Gartner is forecasting further consolidation in the ISP market, claiming providers unable to diversify their business by introducing value-added services will inevitably fall by the wayside.
Although there are still between 300 and 700 ISPs operating in the Australian market, Gartner vice-president of research networks for Asia-Pacific, Geoff Johnson, said the majority were "petrol station or mum and dad" style businesses that were not equipped to deal with the intense commoditisation of the Internet services industry.
"Telecoms and networking have been commoditised severely - there are negligible margins to be made in basic carriage services," he said.
"The smaller ISPs are facing the same trends that the major players are facing... and a lot of the economies are just not rational."
Johnson said ISPs needed to have a differentiating service in order to survive.
"Look at WebCentral's hosting model for example: you have to develop something like that to have a scalable future as an ISP," he said.
He predicted the small ISPs which remain standing in the future would do so as a complementary division to a services or integration business.
Johnson said there were also opportunities for ISPs operating at the higher end of the market to gain ground by looking into more cutting edge broadband services, such as those based on VDSL or ADSL2 technology.
His comments follow the announcement last week that ISPs, Chariot and Datafast, had confirmed merger talks. According to the companies, the combined entity will be Australia's sixth largest service provider, boasting about 250,000 subscribers.
The two ISPs now have more than 100,000 subscribers each, 20,000 of which are DSL-based accounts.
A release issued by Chariot stated no capital raising or debt funding was likely to be required of either party. The deal is now awaiting regulatory and shareholder approval.
Once combined, the ISP will be listed on the ASX under the Chariot masthead.
Chariot currently provides narrowband and broadband services to customers across NSW, Queensland, Victoria and SA. The deal with Perth-based Datafast will give the ISP an established user base on the west coast.
The impending merger is one in a spate of acquisitions undertaken by Chariot this year. In August, the ISP acquired Newcastle-based provider, CNN Internet, for an undisclosed sum. This was the tenth company purchased by Chariot in the past 12 months as part of its goal to attain 150,000 subscribers by June 30.
Datafast has also been active on the acquisition trail. In November, the ISP acquired 25,000 Internet subscribers through its takeover of Melbourne-based provider, KeyPoint.
The month before Datafast spent $1 million on its takeover of the Eftel services business.
Datafast CEO, Simon Ehrenfeld, said the merging of the two companies would ensure both were among the top tier players as the industry matured.
"The larger ISPs are staring each other in the face planning the next stage of consolidation," he said. "OzEmail, Comindico are on the market; AOL has been acquired by Primus, iiNet bought iHug and Virtual Communities. We are in eighth and ninth position - we don't want to be left behind."