Consolidation ‘essential’ to small providers, ISPs say

TORONTO—A majority of Canada's small Internet service providers (ISPs) have seen little or no growth over most of the last decade, which is causing an “ISP class gap” and continued industry consolidation, said Michael Garbe, president of Accelerated Connections Inc. “Most ISPs are not . Most ISPs are flat or declining,” Garbe said in an interview Tuesday at the Canadian ISP Summit in Toronto. “Over the next five years, I think you'll see an ISP class gap. ... The little guys will get smaller, the big guys will get bigger, and you won't find people in the middle anymore.” Small ISPs like Accelerated Connections lease wholesale access on incumbent providers' networks to offer their own retail Internet services. According to CRTC data released in September, small ISPs had an 8.6 per cent share of Canada's $5.4 billion residential Internet market in 2012, up from 7.6 per cent in 2011. Garbe said small ISPs that aren't recording significant profits or continued growth will run into trouble in the years ahead as the increasing consumer demand for bandwidth strains the ISPs' networks and requires them to upgrade their infrastructure. Without sustained growth, he said, some ISPs may not be able to afford those upgrades. “In technology, if you're not growing then you're dying,” he said. “Sooner or later you have to upgrade your network infrastructure. But if you've only got the same money that you had to work with before, you can't.” Garbe predicted that about one-third of Canada's “pure ISPs”—those whose primary service is providing Internet access to homes and businesses—will be out of the business in the next five years. Many of those companies, he said, will likely be bought up by their larger competitors, like Accelerated Connections, which acquired Toronto-based small ISP Network Connection Inc. in August, 2012. Other small ISPs have acquired smaller players over the past year, including Teliphone Corp., which purchased Navigata Communications 2009 Inc. in December, and Comwave Networks Inc., which bought Radiant Communications Corp. in August. Primus Telecommunications Group Inc. also agreed in May to sell its Canadian and U.S. retail telecom operations to New York-based investment firm York Capital Management. Matt Stein, chief technology officer of Primus Canada, said in an interview that consolidation in the small ISP industry is a result of a handful of the larger small providers that are looking for new ways to expand their business, such as TekSavvy Solutions Inc. and Distributel Communications Inc., two of the largest small ISPs. “I think that's actually driving consolidation versus a desire to get out,” he said. In some cases, Stein said, one of those “mid-sized” players will acquire a smaller ISP to boost its own subscriber base, or to be able to offer a product that the smaller player specializes in. Those types of consolidations, he said, have been taking place in the industry for years, but mostly go unnoticed. Over the next two years, he said, he expects industry consolidation to be more “visible” as those larger players pursue acquisitions more aggressively. “ hasn't necessarily been very visible and I think that is what will change,” Stein said. “There's a movement now amongst some of those mid-sized ISPs to start doing acquisitions whereas before they were focused purely on organic growth.” Mel Cohen, Distributel's president, said his company was able to ramp up its Internet subscriber base quickly through acquisitions over the past five years. He said Distributel doubled its subscriber base when it purchased Cybersurf Corp. in 2009 and added another 50,000 subscribers when it purchased Acanac Inc. in 2010. Cohen said Distributel and Acanac have each maintained their own brand and offered some of their own products since the 2010 acquisition. “We really are operating them pretty much like two separate companies,” he said. Cohen said other telecom companies that don't currently offer Internet services are also interested in buying small ISPs to get into the Internet game. He said at least one of those companies has approached him recently to inquire as to whether Distributel is for sale. “I know there are players that are trying to acquire,” he said. “I fairly often get inquiries.” Garbe said Accelerated Connections will continue to look for opportunities to expand its business by buying out other small ISPs, and that the company is relying on further acquisitions to help meet its growth targets. “Our goals are to be 2 1/2 times the size that we are today in five years,” he said. “We're not going to get there by organic growth. ... Sixty per cent of that will come through acquisitions.” Stein said Primus will also continue to seek out potential acquisition targets over the next few years. “It's fair to say that we're always looking for new ways to grow our business, and acquisitions are a very viable and essential tool to do so,” he said. “We'll continue to look for good opportunities to acquire companies.” —With reporting by Nicholas Kyonka at nkyonka@thewirereport.ca and editing by Derek Abma at dabma@thewirereport.ca.

Consolidation ‘essential’ to small providers, ISPs say

News | November 13, 2013

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