Internet service provider iiNet Ltd says it has entered into an agreement to acquire rival Netspace for $40 million.

The deal would be funded by debt, iiNet said on Monday.

Michael Malone ... iiNet chief attacked Westnet for complying with the studios' demands.

iiNet chief executive officer, Michael Malone, said the acquisition would consolidate the company's position as the leading challenger brand in the Australian telecommunications market.

"This acquisition will bring iiNet closer to our target of 15 per cent market share in the fixed line broadband market prior to the commencement of the National Broadband Network," Mr Malone said.

"Netspace is a natural fit for iiNet given the strong alignment of the company's products, networks and cultures. It is a great business, having grown strongly in the residential market, and has a loyal customer base given its customer service focus."

The Melbourne-based internet and fixed telephone services provider, Netspace, has about 80,000 business and residential customers.

AAP