When iiNet was born in the suburban Perth garage owned by...

When iiNet was born in the suburban Perth garage owned by Michael Malone's parents, the World Wide Web was in its infancy.
It was 1993 and the internet was but a glint in Telstra's eye. Paul Keating, in his victory speech after winning the unwinnable federal election that year, made no mention of our digital future and looked to car manufacturing to stem job losses.
From such depths did iiNet grow – a tiny battler based in distant Western Australia that took on the government-backed might of Telstra. It fought insolvency and naysayers to rise up and become a household name with 1 million subscribers, renowned for serving up the friendliest call centre staff.
But today its story as an independent player has ended with shareholders accepting a $1.56 billion buyout offer from TPG Telecom and its executive chair, David Teoh. If regulatory approval is provided as expected, iiNet will be little more than a subsidiary that feeds into the growing pool of TPG's profits.
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Owning iiNet has been a long-term goal for TPG's reclusive boss David Teoh, who has been a major shareholder for several years. Nic Walker
Now that he's finally caught his quarry, what will the reclusive billionaire Teoh do with iiNet?
The most likely answer to the first question comes in three parts: one, using the new customers to help pay for investments in fibre-optic cabling across the nation and beneath the seas; two, preparing for the radical market shift that the $41 billion national broadband network will force on Australia and three, gearing up to make a mobile play – possibly through the acquisition of Vodafone Hutchison Australia.
Owning iiNet has been a long-term goal for Teoh, who has been a major shareholder for several years. He quietly crept up the share registry using a number of different accounts until 2011 when Malone as iiNet's then-CEO broadcast the move to all shareholders.
The merger of iiNet and TPG will give it 1.7 million broadband subscribers. This makes it Australia's second-biggest provider of fixed-line internet services behind Telstra's 3 million accounts and well ahead of Singtel-Optus's 1.03 million.


Milking profits

TPG under Teoh has been a firm believer in infrastructure assets – much to the benefit of its share price and market capitalisation. Australian investors 'get' infrastructure and have lauded the telco's moves to buy rivals with extensive fibre-optic networks including Pipe Networks and AAPT.
But cable networks are sunk assets that must be milked for profitability and the best way to do that is to load them up with paying customers. This partly explains why the company's market cap rose by $1 billion when its iiNet takeover bid was announced.
Telstra still owns and rents out the phone line and internet connection in the vast majority of homes. It's up to telcos to pay for the data carried between Telstra's telephone exchanges and the rest of the world.

iiNet's customers pay a pretty penny for high levels of service and profit margins will improve once their services are delivered over TPG's own fibre cables linked between Telstra exchanges. The same dynamic comes to light with TPG's PPC-1 cable linking Australia to Guam and the United States.
The NBN

The NBN is also an agent of change amongst Australia's telco providers. It has forced Australia's internet market to rapidly shrink as companies with larger balance sheets snap up rivals to survive the rollout.
Simply put, the NBN will be a monopoly player that forces all Australians onto its own services and off Telstra's copper phone-line network. It will also be a wholesale provider that provides a level playing field.

This means the player with the most customers wins. Telcos with more customers can also successfully cross-sell more products such as mobile phone plans, credit cards or even household items like glasses, appliances or healthcare.
And every player wants to have customers locked in when the switch to the NBN comes around to help boost revenues. The takeover also leaves rival M2 Group, which owns Dodo and iPrimus, a distant fourth-placed player in the broadband market.
Buying iiNet also makes TPG a fearsome force the NBN desperately needs in order to turn a profit. TPG can choose to offer low-cost plans over Telstra's older network if it chooses to do so – a move that would have a direct impact on the NBN's earnings.
It will also be able to offer iiNet customers access to a growing network of apartment buildings and offices with fibre-to-the-basement services that use TPG's own networks. This takes high-value customers away from the NBN and hands the profits to TPG and its shareholders.
The mobile play

Finally, the acquisition of iiNet will also make it far more profitable for TPG to buy a mobile service provider with Vodafone Australia the most likely candidate.
TPG would finally become a fully-fledged telco if it owned a mobile network with the ability to offer customers a lucrative bundle package. It already sells mobile products but it only resells services using the Optus network.
TPG has already experimented with 'small cell' technologies that act as small mobile base stations and it was the only non-mobile carrier to buy spectrum in 2013.
Vodafone Australia is not actively looking for buyers and its chief executive Inaki Berroeta has not held discussions with TPG. However, one of its parent companies Vodafone Group has mooted the possibility of selling its Australian operations, which are deemed to be non-core assets.
But a play for Vodafone Australia has one main problem – TPG's inability to get the money required to make an offer.
Neither Vodafone Group nor Hutchison Telecommunications Australia are desperate sellers in need of cash. Vodafone Australia is still losing subscribers but it is on the bounce with revenue and users set to rise over the coming financial periods.
This means TPG will have to either bide its time to generate the cash required to swing a deal or work out a more creative plan. Joint venture partnerships with the parent companies or the introduction of private equity money could all be possibilities.
Legacy

But one way or another, Teoh has established a firm legacy for both himself and TPG with the purchase of iiNet. The all-powerful duopoly of Telstra and Optus in providing broadband to homes across Australia has been broken.
And within a decade there's a high possibility that much of Australia's digital future - the dreams and dollars we transmit around the world across the internet - will be carried over cables owned by TPG or its subsidiaries.