internet service provision

This page considers the history of internet service provision in Australia and New Zealand.

It covers -

• an introduction to commercial and non-commercial services
• the early history of the ISP sector, with some ISPs literally being operated out of garages and spare bedrooms
• the emergence of major commercial entities
• 'free internet' and other unsuccessful models
• the dotcom boom and corporate consolidation
• recent developments such as ADSL and wi-fi
• key statistics
• consumer and competition issues

Highlights are given at the end of this profile. There is a broader disiscussion of ISPs and of the internet in Australia elsewhere on this site.

     introduction

The history of Internet Service Providers (ISPs) and Internet Content Hosts (ICHs) in Australasia has followed the same trajectory as in North America and much of Europe.

Initial access to a predominantly research network was provided by a handful of academic staff on a non-commercial basis for a user population dominated by specialists in universities and major public/private sector research entities such as CSIRO and BHP. As we have noted in discussing the net's evolution, during its first years it was essentially an international private network that operated on a non-commercial basis.

A range of entities then sought to connect to the internet backbone in Australia and New Zealand. Those entities were community groups (essentially driven by hobbyists) and information technology specialists, generally within SMEs or microbusinesses rather than on behalf of major corporations.

The absence of major corporate interest at that time reflected the shape of telecommunications regulation and perceptions that the future lay in proprietary networks -

• serving the data needs of particular sectors (eg news and financial organisations) and
• often involving special terminals or other proprietary technology, reflected in plans by AAPT and IBM, or
• offering a 'walled garden' of entertainment and retail content for an unsophisticated public, on the model of the US Compuserve and AOL systems

Accelerating demand - driven by promotion in particular technical communities and by greater availability of web browsers and authoring tools - saw a proliferation of ISPs in both nations and the withdrawal of academic interest to a few high-performance non-commercial specialist networks.

Many of the ISPs had only a handful of clients, lacked capital and technical support, and were consequently evanescent. The same period saw the emergence of truly national ISPs (ie a presence in all major centres) with a mix of corporate, SME and domestic clients. Those ISPs often leveraged existing corporate infrastructure, eg Telstra's ISP, later rebadged as Bigpond.

Local and overseas ISPs and telecommunication companies vied in acquiring customers through marketing campaigns and through takeover of local/regional competitors, given potential cost savings through scale and an expectation that opportunities for buying desirable ISPs would diminish. With the dot-com boom in full swing several large scale specialist internet content hosts were established and entrepreneurs tested the 'free internet' model.

Contrary to many forecasts, the collapse of the dot-com bubble was not accompanied by a significant consolidation of the industry. Instead, new ISPs continued to enter the market. That market was increasingly polar, with a handful of national ISPs garnering most traffic (and most customers, residential and corporate) and a much larger number of smaller ISPs struggling with far fewer customers.

     early history

Networking in Australia during the 1970s reflected overseas practice, with proprietary virtual private networks for major government and business organisations (primarily through leased lines from Telecom or Telecom New Zealand) and smallscale file exchange by universities such as the dialup modem-based Australian Computer Science network (ACSnet) which used the X.25-based CSIROnet operated by national research organisation CSIRO but subsequently sold. A few institutions were in sporadic contact with ARPANET via electronic mail gateways and the Overseas Telecommunications Commission (OTC).

The early 1980s saw establishment of a permanent Australian university mail link to ARPANET. The dot-au ccTLD was delegated by Jon Postel to Melbourne University's Robert Elz in 1984; by 1986 only a handful of domains had been established and there were only a few hundred net-connected machines in Australia.

Adoption of the net at that time was essentially restricted to information technology specialists within Australian research institutions (eg CSIRO and the major universities). That uptake coincided with various - often expensive and unsuccessful - attempts to establish large-scale government, academic, commercial EDI and library networks.

They included the abortive South Pacific Education & Research Network initiative by the Australian Vice-Chancellor's Committee (a national academic voice, fax and data network proposed by the Carrs Report).

In June 1989 Australia gained a permanent internet connection between the University of Melbourne and the US, with permanent links to CSIRO and major universities across Australia later that year as the basis of the Australian Academic Research Network (AARNet).

     the emergence of major commercial entities

Uptake of the net in Australia began to accelerate immediately before invention of the web, with enthusiasts and a range of organisations in the public and private sectors setting up newsgroups, swapping files and sending person-to-person mail. That was reflected in the growth of domain registrations. Registration was still undertaken by volunteers, rules were informal and proponents of alternative root schemes gained attention later perceived as undeserved.

A range of internet service providers emerged from 1989 onwards. Initially most had a small geographical coverage (eg within one city) and many operated on a noncommercial basis, eg the Australian Public Access Network Association (APANA).

Industry major OzEmail traces its origins to a proprietary electronic mail service called Microtex operated by Australian Personal Computer magazine founder Sean Howard in the early 1980s. Howard sold his remaining publishing interests to the Packer-controlled ACP in 1992, relaunching Microtex as OzEmail with support from Malcolm Turnbull and Trevor Kennedy in 1994. It was supposedly the 33rd ISP to be established in Australia. POPS were located in each Australian capital city and eight other major regional centres. It established a New Zealand subsidiary, Voyager, in 1995. It listed on the NASDAQ in 1996, raising $50 million (for around 30% of the company) and on the Australian Stock Exchange in 1998.

In September 1993 Huston "on behalf of the Australian network community" requested over a million addresses from IANA. The expectation was that would facilitate establishment of a national registry and reduce delays in allocations from the US. The request underpinned establishment of the Asia-Pacific Network Information Centre (APNIC) in Brisbane as a regional NIC.

Adoption of the net by businesses and other organisations took off after release of web browsers and publicity about developments in the US, growing in tandem with the emergence of the Australian ISP industry. By late 1994 "non-AARNet users" accounted for over 20% of traffic on the academic network and were growing rapidly, posing cost and regulatory challenges for the AARNet administrators.

The Australian Vice-Chancellors Committee (AVCC) accordingly transferred AARNet's commercial customers and the management of its interstate/national links to Telstra. (AARNet2 was established in mid-1997 as a national private ATM-based network linking research bodies and is currently being replaced by a higher-performance GrangeNet.)

Local operator connect.com.au (subsequently absorbed by Telecom NZ) has claims to be the first true ISP from May 1994 onwards, followed by major players such as Telstra, Ozemail and Optus. By the late 1990s Australia had around 850 ISPS: many transient, most with only a few hundred subscribers, often quickly absorbed by competitors.

Perth-based Iinet for example was founded by Michael Malone in his garage in 1993. It listed on the Australian Stock Exchange in 1999, the same year that it acquired Wantree Internet (founded 1994), Omen and Nettrek Online Services. In 2000 it absorbed MNS, Comtech, Networx, Infinite Data and Octal. Its reported profit for 2001-2 was $4.3m.

Ozemail had acquired Access One from dot-com Solution Six (itself acquired by Telstra) in 1997, going on to buy the internet division of South Australia's Camtech SA Pty Limited, a 55% stake in Power Up (Brisbane's largest ISP and operator of WebCentral, one of the largest hosting businesses) and 60% of SE Net, South Australia's largest ISP. In 1999 it was in turn acquired by WorldCom for $520 million. In 2001 it acquired the subscriber bases of AsiaOnline, EasyISP, Free Online, PBQ and Cyberloom. A year later its annual revenues were estimated at $135 million.

AsiaOnline had originated in Hong Kong and drew on funding from Softbank and JP Morgan to expand aggressively into the Philippines, HK based, California, Australia and New Zealand. It acquired Internet Access Australia in Melbourne, InterACT and Spirit in Canberra, Internet Co of NZ in Auckland, Brisbane Internet Technology, the Message Exchange in Sydney and Dove in Adelaide before experiencing insuperable financial problems.

Rival Pacific Internet was established by Singapore conglomerate Sembawang Group around Technet, a University of Singapore unit with a dot-sg internet access licence. It expanded into Hong Kong in 1996, the Philippines in 1997, Australia (through acquisition of Mira Networking and Zip World) in 1999, India in 1999 and Thailand in 2000.

US-based America Online (with around 30 million subscribers across the world) arrived in Australia in 1998, with the local arm initially 50% owned by German media group Bertelsmann. In 2000, as part of global restructuring of the AOL-Bertelsmann relationship in conjunction with AOL's merger with Time Warner, the German interests were acquired for $100 million by AAPT (at that time 80% owned by Telecom New Zealand). Despite the muscle of the two parents AOL has made little headway in Australia and its AOL|7 alliance with the Seven television group and AAPT proved disappointing after absorbing upwards of $125 million. In 2004 the partners sold AOL|7 to Primus Telecom for $23 million; the venture had reportedly scored only 90,000 subscribers for "premium services". AAPT clawed back 48,000 dial-up and broadband customers at that time.

Telstra's ISP arm - later rebadged as BigPond - is believed to have between 1.2 and 1.5 million paying customers by December 2001, with executives boasting that new subscribers were being acquired at 10,000 per week. (Many of those customers, of course, churned onwards to competing major and minor ISPs.) Telstra has aggressively leveraged its size and in early 2004 caused widespread comment by offering retail access through BigPond for less than its wholesale price to competing ISPs.

     'free internet' and other models

As in North America and the UK, a feature of the ISP sector at the end of the millennium was the 'free internet' service, typically with no ongoing access charge after a small initial establishment fee. Operator expenses were to be recouped through inclusion of advertising on all screens; in some instances profiles of customers and their surfing habits were sold to third parties. In promoting their operation some services even offered 'free' personal computers. Most were based in major metropolitan centres: the 'free' digital divide started on the outskirts of Sydney, Brisbane and Melbourne.

Such services proved to be commercially unsustainable. Their likely impact was to -

• underpin rhetoric that the net is inherently free
• attract attention, generally more enthusiastic than informed, for claims about new business models and the 'information economy' (eg claims by Gilder and Negroponte that arrival of the 'telecosm' in the immediate future would mean the end of telephone charges)
• encourage churn by consumers, with expectations that ISP clients should/could migrate from ISP to ISP in search of the cheapest offer.

A concurrent development was interest in community networks and virtual communities, with government funding for telecafes in regional Australia, support for small-scale ISPs serving local communities (often on a non-commercial basis) and initiatives such as the 'Virtual Communities' partnership between ISP iPrimus and the Australian Council of Trade Unions. In 2000 it was Australia's largest independent reseller of personal computers, going on to buy an ICH facility from Exodus, AustarMetro (with 20,000 dial-up customers) for $2 million and the BigBlue ISP.

     the dotcom boom and corporate consolidation

1999 saw establishment of auDA, a nongovernment body responsible for domain registration administration as part of the federal government's co-regulatory regime.

Collapse of the dot-com bubble overseas and in Australasia had two effects.

The first was the withdrawal from Australia and New Zealand of some overseas entitities. Major content hosts, for example, closed operations and sold off facilities at what is presumed to be a significant loss. The unavailability of capital in the local markets meant, unfortunately, that small local enterprises generally weren't able to acquire those assets at a discount; facilities instead went to major local players. Overseas ISPs and telcos such as WorldCom offloaded local retail and corporate service provider operations, again at what is presumed to be a significant writedown.

The second effect, exacerbated by the small size and biases of the Australian innovation capital sector, was the drying up of capital for smaller ISPs, something that weakened their ability to -

• conduct large-scale marketing campaigns in competition with dominant competitors
• reach a critical size through acquisition
• acquire appropriate infrastructure, perforce becoming resellers of the service products of third parties
• cope effectively with increasingly onerous regulatory demands
• recruit and retain expert staffing that would enable differentiation from the dominant ISPs on the basis of service quality, generally regarded as an area of weakness of BigPond, Ozemail and other giants.

The effect of the funding crisis is evident in figures (million subscribers) for selected major ISPs over the period 1998 to 2003 -

ISP	1998	1999	2000	2001	2002	2003
BigPond	0.3	0.5	0.60	1.2	1.40	1.50
OzEmail	0.30	0.41	0.45	0.52	0.65	0.45
Optus	0.04	0.12	0.17	0.30	0.35	0.60
iPrimus	0.01	0.03	0.15	0.25	0.35	0.40
TPG Internet	0.08	0.11	0.13	0.20	0.24	0.25
iiNet	0.02	0.02	0.02	0.04	0.08	0.13
Hotkey	0.01	0.02	0.02	0.03	0.07	0.07
Chariot	0.01	0.03	0.05	0.06	0.07	0.07
PowerUp	0.02	0.03	0.04	0.05	0.06	0.07
Pacific Internet	NA	0.02	0.03	0.04	0.04	0.04
Virtual Communities	NA	NA	NA	NA	0.02	0.05
AOL	0.01	0.05	0.12	0.18	0.18	0.26

Those figures are a collation of industry estimates; comprehensive data is not publicly available on a state by state or region by region basis.

     recent developments such as ADSL and wi-fi

After the collapse of the dot-com bubble there was widespread speculation in the media, government and some industry circles about major reshaping of the industry in Australia and New Zealand. In particular, pundits forecast that a fundamental shrinkage of the number of ISPs.

In practice that forecast hasn't been substantiated. The number of ISPs has declined by around 10% over the three years from 2000. The market share of the largest ISPs has increased, with the four largest now having around 60% of the market.

• 7 Very large ISPs (with more than 100,000 subscribers) servicing 3.6 million subscribers, ie some 71% of all subscribers.
• 26 Large ISPs (10,001 to 100,000 subscribers) servicing 0.9 million subscribers (18% of market)
• 160 Medium ISPs (1,001 to 10,000 subscribers) with 0.5 million subscribers (9% of market)
• 251 Small ISPs (101 to 1,000 subscribers) with 0.1 million subscribers (2% of market)
• 110 Very small ISPs (100 or fewer subscribers) with 4,000 subscribers (under 0.1% of all subscribers).

Data downloaded during the March 2003 quarter is estimated at 3,046 million Mbs, up from 1,039 million Mbs in the corresponding 2001 quarter (when there were 3.968 million subscribers).

The July 2005 Internet Activity Survey (IAS), noted earlier in this profile, identified some 689 ISPs. Most were very small and were often 'virtual ISPs' (reselling connectivity from majors such as BigPond). Many were new and unlikely to survive more than two years. The total number of internet subscribers at that time was 5.98 million.

     sector statistics

In September 2003 the ABS reported that the total number of internet subscribers in Australia exceeded 5 million at the end of March quarter 2003, an increase of 521,000 subscribers (11%) since the end of September quarter 2002. The majority of new subscribers (over 98%) were in the Household sector, which accounted for over 4.4 million subscribers in total.

The number of access lines available to subscribers increased by 34% to 857,470 between the September quarter 2002 and March quarter 2003. Subscribers with permanent or non dial-up connections grew to around 470,000 subscribers at the end of March quarter 2003, with Digital Subscriber Line subscriptions growing by 34% from the end of September quarter 2003 - reflecting continued strong growth in broadband (access speeds equal to or greater than 256kbs) services. ISPs provided 1,687 POPS and 857,470 access lines across Australia as of the end of March 2003.

Monthly/Quarterly/Annual access plans remained the most popular access plans with 69% of all subscribers (3.5 million subscribers) choosing that option. However, the strongest growth was in subscribers with Hourly Access plans, which increased by 456,000 (48%).

Points of Presence (POPs) declined by 285 (14%) over the six months to the end of March quarter 2003, consistent with rationalisation of POP operations by ISPs through use of different access technologies such as 0198 numbers or sharing POP infrastructure.

In February 2004 the Australian Bureau of Statistics announced that at the end of September 2003 there were 5.2 million internet subscribers in Australia, with dial-up subscribers as a proportion of that population falling below 90% for the first time during 2003. The number of non dial-up subscribers grew from 470,000 at the end of the March 2003 to 690,000 at the end of September 2003; Digital Subscriber Line (DSL) subscriber numbers grew to 372,000 in the September quarter 2003. There were 667 ISPs, growth reflecting both new entrants and revised ABS methodologies.

     consumer and competition issues

Commercial pressures and the immaturity of parts of the industry have been reflected in a range of consumer issues. We have examined those issues in more detail here as part of a discussion of rights, responsibilities and regulation.

Competition issues have inevitably centred on the behaviour of the dominant players, in particular Telstra as the entity that

• owns the infrastructure into most Australian homes and many SMEs
• acts as a wholesaler of internet connectivity (ie provides the infrastructure for most ISPs)
• concurrently has a dominant retail presence (ie is a major ISP in competition with the several hundred ISPs that use its network)

Telstra and other majors have faced criticism in the past from regulators and consumers. In 2004 it dropped charges for broadband services delivered by its Bigpond ISP arm to significantly below the prices charged to competing ISPs for wholesale access. That action increased Telstra's market share and - perhaps more importantly - destabilised its competitors, some of whom resorted to charging consumers less than they were paying Telstra for wholesale access.

The ACCC served Telstra with a Part A Competition Notice, commenting that "Telstra has engaged, or is engaging, in anti-competitive conduct over its wholesale broadband pricing" and seeking constructive negotiations to determine a competitive wholesale rate structure.

Telstra responded disingenously that it was

confident that the prices it charged wholesale competitors for broadband created a competitive market environment, whilst retail prices were significantly stimulating take-up.

At the same time New Zealand's Commerce Commission filed a High Court action against the carrier, alleging that Telecom NZ

misused its market power, and continues to do so, to prevent or deter competition in markets involving high speed data transmission.

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