iiNet to challenge Telstra’s dominance

In recent years, Telstra’s (ASX: TLS) dominance in the fixed broadband market has been challenged by providers operating through listed companies such as M2 Telecommunications (ASX: MTU) and iiNet (ASX: IIN).

M2, which has the household names of dodo, Commander and iPrimus, has won both customers and investors with low cost, unlimited download packages. iiNet – founded in a suburban Perth garage by Michael Malone and Michael O’Reilly in 1993 – has embarked on a similar growth strategy to M2 in recent years. That is, growth has been driven by acquisitions of smaller ISPs like AAPT, Netspace and, most recently, Adam Internet.

Adam Internet has been a hot commodity after Telstra was denied an acquisition of the South Australian ISP by the ACCC. Citing the likelihood of Telstra turning Adam into a low-cost carrier that could undercut its competitors, the telco giant was knocked back. iiNet did not hesitate to snap up the company to increase its market share.

Now both M2 and iiNET are looking at other ways to steal customers away from Telstra. In The Australian, Mr Malone has announced the roll out of a new unlimited download bundle package aimed directly at Telstra customers — “this is very much aimed at Telstra’s BigPond Brand”. He went on to say that the company was not competing with Dodo or TPG (ASX: TPM) — “We’re not aiming at TPG or Dodo here. It’s more about when a customer leaves BigPond, now they will have an alternative”.

The bundle, called Jiva, gives investors a keen insight into what they can expect from iiNet in coming years. As acquisitive growth starts to slow, both M2 and iiNet will now have to focus on organic growth by providing customers with more competitive prices, new technology and bundled deals. Mr Malone said the simplicity offered to customers by Jiva will provide less overhead and the company hopes to capture 800,000 additional customers in the next two years.

Foolish takeaway

Source: Google Finance

As shown in the graph above, investors have rewarded the acquisitions undertaken by some of our biggest telcos in the past year. However both M2 and iiNET have recently slid downwards sharply – possibly giving long-term investors a great buying opportunity. Investors should realize though that future growth initiatives will be largely organic and possibly much slower. For safety, there are not many stocks that can challenge Telstra — it dominates the local market and pays great dividends.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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