A Case Study on iiNet

A Case Study on iiNet

Background
The 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 Activities
iiNet 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 Internet  ADSL Broadband 1&2  Naked DSL  Dial Up  iiNet Fibre Optic Broadband  Mobile Broadband Phone  Landline Phone Rental  VoIP- Netphone 1 & 2 Pay Television  Fetch TV 1 & 2 Accessories  Hardware- including; Bob, Modem/Voip Handset

Storage  Online Vault Storage- Data

Business Internet  ADSL Broadband 1&2  Naked DSL  Mobile Broadband  iiNet Fibre Optic Broadband  Broadband speed add-ons Phone  Landline Phone Rental  VoIP Calling- Single & Multiline Business Phone Solutions  ISDN- Business Voice Solutions  Sip Trunking Email Web Solutions  Web Hosting  Email Hosting  Domain Name Register  Website Shopping Carts  Virtual Private Servers / Networks Support  Computer Software & Hardware Support Accessories  Hardware – including: Bob, Modem/ VoIP handset, Routers Storage  Online Vault Storage- Data

Personal Internet  Mobile Broadband  iiNet/TomizoneWifi hotspot

Mobile Phone  Mobile Phone- Sim Only Storage  Online Vault StorageData

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Porter’s 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, accounting for 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. 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 and therefore iiNet has to pay a fee to Telstra (iiNet’s 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) 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

Supplier Power

New entrants

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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) 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 amongst high 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)

Competitive Rivalry

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SWOT Analysis for iiNet
A 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

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Large scale customer base. Current customers- iiNet has over 1.3 million customers (iiNet 2010) 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 service – iiNet has won several awards over the years. Increased scale because of the acquisition of large companies (recently AAPT) with active customer base – iiNet has acquired 30 internet service provides since 1998. Main focus SERVICE, BRAND, INNOVATION and SCALE. Infrastructure not owned by iiNet. Heavy reliance on Telstra's (TLS) last-mile copper network which mean that access costs to third party infrastructure still remain the predominant component of the cost to serve.

Weaknesses

 

Opportunities   

Brands with outstanding service and products will continue to be rewarded with higher ARPUs (Average revenue per user) in the future. Increase in revenue through complementary products. (mobile voice and broadband products) iiNet’s investment in customer service will capitalise on the opportunities in the switching customer market- iiNet’s call centres are in Australia and Outsourcing isn’t considered as a beneficial option because customer service is very important. Other competitors (Telstra, Optus, Primus, TPG) Low barriers to entry for new entrants after the installation of NBN (National broadband network)Australia wide

Threats

 

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Competitive landscape for iiNet as an Internet Service Provider
Factors Market Share Concentration Description 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. 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 internetbased 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. The barriers to entry in the ISP industry are the lowest of all telecommunications industries. This is highlighted by the high number of small operation ISPs that exist in Australia. More than 90% of Australian ISPs have less than 10,000 subscribers each. 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. Level Concentration in this industry is Medium

Basis of Competition

Competition in this industry is High and the trend is Increasing

Barriers to entry

Barriers to Entry in this industry are Medium and Steady Globalisation in this industry is Low and the trend is Steady

Industry globalisation

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Major competitors
There are four major players in ISP market which are identified in graph 2. With advantages in scale and scope, 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.

iiNet’s 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 ISP’s (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 major objective, which was gaining market size and market share. Innovation IiNet’s 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 products from 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 didn’t because the saving would have been outweighed by the decrease in service levels. iiNet’s 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 iiNet’s 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 iiNet’s 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, iiNet’s brand is being promoted among potential customers, as being a brand leader, which tells the consumer that they can buy with confidence.

Bibliography
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Hanson D, Dowling P, Hitt M, Ireland R, Hoskisson R 2008, Strategic Management: Competitiveness and globalisation, 3rd edn, Cengage Learning Australia, South Melbourne. Haynes, R 2008 'Optus lures custom with great deals', Daily Telegraph, The (Sydney), 17 July 2008, Australia/New Zealand Reference Centre, EBSCOhost, viewed 27/09/13. Internet Service Providers in Australia Industry Report (2009), 'IBISWorld Industry Report: Internet Service Providers in Australia.' IBISWorld Pty Ltd. iiNet 2011, iiNet in strong position for NBN roll-out [online], Australia, Available from: http://investor.iinet.net.au/irm/Company/ShowPage.aspx?CPID=1415&EID=11894948&PageName=iiNe t%20in%20strong%20position%20for%20NBN%20roll-out [Accessed: 27/09/13]

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