Life after Malone: Where to next for iiNet?

The darling of the Australian telco space iiNet has lost its founder and chief executive Michael Malone for good. The challenge of securing iiNet’s future in a sector awash with disruption could now potentially fall on new shoulders. And it’s a big one.

Malone took a sabbatical in November, in what now looks like a good way to test whether iiNet could cope with his absence, and evidently it's doing well enough for Malone to seek out greener pastures.

With a market cap of $1.2 billion and over 926,000 broadband customers, iiNet has managed to carve out a substantial slice of the market but the consolidation strategy, executed with great aplomb by Malone, has run its course.

The acquisitive strategy used by iiNet to build scale has paid obvious dividends. The financial numbers are good, as is the share price. The challenge for iiNet isn’t just about preserving the current value but also developing a portfolio of value-added services that sets it apart from the rest.

Transition to real value

Ovum research analyst David Kennedy says with the telco industry in a state of transition, iiNet’s focus on innovation could help it differentiate itself from a pure access player to something more valuable.

“They have to shift away from thinking about themselves as an infrastructure company and start thinking about themselves as an ecosystem company,” Kennedy says. “It’s a very different kind of challenge.”

iiNet is already using its in-house capabilities to address the issue, with products like Budii (a combined home gateway, phone and tablet hub) and its planned entry into the home automation market through SmartLife.

The SmartLife product allows customers to monitor and control their power usage and is expected to be launched later this year. It was built in conjunction with the CSIRO and Kennedy contends it's the first step in a potentially fruitful journey for iiNet.

“They need to build more partnerships with regards to developing new applications and services, the big vendors globally are all partnering with OTT developers,” Kennedy says. “They are not trying to build everything in-house.”

The NBN rollout fiasco certainly hasn’t helped iiNet, which to its credit has still managed to grab a 25 per cent share of the NBN market.

Informa analyst Tony Brown says that the full fibre-to-the-premises NBN platform would have created a different playing field for iiNet.

According to Brown, the Coalition’s NBN model just doesn’t allow iiNet to deliver the kind of product mix it could have delivered under FTTP.

“There are three different access means and that complicates things, there will possibly be three different bundles for different access technologies,” says Brown. “It’s going to be a much more difficult process for iiNet."

But the shift to the Coalition’s model doesn’t entirely hurt iiNet’s aspirations. At this point, iiNet would be quite happy to support any plan that extends the NBN’s footprint as quickly as possible and, more importantly, provides clarity.

The TPG elephant in the room

Malone’s departure will undoubtedly rekindle talk of TPG Telecom sharpening its knives to absorb iiNet. The Internode acquisition in December 2011 provided iiNet a handy defence. The Malone-Simon Hackett combo effectively served as a buffer against any move by TPG, but Hackett has since left to take up a seat NBN Co and Malone sold a 3.1 per cent stake in iiNet in August last year for $28.5 million. 

For now, Malone is holding on to the rest of his stake in iiNet, but any sell-off now becomes a financial -- not a business -- decision for him.

So is a TPG-iiNet marriage on the cards? One can never rule it out, but TPG and iiNet are travelling on different trajectories.  

A combined TPG-iiNet will in some ways be the culmination of the consolidation game that iiNet has played so well. But the two are very different beasts.

TPG’s aspirations are deeply rooted in the infrastructure space -- it has spectrum and its push with the fibre-to-the-basement network highlights that it is keen to be a bigger player in the access game.

Malone’s successor, home-grown or otherwise, would perhaps be better suited by aiming higher and moving up the innovation food chain. That’s the logical evolution of iiNet, and a fitting continuation of the legacy Malone is leaving behind.