By the numbers: 5 reasons TPG/iiNet makes sense

By the numbers: 5 reasons TPG/iiNet makes sense

Summary: Two weeks ago, we discussed how buying iiNet could expand TPG's network reach by 40 per cent. But there are many more reasons why TPG should be taking a hard look at its competitor from the west.

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TOPICS: Telcos, TPG
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Two weeks ago, we discussed how buying iiNet could expand TPG's network reach by 40 per cent. But there are many more reasons why TPG should be taking a hard look at its competitor from the west.

The jury is out over which company would buy which, but there are clear benefits of a combined iiNet/TPG, at least as far as investors are concerned. Here are the top five.

1. Better ARPU

A couple of years ago, TPG was facing a slide in its average revenue per user (ARPU); it bottoms out at $46 per month. It's now starting to climb again, thanks to bundling. A user with home phone and broadband together is worth $52.20, plus the value of calls — another $7. That's a big improvement on ARPU, and, with 100,000 on-net phone subscribers, it's having a marked impact on income. The ISP could do so much more if it expanded its DSLAM footprint. Phone services are only the beginning, of course. ISPs can increase ARPU with iTV — but that also needs an ADSL2+ DSLAM.

2. Sweat the assets

Pipe Networks (now part of TPG) has heaps of spare capacity. In July 2011, the usage rate was running at 33 per cent. A contract to service VHA means that it would be extending its reach, which could dilute the utilisation percentage. So, TPG has a backhaul network that can do so much more, if it had the customers. An extra 640,000 from iiNet (plus another 260,000 from Internode) would help fill the pipes with little incremental cost.

3. Lower access costs

iiNet's broad DSLAM footprint will help reduce access costs for TPG — essential for a business that primarily competes on price. We highlighted how the iiNet network would expand TPG's network reach by 40 per cent. iiNet's figures put the gross cost of an on-net customer at $25.11, compared to $41.47 for an off-net customer. Clearly, it's not economically feasible to compete when you are reliant on buying Telstra's wholesale DSL offering. TPG needs this expanded DSLAM reach to grow its base.

4. More business customers

Consumer customers account for just 65 per cent of TPG's total revenue. The rest comes from corporate accounts (including wholesale services from Pipe). iiNet has largely focused on consumers, but its acquisition of TransACT has seen the ISP focus a bit more on the business end of town. The margins from business aren't quite as good, but they still represent a massive growth opportunity for a combined entity. The combination of the broad DSLAM network and Pipe's underutilised backhaul would enable competitive products that would give the bigger players a run for their money, particularly in the SME segment.

5. Synergies

TPG has grown a business on a much smaller cost base; telecommunications expenses are similar for both companies, but TPG's staff costs are 30 per cent below iiNet's $67.5 million. In fact, if we look at the consumer division, TPG gets by with salaries totalling just $20.9 million. Customers may not like it, but presumably TPG would be arguing to investors that they can slash some of the operating costs at iiNet, improving profitability across the board. It could result in more dissatisfied customers, yet TPG's churn rates aren't high, and TIO complaints aren't alarming — not compared to Telstra or Vodafone.

Of course, there's an even stronger incentive for VHA to buy both of these companies. It needs to be able to bundle, and it's a long, slow haul trying to grow a customer base organically, particularly when you've experienced such a tragic loss of mobile customers through poor network performance. A combined VHA, iiNet and TPG really would create a viable challenger to the top-tier telcos.

Topics: Telcos, TPG

About

Phil Dobbie has a wealth of radio and business experience. He started his career in commercial radio in the UK and, since coming to Australia in 1991, has held senior marketing and management roles with Telstra, OzEmail, the British Tourist Authority and other telecommunications, media, travel and advertising businesses.

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8 comments
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  • 2) Internode/iiNET already use PIPE for backhaul - they pay PIPE for it so revenue would drop as well. Internode/iiNET are already some of PIPE's largest customers
    1) ARPU/Bundling would require moving customers off Internode/IINET ports and onto the TPG MSANs. This would add cost and complexity. Cost of moving LSS/ULL ports may not make sense as well as investing in new DSLAMs.

    Staff costs are less, but so is service quality. Questionable if that makes sense.

    TPG need to buy carcass of AAPT. This will give them domestic transmission which is I suspect starting to be one of the external costs they aren't able to control.

    However, TPG will buy iiNET. Question is when not if.
    3) TPG and iiNET both have fairly similar coverage (except WA) and most customers on-net. Suspect this would be minor.
    themmc
    • Hmm - formatting seems to have gone astray:

      1) ARPU/Bundling would require moving customers off Internode/IINET ports and onto the TPG MSANs. This would add cost and complexity. Cost of moving LSS/ULL ports may not make sense as well as investing in new DSLAMs.
      2) Internode/iiNET already use PIPE for backhaul - they pay PIPE for it so revenue would drop as well. Internode/iiNET are already some of PIPE's largest customers
      3) TPG and iiNET both have fairly similar coverage (except WA) and most customers on-net. Suspect this would be minor.

      Staff costs are less, but so is service quality. Questionable if that makes sense.

      TPG need to buy carcass of AAPT. This will give them domestic transmission which is I suspect starting to be one of the external costs they aren't able to control.

      However, TPG will buy iiNET. Question is when not if.
      themmc
      • I take your point on 2), but on 3) they're not that similar: http://www.zdnet.com.au/by-the-numbers-tpg-right-for-iinet-339329759.htm
        phildobbie
  • Seven very good reasons iiNet should by AAPT.

    1. Significant reduction in domestic transmission plus a seat at Southern Cross.
    2. $100m a year interconnect on the gang of four peering.
    3. Call termination expertise. iiNet' mobile and voice products could be configured for CTS termination i.e. with significant reduction on costs.
    4. large business and wholesale customer base (probably also a bit of issue seeing some of the AAPT wholesale customers compete with iiNet).
    5. access to a very large DSLAM network thus improving ARPU.
    6. The two companies are already intergrated and sharing network and capacity.
    7. it would significantly reduce NBN interconnect costs.

    If TPG brought iiNet it would be a nightmare of a merger. All the talent at iinet would quit before they worked for that cheap **** Teoh.
    chugs@...
    • 1. SCCN is a consortium cable - only the owners (Singtel, TNZ, VzB) get a "seat".
      2. GoF peering isn't worth $100M/yr as a cost saving. It just isn't.
      3. iiNET have interconnect. Not sure why AAPT's VERY EXPENSIVE and OLD SIEMENS switch network would help.
      4. Agree
      5. iiNET's DSLAM network is bigger than AAPTs
      themmc
  • Main reasons for iiNET buying AAPT:
    - Domestic transmission and IRUs on Optus' domestic transmission network
    - AAPT has a *fibre* foot print that would reduce cost for DSLAM and NBN Backhaul and reduce spend with TPG
    - iiNET would be able to reduce cost of AAPT significantly.
    themmc
  • I am an iiNet user and I can tell you now if TPG buys iiNet I'll be moving. I hate Telstra but I would sooner be with Telstra than TPG.
    marty999-8232c
    • I second that. However, my back-up plan - Internode - has just evaporated. They may hold onto many of us through lack of credible, scale alternatives...
      cletus75