A Case Study on iiNet

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A Case Study on iiNet


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BackgroundThe Western Australia-based Internet Service Provider (ISP), iiNet, was first established in 1993 and

listed on the Australian Stock Exchange in 1999. Since 1998, the company has acquired in excess of 30

ISPs. Major acquisitions include OzEmail in early 2005; and Westnet in mid-2008. This makes iiNet the

third largest ISP in Australia. The company has engaged in the wired telecommunications market since

the acquisition of AAPT, and subsequently PowerTel.iiNet has vision of leading the market with

products that harness the potential of the Internet and then differentiate with award-winning customer

service.

The company is one of a handful of ISPs that have invested in their own digital subscriber line access

multiplexers (DSLAMs), with about 300 housed in Telstra exchanges. This investment means iiNet

customers residing close to an exchange get internet access at speeds of more than 20 megabits per

second using ADSL2+ technology. Furthermore, iiNet was the first national provider of naked DSL, with

ADSL2+ broadband being delivered without the need for a phone service. This means iiNet customers do

not have to pay phone line rental.

Main Business ActivitiesiiNet has a large offering of products and services for their customers, they focus on three groups

including; home residential, business and personal use. Whilst there is a large offering of products, the

main product and services that iiNet are focused around the internet and include; internet services,

internet protocol pay television, data storage, communication accessories, email and web solutions.

As an internet service provider iiNet represents 8.0% of the market share and is considered to be the

second biggest single internet service provider (Wired Telecommunications Carriers in Australia Industry

Report 2010). Whilst as a wired telecommunications provider they are considered to be the third

biggest single player, with a current total market share of 4.0% (Internet Service Providers in Australia


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Residential Business Personal

Internet

ADSL Broadband 1&2 Naked DSL Dial Up iiNet Fibre Optic Broadband Mobile Broadband

Internet

ADSL Broadband 1&2 Naked DSL Mobile Broadband iiNet Fibre Optic Broadband Broadband speed add-ons

Internet

Mobile Broadband iiNet/TomizoneWifi

hotspot

Phone

Landline Phone Rental VoIP- Netphone 1 & 2

Phone

Landline Phone Rental VoIP Calling- Single & Multiline

Mobile Phone

Mobile Phone- SimOnly

Pay Television

Fetch TV 1 & 2Business Phone Solutions

ISDN- Business Voice Solutions Sip Trunking

Storage

Online Vault Storage-Data

Accessories

Hardware- including; Bob,Modem/Voip Handset

Email Web Solutions

Web Hosting Email Hosting Domain Name Register Website Shopping Carts Virtual Private Servers /

Networks

Storage

Online Vault Storage- Data Support Computer Software &Hardware Support

Accessories

Hardware including: Bob,Modem/ VoIP handset, Routers

Storage

Online Vault Storage- Data


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Porters Five Forces of Industry Attractiveness for iiNet

The porters five forces generally attempts to identify a business as pursuing either a broad (market

wide) or a narrow (niche) scope, either a cost leadership or a product differentiation strategy.

When viewed this way, a business can sustain a competitive advantage by either supplying a different or

better product, which means the customers are willing to pay a premium or a similar product to a

competitor at a cost advantage which either means the business makes money on either unit or can

offer that unit to customers at a lower price.

Buyer Power The customers of internet service providers are households and businesses, accountingfor 84.6% and 15.4% respectively (Internet Service Providers in Australia 2009). There

are several ISPs that provide packages and ranges to suit customer needs. This means

that customers can easily change ISPs in order to get better value for money. On the

other hand, corporate customers have different concerns other than value for money.

They use the internet as tools for marketing and are more concerned with the quality of

services provided by ISPs. They also do not change their providers due to minor

differences in price. This weakens buyer power. On the whole, buyer power is moderate

to high.

Supplier

Power

iiNet has expanded and upgraded their network so as to allow customers in certain

areas to have access to faster internet (ADSL 2+). This service is provided via Telstra andtherefore iiNet has to pay a fee to Telstra (iiNets main supplier). Even though prices are

regulated by the Australian Competition and Consumer Commission, Telstra has the

right to propose a price. Telstra has the largest network and infrastructure in the

country and can be seen as a monopoly. The introduction of NBN in the future will cause

a decrease in the power that Telstra has as a supplier. This means that supplier power is

high at the moment but may decrease with the introduction of NBN. (Internet Service

Providers in Australia 2011)

New entrants The ISP industry is growing quite rapidly. This means that the market is attractive to new

entrants. Also, there is not much required in terms of physical infrastructure as a new

entrant can purchase access to already existing infrastructure. This situation may not

continue to stay this way as customers are demanding faster and increasing bandwidth.

This means that technological innovation is desired for the future, increasing costs and

the requirement for new and developed infrastructure. There is high price competition

amongst already existing players, forcing new entrants to find a way to differentiate

them from the rest. The industry has high fixed costs and is extremely capital intensive,

this makes companies in this industry struggle to achieve economies of scale making the


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industry unattractive to new entrants. These factors weaken the threat of new entrants,

making it moderate. (Internet Service Providers in Australia 2011)

Substitutes The rapid development of the internet has enabled it to become a necessity in the day

to day lives of households and businesses. It has replaced several traditional methods of

research, reading, shopping, communication, and media. However, ISPs are facing the

threat of substitution by mobile telecommunication providers with their 4G

technological development which improve data access speeds. The ISP industry is

currently relying on WiMax technology to offer a competitive position against the 4G

mobile broadband internet threat. Although this threat is not a current one and will take

time to materialise. This means that currently the threat of substitution is low to

moderate. (Internet Service Providers in Australia 2011)

Competitive

Rivalry

The ISP industry is currently dominated by Telstra. Besides Telstra, the market has

several other ISPs which mean that competition is high among them. Price is a major

basis of competition. Price in this industry is shaped by two components, download

speeds and the amount of download activity. The main driver for competition amongsthigh end internet service providers is faster and better service along with value for

money. In this highly competitive market it is important for iiNet to keep innovating and

developing their services in order to stay in the market. This large amount of

development leads to high costs and can put a constraint on cash flows. (Internet

Service Providers in Australia 2011)


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SWOT Analysis for iiNetA SWOT analysis of iiNet shows its strengths which it can utilize in order to build its strategies. It also

identifies areas which iiNet needs to improve upon. It is a very important tool and is used by businesses

before a new venture or project is proposed.

Strengths Large scale customer base. Current customers- iiNet has over 1.3 million customers (iiNet2010)

A publically listed company Ability to leverage off their own infrastructure which is largely a fixed cost network - The

Company is one of a handful of ISPs that have invested in their own DSLAMS, with about

300 housed in Telstra exchanges.

Award winning customer serviceiiNet has won several awards over the years. Increased scale because of the acquisition of large companies (recently AAPT) with active

customer baseiiNet has acquired 30 internet service provides since 1998.

Main focus SERVICE, BRAND, INNOVATION and SCALE.Weaknesses Infrastructure not owned by iiNet.

Heavy reliance on Telstra's (TLS) last-mile copper network which mean that access costs tothird party infrastructure still remain the predominant component of the cost to serve.

Opportunities Brands with outstanding service and products will continue to be rewarded with higherARPUs (Average revenue per user) in the future.

Increase in revenue through complementary products. (mobile voice and broadbandproducts)

iiNets investment in customer service will capitalise on the opportunities in the switchingcustomer market- iiNets call centres are in Australia and Outsourcing isnt considered as a

beneficial option because customer service is very important.

Threats Other competitors (Telstra, Optus, Primus, TPG) Low barriers to entry for new entrants after the installation of NBN (National broadband

network)Australia wide


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Competitive landscape for iiNet as an Internet Service Provider

Factors Description Level

Market Share

Concentration

The Australian ISP industry is characterised as having a medium

level of concentration. This year, the top four players (Telstra,

iiNet, SingTel Optus Pty Limited and TPG Telecom Limited) in the

ISP industry are forecast to account for 63% of total industry

revenue.

Concentration in this

industry is Medium

Basis of

Competition

Quality of service tends to reflect support and help desk services,

which can be a differentiating factor, particularly for new internet

users.

Price is the major basis of competition, as internet access is a

commoditised service.

Product innovations are important to winning subscribers in this

industry. Given the speed of technological advances occurring

within this industry, combined with the trend towards

convergence in telecommunication devices (i.e. the internet is

available through mobile phones being one example), the ability to

offer the latest value added features is of paramount importance

in differentiating the various players.

Product range has become increasingly important, as the price per

data byte will continue to deteriorate into the future. For example,

some ISPs have extended their product suite to include internet-

based telephony services (voice over internet protocol or VoIP) as

well as national and long distance calling minutes.Innovative packaging and bundling is also becoming significant

competitive tool, as players offer integrated combinations of the

latest products and services to encourage customers to become

multi-product users.

Branding is now a critical competitive weapon as it serves as

means for differentiation.

Market segmentation can be a basis of competition. Some players

achieve higher margins by focusing on small niche segments or

market segments such as business.

Competition in this

industry is High and the

trend is Increasing

Barriers to

entry

The barriers to entry in the ISP industry are the lowest of all

telecommunications industries. This is highlighted by the highnumber of small operation ISPs that exist in Australia. More than

90% of Australian ISPs have less than 10,000 subscribers each.

Barriers to Entry in this

industry are Mediumand Steady

Industry

globalisation

The Australian ISP industry is deemed to have a low level of

globalisation. Foreign owned entities are believed to account for

less than 15% of industry revenue.

Globalisation in this

industry is Low and the

trend is Steady


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Major competitors

There are four major players in ISP market which are identified in graph 2. With advantages in scale andscope, Telstra has been able to fend off attacks from a host of competitors. In 2008-09, the company

accounted for about 46% of total telecommunications revenue. With iiNet rapidly acquiring new Naked

DSL broadband and VoIP subscribers, IBIS World expects the company will reach a market share of 8.1%.

In 2010-11, Optus is forecast to account for 8.0% of industry revenue, down from the high of 8.2% in

2004-05. This loss of share was despite an increase in its proportion of fixed internet subscribers. For

others, The ISP space is hotly contested. Mergers and acquisitions are a frequent occurrence as

emerging ISPs seek enough scale to take on the full service providers: Telstra and Optus.


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Strategies of iiNet

Business strategy describes how a particular business intends to succeed at its chosen market

place against its competitors. It therefore represents the best attempt that the management

can make at defining and securing the future of that business.

iiNets Current Business-Level Strategies

Scale

iiNet Ltd is the fourth largest internet service provider in Australia. Over the years, the company has

followed an expansion strategy, which allowed them to acquisition over thirty ISPs (Internet service

providers) including two major acquisitions, OzEmail and Westnet. After acquiring these two major

companies, subscribers reached over 480,000 in 2008 which made iiNet the third largest ISP in terms of

the number of subscribers (iiNet, 2011).

Of course, some acquisitions were not always successful. OzEmail for example caused outages, poor

response times and below average service levels. Although the company still achieved their majorobjective, which was gaining market size and market share.

Innovation

IiNets capital investments in its own DSLAM network manifest its attempt to cope with the risk of

rivalry which aims at revolutionizing its product offerings to its customers. However iiNet needs to

maintain its competitive advantage and the large cost involved with the development as this can put a

constraint on cash flows (iiNet, 2011).

iiNet has also been growing in maturity in the broadband market by building scale and diversifying into

fresh territory, like Fetch TV, Mobile Voice, NetPhone, and a new suite of innovative consumer productsfrom our iiNet Labs to ensure long term growth. NBN is also a new breakthrough in broadband that

looks attractive in price for both iiNet and customers.

Service

The needs of the customers are one major driver of business strategy. Quality of service therefore, may

also be a key differentiator in going forward as iiNet continues to deliver outstanding customer service

with call centre costs only being 11% of revenue. This overhead has allowed iiNet to achieve its industry

leading NPS and customer retention. iiNet also decided not to outsource, which would have led to a

saving of 2-3%, however they didnt because the saving would have been outweighed by the decrease in

service levels.

iiNets investment in customer service will also capitalize on the opportunity of customers switching

within the market, with a 50% saving on set up costs, when a customer transfers from a competitor to

iiNet. This allows for continued organic growth, with a majority of iiNets new customers coming from

competitors that has high prices and low service quality. iiNet has reduced the reason for customers to


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leave with 35% of their customers leaving only because they were relocating, and many others returning

to iiNet after having left to try services with iiNets competitors.

Brand

iiNet has a long history of investment in service, brand, and innovation and iiNet has the scale and

credibility to continue to grow by acquisition and diversification. By being one of the front running

companies in broadband, iiNets brand is being promoted among potential customers, as being a brand

leader, which tells the consumer that they can buy with confidence.

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A Case Study on iiNet

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