iiNet takes Netspace: The benefits of scale

Having recently reached 460k broadband subscribers, TPG appeared to have  snatched third place in the fixed broadband market. But any glory was short lived,  with iiNet  reclaiming its number three position by announcing the acquisition of Melbourne based Netspace.   In exchange for $40m, iiNet has added ~70k broadband subscribers , bringing it to 520k broadband services in operation.

But is bigger better?

In both the current (pre-NBN) world  and the NBN world, being big has it’s advantages.

In the current (pre-NBN) market,  one of the main advantages of having more subscribers is improving the economics of DSLAM deployments.

For exchanges where iiNet already has DSLAMs with spare ports, adding a new customer “on-net”  should lower the average cost per subscriber on that DSLAM. This is due to being able to  spread the fixed costs of establishing a presence in the exchange  (e.g. DSLAM set up, backhaul/dark fibre ) over more subscribers.

In an investor presentation in June 2009, iiNet indicated it had about 15k spare DSL ports in Victoria, with  plans to add a similar amount.  iiNet expects its acquisition of Netspace to enable it to  migrate ~ 20k customers on to it’s network over the next twelve to eighteen months. That ought to improve the economics of it’s Victorian DSLAMs a bit.

As an added bonus, the Netspace acquisition also grew it’s DSLAM footprint by another 13 DSLAMs.  So as well as migrating Netspace customers on to existing iiNet DSLAMs, there may be the potential to migrate iiNet customers on to the newly acquired ex-Netspace DSLAMs to improve the return from those DSLAMs also.

But what about when the NBN arrives and fibre to the home strands iiNet’s copper based DSL investments?

I’m speculating a bit here, but I think it’s a relatively safe bet that scale is still going to matter.

iiNet is already positioning itself for the NBN world, highlighting in a recent investor presentation its investment in innovations such as BoB and its forthcoming IPTV service.  Developing and productising these (and future) innovations may have  high first-copy cost, but  lower marginal costs.  Similar to the DSLAM scenario, the more subscribers these initial costs can be shared across, then generally the more profitable these services become.

There are a range of strategic drivers for iiNet’s acquisition of Netspace, and whether one looks at the pre or post NBN scenarios, bigger definitely looks like better.

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