TPG surprised Australia last week on Friday when it announced its upcoming acquisition of iiNet for 1.4 billion dollars. This has led to some confusion over how Australia’s 4th largest internet service provider (ISP) by customer volume – TPG – could afford to purchase the 3rd largest – iiNet.
Concerns have also been raised by customers of iiNet and its subsidiary, Internode, as to the future of their service.
How could TPG afford this?
TPG has been remarkably effective in advertising itself as ‘the little guy’. It may be no Telstra, but already TPG owns and operates the second-largest land line broadband distribution network in Australia with 400 ADSL exchanges, compared to Optus’ “over 300”.
In terms of customer base it’s number 4, behind Telstra, Optus and iiNet, reporting 671k home broadband subscribers in 2013. Home phone subscribers that same year was 358k and mobile subscribers was 360k.
On top of this, TPG runs a large corporate division, which was responsible for around one third of its earnings in 2013.
Not enough? TPG finalised its acquisition of AAPT – another Australian ISP – for $450 million at the beginning of last year.
TPG may seem like a small player, but it now represents the undeniable success of the unlimited download plan model. Where Steve Dalby – the current Chief Regulatory Officer for iiNet – commented back in 2010, with regards to the unlimited download business model, that it was “good for bragging rights”, but not much else, it would appear that Dalby's new bosses had it right all along.
If you’d like to see more evidence of TPG’s meteoric rise to power, you can browse through its own annual earnings report from 2013, which is available online as a pdf download.
If the acquisition goes through, which seems likely, TPG would become the second largest ISP by user base. The two ISPs added together, as well as iiNet subsidiary Internode, would come to roughly 1.7 million subscribers. That leaves Optus far behind with just 1 million, but still falls short of Telstra’s approximately 3 million.
Will iiNet disappear?
Right now TPG’s plans for iiNet are unclear. TPG may choose to keep iiNet on as a premium service provider, in much the same way that Telstra owns and operates ISP Belong, or that Qantas operates Jetstar as a low-cost competitor to itself. This two-market approach can be effective, as evidenced by the until-now individual success of each company.
Also to consider is that TPG purchased AAPT in early 2014 and did not dissolve it as a company. This was a company with a failing user base, huge debt and a tenuous reputation. If TPG would allow AAPT continued existence, it would be surprising to see iiNet disappear.
At the very least, iiNet should live on in the short-term. TPG didn’t just buy iiNet’s staff, customers and technology; it bought iiNet’s good name. To purchase a company that is so loved by its subscriber base and immediately relegate it to history would be a waste of a hugely valuable resource.
With iiNet’s board of directors voting unanimously in favour of the buyout there would seem little in the way of TPG’s road to the number two spot. However, the motion must still pass a vote to be held at the annual iiNet shareholders meeting in June this year.
The ACCC has also called for a public review in to the deal, although this seems more of a formality at this stage, rather than potential for derailment.