With the looming roll-out of the National Broadband Network (NBN), Internode founder Simon Hackett was worried that his internet service provider (ISP) just wouldn't be big enough on its own to succeed.
In a conference call this afternoon discussing the $105 million takeover announcement, Hackett said that because of NBN Co's connectivity virtual circuit charge, and the decision to have 121 points of interconnect (POI) for the network, only an ISP of around 250,000 customers would have the scale to survive in an NBN world. With 260,000 active services, Internode just makes the cut. He said the merger was a matter of survival.
"The size of Internode on its own is right on the bottom edge of what we've considered viable to be an NBN player. If you're smaller than that, the economics don't stack up. It would be a dangerous thing for us to enter the next era being only just quite big enough," he said.
"Now, as part of a larger group, we end up with a scale that is three or four times that in total, and that puts us right in the sweet spot to make the economics of the NBN a very comfortable thing for the combined group."
iiNet CEO Michael Malone was more reserved, saying that acquisitions would have continued regardless of the roll-out.
"I'd certainly say it contributes, [but] I think consolidation would have been happening in this market even if NBN wasn't in the backdrop," he said.
The two companies had a lot to offer each other, Malone said, such as iiNet's ability to manufacture its own hardware, and Internode's running international links with peers on three continents. Malone also expected that it would be easy to integrate many of their systems, because they would be very similar. For instance, iiNet and Internode's ADSL2+ equipment and Voice over IP (VoIP) equipment were from the same vendor.
The two companies have been talking about merging for many years, with Hackett pointing to an email from as early as 1998 mentioning the possibility of a buy-out.
In addition to iiNet's 1.3 million active services, Internode's 260,000 active services give iiNet a market share of 15.5 per cent, according to Malone, which would fall below the 20 per cent mark at which he said the Australian Competition and Consumer Commission (ACCC) would become concerned.
For the foreseeable future, Internode will keep its brand, Malone said, noting that the company's brand awareness is big online, with very little advertising elsewhere. The brand is also "very strong" in Internode's home town of Adelaide.
"It is always going to remain a great company in South Australia. There's no intention on changing that," he said.
Hackett is staying on to manage the separate Internode brand, and, with a 7.5 per cent stake in iiNet as part of the deal, Hackett has no intention of sitting on the sidelines.
"I very much want to leave a substantial number of chips in this," he said.
"We're now facing the future together."