As the creator of Australia’s third largest Internet service provider, iiNet’s Michael Malone has evolved from a hands-on technology operator. David Gibson and Mark Beyer report.
Self-Professsed ‘techie’ Michael Malone is one of those rare breeds, an entrepreneur who has survived the transition from start-up to big business, creating what is arguably Western Australia’s leading technology-based business.
And while the technical expertise is not a prerequisite for success in this fast-developing sector, understanding the fundamentals has clearly helped the unassuming managing director take the company he founded in 1993, iiNet, to become Australia’s third largest Internet service provider (ISP).
From the company’s famous beginnings in the Malone family’s Padbury garage, iiNet is now challenging the ‘big boys’ of Australia’s telecommunications industry.
In 1999, the company listed on the Australian Stock Exchange. Progressing from those garage beginnings to iiNet’s present industry position, Mr Malone’s role has, over time, evolved from the realisation that he would no longer have Internet access once he graduated from the University of WA into that of corporate manager.
“I’m still a techie at heart, I still have a deep interest in that side of things.”
Mr Malone doesn’t pretend that he has all the skills to run the fast-growing business.
“My role is finding the right people and making sure they can do the job,” he said.
Throughout its history, iiNet has completed almost 40 acquisitions, and in February this year the company announced its intention to acquire OzEmail – its largest yet at $105 million – launching it into the big league, by adding 230,000 subscribers. The deal was completed later that month.
For observers of iiNet, OzEmail is seen as the biggest test of the company’s ability to manage rapid growth, but Mr Malone said in his mind, it was “a simpler transaction than ihug, which was 130 per cent iiNet’s size [at the time].”
As well as size, he said, ihug’s overseas location further complicated the deal, as did ihug having its own network and different accounting standards.
Mr Malone said a successful acquisition required not just effective technical integration but also effective customer communication.
Its much-publicised DSLAM broadband Internet rollout has allowed the company to directly compete with rivals Telstra and Optus. The infrastructure has allowed iiNet to be regarded as the ISP known in the market for its ability to deliver superior broadband speed.
But while he appreciates how far iiNet has come, Mr Malone acknowledges its place in the ever-changing industry.
“I think the company has a long way to go. We’re number five now as the telco, and people say we’re three as the ISP, but the gap between us and the next largest is gigantic,” Mr Malone said. “So I guess I’d say while we’ve grown very fast, we’ve come off a zero base.
“Primus is the next largest telco after us and they’re four times our size, so you know, while we’re sitting there thinking we’ve done pretty well, the market is highly polarised and we’re barely at the top end.”
But research director Landry Fevre, from IT research consultant ITC, is much more fulsome about the impact of iiNet. He said iiNet was “one of the biggest threats to Telstra”.
“The major players have missed an opportunity that iiNet has capitalised on,” Mr Fevre said. “They missed a wave which iiNet has captured.”
Overall, Telstra has been gradually losing its dominant grip on all fronts of the telecom market, Mr Fevre said.
Widely respected for his business sense, Mr Malone’s local competitors also acknowledge his involvement in setting up the WA Internet Association (WAIA), where he was president in 1996 after being the founding president of the association’s South Australian affiliate a year earlier.
“There’s no doubt he’s been a leader in a number of services,” one competitor said.
“Both our companies push each other … it’s really quite healthy for our industry, locally.”
Current WAIA president Richard Keeves said Mr Malone had always demonstrated tremendous business acumen over the years he’d known him.
“He’s technically very knowledgeable and he’s also had a strategy and an approach that’s helped iiNet grow,” Mr Keeves said.
iiNet now employs 740 people, handles 20 per cent of Internet traffic into Australia, has more than 620,000 subscribers, and is operated from its Adelaide Terrace headquarters. From a home-based business, it now has a market capitalisation of $310 million.
Mr Malone is joined on the company’s board by non-executive chairman Peter Harley, who also sits on the boards of local miners Gunson Resources and Perilya, and was formerly involved with ERG, another local technology company.
An interesting trade-off exists between the board and Mr Malone, a 17 per cent shareholder – itself a significant incentive to perform.
“It’s an interesting tension. I’m the largest shareholder and also the one who argues against dividends at every AGM,” Mr Malone said.
He has also been able to rely on the right people, it seems, to do the right job. As managing director, Mr Malone credits the implementation of this strategy to iiNet chief financial officer Clayton Hollingsworth, who was formerly a member of Wesfarmers’ business development team.
This strategy has not been all plain sailing, though, according to Mr Malone.
“We’ve made every mistake you can but we try to make sure we only make them once,” he said.
The company has avoided complicating the operating structure with systems from companies it acquires. Instead, Mr Malone insists, the best from each business “is the people who work there”.
Mr Malone is aware of the ups and downs of investment in the historically volatile IT industry.
iiNet felt the highs and lows of the dot.com boom and bust like most others in the sector, but its profitability has held it in good stead, Mr Malone said.
“During the dot.com boom we were sitting there doing things like delivering NPAT, and people just weren’t interested. We were talking customers, margins and they were saying ‘don’t worry about collecting revenue – what’s important is eyeballs’,” he said.
“That was just not rational.”
That period helped crystallise Mr Malone’s thinking that “the market is not sane”.
The company most recently turned to the market in its acquisition of OzEmail, raising $85 million underwritten by Euroz Securities, towards the $105 million purchase price.
The game plan for iiNet from here on in is dependent on a number of factors.
To a large degree it hinges on the moves made by the major players, Mr Malone said.
Also important are iiNet’s ability to keep its broadband customers loyal as it looks to bundling services in which customers’ broadband Internet and telephony services are combined into one package, and offered at a cheaper rate than would otherwise be the case.
“The only way you get real cost advantages is if you bundle and I think that’s where the market’s heading to,” Mr Malone said.
And while the broadband market still has a ‘grab phase’ – in which ISPs will try to convert as many dial-up customers to broadband as they can – to run, Mr Malone sees the distinction between telephony and Internet quickly disappearing.
“It’s already blurred, it’s rapidly going. I mean, Optus gets about a 95 per cent bundle rate on their broadband. They’ve made it very, very clear. They only see broadband as an adjunct to telephony.”
Telstra currently has about 71 per cent of the fixed-line telephony market and Optus 14 per cent, but Mr Malone sees this as the main area in which iiNet can grow.
“We have the ability to really disrupt in that area,” he said.
“We’ve done well in the dial-up, well in the broadband, but now we have the chance to completely change the telephony market.”
To put this in context, Mr Malone does not anticipate snaring huge swaths of market share from the big players.
He said gaining 1 to 2 per cent of the telephony market would be a “company maker” for iiNet.
And voice-over-Internet protocol (VoIP) will be the driver by which iiNet attacks the major players.
“We’re going to use VoIP in the core to handle analogue calls. So we’ll be able to get the cost base of VoIP, but without getting customers to change their behaviour pattern, so they’ll still be out there using the normal analogue phone at home, and we’ll just carry it over VoIP in the background,” Mr Malone said.
“As long as we protect our broadband service, and I see good signs on that in the short term, I think there’s not a lot of difficulty in us attacking telephony.”
Mr Malone acknowledges that the road ahead poses significant challenges.
“All the companies that are bigger than us have a gigantic base of voice revenue that they’re protecting and they’re using an old cost base and it’s highly profitable. So the only way for them to compete with the VoIP players is to really slash the rates – and they’ll control that for as long as they can,” he said.
“The big guys aren’t stupid. The big guys are actually very clever, in that if you’ve got a large, large installed client base like that you don’t slash your prices to compete with people like us. That’s just silly. Instead they’ll try and retain those customers and add more value to the proposition, however they do that.”
But iiNet will use its broadband base to move on its opposition’s telephony base.
“I have a high degree of confidence that we can make good inroads into telephony on the back of broadband,” Mr Malone said.
“On the other hand, if I announce tomorrow that we’re going to forget about this broadband thing and we’re going after telephony, we wouldn’t stand a chance.”
iiNet is planning to make a big marketing push this year, with about $8 million set aside for advertising.
A big part of this will be devoted to boosting the OzEmail brand. Mr Malone said OzEmail was traditionally seen as an innovative pioneer and was still a valuable brand, but a lot of people no longer knew what it stood for.
Mr Malone has spent a great deal of time over the past few months living in Sydney to bed down the OzEmail acquisition.
But despite its interstate and international growth, which means only 15 per cent of iiNet customers are in WA, Mr Malone has no plans to move head office.
“I’ve become convinced Perth is our home,” he said.
Customer contact was online anyway, he said, the cost of employment in Perth was lower, and the company’s size and brand profile in Perth made it easier to attract and retain quality staff here.
