John Linton
........as the press release yesterday reported that Netspace had been taken over by iiNet...sad to see a long time and well regarded communications company disappear along with its standards and long term owners. However the current and likely future state of the Australian communications markets gives little reason to believe that the furore caused by the 'NBN2' will not be settled in any realistic time frame and it is very much harder, and much more difficult, to operate a communications company in Australia today than at any time I have been involved in this industry. A 5X multiple of EBITDA seems a realistic price but is far less a multiple than iiNet paid for Westnet so presumably that is some recognition of the difference in market 'sentiment' between now and some 21 months ago.
http://www.smh.com.au/business/iinet-buys-netspace-for-40m-20100329-r8bq.html
I haven't changed my mind on just how tough this calendar year will be since I first wrote about the difficulties ahead some six months ago. Although Exetel seemed to be almost 'magically' shielded from the obvious effects throughout the first six months of this financial year and for January the predicted 'wars' to try and rekindle growth in customer bases and/or end the increasing erosion as the ADSL market stalled and began to fall back have begun to affect even companies of Exetel's size. While we very clearly saw this scenario as inevitable (and did the best we could to plan for it) the effect is still a little surprising in its severity as more and more ADSL suppliers realise how they are being affected and take their first tentative (at this stage) steps to address the situation that they must have seen coming.
The termination/resignation of long term BigPond head Justin Milne, would seem to be an indication that Telstra is preparing to do things to prop up their residential ADSL customer base that, presumably, Mr Milne was unwilling to do and that change, whatever it might be, will come soon now. Optus is 'rumoured' to be contemplating some radical changes to its ADSL offerings but have 'missed' the Easter promotion period but they can't be far away. TPG's half year results for residential services were very positive but they have had to raise their value proposition three times in six months to maintain their growth and only time will tell on what the longer term effects of that might be. iiNet have done what they always do - buy another company when their growth falters so that the next reporting period's numbers will be very hard to work through and Internode is sending cautious signals that it needs more money to achieve its future plans via a share offering of some type.
With the possible exception of TPG, all the signs from Telstra on downwards, are of companies not meeting their FY2010 targets in terms of either revenue or profit and struggling to address those twin problems. I obviously have no knowledge of what any other company's situation might be but the 'facts' that can be ascertained from 'the public record' is pretty dismal and appears to be getting even more dismal. If the ABS figures do show a further decline in ADSL numbers tomorrow (bearing in mind the sources of their figures) then you can pretty much make the assumption that the residential ADSL market will get much tougher and more quickly than it has done over the past year or so.
In many ways this will be good for the end user of residential ADSL services because the different suppliers will need to find ways of making their current customers happier to stay with them than move to the next most attractive promotion made available by increasingly anxious suppliers. However, unless each of the companies who go down this path have found some new ways to reduce operating and supply costs, the 'profit squeeze' is going to be not insignificant and it will also be necessary to find the money for the various promotion costs whether that is via marketing/advertising or the lower costs of the services offered. The well defined "more downloads for the same price" gambit that has been the method of addressing these issues since the first ADSL service was made available has no reached its limit with AAPT offering unlimited downloads - there is nowhere for that company to go and similarly any company that goes down that path. This means the only real option is, Heaven forbid, lowering the cost per month of providing services which, for almost all current major suppliers, is not possible without a very noticeable bottom line erosion.
Perhaps the owners of Netspace see the future in the same way and, in their case, saw an even bigger challenge in their corporate customer base where they, like so many long time providers have a large number of customers paying way over what data services are now capable of being provided for. I don't know any more than any other casual reader of the 'public record' but I was slightly saddened to see the end of one of the better Australian communication providers albeit via a handsome 'pay day' for the people who spent so much of their lives building the company from a zero base.