Technology to blur the lines

The Internet services marketplace is tipped for a significant shakeup this year as boundaries that divide traditionally separate sectors disappear.

Voice, video and data are all up for grabs, although these markets are highly contested and entry costs are considerable.

The technology blend, driven by higher broadband speeds, presents opportunities for all involved, but Western Australia’s iiNet and other innovators have beaten the giants, Telstra and Optus, to the prize, holding a distinct advantage on current broadband speed offerings.

The key to these markets is high-speed broadband Internet subscriptions.

At the end of last year, Telstra had about 42 per cent of the residential broadband market, Optus had 21 per cent, while iiNet and OzEmail represented 8 per cent, according to international research firm IDC.

But where Telstra stands to lose most is over its vice-like grip on the telephony market.

Telstra has been losing market share in all telecommunication markets, which it controls to a large extent through its ownership of the majority of Australia’s copper line infrastructure.

Those most likely to threaten Telstra include iiNet and Primus, according to IDC.

Sydney-based IDC analyst Landry Fevre said that, of the top three broadband service providers, iiNet seemed to have the most advanced nationwide network in the country.

And iiNet’s growth by acquisition has allowed it to build up a broadband base of more than 620,000, which it will use to offset its attack on telephony, according to managing director Michael Malone.

Bundling of broadband with telephony, through VoIP (voice-over-Internet protocol), will help iiNet and others to offer substantially cheaper services than Telstra on its telephony base. Basically, VoIP carries voice as data over the Internet, cutting Telstra out of the loop.

However, the issue for smaller players, according to Mr Fevre, is that they generate great margins with dial-up (between 40 and 50 per cent) but they rely on Telstra for their broadband wholesale offering with very thin margins.

“Their broadband uptake is about a 10th of their dial-up base. They have some room to migrate their dial-up customers to broadband but this will generate less margin,” Mr Fevre said.

Those that do not get on the expensive broadband wagon are expected to fall by the wayside. Mr Fevre predicts there will be further consolidation in the industry, but overall the number of ISPs is still growing.

“The market is moving to broadband and this is taking companies to a lower margin business and lower volume at this stage,” he said.

“Many dial-up ISPs are giving up as this is too hard and competitive in the broadband market.

“The consolidation will happen for large dialup customer base ISPs that have been late to migrate their subscribers to broadband.”

Bundling of broadband, telephony, video and even mobile services is considered the next phase in the market, according to IDC.

However, these ‘triple-plays’ require substantial infrastructure to be considered feasible. Currently only higher speed operators will be able to compete in this league, as the bandwidth required is faster than most can handle.

iiNet has plans to roll-out video content over its broadband infrastructure as well, which could leave Telstra lagging.

The company is already ahead of the pack on this front, with customers in Perth currently being migrated to ADSL2 technology, allowing download speeds of up to 12Mbps.

Once Telstra wakes up to its competitors, though, there will be a level playing field, according to Mr Fevre. Telstra is expected to start upgrading its ADSL services to ADSL2+ by mid-2006, providing download speeds of up to 24Mbps – more than enough for streaming video.

From then, the market will become highly complex, as Telstra will be able to offer this speed as a wholesale service, creating the potential for multiple video content providers, Mr Fevre said.

ADSL2+ services will also be offered by iiNet within the coming months, the company said.