Wafer-thin margins for broadband force rethink

Mark Rushworth says the problem facing Telecom's competitors is that there is little profit in selling broadband. Picture/ Richard Robinson

The Government may have had greater broadband penetration in mind when it moved to dismantle Telecom's phone and internet monopoly but the sector is still reliant on the plain old phone call to make broadband pay.

The wafer-thin margins for selling broadband are behind third-ranked internet provider ihug's latest bid to reinvent itself as a communications provider.

Ihug is known mainly for its toll call deals and dial-up and broadband packages but it hopes new packages targeting Telecom's home phone line monopoly and a TV ad campaign will change that.

Ihug is keen to move its customers on to flat-rate, all-you-can-eat calling plans to deliver better average revenue per person than present plans.

The new plans range in price from $15 a month for unlimited evening and weekend calling to $40 a month for unlimited calling any time to phones nationally and in Australia, Canada, the US, the UK and Ireland. The deals require switching line rental to ihug for a monthly charge of $45 and keeping home phone numbers.

The new deals will become more economical to provide next year, when local loop unbundling gives ihug access to Telecom's phone exchanges, allowing it to offer its own services rather than resell Telecom's.

Ihug's chief executive, Mark Rushworth, points to the problem faced by Telecom's competitors in the internet provider market: "There is, quite simply, little profit in selling broadband."

A recent cut in broadband pricing by Telecom illustrates his point. For the first time, Telecom is offering customers an entry-level broadband deal at $29.95. It charges its rivals a wholesale price of $31.55 for the same deal. Ihug has 34,000 broadband customers.

No provider can afford to be in broadband provision alone and, increasingly, broadband is becoming the stock commodity offered in a bid to get customers signed up for other services - such as toll calls.

Rushworth believes broadband itself will be a free service here within five years.

"More than likely [within five years] the price of broadband has dropped to zero if you take a calling package and home phone."

The move to free broadband is already under way in Britain where Sky TV, the Carphone Warehouse and mobile phone operators Orange and Virgin offer free broadband plans when a person signs up for their other services as well. Despite local loop unbundling having existed in Britain for several years, there's no business case for providing broadband solely because of the competitive market.

Satellite TV services, home phone line rental, toll calls and mobile phone rental were the revenue generators consumers taking up free broadband deals were locked into.

Rushworth said ihug would eventually offer the same deal structure potentially with pay TV and mobile phone services included.

Ihug had decided not to take up a resale deal with Vodafone allowing it to sell mobile phone connections and bill customers for mobile services on its account.

"What we'd prefer to do is a mobile virtual network operator deal," he said. Such a deal would give ihug more flexibility to integrate mobile phones with its fixed line services so that a customer could use one phone for all their calling.

A former Telecom marketing manager, Rushworth believes there is plenty of opportunity to steal market share from his old employer and second-ranked telco, TelstraClear.

He points to Telecom's continuing monopoly on home phone line provision - some 93 per cent of the market. But Telecom has only a 30 per cent share of the toll-call market where it's much easier to shift provider in pursuit of the best deals.

"People are itching to move off Telecom and they haven't had an option," said Rushworth. "We have to take a seat at the table as an alternative to the likes of Telecom."

Rushworth, who helped launch a successful $5 weekend national calling plan while in a previous role at Telecom, said he had lobbied to launch deals that mirrored those just unveiled by ihug.

"I wanted to provide a fixed price per month for all national calling." He wasn't allowed to do it. "It wasn't appropriate for an incumbent," he says.

Rushworth does not see TelstraClear, which also resells Telecom home phone line services and has a large toll-calling business, as being the logical alternative to the incumbent.

"We don't see them as an alternative to Telecom. It looks and smells like Telecom, therefore it can't be an alternative."

Rushworth would not discuss negotiations for the sale of ihug by Australian parent iiNet, which has turned down an offer of $30 million from Auckland-based internet provider Orcon.

Industry sources suggest the asking price is closer to $40 million and that conflicting views over value, taking into account the opportunities afforded by the new regulation, is what is holding up a sale.

Few local internet providers have the scale or access to capital to pick up ihug, though larger players such as TelstraClear and Sky Television have been mooted as potential buyers. Who eventually acquires ihug may well determine whether the company sticks to its pledge made last year to invest $20 million in infrastructure based on local loop unbundling.

Back to basics

* Telecom's cut-price packages are making it hard for competitors to make a profit out of broadband alone.

* As a result, ihug is targeting the home phone market.

* Broadband could be a free service within five years.