Michael Malone says he set up iiNet to get internet access for himself after he graduated from university.
Photo: Rob Homer
When it comes to street credamong Australian geeks, internet service provider iiNet ticks all the boxes.
Founded in parents’ garage? Check. Took on the music industry’s anti-piracy lawyers to defend consumer rights? Check. Enthusiastic embrace of the national broadband network? Check.
To top it all off, last week iiNet launched Jiva, a new broadband brand offering unlimited downloads.
Less well known is iiNet’s aggressive expansion into the business market.
iiNet chief executive and founder Michael Malone says iiNet began chasing business customers about five years ago, bolstered by the acquisitions of Internode and TransACT in 2011.
“Going back five years ago we were exclusively retail, we had a few business customers but not on purpose,” Malone says. “In about 2008 we decided we needed to start getting serious. We set up a business component and iiNet’s business revenues are now about $200 million of a total north of $900 million.”
Earlier in August iiNet announced it would buy Adam Internet for $60 million, pending regulatory approval. The acquisition delivered a number of South Australian business and government clients using data centre, hosting and cloud services, and provided iiNet with a second data centre in Adelaide for in-built redundancy. In Brisbane, Sydney and Melbourne, iiNet rents capacity from NEXTDC.
Chasing business customers
Malone says internet telephony (VoIP) is its biggest opportunity to lure business customers, especially at the small to medium end.
“SMEs are overwhelmingly using traditional telephony and they’re still paying 18 cents a minute for long-distance phone, so we don’t have anything to lose in this space,” Malone says.
Credit Suisse analyst Bradley Clibborn says the push into the business market, particularly SMEs, is a good strategy.
“The evolution of VoIP for business customers will reduce the cost of telephony for many small business owners,” Clibborn says. “It also creates a churn event for an SME to reconsider its broadband and telephony provider. [This] could drive market share gains and revenue growth for iiNet.”
But the research director at analyst firm Telsyte, Foad Fadaghi, warns shifting into the higher-value business and government market won’t be easy.
“iiNet has hardly made an impact on the business or government market. Its marketing and strategy needs to mature as the drivers to switch providers in the business market are not the same as the consumer market,” Fadaghi says. “Leading business ISPs are seen more as partners rather than low cost providers of pipes.”
The entrepreneur’s journey
iiNet is 20 years old this year and it recently entered the ASX 200. Last week it posted a healthy profit of $60.9 million for the 2013 financial year, ended June 30. But to hear Malone tell it, he founded the business almost by accident. After having internet access at university in Perth since 1987, he discovered there were no ISPs in Western Australia.
“The thought of losing it was more than I could bear,” Malone says. “The real purpose in setting up iiNet was so I could get internet access for myself. I never expected it to become a job or a business. It was really about covering my own internet costs.”
The price for a 14k dial-up link to the United States was about $25,000 a year so Malone figured he would need 200 customers to cover costs. He installed the equipment in his parents’ garage.
Malone graduated as a maths teacher but his parents ran small businesses and he had the vague idea that he would run his own show at some point. Prior to iiNet, he tried fence construction, tutoring and an online shopping business – a concept that was ahead of its time in early 1990s Perth.
“Those first few years were very much hand to mouth,” Malone says. “I had a business partner at the time and friends and family were the first recruits. There was always this perception that if it all goes bad we’d just get a real job because you’ve got nothing to lose when you’re in your early 20s. The turning point was when we got an offer from Optus in 1998 to buy the business and that’s when it all changed because it made it real.”
Malone’s business partner wanted to take the Optus offer but Malone didn’t. He asked for two weeks to match the offer and, although he only had $15,000 of equity in his home, Westpac loaned him nearly $2 million to buy 40 per cent of the company. He took the company public a year later to pay off that debt and bought out his partner’s remaining 10 per cent stake.
iiNet listed during the dotcom boom, floating with a market capitalisation of $38 million off $10 million in revenue and $1 million of profit.Malone says he benefited from the fact that so many funds wanted to buy into the dotcom boom but couldn’t invest in companies with no revenue and profit so an ISP was seen as the next best thing.
In April 2000, the market crashed – and iiNet’s stocks along with it. Malone’s family had 18 million shares at the time of listing, so his personal wealth went through the floor too.
Malone says he did not lose confidence because it was clear the valuation had swung to the other extreme. He recalls the firm at one stage had a market capitalisation of just $8 million, despite having $6 million cash in the bank, and predicting there would soon be another $2 million.
“My mum happily took advantage of that and bought a nice bag of shares at 20¢ and she did very well out of it,” Malone says.
iiNet expanded across Australia and made various acquisitions, notably OzEmail, in 2005. It stayed up to date with technology and was one of the first to offer ADSL2 services. But the event that really made its name was the four-year court case against 34 Hollywood studios.
The studios wanted to force iiNet to disconnect customers accused of piracy but iiNet resisted this all the way to the High Court and won in April 2012.
Malone says he does not condone piracy but did not think iiNet should be forced to spy on its customers, nor do the movie studios’ bidding without independent oversight.
“That court case was a big deal – we perceived ourselves as fighting the good fight on behalf of customers,” Malone says. “It was a great victory for us and very good for iiNet’s brand because we see ourselves as a challenger and advocating on behalf of customers.”
Last week’s announcement of Jiva, a new brand offering unlimited downloads, certainly fits this image though not everyone is convinced it is good business.
“There is substantial risk in all-you-can-eat plans as they can attract heavy users and impact on ISPs’ margins,” says Telsyte’s Fadaghi.
Fibre to the home, thanks
In the consumer and business markets, iiNet’s biggest opportunity for growth comes from the NBN because this will allow the company to take on Telstra in a meaningful way in regional areas.
Malone says many people in regional Australia either can’t get broadband or need to pay significantly more than their city counterparts. Telstra has more than 70 per cent market share in regional areas compared with 35 per cent in the cities.
A decade ago iiNet was embroiled in repeated regulatory battles against Telstra and iiNet’s far bigger competitor is still the one thing that keeps Malone up at night. He is relieved that the NBN provides a regulated wholesale monopoly, giving all retail ISPs access on an equal footing.
“If you can get a level playing field [between ISPs] across the entire country, there’s a chance for us to rob Telstra of some market share and, more importantly, broadband becomes more affordable for people in regional Australia,” he says.
Malone says while the Coalition plan of fibre to the node would be faster, the Labor model of fibre to the home is preferable, describing it as Australia’s “highways of tomorrow”.
He says he would opt for fibre to the home if he were a prime minister trying to deliver good broadband policy but also if he were a telco entrepreneur seeking a commercial return, because the monopoly nature of NBN Co makes it a low-risk investment.
He also believes fibre to the home is better for iiNet – though Credit Suisse’s Clibborn offers a different view.
“The current fibre to the home plan rolls out progressively to both metro and regional areas and therefore overlaps to a degree with iiNet’s DSLAM footprint,” Clibborn says. “Under a Coalition plan we expect more of a priority to under-served areas initially, which actually expands iiNet’s [potential] market.”
Acquisition trail drying up
iiNet claims to be the second biggest DSL provider behind Telstra, though Optus is still bigger when cable customers are included.
Over the years much of iiNet’s growth has been fuelled by acquisition, including OzEmail, iHug, AAPT, Westnet, Internode, TransACT and Adam Internet.
iiNet closed the deal to buy Adam Internet within weeks of the Adelaide-based ISP going back on the market, after Telstra failed to gain regulatory approval for its own planned acquisition.
Malone says he was taken by surprise when Telstra announced the purchase last November and admits he found it satisfying that he “managed to snatch it out of Telstra’s jaws”.
“It was the last one, so we were disappointed we hadn’t had the chance but it was more surprising than anything,” Malone says. “We had our hands full because we’d just acquired TransACT and Internode so it would have been a distraction and the timing worked out well for us.”
iiNet has traditionally retired most brands of the businesses it acquires, but Malone says it is case by case. Adam Internet’s brand is strong in South Australia and likely to survive, he says.
Malone says acquisitions are never easy and each one brings unique challenges.
“We’ve learned not to make the same mistake twice,” Malone says. “From the outside iiNet and Westnet looked very similar to each other and were across the street from each other, but they were very different. TransACT had no automated systems. Culturally, if we could do an acquisition like Internode every three to six months we would do it because it’s come together so easily.”
The purchase of Adam Internet could mark the end of the acquisition trail for iiNet as Adam is the last privately owned ISP of any significant size in Australia. Rival M2 acquired another one, Dodo, for $204 million, in March.
Future growth may be slower as a result but Malone is optimistic about opportunities ahead, and has no plans to go anywhere any time soon.
“I’ll serve for as long as the board will have me,” Malone says. “I’m still enjoying it and I think there’s a lot to do so I’m in no hurry to get out.
My family now controls about 8 per cent of the company so I’m not here as a shareholder; I’m here because hopefully I’m the right person to lead the company for a good deal longer.”