Analysis of Internet Services in Australia - Case Study Example

Internet Research Project Name Tutor Unit Code Executive Summary Internet services in Australia are provided by several players but the report focuses on main ISPs: Telstra, iiNet, Internode, TPG, Optus, and Vodafone. The data is collected from each firm’s website. At present, the Australian internet industry is dominated by a few to players: Telstra, iiNet, TPG Telecom, and Optus, in that order. There is high competition that continues to strain profitability and the industry is dogged by mergers and acquisitions as large companies aim for higher economies of scale. Small ISPs such as Vodafone focus on niche market segments. The nature of the market is imperfect competition. The products and services provided by the Australian ISPs are somewhat differentiated but there still remain as close substitutes. The Australian internet industry is attractive to new entrants, who can secure access to already existing infrastructure from other ISPs. However, some factors such as increasing costs and the desire for innovative and technologically advanced infrastructure restrain the threat of new entrants. Optus, TPG Telecom and Vodafone use the volume-based approach. They charge their customers based on the downloaded content. Optus and Vodafone charge extra data usage. On the other hand, Telstra, Internode, and iiNet use flat-rate pricing. Telstra, Internode, TPG Telecom and iiNet offer additional elements at no extra charge. Companies exercise their market power by the prices they charge, starting with Telstra that charges higher premium prices. With increasing broadband services, the demand for data will continue to attract both individuals and businesses. Table of Contents Executive Summary 2 Introduction 4 Market Structure 4 Pricing Strategies 7 Market Power 8 Potential Customers 10 Conclusion 11 References 12 Introduction Internet services in Australia are provided by several players. Following the privatisation of the state-owned firm, Telstra, several other players have infiltrated the market. Even though the market is dominated by a few players, other smaller firms provide niche services (Noam, 2011). This report looks into the naked broadband market in Australia, with a focus on the nature of the market, competition, pricing strategies and potential customers. The report is based on six Internet Service Providers (ISPs) in Australia. These are: Telstra, iiNet, Internode, TPG, Optus and Vodafone. The data is collected from each firm’s website. The first part of report looks into the nature of the internet market in Australia. This is followed by an analysis of the pricing strategies used by each ISP and their effectiveness in terms of growing each firm’s market share and improving profitability. Based on the firm’s pricing strategies, the report also analyses each ISP’s market power and the potential customers for different data plans. Under this, the economic rationale for the lower unit charge for heavier users is also discussed. Finally, there is a conclusion that also captures a recommendation of the appropriate investment decision and the kind of pricing scheme that should be adopted. Market Structure The Australian internet industry is dominated by a few to players: Telstra, iiNet, TPG Telecom, and Optus, in that order. The ISP providers are embroiled in intense competition that continues to strain profitability (Noam, 2011). The industry is dogged by mergers and acquisitions as large companies aim for higher economies of scale. For example, iiNet and TPG Telecom have strongly engaged the acquisition strategy that has propelled them to be the second and third largest ISPs in Australia respectively. iiNet has acquired over 30 ISPs since 1998, such as Adam Internet (2013), Internode (2012), TransACT (2011), and Westnet (2008), among others. TPG merged with SP Telemedia in April 2008, and acquired PIPE networks in 2010. Small ISPs such as Vodafone focus mainly on niche market segments. The ISPs mainly operate in the major eastern population centres of Australia, that is, Victoria, New South Wales and Queensland in relation to the Australian population spread. Nevertheless, ISPs have been expanding to other regions of Australia particularly to Western Australia and the Australian Capital Territory. Recently there has been a more trend out to less-populated areas (IBISWorld, 2015). Figure 1: Distribution of ISPs in Australia Source: IBISWorld (2015). The nature of the market is mainly points to imperfect competition within the market. The products and services provided by the Australian ISPs are somewhat differentiated but there still remain as close substitutes. Each ISP sales the same product but under a different brand name. Each firm has some degree of control over its prices. Telstra is the largest ISP in the country and covers the largest part of Australia. The company had been enjoying a monopoly status before. The company still continues to exercise control of price in the market even after the entrance of other firms. Telstra seems to be the price setter given that no other firm charges more prices than it charges across the different data plans. Other firms such as iiNet and TPG Telecom have staged the competition through mergers and acquisitions to gain some competitive advantage through economies of scale. They also exercise control over their prices. Same for other small firms (IBISWorld, 2015). The Australian internet industry is growing rapidly. The market is attractive to new entrants, who can secure access to already existing infrastructure from other ISPs. However, this situation may not continue to stay this way for long. Customers are demanding faster and increasing data meaning that technological innovation is desired for the future. Firms are faced with increasing costs and the desire for innovative and technologically advanced infrastructure. There is stiff price competition among the present existing players. Therefore, new entrants have got to look for a way to differentiate them from the rest. The industry has high fixed costs and is capital demanding, this makes firms in this industry scuffle to realise economies of scale making the industry distasteful to new entrants. These factors restrain the threat of new entrants (Noam, 2011). Pricing Strategies Pricing of broadband services is mainly characterized by an open internet session; the time of day/week when a session is made; and the duration of a session. The pricing strategies are influenced by a number of factors that are contingent on the needs of the market. These include: the extent of government regulation, the competitive structure of the market, the existing infrastructure, competing technologies such as cable TV and the indirect competitive pressure from bordering countries. Recent liberalisation, as well as high innovation and convergence has increased competition. Therefore, ISPs have had to answer back with differentiated pricing strategies based on technology and speed of connection (Biggs & Kelly, 2006). Packages for broadband access possibly will include: monthly access fees; installation fee; equipment charges (purchased or rented); additional thresholds, by bytes or time. There may also be charges on additional services. For example, some ISPs can charge separately for internet access or for e-mail accounts for the same data package. Discounts, e-mail accounts plus extra services can also be offered, as well as Voice over Internet Protocol (VoIP). Moreover, ISPs are increasingly bundling broadband packages with supplementary elements of the ‘‘triple play’’, such as TV channels or minutes of telephone service (Biggs & Kelly, 2006). Table 1 summarises the main broadband pricing strategies practised by ISPs in Australia: Table 1: Australian ISPs Pricing Strategies Company Optus Telstra Internode TPG iiNet Vodafone Pricing strategy Volume-based Flat-rate Flat-rate Volume-based Flat-rate Volume-based Additional elements Rental home phone lines with PAYG call rates, International call lines are discounted NodePhone VoIP, $10 monthly call credit TPG IPTV trial, 20 e-mail accounts, 30mb web space (static IP address), spam filter and virus protection iiTalk VoIP, 10 e-mail accounts, 1 GB webspace, iiNet Freezone access, virus and spam threats protection None Extra charge $20 for extra 30G 0 0 0 0 $10/GB on data expiry Optus, TPG Telecom and Vodafone use the volume-based approach. They charge their customers based on the downloaded content. Optus and Vodafone charge extra data usage. On the other hand, Telstra, Internode, and iiNet use flat-rate pricing. Telstra, Internode, TPG Telecom and iiNet offer additional elements at no extra charge. Market Power Telstra has the largest market share (47.5 per cent) given its scale and scope. iiNet has been briskly acquiring new Naked DSL broadband and VoIP subscribers and now has a market share of 14.2 per cent. iiNet was the first ISP for naked DSL. TPG Telecom accounts for 11.6 per cent of the market share whereas Optus enjoys a market share of 9.2 per cent IBISWorld (2015). Internode was acquired by iiNet in 2012 and therefore is counted under its market share. The acquisition of Internode enlarged iiNet’s market share, mainly in the residential and business sectors and added to the company’s position as the number two ISP in Australia. Vodafone account for a very small market share in the Australian ISP market. Figure 2: ISPs Market Share Source: IBISWorld (2015). The pricing data exemplifies market power that somewhat falls into the ranks of the market share. This clearly indicates that the ISP market in Australia does not fall within the requirements of a perfectly competitive market environment. Telstra enjoys a huge market share and therefore enjoys greater market power. That’s why it charges higher and premium prices: its broadband internet are the most expensive at $73 (50GB), 93 (200GB), and $113 (500GB). iiNet also comes in second. The company offers more broadband bundles at relatively lower prices of $69.95 (300GB), $89.95 (600GB), and $109.95 (1000GB) respectively. Internode being a subsidiary of iiNet exemplifies the same trend at $59.95 (150GB), $89.95 (400GB), and $109.95 (1200GB) respectively. Even though TPG Telecom has a slightly higher market share at the moment than Optus, it has a comparatively lower market power. Its broadband prices are lower than Optus at $50 (50GB), $60 (200GB), and $70 (unlimited) and $50 (30GB), $80 (200GB), and $100 (unlimited) respectively. Vodafone is not a big player in the Australian ISP market and therefore it provides smaller data bundles at very low prices of $20 (2.5GB), $45 (8GB), and $90 (25GB). Nonetheless, the Australian ISP market space is fiercely contested. There are frequent mergers and acquisitions as emergent ISPs, such as iiNet and TPG Telecom seek out sufficient scale to take on the established ISP: Telstra. Potential Customers According to IBISWorld report (2015), many subscribers are migrating from the old and slow dial-up connections to the recent and faster broadband services. IBISWorld expects the number of internet connections to go up in 2015. In the same vain, the number of households with PCs is projected to go up and therefore increase the demand for internet. Household demand for internet has been increasing given the high speeds plus high levels of innovation. This has increased the volume of downloads. Furthermore, ISPs have improved their broadband pricing and increased functionality and usability of online applications. Therefore, households are expected to be the primary customers for all Australian ISPs for the lower end, the middle range and the high end data plans. Individual customers can use the data for on-line shopping, to stream movies, to listen to and watch music online; depending on their usage (Hanson et al., 2008). Businesses are also disposed to subscribe to the different available naked ADSL broadband services. Internet is a very important tool for business to reach customers, mainly through marketing. Also e-commerce is on the increase and is expected to be a big thing in future. Businesses also benefit from the greater access of fixed-line internet than wireless internet. As broadband speeds continue to increase and with the increase in the number of businesses, the corporate demand for broadband services will keep going up. However, businesses are more apprehensive with the quality of services delivered by ISPs other than the value for money. Businesses are the main customers for the mid-range and top end data plans. They are also sensitive to their costs. ISPs therefore try to charger lower amounts per unit for big bundle plans. It also goes by the rule of economies of scale whereby more data bundles are expected to attract a lower per unit charge (Hanson et al., 2008). The ISPs will therefore continue to make available data plans and varieties that suit customer needs. This means that all customers can without problems change ISPs and data plans so as to get enhanced value for money (Hanson et al., 2008). Conclusion The Australian internet industry is dominated by a few to players that are embroiled in intense competition that continues to strain profitability. However, the best way to grow into the future is through mergers and acquisitions to boost economies of scale. A small firm can focus on the niche market segments. The flat-rate pricing strategy is the best to adopt. It is easy to understand and customers feel that they get value for money. It is also easy to sell and to bill making easy financial planning. Moreover, provision of additional elements at no extra charges boost the firm’s competitive advantage and attracts more customers. References Biggs, P and Kelly, T. Broadband Pricing Strategies. 2006. Emerald Group Publishing Limited. Vol. 8, No. 6, pp. 3-14. IBISWorld Industry Report. Internet Service Providers in Australia. 2015. IBISWorld Pty Ltd. Hanson, D. Dowling, P. Hitt, M. Ireland, R. and Hoskisson, R. Strategic Management: Competitiveness and Globalisation, 3rd ed. 2008. Cengage Learning Australia, South Melbourne. Noam, E et al. International Media Concentration Research Project. 2011. Columbia Institute of Tele-Information. Read More