Internet and Broadband: Broadband Flexes Muscles

The saga of broadband services climbed up the adoption curve after the dust on
the initial hype settled down. The Ministry of Communications and IT set the
tone in 2004 with the Broadband Policy in place. From thereon, the broadband
market witnessed a significant growth despite falling short of the target. The
total number of Internet subscribers is approximately 71 lakh as on 31 March
2006, including 13.1 lakh broadband subscribers, which is almost 29% growth over
last year's 55.5 lakh subscribers that included 1.8 lakh broadband
subscribers. The figure of broadband connections crossed 10 lakh in January
2006, which is significantly below the “Broadband Policy 2004” target of 30
lakh set for 2005 end.

For India it's a leapfrog considering the fact that during the year, the
percentage of broadband subscribers in the overall number of Internet
subscribers grew from a mere 3.35% to 18.63%. India has the world's fourthÂ
largest base of Internet subscribers, which is estimated to have
registered a whopping growth of 54% growth with 4 crore users as of 2005-06 from
just 2.5 crore in 2004-05.

According to estimates, Indians go online for a number of activities
including e-mail and IM (98%); job search (51%); banking (32%); bill payment
(18%); stock trading (15%); and matrimonial search (15%). Online Indians are
regularly reaching out to online research content that includes workÂ
(62%) and personal (70%) and a sizeable contribution is due to the fast
growing e-commerce in India.

As per V&D estimates the total revenue from Internet services during the
FY 2004-05 was Rs 1,592 crore and the revenue for FY 2005-06 is estimated to be
Rs 1,619 crore. This is only a marginal increase of 1.7% mostly on account of
falling ARPU even as the subscriber base grew.

Encouraging Factors

Broadband connections have started to grow steadily since the beginning of
2006. According to TRAI, during the month of April 2006, approximately one lakh
additional broadband connections were provided taking the total broadband
connections in the country beyond 14 lakh.

Broadband prices have been moving southward, thereby increasing the number of
subscribers. Minimum monthly tariff for broadband connection has come down to Rs
199 with 400 MB free download. The charge per MB of download has come down to Rs
1/MB as compared to Rs 4/MB a year ago. In comparison to some developed
countries the minimum tariff for a broadband connection has become lowest in
India. The tariff has dived down by almost 80% over last one year.

E-commerce and high demand for .in domain registrations are also factors for
the increase in online users. The '.in' domain registrations surpassed
150,000. Another key factor is the availability of low-cost computers.

Missing the Bull's Eye

Despite the enthusiasm, the pace of broadband adoption hasn't yet matched
the expectations. Out of the set target of 30 lakh subscribers, 15 lakh
subscribers were to be added by the PSU operators (BSNL and MTNL). The numbers
revealed by TRAI show that the subscriber base for broadband users was around 14
lakh at the end of April 2006, out of which 9 lakh connections belongs to PSU
operators and remaining 5 lakh is attributed to the private service providers.
By early 2006, there were close to 10 lakh broadband subscribers-a penetration
of less 0.1%.

One of the factors for the slow adoption of broadband is attributed to
additional start-up cost—installation charges including capex for the
connectivity at the CPE level and some minimum monthly payment. Another main
reason for slow conversion is that the bandwidth, both domestic leased lines and
the international, continues to be high and that keeps the broadband prices
still higher than the affordable level for most subscribers.

Dial-up Still Way Ahead

Even though dial-up subscribers have reduced by little over 20% since last
fiscal, over all dial-up is still in demand. Total dial-up subscribers are
estimated to be around 45 lakh of the total 71-lakh Internet subscriber base.
Broadband (> 256 kbps) as on 31st March 2006, added up to 13.1 lakh
subscribers, gaining significantly over last fiscal. Broadband subscriber
constitutes 18.4% of the total subscriber base compared to just 3.3% in last
fiscal. Another gain is related to subscribers on broadband technology platform
(speed < 256 kbps and last mile is on cable Ethernet, cable or DSL) that is
around 18% of the total subscriber base.  Leased line subscribers are the least at 15,000.

Most of the broadband subscribers are those graduating from a dial-up and the
metros account for the bulk of broadband subscribers, though the service is
available in close to 200 districts in the country. On the other hand, the
dial-up is growing more in tier 2 & 3 cities, especially on account of
first-time users. Market for cable-through Internet has not picked up as
expected. Investment required at the cable operator end to upgrade
infrastructure, is very high. Also, the experience of cable-broadband users has
been poor, as they are discouraged by frequent problems with bandwidth and slow
connections.

Being in Business

While business opportunities are booming for the ISPs, the number of ISPs
currently operational has come down from 172 in March 2005 to around 155 in
March 2006. 750 licenses were granted, out of which more than 300 have been
surrendered. After a period of market rationalization, despite the large number
of providers, 10% of the ISPs have 90% of the subscribers as the state-owned
BSNL and MTNL continue to dominate.

The broadband bandwagon is continually adding new emerging players. Several
communication solutions organizations such as Net4India, HCL Infinet, and Hughes
Communications have joined the camp. Most ISPs are targeting the SOHO and SMB
segments that are increasingly using broadband services for business-supporting
applications such as messaging, remote access services (SSL VPN) for enterprise
mission-critical applications, and e-ticketing.

ISPAI estimates that there are more than one lakh cyber cafés across the
country, and an estimated 60% of Internet users regularly access the Internet
via cyber cafés across the country. Number of cyber cafés has also been on the
rise especially, in the tier 2 and 3 cities. When it comes to high-speed access,
the broadband scenario is limited to metropolitan areas. Regarding
Internet-content, the void still exists with a huge demand of localized content
not being met.

However, high cost of bandwidth and vertical price squeeze by the incumbent
are pinning down the growth prospects of the ISPs. Taking out VPN service from
the ISP license and imposition of 6% revenue share on Internet telephony offered
by the ISPs w.e.f. January 1, 2006 has put immense burden on the ISPs. However,
the charges from Internet access, Internet content, and Internet access related
installation charges have been excluded from the gross revenue to arrive at the
AGR. The reduction in international private leased circuits (IPLC) and domestic
leased circuits (DLC) represents the upside, however, there is further scope for
downward reduction in the ceiling tariff for domestic and international leased
lines.

Wireless Internet

There are close to 9 crore cell users in India, and only a fraction of PC
users. India is the fastest growing market in the cell phone segment in the
world with about about 4.5 mn cell phone subscribers being added every month.
Undoubtedly, the next big thing round the corner is the multiplied growth of
Internet users on mobile handsets. The Internet service providers are
transforming into a new 'Avataar'—Wireless Internet service providers or
WISP. Industry analysts expect that there will be 12 crore mobile subscribers by
2008.

The cost of wireless cards for accessing Internet on PCs or laptops have also
nose-dived in the last couple of months. Airtel offers wireless data cards for
accessing Internet for as low as Rs 399 with free bundled usage of 100 MB and
its highest tariff plan is of Rs 799 with a free bundled usage of 1.5 GB.
Reliance's R-Connect cards are priced at a minimum tariff of Rs 650 with
bundled data exchange of 1GB, while a premium deal is priced at Rs 1500 for
unlimited data download. Hutch's Edge cards cost Rs 8,000 and the monthly
tariff is lowest at Rs 499 with free bundled usage of 100MB and maximum at Rs
699 with free bundled usage of 1GB.

The cost for downloading on GPRS and MMS facility has also been drastically
reduced. From Rs 5 for MMS download for pre-paid subscribers, BSNL has slashed
the cost to mere Rs 3 per MMS. Similarly, it has slashed its tariff for
unlimited download for post-paid customers to Rs 199 per month from Rs 349 per
month. This is likely to trigger off a price war as this is among the lowest
tariff rate for mobile Internet service.

Leaping Ahead with IPv6

In a significant move, TRAI has brought forth recommendations on the
transition from IPv4 to IPv6 this January. This is important if India has to
achieve the Broadband Policy target of broadband and Internet subscribers of 2
crore and 4 crore respectively by 2010. The present generation Internet (IPv4)
is clearly not enough to achieve these objectives.

According to a consultation paper prepared by TRAI, India has merely 28 lakh
(2.8 mn) IPv4 addresses compared to 4 crore in China. USA ISP Level-3 alone has
more IP addresses than China. India has 0.17 of an address block, while the US
has full 75 blocks. The paper recommends  India
to achieve 20% penetration of the Internet, and if three persons share each IP
address, it will need 101/8 blocks. This is more than the remaining global IP
address space of 82/8 blocks.

VPN Issue

There was some relief for the private ISPs on the Virtual Private Network (VPN)
issue. TRAI recommends that ISPs should be asked to pay an entry fee of Rs 30
lakh and zero licence fees for offering VPN services. This came as a breather to
the ISPs, as they were earlier asked by the Department of Telecom (DoT) to cough
up between Rs 1 crore and Rs 10 crore as entry fee and 8% of the revenues as
licence fee for offering VPN services.

DoT's proposal was a crucial bone of contention as it led most of the
operators, barring a few ISPs, to exit the VPN business. Most of the 700 ISP
licence holders are loss-making entities and do not have the resources to pay
the Rs 10 crore entry fee. Now TRAI's recommendations could bring the ISPs
back in business. However, the service providers are being cautious as the final
decision on the matter is yet to be taken by DoT.

Internet Telephony Grows

Another significant decision was opening up of Internet telephony. The
government allowed access service providers to provide Internet telephony,
Internet services, and broadband services.

Usage of Internet telephony grew from a level of 14.3 crore (143 mn) minutes
during 2004-05 to more than 20 crore (200 mn) minutes during 2005-06. However,
the ISPs are hit by the government's decision to impose 12.24% service tax and
6% revenue share in the form of license fees for the Internet telephony service
provided by the ISPs. Having accepted this the ISPs want the government to
restrict access to the Internet telephony service provided by Foreign Service
providers (e.g. Skype, Net2Phone, etc.) to the subscribers of Indian ISPs, in
line with the stipulations— but not limited to the ones defined under the
Section 21 of the Indian Telegraph Act, 1885.

Outlook

The broadband target before the ISPs is to have monthly additions of over 4
lakh subscribers so as to close in on the set target of 90 lakh by December
2007. Availability of last mile is what is going to finally decide the future of
the broadband market. Other issues such as affordability for end-users or
availability of killer applications will become important only after the
availability of the basic service is there. The key drivers of broadband will be
in the areas of telephony, education, entertainment, and healthcare. Widespread
'always-on' connectivity will surely drive the usage of VoIP and vice versa.

ISPs are bullish on tapping the rural market for telephony as well as other
value-added services including telemedicine and education. And not before long,
a new breed of Internet users will emerge surfing the net on their mobile
handsets or laptops.

By Our Reporter

vadmail@cybermedia.co.in