iiNet, based in Perth on Australia's west coast, is one of Australia's earliest ISPs. It has recently acquired several rivals and is continuing to look at acquisition opportunities in Australia.

by Craig Liddell of australia.internet.com [January 16, 2003]

In December alone, Perth-based ISP iiNet acquired three ISPs. Perth is on Australia's west coast, while the nations two largest cities, Sydney and Melbourne, and its capital, Canberra, are on the east coast.

The company is currently conducting due diligence on Local Telecom and Internet (LTI) in preparation for taking over their 15,000 strong customer base for $2.25 million. LTI owns two leading regional ISPs, Ruralnet and Tassie.net.

Earlier in December, iiNet acquired Country NetLink, which provides Internet services to approximately 4,000 customers in regional areas of Victoria and NSW. The company also acquired regional New South Wales (NSW) provider WebFront, with a customer base of approximately 2,500.

For a company that was founded before the World Wide Web had even been developed, the deals follow a ten year history of being at the forefront of technological development.

Michael O'Reilly and Michael Malone met as students of the University of Western Australia (UWA) in 1993. "We were both Internet mad," says Malone, iiNet's managing director. "It hit on us that after university, there was no commercial options to get access. So we decided to set up a business to do it."

The decision was not commercial. Rather, it was simply a way to fund link costs for Internet access. "We really did operate out of a garage at my parents' house using whatever hardware we could afford and rolling most of the software ourselves. Standard packages didn't yet exist," Malone explains.

"By the end of the first year," Malone continues, "we only had about 200 customers. Mind you, for the time, that was quite large. There was no money in the industry and it was a tiny market. These were the days of text based packages all running from a Unix command line. 14.4 Kbps modems had only just been released."

The organization was the first in Western Australia to offer dialup Internet access to the public. Users had 2.4 Kbps or 14.4 Kbps modems. Clients were charged a flat A$25 per month rate.

Malone says, "the Australian Internet community in the late 1980s and early 1990s was very small. So it was more the social network that we used the net for, keeping in touch with friends in other states."

By 1995, they realised their hobby was getting out of hand. iiNet added their first staff member. For a while, Justin Lowe shared Malone's bedroom along with the other Michael, Deanne Godfrey, a cat, and a pool table. O'Reilly worked in a storeroom that doubled as iiNet's server room.

A lack of suburban phone lines pushed the company to set up an office in the city to service the rapidly growing customer base.

"The release of Netscape in October 1994 changed the market completely," Malone says. "All of a sudden, 'normal' people could use the Internet. Over the next six months, we added 1,000 new clients and we had more customers applying than we could manage on our own."

Five years later (in 1999) and after a period of acquisitions, the company listed on the Australian Stock Exchange (ASX). In an oversubscribed offering, iiNet raised $15.75 million, placing the company's market capitalization at almost $38 million.

The impressive performance continues. At the end of financial year 2002, iiNet announced a record net profit of $4.3 million. EBITDA was $9.7 million, a 138 percent increase on the $4 million in the corresponding period in the previous year.

iiNet's growth is largely driven by acquisitions.

The company leads a general consolidation of the ISP market that has continued at a steady pace since the mid-1990s. But acquisitions have been sporadic over the company's ten year history.

"There are marked periods of consolidation for various external reasons," Malone explains. "At the end of 1997, the market started to flatten out and many ISPs that had grown on the explosive growth of 1997 found that money was tight. We did quite a few acquisitions during that period."

iiNet hit a similar phase in late 1999 and acquired five ISPs between September of 1999 and April, 2000. Growth slowed and the market has been flat since, according to Malone.

The company's next acquisition phase began early last year. "That's when broadband really started to kick off," he says. "Again, this was a decision point for the smaller ISPs. Do they invest in broadband infrastructure, or do they sell?"

Figures from Australian Bureau of Statistics (ABS) back the trend. Subscriber numbers increase while the number of ISPs continues a steady decline.

The number of ISPs decreased by five percent to 571 over the six month period to March 2002, according to the ABS. That continues a decline since September 2000, the first time such statistics were released.

At the end of September quarter 2000, there were 718 ISPs in operation. In 2001, there were 665 ISPs.

Consolidation is most noticeable at the smaller end of the market where ISPs provide services for between 100 and 1000 subscribers.

"From our point of view," says Malone, "the timing is good. We need to expand outside of Western Australia, but we can't afford to do a strong marketing blitz. Therefore the best way to expand is by acquisition."

iiNet are also innovators in new delivery technologies. When broadband and wireless Internet were not even on the radars of the larger players, the company introduced a range of services. Late in 1999, iiNet introduced Cable Internet Access, Cityspan Wireless Internet Access and ADSL.

"We were using 802.11 spread spectrum gear with eight base stations covering Perth," Malone says of the wireless service. "The client side equipment was quite expensive per site and several suburbs were subject to chronic interference at certain times of the day."

As a result, the company abandoned wireless to focus on ADSL. "That technology was simply better," he says. "It was cheaper per location, could be deployed on a mass market basis, and has proven to be much more reliable."

Customers were transferred to ADSL and iiNet decommissioned the wireless network.

iiNet are now concentrating on ADSL for regional rollout. "The coverage for ADSL is good, and getting better," Malone says.

Recent acquisitions also provide additional scale to explore further regional rollout. The company plans to open in Tasmania later this year.

Those acquisitions and investment in carrier infrastructure has also enabled the company to create one of the lowest cost bases for dial-up Internet access.

"We entered into a commercial arrangement with Telstra in 2000 to interconnect with the voice network," says Malone. "That agreement was restricted to WA. In 2002, we agreed on terms for a national expansion."

"In essence, interconnect means that we do half the work of terminating calls," he continues. "So the costs of purchasing lines from Telstra is reduced. This is common for the larger carriers, but quite rare in the ISP sector in Australia."

That provides a good cost base to run the dial-up business at a reasonable margin, according to Malone, even though it has become quite competitive.

"The strategy is to buy dial-up ISP's on the East Coast now," he says, "run them profitably on our own infrastructure for the next few years, and hopefully as the clients transition to broadband, they will choose to do so with iiNet."

Today, iiNet's Internet offerings are dial-up and ADSL services.

Malone says the company is not aiming to be a leader in the market. "We need scale to be able to be competitive on ADSL and growth is good for morale. But we're not seeking to be number one or anything similar."

"iiNet has a customer service focus," he adds. "All our staff are recruited from hospitality, tourism, retail or other customer service positions. Technical training is then provided internally. The difference is fairly significant. As we're growing, we're still trying to retain the 'small business' ethic."

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