Meet Australia's new number two broadband provider

The competition regulator's approval of TPG's proposed acquisition of iiNet today will mean Telstra has a new fixed-line rival nipping at its heels.

The ACCC was able to overcome its initial concerns about the effect the merger would have on competition to give the buyout the official stamp of approval.

The $1.56 billion takeover of iiNet will allow TPG to leapfrog Optus to become the country's second-largest provider of retail broadband services.

The combined entity will boast more than 1.7 million fixed-line customers and revenues of $2.3 billion, compared to Telstra's 3.1 million and Optus' 1 million. 

iiNet is a strategic investment for TPG, which has traditionally opted for infrastructure-based players such as AAPT and Pipe Networks in its acquisition activities.

But iiNet provides the ISP what it needs to ensure its infrastructure assets are profitable - paying customers.

It's a benefit that was widely lauded by investors when TPG first announced its takeover bid, evidenced through the $1 billion jump in TPG's share price at the time.

TPG now needs only to get the acquisition through the courts - a likely outcome - before iiNet is officially integrated into David Teoh's ISP.

Now that the proposal is an almost done deal, all eyes will be on how TPG handles iiNet's famed approach to customer service and advocacy - something TPG has traditionally placed less emphasis on in favour of low-cost operations.

TPG has said it plans to retain the iiNet brand as a premium service within the TPG group, but there's no word yet on what will happen to others within the iiNet family, such as Internode, Adam Internet and Westnet.

TPG has also said it hopes to take some lessons from iiNet's "expert customer service" and leverage them within the TPG group.

But fears of declining iiNet customer service levels following the takeover were highly represented in submissions to the ACCC's study into the merger.

iINet has built its reputation as an ISP that offers customers high service levels and support, and as one that stands up for user rights in areas like privacy and copyright infringement - as evident in its current legal battle with the owners of the Dallas Buyers Club film.

TPG, on the other hand, has prioritised dollar value over brand and customer service.

Concentrated market

Telco analyst Paul Budde said the biggest loss for many consumers in the deal would be sentimental.

“The reality is telecoms is becoming a utility. The services people use are now apps or over-the-top services [rather than provided by carriers], so the sort of company iiNet or TPG is has changed,” Budde said.

“At the same time, [the merger] is not good for competition because competition from iiNet has lifted standards in the telecommunications industry, and some of that will be lost.”

Telsyte managing director Foad Fadaghi said the deal means the Australian telecommunications market will be concentrated in the hands of three major players.

“We know the combined unit will be the second largest in Australia, at around 24 percent market share in a market with about 7.4 million subscribers,” Fadaghi said.

“The key thing here is that the top three players will have around 81 percent of the market, which leaves just 19 percent to all the other [communications service providers].

“So what acquisition of scale is left? This is the last big deal.”

The impact of further consolidation was also front of mind for the ACCC, which in its ruling said any further mergers and acquisitions in the space would be closely scrutinised by the regulator.

"Any future merger between two of the remaining four large suppliers of fixed broadband is likely to raise serious competition concerns,” chairman Rod Sims said today.

Premium services

In terms of customer service levels, Budde said the combined entity would likely resemble TPG far more than iiNet.

“Over the next six to 12 months there will be a lot of integration, and you will end up with more of a TPG-level of service,” Budde said.

“TPG is a price leader and it will remain a price leader, and it will challenge Telstra and Optus. In the end, competitive prices are what a lot of people go for.

“In 30 years, I’ve never seen a company that has succeeded on customer service alone. iiNet had good services at competitive prices.”

The big advantage in an increasingly commoditised market, according to Fadaghi, will be power and scale.

“The combined organisation has more purchasing power for things like backhaul and international data. There’s a lot of synergies – mainly cost synergies,” Fadaghi said.

“There will be all kinds of possibilities. Some agreements will be long-term and so changes will happen over time."

He said he wasn't expecting iiNet customers to churn en masse - as long as the level of service did not degrade.

“The issue is who are consumers going to churn to? Another low-cost provider is not going to be any better than TPG, while many iiNet customers left Telstra for a reason and are unlikely to go back.”

Fewer consumer lawsuits

One negative consequence of the merger is the likely loss of an advocate ISP willing to pursue legal action in the interests of consumers.

“From my perspective, iiNet was the only one on the barricades for the users, and we’ll lose that,” Budde said.

“We haven’t seen Optus or Telstra take similar action for consumers. They all roll over or hide behind legislation.

“iiNet stood up for customers and created tremendous good will… For Optus and Telstra, they have to ask whether [such legal action] makes money for shareholders, and in most cases it doesn’t.”