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Analysts: ISPs will suffer in a saturated ADSL market

Analysts: ISPs will suffer in a saturated ADSL market

Cutting prices and increasing bandwidth for customers will not help ISPs, according to telco analysts.

ISPs will find it harder to stay competitive in an ADSL market close to saturation point, industry analysts claim.

According to the latest Internet Activity report from the Australian Bureau of Statistics (ABS), DSL continues to be the most popular form of broadband access, accounting for 51 per cent of non-dialup connections in July-December 2009. The figure was down from 57 per cent in January-July 2009 and has been falling for several years.

The results, along with the recent merger between iiNet and Netspace and a spate of cheaper and bigger ADSL packages from several ISPs, demonstrated the broadband market was close to saturation point, independent telco analyst, Paul Budde, said.

A number of ISPs have reduced ADSL prices and ramped up bandwidth across their broadband plans to be more competitive. Last month, AAPT announced its unlimited ADSL2+ offering, while Internode recently refreshed its Extreme ADSL2+ pricing.

“ISPs had enough warning the market is changing,” Budde said. “It is a natural development and you would expect ISPs would plan for it.

“With the National Broadband Network [NBN] around the corner, timeframes [for the rollout of next-generation infrastructure] are known and it’s up to ISPs to make a decision on how they can survive in a commodity world.”

Budde claimed price cutting would not be enough for ISPs to fight and win in an overpopulated sector. He added more price competition spelt lower financial growth.

“You can see how AAPT keeps struggling in the market – it clearly indicates you need to have scale. You need to grow big and you might even need to have mergers on the level of Optus and AAPT,” he said.

“The pressure will only increase and if you operate in a commodity market, and you’re not big, then there is no chance of survival.”

Independent telco analyst, Kevin Morgan, agreed with Budde over the futility of price competition.

“It is a fiercely competitive market and they’re basically fighting over the same cake, a cake that is not growing,” he said. “There will be a lot of price competition, but how durable is that? I think it’s already evident significant consolidation is going to take place, especially with the threat of the NBN.

“Scale is going to be everything if you want to survive in the NBN so it’s going to be a short-term battle over market share of the existing cake that will ultimately be expressed in consolidation.”

Budde perceived only two ways to overcome a saturated broadband market: ISPs either merged to become bigger players and gain cost efficiencies from a larger number of customers; or they became value-added providers.

“Cost of connection becomes irrelevant to customers when you provide all sorts of additional IT services,” he said.

The recent ABS report also found wireless broadband adoption accelerated by 40 per cent in the second half of 2009, but Budde claimed ISPs couldn’t rely on that for larger profits.

“Companies like iiNet, AAPT and Internode don’t have a mobile network and have to depend on other providers, so pricing for them will always be higher than the operators,” he said.

The ABS report surveyed 104 ISPs with more than 1000 active subscribers.


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Tags Mergers and acquisitionsiiNetADSLaaptpaul buddenetspaceKevin Morgan

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