The number of small ISPs operating in Australia will continue to fall as bigger players acquire more companies and fight for members in the ramp up towards the launch of the National Broadband Network, experts say.
The comments come as Michael Malone, the managing director of ISP iiNet, is expected to release figures tomorrow as part of an investor presentation showing the number of small ISPs operating in Australia has dropped by as many as 200 during the past 12 months.
iiNet chief regulatory officer Steve Dalby says the figures are part of research conducted by the company, and are evidence the telco market is changing in the lead-up to the NBN.
“We are aware the number of ISPs operating in Australia has dropped… and this is just about the natural market rationalising,” he says. “Certainly in 2004 there would have been about 600 ISPs and we know that number has dropped significantly since then.”
Dalby says the number of acquisitions has increased as the market makes its transition from being dominated by wholesalers, such as Telstra, to where access is provided by the NBN.
“We’ve certainly done our bit to acquire a number of ISPs, and many of those are either being acquired or are dropping away. But we’ve been saying this for some time, that the market will move to a model like the banks where you have major operators, and a second tier.”
“It certainly won’t be the number of 600 or so that we’ve seen in the past where every small town has their local ISP, which was a model we saw in the 1990s.”
Telco experts say that as the NBN creates a level playing field for all ISPs, as major wholesalers such as Telstra won’t be able to dominate the market, maintaining power in the telco industry will be judged by the number of members you have.
Ovum research director David Kennedy says the number of ISPs will continue to fall.
“Apart from price, there isn’t a lot more to differentiate basic broadband services so scale becomes important to maintain profitability. As a result, smaller ISPs are finding it harder to maintain margins, and of course there are companies like iiNet searching for acquisitions.”
iiNet acquired Westnet in 2008 and last year finalised the acquisition of Melbourne-based ISP Netspace, along with the user arm of AAPT.
But Dalby argues the telco market may evolve to a place where smaller ISPs are able to enter with different business models.
“You might see that you have non-traditional ISPs that will pop up. These won’t just sell internet access, but they have service providers offering specialised education applications, or health applications, or so on.”
“These could be existing corporations that move into this space for niche applications. I think we may see entrants into the market but using a different model.”
Kennedy agrees. He says there is a space for smaller ISPs that serve a niche market – but that mid-tier ISPs will find it more difficult to survive in the new environment.
“I don’t think we’ll go so far as seeing a market where there are just a few operators. I don’t think we’ll get below dozens, so there will be plenty of competition.”
“But you may see a niche market where people enter, but they have to differentiate themselves. For example, there could be ISPs that specialise in the tourism industry. Scale isn’t the only factor here in the market, but it’s an increasingly important one.”
However, all things being equal, Kennedy says, “we should expect the number of ISPs leaving the market to continue to grow”.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
