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iiNet and TPG battle for bronze
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TPG and iiNet are neck and neck in terms of customer numbers, battling it out for the position of third largest provider. Will the company that comes out on top with the most customers be the ultimate winner, or will other factors come into play?
With the NBN expected in the (let's be optimistic) not too distant future, both companies will be keen to grab as many subscribers as they can before the new wholesale network levels the playing field at the expense of companies that have invested heavily in their own infrastructure.
But will their revenues grow alongside customer numbers? Their share prices, which have sky-rocketed over the last year, indicate that investors think so. I think there might be a degree of optimism here. People expect the cost of internet access to continually slide, so to feed the hunger for revenue growth both ISPs need to keep acquiring customers, or offer new services and value that will enable them to maintain revenue per customer.
And growth in customer numbers is by no means a given. Barriers for growth in this second tier of ISPs are all too possible, with politics, as usual having its part to play.
Ultimately, of course, it's profit that counts. I'm sure either company would be happy to be fourth place in customer numbers if they assumed third place in earnings before interest, tax, depreciation and amortisation.
To do that costs need to be kept down, an area in which TPG seems to have a sharper focus. Outsourcing its call centre is a prime example. If that's resulting in poor service it doesn't seem to show in the company's churn rates. So low costs and low prices, will the race be won as simply as that?
In this edition of Twisted Wire you'll hear from:
- Guy Cranswick, advisor, IBRS
- Emilie Ditton, senior analyst at Telsyte
- David Cannon, program manager, Telecommunications at IDC
What do you think? Are customer numbers the end game?
Talkback
tpg customer service is terrible..
tpg customer service is terrible but their service costs much less.. at the moment i'm with tpg because i dont have money to throw around.. but if i did then i would be with iinet or westnet..
Anonymous February 11th, 2010TPG will win - iiNet will end up owned by AAPT
TPG won the game with its purchase of PIPE. Now TPG was running at 1500:1 contention ratio (1500 customers to 1mbps of wholesale bandwidth).
With its purchase of PIPE, TPG now can leverage the massive amounts of PIPE fibre and infrastructure to an even lower cost base. In other words their margins have shot up with a single $300m purchase.
It also means TPG can enter the wholesale market, and sell their excess port capacity packaged with Pipe IP products, rack space and other wholesale level services.
iiNet on the other hand owns little to nothing. They are just a colouring department, a marketing company with its own billing platform and whole lot of customers. They're also leveraged to the hilt. Sure they're making margin but now is the time to off load the asset at the high point of the share price. With NBN, heavy competition from AAPT and TPG its unlikely they'll be able to gain further market share.
AAPT on the other hand needs the customer base. Yeah they're selling alright with their current deal but its not going to be enough to justify the capex to do the next round of network build. Not enough customers.
I predict that iiNet will be purchased in the next 12 months - pretty much as soon as the NBN plans firm up.
Anonymous February 11th, 2010iiNet owns little to nothing?
Yeah sounds almost right, if you disregard the largest ADSL2+ DSLAM infrastructure of course...
Anonymous February 12th, 2010What are a few DSLAMs, really?
What are a few DSLAMs compared to a massive metropolitan fibre network? iiNet may own a few DSLAMs strung together with leased ethernet, but TPG will own the very infastructure which powers its business model.
It will also cost them a fraction of what it costs now to bring new DSLAMs online and they do not need a minimum customer justification to bring an exchange online if PIPE has fibre there already - they will simply light up another wavelength and be done with it.
They then also control the infastructure which their competition uses to deliver their own services - TPG are in a much stronger position.
Anonymous February 12th, 2010DSLAMs and NBN
DLSAMs might be worth currency in today's market, but what about in the NBN era? This of course depends significantly on the NBNCo's build strategy; outside-in or inside-out.
If inside out in the early stages, expect an uproar from those SPs who have shelled out millions on DSLAM rollouts. Granted, if done correctly, the payback on a DSLAM should be no more than 18 months even with a modest customer growth rate, however I'd be looking to maximize the return well into the future and keep shareholders happy.
Even metro fibre networks aren't bullet-proof from the NBN. Sure, you have to get transit out to the pops or exchanges, however you wont find 10 companies competing for backhaul at a particular pop or exchange, there just isn't the room in the market.
TPG have a solid path forward with the yet-to-be-approved acquisition of Pipe, which gives them short term cost reduction through owned metro transit, however the real key is PPC-1, the international cable. As speeds increase, so will the need for transit out of this country (not forgetting that most traffic comes from O/S).
Though, in response to above, its not as simple and 'turning on a wave length'. TPG have been quite aggressive in their DSLAM roll-out and you could probably bet your bottom dollar that they already have a DSLAM in each exchange that PIPE terminates fibre to, so the only advantage here is the lower running costs, rather than expansion. It also gives TPG a play in the NBN space with backhaul in metro areas.
From an infrastructure perspective, should TPG's shareholders agree to the acquisition of PIPE, TPG will be in a much better position, now and in the future. iiNet on the other hand, has a solid brand and we've seen what solid brands without owned infrastructure can do (just look abroad to the UK in the early days).
TPG may in fact turn their focus to a much higher end customer (i.e. corporate) with the PIPE deal, or, they could do the way of the Dodo and fall of the face of the earth, though providing dirt cheap products and service, ruining any hope of remaining in the top-4.
One thing that seems certain though, is that both businesses are well poised financially and the era of consolidation is yet to happen - were only just starting to see it with TPG and PIPE (no dismissing iiNet and Westnet), however the land grab will feature soon and a lot of mid-small ISP's will get eaten up. Those with money, will indeed win the race, but need to be careful as money doesn't always bring happiness (EISA, Ozemail, Austar etc).
Anonymous February 13th, 2010TPG is highly profitable
The article seems to neglect the fact that David Teoh, owner of TPG / Soul, has a track record of the highest return per customer of any ISP in Australian corporate history. This was a key decision in the Soul board approving the reverse takeover of TPG - Soul had the numbers, but not the profit.
Patrick February 12th, 2010TPG Customer Service
If we're debating what defines a company's performance - profits or service, I'd say that TPG is actually ahead in customer service over the top 2. Having dealt with all 4 I have found TPG to be the best. My only criticsm is their shorter working hours - having said that, I have never had a waiting time more than a minute or two to connect to an operative - and they assign you a rep rather than a case number, so every time I call back I can ask for the same person by first name and not have to jump the same hoops. Try that with Telstra! And then there's pricing - it's cheaper for me to run TPG ADSL and Telstra Foxtel rather than bundling Telstra's services - what does that say?
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iiNet's call centre
Sounds like the analysts need to pay more attention to iiNet's shareholder presentations or their website (http://www.iinet.net.au/about/follow-the-sun.html), with two of their four centres being off-shore, its hard to see how they're keeping everything here in Australia.
iiNet's call centre
It's true iiNet has 2 offshore call centres, but I don't recall either of them causing job losses to Australian staff, and New Zealand / Cape Town aren't nearly as cost saving as TPG's call centre in the Philippines would be.
Also the long-standing English backgrounds to each of those locations is sure to be more welcome / less frustrating to many of the callers.
TPG appeared to take the cheapest route possible, rather than the most customer friendly outcome.
The article wasn't discussing the patriotism of iiNet, it was more focused on cost savings and potential negative outcome of customer churns based on running things for less cost.
re: iiNet's call centre
Agreed that it wont stifle the patriotism, however that wasn't the aim of the comment. Note the reference was to the analyst reporting correct and factual information.
Current and potential investors rely on these people reporting factual and solid information. As such, the point is not about iiNet's patriotism to call centres and Australia, simply the inability for an analyst to report correctly.