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Bean-counters to rein in iiNet?

Will iiNet be able to continue its strategy of leveraging technological leadership now that its financial dirty laundry has been so publicly aired?
Written by Renai LeMay, Contributor
commentary iiNet managing director Michael Malone was right to describe his company's purchase of OzEmail from MCI just 15 months ago as "a momentous time".
Renai LeMay, ZDNet Australia
The AU$110 million acquisition appears to have been the first of a chain of events indicating a threat to telco iiNet's business strategy and even its survival as an independent company.

Since that time, iiNet has publicly battled to integrate OzEmail's 230,000-strong customer base into its billing systems.

The project saw iiNet's customers left on hold as the company's call centres struggled to deal with call volumes.

These problems were accompanied by a December earnings downgrade and technical issues with iiNet's fledgling Internet telephony service and international data links.

Finally, on 18 April the company suspended trading of its shares, pending an announcement. As the days dragged on, speculation mounted that iiNet was on the verge of another major purchase.

However, the truth was much darker.

"The company's financial performance in the March quarter has been well below expectations," iiNet revealed two weeks later.

The embattled telco claimed the situation was not identified earlier due to "deficiencies in forecasting and clerical errors in revenue recognition that have only recently emerged".

The company's shares remain on hold, and iiNet is reportedly fielding offers from parties interested in a merger or acquisition scenario.

Looking a little into the future, whether iiNet will be purchased is obviously a critically important issue for its customers.

However given some analysts believes the underlying business remains strong, the real issue may prove to be whether iiNet can continue its strategy of leveraging technological leadership.

One of iiNet's main differentiating factors in the market is that early investments in infrastructure have allowed it to get ahead on a technological basis compared with slower moving competitors such as Telstra and Optus.

For example, iiNet has offered 24Mbps ADSL2+ broadband and Internet telephony services for some time. Most Australian telcos are still stuck on 1.5Mbps.

It is likely iiNet's management will move more conservatively now that their financial dirty laundry has been so publicly aired. They'll need to remain focused on consolidating their assets after what is expected to be a large drop in iiNet's share price when the stock resumes trading.

This change of focus was signalled when iiNet's chairman Peter Harley stepped up to executive responsibilities on 11 May.

The company also appointed GEM Consulting to facilitate a strategic review of iiNet, aiming to "refine the company's growth strategy".

Reading between the lines here, it appears as if iiNet may believe that its infrastructure investments were growing faster than its customer base could support.

What do you think of iiNet's financial problems? Will the company's infrastructure investments continue unchecked or be cut off at the neck? Send your thoughts to renai.lemay@zdnet.com.au.

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