IiNet: Difference between revisions

iiNet Limited (ASX: IIN) is Australia's third-largest ISP (2005/2006).^[1] Their focus is primarily on ADSL-based Internet access, using their own (and currently one of the largest) rollout of ADSL2+ infrastructure in Australia. iiNet also provides dial-up and voice services.

iiNet has acquired (or merged with) many smaller ISPs in its growth. It built a substantial customer base in Western Australia, and then expanded significantly into the eastern states by acquiring ihug and OzEmail.

History

iiNet was founded in 1993 by Michael Malone and Michael O'Reilly, who started the business in a suburban garage in Perth, Western Australia as iiNet Technologies Pty Ltd. It began as one of the first Australian ISPs to offer TCP/IP Internet access, as opposed to the store-and-forward techniques (such as MHSnet) that were then in use at other ISPs. It claims it was the first ISP to offer PPP access in Australia, and to be the first to base operations on the then new Linux operating system.

The company outgrew its suburban home in 1995 and moved to CBD office accommodation. Its early growth during the Internet boom was hampered by the ability of Telstra (not releasing Bigpond an ISP until 1997) to deliver enough telephone lines to cope with demand, and by the sheer competitive pressure in the Perth market, which had a comparative oversupply of low-cost providers. In 1996, iiNet successfully expanded into the Adelaide market under the name light.iinet.net.au (named after Colonel Light), in partnership with locals John Lindsay and Leigh Hart. The SA arm moved quickly to become the number three ISP in the state, before being acquired by Auslink in 1998.

Early growth

A growing demand on infrastructure and a rapidly increasing number of staff saw the company relocate again in 1997 to the central QV.1 building. Also in early 1997, the Western Australian Internet Association, formed in 1995 to represent the Internet community in Western Australia [www.waia.asn.au], created a peering and interconnection arrangement known as WAIX (Western Australian Internet Exchange [1]) between its members, which included iiNet and several other Perth-based ISPs.

In late 1997, the Internet market was moving towards 56K technology [2]. As one end of a 56k connection must be digital, the racks of modems found in every ISP became redundant overnight and expensive CBD-hosted equipment offered by Cisco, Ascend and Livingston became a requirement in order to survive in the marketplace. Also, in 1998, competitive pressure from budget national providers, led by One.Tel, started to reach the Perth market.

In 1998, founding partner Michael Malone purchased the company outright and listed it on the Australian Stock Exchange in September 1999 under ticker symbol IIN. The newfound capital was used to acquire its two major local rivals in the Perth area - Wantree Internet and Omen Internet - along with numerous smaller rivals such as Networx Internet, Infinite Data, Octal and NetTrek Internet Services.

This was perceived by most observers as a rationalisation of an unsustainable services market, and allowed not only iiNet, but also other providers such as Westnet, EFTel (itself an agglomeration of several ISPs formed in 2000), ArachNet and Global Dial among others to grow in the local market and to expand into fully-fledged national providers.

After the dot-com bubble burst in mid-2000, iiNet fared poorly on the markets - with shares at one stage falling to A$0.20 from a A$1.00 issue price - however its share price recovered as time progressed. In September 2000, iiNet became the first Western Australian provider to offer ADSL technology [3].

Growth through acquisition

The company created a new registered telecommunications provider iiTel, later renamed Chime, that sought to improve Internet access prices by making wholesale telephone access much cheaper. This was possible through new interconnection agreements mandated by the Australian Government's deregulation of the telecommunications industry, and provided the foundation for iiNet's later move into telephony (via its iiPhone (Later Phone Advantage and Phone 1) and iiNetPhone (Later iiNet VoIP) products).

Based on its new abilities, and after consolidating its local position, iiNet focused on expanding to national coverage in the early 2000s through strategic acquisitions and natural growth. The acquisitions were:

• RuralNet (Mildura and regional Victoria)
• Tas Access (Tasmania)
• Granite Internet (Fleurieu Peninsula, South Australia)
• RockNet (Rockhampton, Queensland)
• Hartindale (Sydney)
• Country Netlink (regional Victoria)
• Origin Internet (regional Victoria)
• Froggy Internet (Sydney)
• Virtual Communities (Melbourne)
• Octa4 (Darwin)

With the advent of ADSL access, iiNet and several other Western Australian providers on the WAIX were at the forefront of the price and service wars, and were able to make a sizable push eastwards into larger lucrative markets.

In 2003, iiNet made what was then its biggest acquisition, purchasing key New Zealand provider ihug. The acquisition significantly increased iiNet's share of the Australia/New Zealand Internet market.

In 2005, iiNet acquired the residential ISP business and trademarks of rival OzEmail. The business side and infrastructure of that business remained in the ownership of US-parent MCI. OzEmail had been Australia's largest ISP until 2000, when it was acquired by MCI. The retail arm had been neglected, and the company moved very late into ADSL, meaning that it had difficulty positioning itself as a broadband player. iiNet initially used both the OzEmail and iiNet brands on the east coast, but by 2006 iiNet had largely abandoned the OzEmail brand, using its own corporate image across Australia.

DSLAM deployment

In late 2004, throughout 2005 and into 2006, iiNet moved to introduce their own DSLAM infrastructure (colloquially known as iiSLAMs or iiDSLAMs in the industry) into telephone exchanges Australia-wide. This move allowed iiNet to be the first Australian DSL carrier to offer speeds of over 1.5 Mbit/s to a significant number of customers. The maximum download speed was initially 8 Mbit/s (ADSL1), which increased to 12 Mbit/s and later to 24 Mbit/s, as ADSL2/ADSL2+ standards have been ratified and tested with iiNet's equipment. There are currently over 200 iiSLAMed exchanges active around Australia, and a list of these exchanges can be found at iiNet's official website [4]. In future this infrastructure is expected to be used in conjunction with MSANs to allow iiNet to offer increased telecommunication services.

Launch of telephony products

2004 saw the introduction of iiPhone in the form of a long distance carrier.

In February 2005, iiNet introduced their full-service iiPhone telephony service with their new range of iiBroadband2 packages, allowing customers to pay their telephony costs completely through iiNet, including line rental and local calls.

In August 2005, iiNet released iiNetPhone, their consumer VoIP service. The product was an "add-on" service, available only to customers that also use their iiPhone service. As with most VoIP services, call costs were well under standard market prices for a regular copper line. The iiNetPhone service supports inbound and outbound calls to normal Australian PSTN numbers.

In 2006, iiNet were trialling its MSAN services in 3 Perth telephone exchanges; but release/expanded trial of these has since been put on hold until further notice. MSANs are iiNet's own full telephone service, meaning they can be completely off Telstra's phone service and onto their own. This would result in a lower line rental price for its customers and free additional add on options to the phone service.

Regulatory conflict with Telstra

In late 2005, Telstra Wholesale made changes to their pricing arrangements, each of which forced iiNet to make changes to their product line and pricing. The first of these changes was to the DSLAM port rate, which resulted in an increase of the cost of a 1.5 Mbit port. iiNet had only offered 1.5 Mbit/s plans (and above) since February 2005, so this affected them greatly. iiNet reduced the speeds for their two cheapest plans to 512 kbit/s, while doubling the data allowance on these plans in an attempt to placate users. They also rebranded the plans available to their Telstra Wholesale customers (512 kbit/s and 1.5 Mbit/s plans) to iiBroadband1, reserving the iiBroadband2+ moniker to uncapped "Up to 24 Mbit/s" speed plans, only available in areas connected to an exchange with an iiNet DSLAM. In April 2006, another iiBroadband1 (using Telstra Wholesale) plan's speed was reduced to 512 kbit/s (though existing plan users were allowed to keep their speed).

The second was an increase in line rental for iiPhone. The rate was increased from A$29.95 to $33.36, and was also blamed on price increases from Telstra Wholesale. Michael Malone said in regard to both changes, "We're disappointed in the changes to our broadband arrangements and line rental prices from Telstra Wholesale and we're challenging this." [5]

This dispute has now been resolved, and line rental has since returned to A$29.95/month under the re-branded 'Phone 1' plan on the iiNet Website. See [6]

Suspension and resumption of share trading

iiNet's share value slid from A$3.40 in September 2005 to A$1.69 in April 2006. On 18 April 2006, iiNet requested a trading halt pending the release of an announcement. Two days later, it suspended its shares from quotation. Initially, the company advised it intended to resume trading on the ASX the following week, but on 21 April, a local newspaper, WA Business News, speculated that "One line of thought is that uncertainty on behalf of iiNet's bankers, will result in the company embarking on a capital raising to address concerns over banking covenants, and provide its bankers will a measure of confidence." Other speculation in the same article suggested that iiNet may be about to exit New Zealand or the CEO was about to sell his shareholding [7]

On 1 May 2006, iiNet advised the ASX that its shares would remain suspended, as its March quarter results had been "well below expectations". The company announced on 11 May 2006 that updated financial figures for the previous year would not be released for "one to two weeks". [8] [9] On 13 May, The West Australians business section reported on the matter, and claimed that founder Michael Malone had been "sidelined", and that the company was "open for takeover" according to analysts, who rated Singtel Optus as the most likely suitor. [10] On 18 May, WA Business News agreed with the West's claim that takeover offers were being evaluated, however contradicted the claim that Malone had been sidelined. [11] Meanwhile, ZDNet reported, "It is likely iiNet's management will move more conservatively now that their financial dirty laundry has been so publicly aired. They'll need to remain focused on consolidating their assets after what is expected to be a large drop in iiNet's share price when the stock resumes trading." [12]

On 26 May, the stock was reinstated to official quotation and fell on its first trading day to A$0.85, after the 27 May edition of The West Australian reported that iiNet was in the red for the first time in five years and had vowed not to repeat costly mistakes. PowerTel, a Sydney-based telco, would emerge with a diluted stake of 13% at 85c a share [13], and Michael Malone's share would be diluted to 14.4%.

On 31 May, Amcom Telecommunications announced it had acquired a 19.96% stake in iiNet, becoming the company's largest shareholder. [14] On 21 June, the Malone family increased their holding to 19.97%. [15]

Sale of ihug - New Zealand subsidiary

On 20 July 2006 iiNet announced that they were wanting to sell their New Zealand subsidiary - ihug. Potential buyers included Orcon Internet Limited, Vodafone and TelstraClear. The sale to Vodafone NZ was announced on the 9th of October 2006[16], at a price of AU$36 Million - roughly six times ihug's EBIT at the time.

Products & Services

iiNet Limited provides broadband and IP telephony communication services to consumers and business customers. Its flagship products are broadband2+ (ADSL2+) services and VOIP services for businesses.

See also Broadband Internet Access (Australia).

References

External links

• iiNet official website
• iiNet forum on Whirlpool
• iiNet listing on Broadband Choice