iiNet deal sees Netspace founders leave

Netspace co-founders and sole investors Stuart Marburg and Richard Preen plan to leave the internet service provider before its $40 million acquisition by rival iiNet is completed by the end of April, iiNet chief Michael Malone revealed this afternoon.

However, iiNet plans to maintain the Netspace business as a stand-alone brand, he said, similar to how iiNet has managed its previous Westnet acquisition. The company's 180 staff and management team, led by chief operating officer Peter Eley, is to remain while back-end technical integration work will just go on behind the scenes.

Netspace was founded in 1992 by its current managing director Stuart Marburg, and technical director Richard Preen. The company was today directing enquiries to iiNet's spokesperson.

In a teleconference to detail the acquisition to journalists this afternoon, Malone said iiNet had been talking to Netspace off and on for "probably over a decade" about bringing the two companies together.

There wasn't any special precipitating event that had finally brought the acquisition this year, he said — instead, it came down to the personal situation of Netspace's founders, who were "at a point in their life where it made sense", he said, noting that iiNet and Netspace had been in formal talks for around the past six months.

"We've come close on a few occasions, but nothing down to agreed price or anything like that, more down to principles. There was always a gap in price — it would have been a good fit otherwise."

"iiNet's investment criteria hasn't changed during that time," Malone added. However he noted Netspace had invested in its business in that time, making it more attractive — for example rolling out its own ADSL infrastructure in telephone exchanges.

The Netspace acquisition will add DSL multiplexer (DSLAM) infrastructure in 17 telephone exchanges — including about 12 in Tasmania — where iiNet does not currently have its own hardware, although there is some overlap between the pair. The addition will mean iiNet will have its own ADSL infrastructure in some 345 exchanges nationwide.

In general, iiNet will attempt to migrate its own customers onto Netspace's network in Tasmania, and Netspace's customers onto its own network in other areas. Malone said if there were existing ADSL ports available at exchanges, customers could be moved over within a few months, but typically it would take much longer due to the need to build back-end infrastructure.

Netspace currently has about 20,000 of its 70,000 customers on its own network — with the remainder on resale services from wholesale provider such as Telstra.

iiNet will also give Netspace customers access to the internet television (IPTV) services it plans to launch in trial form by the end of this month, however less customers on the Melbourne-based ISP's network will be technically able to receive a solid service.

Malone said the IPTV service only delivered a good experience for customers who were on iiNet's own network, had a line speed of over 6Mbps and had their telephone exchange connected via fibre. "We need to control quality of service all the way from the set-top box back to the CBD," he said.

"In iiNet's case, it would be 53 per cent of the total customer base, in Netspace's case it would be even less — a lot less."

Malone said one of the factors that had given iiNet confidence that the culture of the two companies would be a match was the fact that both Netspace founders had been operating "almost like directors" of the business for the past few years, with a professional management team in place.

He also noted that the heads of Netspace's development team and call centre were ex-iiNet staff. "They're actually double agents for iiNet that have been operating for some time now," he joked.

Ultimately iiNet is still in a position to look for other acquisitions, Malone said, but he didn't expect that would happen by the end of 2010. He noted that iiNet's view was that eventually Australia's ISP market would be dominated by up to five large players, who had the capability to offer the next generation of online access.

"It'll be very difficult to operate as a small player then," he said.