Smart TransACTion puts Optus in iiNet's sights

Smart TransACTion puts Optus in iiNet's sights

Summary: It is ironic that Optus celebrated the 20th anniversary of its establishment — the putative beginning of Australia's telecoms competition — in the same way that it began: by attacking a monopolist in a hail of vitriol and dire warnings of imminent systemic collapse. This time around, however, it's threatened not by Telstra or NBN Co, but by an upstart WA ISP with big dreams and the resources to make them real.

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It is ironic that Optus celebrated the 20th anniversary of its establishment — the putative beginning of Australia's telecoms competition — in the same way that it began: by attacking a monopolist in a hail of vitriol and dire warnings of imminent systemic collapse.

By all accounts, that was the tone of Paul O'Sullivan's speech on the occasion, in which he warned that the NBN venture is on "a knife's edge" and that the ACCC must guide our brand new monopolist — NBN Co — with a firmer hand than the limp-spaghetti grip it has used to "manage" Telstra.

There is truth in what he is saying: NBN Co must of course be managed appropriately to ensure its status as favoured monopolist doesn't foster anti-competitive behaviour that could hinder the industry's growth in the future. Yet to have Optus — for years a favoured competitor to Telstra that ran smack into the monopolist's brick wall when deregulation kicked in back in 1997 — call for greater regulation is sweetly ironic.


Unencumbered by 20 years of hits and misses, iiNet's new cloud and fibre nous has it gunning for Optus. (Ordoez gun barrel image by BrokenSphere, CC BY-SA 3.0)

The whole point of deregulation, after all, was to free up the landscape so Optus and other vendors could swim or sink on their own merits. And where many have sunk, Optus has thrived: 20 years on, it's an industry behemoth of sorts, with many millions of fixed and mobile customers, billions in revenues and a significant industry presence.

Much of this growth came because Optus was unencumbered by many of the legacies of Telstra's past. The copper network might have been an instrument of market control, but it's also expensive and forced Telstra to maintain non-commercial services such as its Universal Service Obligation investments. This sword had two edges: Telstra had to spend to maintain and fiercely protect an ageing and problematic infrastructure whose fundamental failures in large part justified the NBN in the first place. Telstra itself has publicly said the network will have zero value within a decade, and — inevitably freed of its monopolistic strength and restrictions — it hardly wants to still be propping up the network by then.

Of course, Optus has its own legacy: namely, a series of misfires as it tried, unsuccessfully, to expand its core access business into new and profitable areas. Its cable business hobbled along for years as it tried to pry exclusive broadcast rights from Telstra-Foxtel's hands, which eventually rendered Optus Vision extinct and diminished hybrid-fibre coaxial's potential to the point where Optus is now happy to shut the whole thing down and never talk about it again. There was also the big-money Optus@Home content portal, back at a time when media companies were convinced all they had to do was partner with an ISP to be rolling in dough.

Telstra has had its own stumbles: remember how it decided to break to the professional services market by buying Kaz in 2004, then held onto it for five years before selling it off in 2009? Or how it invested heavily in Hong Kong but ended up losing big on its CSL New World and Reach joint ventures? Now, we hear it's reading last rites over Sensis, a bloated holdover from the printed content era whose time came a long time ago.

NBN Co is not Optus' biggest problem: however good or bad NBN Co is, it will be that way to all ISPs. And that includes Telstra, once it's separated. No, Optus' biggest problem is iiNet.

Sensis, like obscure and usually-empty shops such as Tandy and Ed Hardy, is one of those companies whose existence you often wonder about. It does lots of stuff with maps, apparently; has an iPhone app that sometimes finds what you want it to; and wants so desperately to market details of its customers that it once led Sol Trujillo to declare it more important than Google and predict that it would generate $3 billion in revenues by this year.

Ahem. It didn't, and now it's being restructured as Telstra tries yet another strategy to move forward into the digital age. Universal Service Obligation (USO) burdens, unrealistic shareholder expectations and the fall-out from combative management relations with government overlords all exacerbated Telstra's problems throughout the years — years in which Optus was happy to play good cop to Telstra's bad, collecting customers along the way and merrily laying fibre where it pleased.

These are familiar stories in the telco world, where Optus and Telstra have spent so much time trying to one-up each other that they've embarked down some questionable paths that have often failed to deliver what they'd hoped. Unless, you know, you're a huge fan of the ARIAs and see value in subscribing to Optus just so you can watch all the contrived back-stage dramas.

Sure, companies are always trying new things, but when they become lumbering giants they leave themselves open for smaller, nimbler competitors to come cut them off at the knees. And NBN Co is not Optus' biggest problem: however good or bad NBN Co is, it will be that way to all ISPs. And that includes Telstra, once it's separated.

No, Optus' biggest problem is iiNet.

Once a scrappy little ISP from Perth that developed a nationwide reputation thanks to good customer service, iiNet has spread across the country with a goofy advertising campaign, solid services, good prices and well-intentioned investment in DSLAMs that have given it significant broadband penetration. A series of major investments have boosted customer numbers, while carefully-planned change programs integrated those customers without the company skipping a beat. The company is that rare and dangerous breed that combines an upstart's ambition with the large scale to realise it.

iiNet is, in a word, ravenous — and it has Optus in its sights. And that's why its acquisition of TransACT is more than just another entry in its balance sheet: TransACT, with a long and storied history of delivering fibre to the home (FTTH) services across the ACT as well as owning HFC infrastructure in several regional cities, has more recently refocused its strategy on cloud computing — and is at the end of an 18-month restructuring that has refocused its core business in that direction.

If iiNet continues to expand its coverage and strategically extend the depth of its services to sit at the forefront of cloud computing and other fast-growing markets, it will secure a position as a new and very real contender in crucial government and big-business contracts.

iiNet CEO Mike Malone was quick to downplay suggestions that the buy is a pre-emptive strike against the NBN. However, there's more to the story than simply buying TransACT's 40,000 customers: like every telco, iiNet is also eyeing cloud computing; its purchase of TransACT will give it a big boost in that space, where Optus and Telstra are already stretching their wings.

If it can leverage TransACT's infrastructure and expertise, iiNet will be able to sell an even more-convincing story to the enterprise and markets that Telstra and Optus have largely split until now. And, since iiNet will be able to leverage the NBN, it can avoid sinking billions into infrastructure as Telstra and Optus have done. Rather, it can focus on fine-tuning what infrastructure it does have, gradually shifting its customers to the new network, and continuing to bulk up and pursue ever-larger customers at the expense of its rivals.

If Telstra and Optus are heavily-laden freighters lumbering their way through the seas of the telecoms market, iiNet is a speedboat that's weaving to and fro in front of them while passengers moon their pilots from the deck. iiNet offers FetchTV IPTV; Optus does the same. Optus runs a big mobile business; iiNet has launched itself as a streamlined MVNO. Yet, iiNet knows what it wants to become, and it has a plan to get there. Optus and Telstra, meanwhile, have their toes in so many different pools that they've repeatedly found themselves tripping over their own feet.

Just as Optus learned from Telstra, iiNet is learning from both Optus and Telstra. Both giants are using the NBN as an inflection point, from which to reshape their business and consider life in a world where they don't have to focus so much on physically providing access. But iiNet has sidestepped all that: it may have a large customer base, but its relatively shallow base of products compared with its legacy-burdened rivals means it has the flexibility to try many new services and quickly ramp up the ones that are successful.

If iiNet continues to expand its coverage and strategically extend the depth of its services to sit at the forefront of cloud computing and other fast-growing markets, it will secure a position as a new and very real contender in crucial government and big-business contracts — and establish itself as the Optus of the third decade of competition.

What do you think? Does iiNet have what it takes to rumble with the big boys? Or will it fail to make the jump from home darling to big-business mainstay?

Topics: NBN, Broadband, Government, Government AU, Telcos, Unified Comms, Optus, Telstra

About

Australia’s first-world economy relies on first-rate IT and telecommunications innovation. David Braue, an award-winning IT journalist and former Macworld editor, covers its challenges, successes and lessons learned as it uses ICT to assert its leadership in the developing Asia-Pacific region – and strengthen its reputation on the world stage.

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3 comments
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  • David,

    Did you even bother to read the article you linked in reference to TransACT's '18 Month Restructuring' to refocus their core business around Cloud?

    I appears not. TransACT's GM of IT was talking about the issues they were having with existing business systems left over from their sister company, ActewAGL. They were looking for a replacement ERP system and decided on Netsuite, using Cordelta and Netsuite developers to assist in documenting E2E processes and the migration itself.

    They've got quite a large data centre based in Canberra, in fact it's where the majority of national ISP's and C&G Points of Presence are. Their background is predominately telecommunications based, with substantial MVNO (Vodafone) and content agreements. They don't have a cloud offering and if they did, it would be partnered up with a company that was capable of delivering not only SME solutions, but C&G environments that adhere to AGIMO, DSD and PCI DSS standards.
    nathan.gumley-fb98f
    • Hi David,

      I read you article with great interest, however after reading the linked article on the 18 month restructure, I've got questions in the same vein as Nathan. the article reads that they are going to consume cloud services not provide them.

      Have we mis-interpreted the articles?
      RB
      red_baron-12dc0
  • iiNet's next purchase will be AAPT, for their wholesale, Enterprise and Government customer base. The gang of 4 peering arrangement and the $100m a year that brings will be icing on the cake, as well the significant reduction on transmission costs.

    the purchase of Transact was just for the customers pure and simple.
    chugs1