Get connected

If you didn’t pay for an internet service provider (ISP) you wouldn’t be reading this page. ISPs have gone from an option to a necessity, reports JASON BAKER of IBISWorld.

By Jason Baker

In the past 10 years, the internet has gone from being an optional luxury to a necessity for business, and now homes as well.

Internet service providers in Australia have enjoyed a period of intense revenue growth in the five years to 2006-07. The industry will achieve revenue growth of 152.6%, which will be far stronger than any other industry in the telecommunications sector.

The ISP industry is characterised by a high concentration of smaller firms. Information provided by the ABS and IBISWorld analysis shows that approximately 95% of ISPs have fewer than 10,000 subscribers. At the other end of the scale, only 1.2% of ISPs have more than 100,000 subscribers.

Revenue growth has been driven by strong consumer and business demand for internet services. Comparative prices in the industry have dropped, as Telstra dropped its retail and wholesale prices, resulting in household internet penetration increasing.

However customers utilising and migrating to broadband services generate increased revenue. Subsequent higher pricing points have further maintained strong industry revenue growth rates. More attractive broadband pricing has increased broadband penetration to 13.8% of the population as at December 2005, according to the OECD.

This year, growth will continue to be driven by an increased demand for broadband services, with subscriber numbers expected to increase at double-digit rates. As the availability of ADSL2+ increases and the prices fall, albeit slowly, more regular broadband subscribers will migrate to this faster technology, which will boost industry revenues further.

In the future, this fast growth trajectory is expected to continue. The main driver for the increase in revenue will be the increased adoption of broadband services. Falling prices will boost penetration even further, with households on relatively low incomes becoming subscribers for the first time. Migration to broadband from dial-up will benefit the industry, as broadband plans have higher prices.

Technology will play a key role in shaping the industry for the next product life cycle, which will be super-fast broadband capable of speeds in excess of 100Mbps, utilising fibre, although this will occur beyond 2011-12. While more and more providers are now offering broadband speeds up to 20Mbps, utilising ADSL2+ technology in various exchanges, geographic coverage is limited, although it is expanding rapidly.

In November 2006, Telstra switched on its ADSL2+ infrastructure, but ADSL2+ services will only be offered in locations where a competitor also offers the same services.

The reasoning behind the limited roll-out is that Telstra is wary of having its services declared, which would result in wholesalers having access to its various infrastructure.

Although the ACCC has not made any definitive rulings, it has suggested that it will not declare Telstra ADSL2+ services given that a network build is not extremely expensive relative to replicating the public switched telephone network (PSTN).

In the short term, the outlook looks very good for ISPs, and updated technology, which will continue to lift the speed limit on the information super highway, will ensure that revenue growth remains for some time to come.

Source: IBISWorld

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au