Over the past 10 years the internet service provider industry has been one of the fastest-growing on the ASX and it is entering maturity in a period of flux. The majority of Australians have access to broadband at home, with the latest figures showing 77 per cent of households have broadband connectivity.

As well as taking up broadband in a major way, Australians have significantly altered the way they use the internet in the past 10 years. Online streaming and multi-device connectivity has the Australian household focused on download speed and service reliability.

The average Australian consumer downloads between 50 and 60 gigabytes a month and this is growing at around three gigabytes a month. This pace is expected to accelerate as online streaming gathers momentum, particularly as high-definition videos have become the norm.

Bundling television, internet and telecommunications through a single provider is becoming more compelling, offering greater choice for the consumer. Bundling reflects the industry’s appetite for consolidation, particularly through merger-and-acquisition activity. In June 2005 there were 193 internet service providers; by June 2014 there were 71. The question now is whether there is more consolidation to come.

Consumers’ propensity to stream will grow exponentially over the next few years.
Consumers’ propensity to stream will grow exponentially over the next few years. Louise Kennerley
A tale of two buyers

The two listed companies driving merger-and-acquisition activity in the past few years have been TPG and iiNet, affectionately referred to as the Pacmen of the industry. iiNet in particular has been aggressive in “bolting on”, or acquiring, businesses and subscribers, whereas TPG has focused on expansion into infrastructure, a major example of which was the acquisition of PIPE Networks in 2010. More recently, TPG has made an offer to acquire iiNet at $8.60 a share. If successful, the combined entity would be a clear number two in the market to Telstra, with Optus back in third place.

TPG has been one of the best-performing stocks in the ASX in this bull market: its shares have risen from $0.13 in March 2009 to more than $9 in late March, representing a gain of almost 7000 per cent. What is becoming clear is that the infrastructure owners are in the strongest position as we enter the national broadband network era in Australia.

The strong growth of TPG and iiNet and their active role in consolidating the industry have taken some players by surprise. Recently, we have seen Optus looking to become more competitive on price under its new CEO, as well as M2 Group focusing on growing its ISP business. M2 Group’s core brand is Dodo, which has one of the cheapest retail plans in the industry at $40 a month.

The NBN era approaches

In our opinion, the owners of infrastructure are going to be the clear winners of the next decade, because they control their destiny more than resellers of capacity. If the United States market is anything to go by, consumers’ propensity to stream will grow exponentially over the next few years as products such as Netflix, Stan and Presto are adopted in the local market.

Telstra is also incredibly well positioned, given its deal with the federal government to decommission its existing copper networks through the NBN. Telstra will receive compensation for the replacement of existing infrastructure as the government installs the fibre needed to support consumers’ growing high-speed habits.

Who’s next?

Considerable media attention has focused on M2 Group’s suitability as either an acquirer or target, but as the industry is now close to maturity the remaining options are slim. The great unknown is Optus – a question mark hangs over its new management team and investors and industry spectators alike are wondering how it will react to the changing industry landscape.

We expect merger-and-acquisition activity will slow and move towards cost management and potentially see adjacencies added to existing business to provide opportunities. Companies that can align with the data and storage industry will benefit from the demand for data warehousing as it grows with internet speeds and changing consumer usage.

Back to blog