John Linton
........for those of you that remember the major premises of the movie (as opposed to the US kindy books) and apply those premises to the communications industry.
I had a discussion yesterday with an acquaintance about the general state of the the communications industry and the possible 'strategies' of some of the larger companies over the coming few months. We had a similar discussion a few months ago and, by and large, my observations about various companies had been more in line with the situation today than his had been - at least in some respects. We mainly talked about TPG yesterday and the ramifications of its offer to buy Pipe and how/if that would affect other companies with whom TPG competes. We had very different views.
His overall view was very enthusiastic emphasising the obvious success that TPG had enjoyed over a very long period of time and the recent acceleration of that success underlined by its increasing market share gains (56,000 increase in ADSL customers in the first two quarters of 2009 and 29,000 in the third quarter of 2009. Excluding the acquisition of the 50,000 or so ADSLĀ subscribers in the 'take over' of Soul last year the growth of TPG's ADSL customers since the start of 2007 by percentage has far exceeded that of the other 5 largest ISPs by more than double and in actual numbers is only exceeded by Telstra over that three year term and this year has blitzed every other provider, especially Telstra, whose net subscribers have hardly moved at all - if at all.
It has undoubtedly been a remarkable achievement.
We had different views on what the Pipe takeover will mean (assuming it does in fact proceed). His view was that it gave TPG the ability to provide unlimited broadband via its growing DSLAM network. His further view was that the profit made by Pipe would more than cover the interest on the money TPG would need to borrow and the actual money borrowed would be repaid in less than five years out of the increased profits that "free" IP would allow TPG to make from a continuing rapid increase in ADSL customer numbers. That would fit neatly into David Teoh's company buying track record of buying companies at prices low enough to ensure that their future profits funded the cost of acquisition within a very short time frame even if, as apparently the case with the Pipe purchase, he is paying a premium rather than buying at a discount. As my acquaintance put it - it makes a lot of sense and delivers TPG a competitive advantage than NO competitor can get close to - not even Telstra should it ever decide it needed to go down that path.
It does all make sense and it would look good in a company strategy and to the shareholders and market analysts. Except for one or two minor issues that spring to mind.
The first issue, and I don't know the actual figures so it is only by way of a 'small dark cloud on the horizon' at this stage. Pipe's current revenues (and profits) come from a mix of direct sales to commercial customers and sales of dark fibre and lit fibre to the larger ISPs with whom TPG competes - even small ISPs like Exetel spend around $A50,000 a month with Pipe and I would imagine that other ISPs spend much, much more than we do. If TPG's assumptions are that it will use the profits from its acquisition of Pipe to drive its ISP competitors out of business then I would have thought that those ISPs wouldn't be willing accomplices in their own commercial deaths and will simply cease buying from Pipe. As I said, I don't know what percentage of Pipe's business is with ISPs but I would think it will end up as zero when it becomes clear that is in fact TPG's commercial basis for the acquisition of Pipe. I would have also thought that TPG was itself a Pipe customer, and of some magnitude, so beware 'the double counting' where profits are allocated.
The second issue of offering unlimited broadband plans is the exchange back hauls of which TPG states that it has greater than 400 and continuing to grow. I, of course, have no idea of what current bandwidth is in place between those 400+ exchanges and their hand off points but I would take a reasonable bet that they are mostly 1 gbps with perhaps some 10 gbps links for the more heavily populated exchanges. Now I also fully realise that the cost of 10 gbps switches has fallen in Australia but 100 gbps switches are still very, very expensive and re-dimensioning the current TPG network to make unlimited broadband a reality is not going to be a trivial cost - a guess would put such a project not far South of $A100 million over a short period of time.
The third, not so important consideration will be what a TPG takeover of Pipe will do to the current 'free fall' in IP pricing, not from the duopoly so constantly referenced by Pipe in it's publicity, but from the new carriers entering the Australian market NTT and Tata as well as the continuing presence of Verizon and AJC and the future intentions of Telstra with its Endeavour capacity. The IP market is not a duopoly it's currently:
Southern Cross, Telstra, Verizon, AJC, NTT, Tata, Pipe and, if you like, Vocus as Pipe's reseller to some markets.
Prices for IP (excluding the fact that over 30% of IP is now delivered by even a small company like Exetel from peering and Akamai caching with new versions of PeerApp expected to move that percentage closer to 40% by early 2010). "Free IP" funded by the profits made from selling IP and cross connect services to competitors may not yield the returns a first, or even second pass, 'analysis' might indicate.
Then there's TPG's WA DSLAM roll out which will greatly disturb iinet's/Westnet's user base in that State which will also certainly mean that TPG's 'free run' at acquiring churn ins from the larger ISPs will face some resistance for the first time in three years with Telstra now on 'red alert' to stop the decline in its customer base and other large ISPs recognising that TPG's buying Pipe is more dangerous to them that it may have looked and that they should consider whether or not they assist TPG take their customers away or whether they should do something about that scenario.