.

That number has grown to 680,000 "active services", including 470,000 dialup and broadband subscribers.

A lot of the growth has come from the 30 acquisitions iiNet has completed, mostly of small ISPs operating in Western Australia.

It has also made three big acquisitions: New Zealand-based ihug in 2003; Sydney-based OzEmail in 2006; and recently the $81 million purchase of Westnet, which was established in Geraldton by Peter Brown and grew to become Australia's sixth largest ISP.

The combination of iiNet and Westnet will give the group annualised revenue of $375 million, reinforcing its position as Australia's third largest ISP.

In WA, the combined group will have more than 30 per cent market share.

iiNet's acquisitions have been matched by other big players in the market. As a result, the top 10 ISPs have 90 per cent market share.

Mr Malone said iiNet needed to complete acquisitions to build scale so that it could build its own network.

The acquisitions were also designed to leverage iiNet's low cost base.

He described iHug as the most successful acquisition, because the two companies had very similar cultures, in particular a strong focus on service.

"OzEmail was the opposite," Mr Malone said.

Its focus was on new sales, which resulted in a lack of support for existing customers.

Mr Malone said that, at the time of the acquisition, OzEmail's sales staff had an average tenure of three months while the technical staff had an average tenure of three years, yet the sales staff were paid more.

This revealed a poor culture and inappropriate focus.

Mr Malone told the breakfast gathering iiNet had always pushed innovation, which meant the leading edge sometimes became the "bleeding edge".

The company's approach was illustrated by its broadband network strategy.

iiNet did not know which technology would prevail and therefore set up four business units promoting cable, satellite, wireless and ADSL technology.When it became clear that ADSL would prevail, it shut the three other business units.

Importantly, he said staff working in the units that were shut down still qualified for bonuses.

"You can't punish failure where it's been a well-executed failure."

Mr Malone said one of the company's recent success stories was an advertising blitz in Sydney.

This involved taking every piece of advertising space in Town Hall train station.

This helped to lift iiNet's market awareness in Sydney from 10 per cent to 60 per cent in a matter of months.

He spoke enthusiastically about its current advertising campaign, featuring the character Finn, who he believes captures the spirit of the company.

"If you want a position in the market, you need to take a position," Mr Malone said.

Another recent initiative was the opening of a call centre in Cape Town, in South Africa.

This is the company's fourth call centre, and extends its time zone coverage from Auckland, Sydney and Perth.

Mr Malone said iiNet had access to a pool of well-educated workers in Cape Town, where the locals have a relatively soft accent, and the response from customers had been positive.

"We've tested this on our customers and they think they've called their lawyer by mistake," he said jokingly.

Mr Malone concluded his presentation by reflecting on the difficult period the company faced in 2006, when there was a lot of speculation about its ability to survive.

While most of the commentary at the time focused on the impact of integrating iiNet's acquisitions, particularly OzEmail, Mr Malone said a bigger issue was the 50 per cent jump in costs as a result of pricing changes introduced by Telstra for wholesale access.

He also reminded the audience that, at the time, the company was generating $2 million of free cash flow each month.

iiNet currently has a strong balance sheet with net debt to equity of just 16 per cent.

The company recently reaffirmed its profit guidance, of a 27.7 per cent increase in net profit after tax to $15.2 million for the year to June 2008.

The group expects to lift underlying EBITDA by 17.6 per cent to $46 million; with Westnet, that figure would have been $58 million, before accounting for any synergy benefits.

iiNet expects the merger will create annual synergies of $2.5 million in 2008-09, rising to $8 million by 2012-13.

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