The Great ISP Buyout

Consolidation runs and runs

Feature It's been a busy couple of months for the UK's internet industry with a string of ISPs being snapped up. In the last six weeks alone Kingston Communications has acquired Eclipse Internet, NTL has taken control of Virgin.net, Claranet has swallowed VIA NET.WORKS in the UK and Iomart has bought out Easyspace. Earlier this week, Business Serve took control of internet telephony outfit Pipemedia and internet entrepreneur Dominic Marrocco scooped up 186k and Onyx Internet. Include the mergers and acquisitions that have occurred over the last 12 months and the list of ISPs that have changed hands reads like a "who's who" of the UK internet industry.

Analysts says this is all part of the ongoing consolidation within the UK's ISPs sector. Snag is, that's what analysts have been saying for the last seven or eight years. A quick Google search soon digs out articles and reports from as early as 1996 discussing the consolidation of the ISP sector and how within a few short years there might only be a handful of ISPs serving the market.

Clearly, this isn't the case. ADSL Guide lists more than 100 broadband providers on its website, while the UK's internet trade body, ISPA, has more than 120 members.

Nonetheless, this recent M&A activity suggests that the sector's tectonic plates are shifting. Luckily, you don't have to be a cybergeologist to work out what's going on. Tony Lavender, Head of Telecoms Research at Ovum, says consolidation among ISPs has to happen - or "companies will go to the wall". He believes it's always been going on in some shape or form, but that it's particularly busy now because the "value of businesses is low".

This assessment is echoed by Nick Lansman, secretary general of the Internet Service Providers Association (ISPA), but he doesn't believe that consolidation will mean that the number of ISPs will dwindle significantly. "Consolidation has always happened," he says. "Will there be only 50 ISPs in two years' time? No."

The reason is that as ISPs are swallowed up or go bust, others are created. They might not all be in the internet access market, but that doesn't really matter. These days, ISPs can be defined as any business that deals in IP (Internet Protocol) as its main currency. As new technologies - such as VoIP - are developed, so too are new businesses born to exploit these breakthroughs. While some may prove successful and stand on their own two feet, others may well be bought up and bolted on to existing ISPs giving them even more services to offer customers.

After all, that's effectively what Telstra Europe Limited, a wholly-owned subsidiary of the giant Australian telco, did when it bought the UK business of ISP PSINet Europe for £50m in August. Until the acquisition, Telstra Europe had provided voice telecoms services to small and medium-sized business (SMEs). With the addition of PSINet UK, the enlarged group is now able to provide data services as well to meet "growing demand for converged voice and data services".

The same can be said of the highly acquisitive Lancaster ISP Business Serve which has snapped up a dozen businesses over the last two years. This week it paid £600,000 in cash and paper for telecoms and VoIP outfit Pipemedia giving it yet another set of products to offer to customers. Said Business Serve boss Simon Cleaver: "We will now be able to offer 'a one-stop-shop' for the provision of both traditional ISP products such as web hosting and broadband, as well as telecommunication services such as carrier pre-selection and VoIP - with all the substantial cost savings that this new service brings."

But as ISPs consolidate, they also get bigger. As Cleaver explains: "Consolidation makes sense financially. The market is starting to mature and as it does so ISPs need to be larger to survive and thrive."

Customer acquisition

One of those ISPs that has undergone a major transition over the last twelve months is Pipex. A year ago GX Networks bought Pipex - the sixth acquisition the company had made over the previous 18 months - before adopting the name of the company it had just bought. Since then, the ISP has acquired hosting outfit Host Europe and business broadband service provider Nildram.

Mike Reid, MD of Pipex ,said that 18 months or so ago, the company recognised the potential of acquiring companies at a reasonable price. "A number of companies became available and we needed acquisitions to build where we wanted to be. The acquisition of Pipex meant we became the UK's fourth/fifth largest ISP [and we] added value with Host Europe, 123.reg and Nildram, which added a large number of business customers," he said.

Whether Pipex continues to acquire ISPs remains to be seen. But with customer sign-ups currently increasing by around 10,000 a month, the company is growing very nicely without having to splash out on a new business. Which highlights a key business decision facing many ISPs. Is it cheaper to buy new customers through acquisition of an existing ISP or better to spend time and marketing money trying to get them to sign up to your service?

David Thorn, MD Telstra's MD of Global Business Offshore, which bought PSINet UK in August, is in no doubt: "Buying a customer base is often cheaper than doing it for yourself. You can pick up a loyal customer base with a revenue stream for a fraction of the cost of acquiring the customers yourself." According to Mr Thorn, some ISPs spend between £150 and £300 to recruit each new consumer, while buying an existing ISP can work out at between £60 and £100 a head.

Then again, there are those who believe the broadband market is currently in a chaotic, transitional phase as it moves towards mass market appeal. Mark Lang is Head of Broadband and ISP Development at Exeter-based Eclipse Internet. He recently made the news after he sold Eclipse to Kingston Communications for £12.5m and reckons that 2004 has been far more aggressive than any previous period.

Too big to be small and too small to be big

He believes ISPs are consolidating to guarantee survival. If they can benefit from increased economies of scale, they will be much better placed to compete against the extremely powerful marketing machines from the likes of the big boys such as AOL UK, BT and Wanadoo.

Said Lang: "Many current ISPs are too big to be small and too small to be big – lacking the resources to be able to fully exploit market opportunities. There is a strong threat that they become ‘stuck in the middle’ and are unable to compete with the powerful brands but also lack key differentiators that can help maintain their niche position."

But it's not just about scale. The tie-up between Eclipse and Kingston Communications was a strategic move between "complementary organisations".

"Such buyouts allow core competencies to be leveraged effectively," said Lang. "A telco acquisition of an ISP is a perfect example, and clearly demonstrates a future trend in the market and the need for convergence of expertise."

Indeed, in May 2004 Cable and Wireless plc shelled out £18.6m to buy local loop unbundling (LLU) ISP Bulldog Communications. C&W has since pledged to invest between £55m-£85m into LLU over the next couple of years as it ramps up its investment in broadband. LLU gives C&W the chance to take advantage of its UK network and it also gives the telco "full ownership of its customers as their sole telecommunications provider reducing reliance on the incumbent".

Said chief exec Francesco Caio at the time: "LLU allows us to establish a strong presence in the access network and to unlock the value of our fixed network. Over time this will translate to stronger margins."

Similarly, NTL's decision to take full control of its Virgin.net joint venture and the announcement of its plans to invest in LLU is part of the company's move to target the UK beyond the confines of its cable network. Why? Because, it's cheaper to invest in LLU than physically rolling out cable to extend its own network.

Whether ISPs are buying customers, expertise, new products and services, or just trying to expand, there seems little doubt that consolidation of the UK's ISP will continue to keep the industry on its toes. And as Marco Potesta, marketing director of PlusNet, says: "There are always opportunities in the market." ®

Related stories

Firstnet founder buys 186k, Onyx, others
Business Serve buys VoIP outfit
Namesco buys Simply.com
Business Serve snaps up Vital Online
Kingston Comms buys Eclipse Internet
Claranet buys VIA NET.WORKS UK
Your Communications seeks buyer
Iomart swallows Easyspace for £10.5m
C&W buys Bulldog
Telstra buys PSINet UK
Pipex swallows Nildram
Pipex acquires Host Europe for £31m
GX Networks to buy Pipex for £55m

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