It didn't take long for the internet to take on near life-staple status, and the internet service providers have been riding the e-wave. But satisfying the growing pent-up demand for fast web access will sort the future winners from the also-rans.
IBISWorld estimates that the internet service provider sector will grow at an average rate of 16.1% a year during the five-year period to 2008-09.
In 2008-09, industry revenue is expected to be partially hindered by an undermining of consumer sentiment and household consumption by the weakening economy. In turn this will slow the migration of customers on to the faster, larger and more expensive broadband packages. However, ISPs are expected to continue to cut prices on the higher end broadband products.
One of the main variables influencing the performance of this industry has been the strong growth in demand and user levels, which in turn reflects rising computer penetration within Australian households.
The tendency of many Australians to want to "keep up with the Jones's" has meant that the amount of homes with a computer - or multiple computers - has increased. The number of households with both a computer and the internet is also increasing.
Businesses were even quicker to jump on the internet bandwagon, largely due to the fact that they would and have achieved material productivity gains and cost savings. By the end of 2008-09, over three quarters of business will have the internet.
IBISWorld forecasts that this industry will grow at an average annual rate of 5.2% during the five year period to 2013-14. Expansion of this industry will be driven by increased internet penetration, particularly among households.
Emerging services that require internet, such as voice over internet, will help maintain a high underlying level of demand for the industry.
While the internet has clearly moved from being an optional luxury to an absolute necessity for businesses and consumers, this industry is far from a point of saturation and will benefit in the short term from consumer migration to faster broadband services.
Throughout the outlook period, the majority of exits from the industry and takeovers will occur at the smaller end of the scale.
This industry is anticipated to remain on a growth trajectory during the outlook period. Industry revenue growth rates will trend lower, reflecting falling prices and an industry that will eventually approach saturation.
The core growth driver will be continuing increases in broadband take-up and migration. Falling prices and added value will boost penetration even more, with households on relatively low incomes becoming subscribers for the first time.
At present time there is a substantial pent-up demand for fast internet access at reasonable prices. Investments in submarine cables, which will ultimately reduce industry data transmission costs, will help facilitate impending decreases in retail prices.
Once this occurs, subscriber growth and revenue growth will take-off yet again, as new subscribers enter on lower entry level plans and broadband subscribers migrate to faster speeds.
Key success factors for operators in the industry
- Access to required utility infrastructure. Adequate access to carrier's networks in general and bandwidth in particular is vital to the success of an ISP.
- Level of competition existing in the market. Given the 600-plus participants in the industry, this is of key importance.
- Marketing of differentiated products. Given the number of ISPs in the market, it is essential that product and service offerings are differentiated.
- Having a loyal customer base. It is important to take measures to ensure customer loyalty and reduce customer churn.
- Proximity to key markets. POPs must be located within the local call zone of the targetted population.
- Effective product promotion. This is essential given the number of competing ISPs.
- Ability to quickly adopt new technology. This is essential given the very fluid nature of the internet itself.
- Development of a symbiotic relationship with another industry. This reflects the growing trend towards convergence.
Products and service segmentation
Major market segments
IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au
