NBN no factor in TransACT buy: iiNet

iiNet's TransACT acquisition wasn't part of a grand National Broadband Network (NBN) preparation plan, according to CEO Michael Malone, but it was something he would have done even if the NBN had never existed.

After the acquisition, analysts said that iiNet's move was part of a last-minute landgrab by providers to build up customer numbers before the NBN came to be. But Malone said that he hadn't been thinking of the network when he decided to move on TransACT.

He said that the market had reached the point of commoditised broadband; all of the providers were serving customers from the same 400 exchanges, with the same costs, and every new customer needed to be won from another provider.

He said that it is now about differentiation, with iiNet fighting on service — and that scale does matter.

With the TransACT buy, iiNet is not only making a move out of its "fortress WA" — one third of the company's revenue comes from that state — but also seeking a hold on the corporate and government market. TransACT has 50 customers in the federal and state government space, while 40 per cent of its revenue comes from the corporate space.

iiNet wanted to prove itself in these markets, and then possibly tackle them head on with further acquisitions.

"I'd like to see that as a new opportunity," Malone said.

TransACT also has a very low churn rate, even lower than iiNet's, despite the latter's pride in its service. This was due to a high proportion of TransACT customers taking bundled services with energy from ActewAGL; 21,000 from 40,000 customers.

TransACT came onto the market because its major shareholder, private equity firm TVG, had reached the end of its 10-year investment cycle.

A network question

Just because the NBN didn't spark the buy, doesn't mean that Malone hadn't thought about the effect that the government project would have on TransACT's network — especially given that Telstra and Optus have received compensation for decommissioning their networks and moving their customers onto the NBN.

Malone said that he sees three potential scenarios for TransACT's 4500km network, on which it has spent $280 million:

• NBN Co decides to buy the network
• NBN Co decides to overbuild the network
• NBN Co regards the area as adequately serviced by TransACT.

Malone said it would be "politically and commercially insensible" to overbuild the network; however, he said that he wouldn't turn down any money.

"If the NBN Co does want to pay us $1000 per household passed, as they did for Optus, we're very happy to talk," he said.

Slavich said he believes that the area is "adequately serviced", depending on what the definition of that is, and that the company has been in discussions with the Department of Broadband, Communications and the Digital Economy (DBCDE) to clarify the definition.

Slavich said that the company has a deal with ActewAGL for exclusive pole access for cables for a network, which means that NBN co would have to roll out the network completely underground via Telstra's ducts.

He said that the company has also put in a request for a ministerial exemption from newly passed cherry-picking legislation to be able to extend the network further than 1km from the existing footprint, to service the Melonglo Valley and Geelong. The network already covers 98 per cent of Canberra.

Competition

With iiNet getting larger and larger, following acquisition after acquisition, the question was asked whether this consolidation of telco companies is a good thing for competition.

Malone said that the industry's consolidation has changed the industry from a whole bunch of tiny competitors that Telstra didn't care about into ones that it does care about, and so the consolidation has strengthened competition.

"At the top end of town, scale matters," he said.

iiNet has 13 to 14 per cent market share in DSL, he said, but only 10 per cent in broadband.

Malone hoped to make further purchases. "We don't see TransACT as the last acquisition we're going to do," he said.

Yet he would not be drawn on TPG's recently acquired 5 per cent share in iiNet, and what that would mean for his company. "We've got a lot of shareholders on a 5 per cent stake," he said.

Back-office savings

Malone was convinced that iiNet could save a lot of money by extracting costs out of TransACT's back office. TransACT has just extracted its IT from ActewAGL's, and spends between $3 million and $4 million on outsourced IT.

"We think there are considerable savings to be made," Malone said.

He said that iiNet has no interest in making any of TransACT's staff redundant, but that business as usual does not mean that things will never change.

He also thinks that the TransACT brand, like Westnet's, is not going to disappear.

"It's so deeply embedded," he said. "My gut says the TransACT brand is here to stay."

Slavich is also to stay on to run the company, with Malone saying that he certainly doesn't want to run it.