Internet & Broadband: Uphill Task

With 2007 being christened as the year of the broadband, it was
more than business as usual for the Internet service providers. Having missed
the previous target of registering 30 lakh broadband subscribers by the end of
2005, ISPs faced an uphill task of achieving 180 lakh Internet subscriber base
and 90 lakh broadband base by March 2007.

Though, in reality, the Internet subscriber base has reached
only half way the target standing at 90 lakh in FY '06-07. This is almost 29%
growth over 71 lakh subscriber base in FY '05-06. The broadband connections
(>256 Kbps download) too have fallen way behind the target touching nearly 26
lakh at the end of March 2007. However, it has grown to overwhelming 70% since
March 2006, when it was close to 13.4 lakh subscribers.

The overall Internet services revenue during FY '06-07 is
estimated to be Rs 2,040 crore, and has grown by 26% over Rs 1,620 crore during
FY '05-06.

The above subscriber figures are the number of connections, and
do not reflect the actual number of users of the Internet facility. Disparity
between the number of connections, and number of users is mainly on the account
of the fact that a number of users avail Internet facility at cyber cafes,
shared Internet lease line/broadband connections.

Are We There Yet?

As per TRAI, the broadband penetration rate in India stands at a dismal
3.5%. The rural market is virtually untapped with broadband mainly reaching the
large and medium cities.

As per VOICE&DATA estimation, in FY '06-07, the number of
broadband subscribers was close to 26 lakh. Out of this, over 22 lakh are DSL
based; over 1.42 lakh cable modem; over 76,000 Ethernet LAN; almost 21,000 fiber
and 12,000 radio customers. There were over 2.3 crore Internet users aged over
15 years at the end of March 2007 compared to less than 1.6 crore a year ago.

Even though bandwidth tariffs have come down significantly, due
to host of factors including high bandwidth prices, lack of adequate content,
lack of competition among broadband service providers, and last-mile
connectivity issues, the broadband usage in India has not yet picked up.

Most countries that have high broadband penetration have either
unbundled the local loop and/or have an organized, robust cable infrastructure.
Unfortunately in India, we don't have any of them. So, there are only two
options left for the ISPs-either establish one's own infrastructure, or use
infrastructure that already exists, for example tying up with cable operators
for broadband services.

Bandwidth prices in India are 1,000 times more than neighboring
counties like China and South Korea. While consumers wait for bandwidth prices
to drop, ISPs are gung-ho about value-added services to edge out closest
competitors. As many as thirty ISPs, both local and national, offer VoIP
services. For a subscription fee of around Rs 100, a subscriber can make calls
to any international land line or mobile for as little as Rs 1.25 a minute.

In order to inject broadband services further in both urban and
semi-urban areas, telcos are backing WiMax. Almost all the top players have
outlined their WiMax plans, with BSNL leading the way in rural and semi-urban
areas. VSNL and Bharti Airtel have already started offering WiMax services in
cities like Bangalore, and are in the process of rolling in metro cities.

Dial-up Losing Steam

Dial-up connections are still the most popular way to connect to the
Internet, but take-up of faster, digital alternatives, collectively referred to
as broadband, is on the rise. The percentage of Internet subscribers using
dial-up connection for Internet access decreased from 84% in FY '04-05 to 66%
in FY '05-06, and it was less than 60% at the end of March 2007.

The ARPU per month for dial-up Internet subscribers hovered
between Rs 205-210 during FY '06-07. This is only slightly lower than the
reported ARPU for FY '05-06 where ARPUs swung between Rs 220 to Rs 210. The
minutes of usage for dial-up access per subscriber/month was 190 minutes as of
March 2007 compared to 175 minutes in the previous fiscal.

Industry Shrinking

A matter of concern for the industry is that out of 700 licenses issued
within three years of opening of ISP sector to private service providers, only
377 licensees exist today. Only 148 Internet service licensees are functional
today with 49 Cat A ISPs, 58 Category B Licensed ISPs, and 41 category C
Licensed ISPs. Other ISPs have moved to niche markets.

Incumbents BSNL and MTNL control over 64% of the market while
none of the over hundred competitors control even 10%. In addition, the policy
guidelines laid down by the TRAI and DoT with respect to defining the role of
the ISPs has been narrowing down the potential multi-role of an ISP.

TRAI has recommended major structural changes regarding
functional area of ISP license with a view to ensure viable business model. It
has recommended that the free entry be replaced by an entry fee of Rs 20 lakh
for national level ISPs and Rs 10 lakh for state level ISPs licenses.

The regulatory body has also imposed a uniform license fee of 6%
of AGR along with minimum annual license fee of Rs 50,000 for national level, Rs
10,000 for state level, and Rs 5,000 district level. This has triggered a
serious debate, with the industry fiercely opposing the move. Small ISPs allege
it tolls the death knell for them, while the large telecos complain it will give
ISPs a backdoor entry into their domain. TRAI continues to insist that its
recent recommendations will only further boost Internet penetration, curb grey
market, and provide level-playing field.

Moves such as removing VPN services out of the ambit of ISP
license; restricting internet telephony services, in which PCs may not call
landline or mobile phones; FDI be lowered to 74% from the current 100%; ISPs
disallowed to provide IPTV services; and the latest recommendation of having 6%
revenue share currently charged to Internet telephony operators be extended to
all ISPs-are being seen as detrimental to the growth of broadband service
providers.

As a result, the smaller ISPs are finding the battleground
limiting year after year. Challenged by the presence of larger players,
especially those that also function as telecom operators, the regional ISPs are
either folding up their business or looking for consolidation.

One such testament is that of the recent acquisition of Gujarat
based IceNet by YOU Telecom (formerly known as Iqara Telecom). The move was
necessitated by the need of the regional players to seek national presence.

Traditionally strong in the dial-up Internet market, VSNL has
seen subscriber numbers fall as India's Internet users switch to broadband
services with rival carriers. As a consequence VSNL is also walking on the
acquisition trail, acquiring country's largest private provider of fixed
wireless broadband, Direct Internet and its Primus India subsidiary.

Regulatory action has fallen short of ensuring fair play for new
entrants, especially stand-alone ISPs. In addition, ISPs are feeling a vertical
price squeeze. The broadband access rates in the country are among the lowest in
the world at Rs 250 per month (approx $5 per month) for 2 Mbps download,
compared to $25-30 in the US. This, coupled with the high price of bandwidth, is
forcing the private ISPs to innovate or perish away gradually.

Big Players in Command

It's worth noting that over 90% of the total subscriber base is with the
top five leading ISPs. About 64% of the total Internet subscriber base is with
the PSUs (BSNL/MTNL). Their pan India presence and the dominant status in fixed
line service, puts them in an advantageous position to offer combo plans (where
user of voice services can avail Internet services also). However, with their
uninhibited access to copper lines, the PSUs can achieve much more. Their
combined subscriber base of 60 lakh Internet subscribers, and 15 lakh
subscribers seem to be on the conservative side.

Market leader BSNL has added almost 5 lakh broadband subscribers
during 2006-07 covering a total of 900 cities. It has plans of reaching up to
1,700 cities and 20,000 villages with broadband connectivity by the end of March
2008. In order to achieve its objectives, it is leveraging next generation
networks (NGN) for broadband.

BSNL's dial-up subscriber base is estimated to be around 33
lakh with total additions of 8-10 lakh, mostly from smaller towns. As part of
its rural connectivity roadmap, BSNL plans to provide hi-speed (<256 Kbps)
Internet connectivity to 6,000 blocks of which 1,000 blocks will be covered
using WiMax. BSNL plans to add 50 lakh new connection in this financial year.

Of the 700, only 148 Internet service licensees are functional

MTNL has a subscriber base of about 4.75 lakh for its broadband
services. Of this, about 2.49 lakh subscribers are in Mumbai, while Delhi
accounts for the rest 2.26 lakh. MTNL has a target of 10 lakh new connections in
the current fiscal year.

Both MTNL and BSNL offer a broadband speed of 2 Mbps to all
their subscribers. This is one of the reasons why its services are popular.
Private operators offer speeds ranging from 256 Kbps to 2 Mbps, charging more
for high speed.

To boost the deployment of a broadband and Metro Ethernet
network in Delhi and Mumbai, MTNL has awarded a contract to Sterlite Optical
Technologies. The network, once completed, would be capable of handling about
half a million broadband connections in these cities.

Sify has managed to garner revenue of Rs 420 crore in the last
four quarters from dial-up, leased lines and other Internet services during FY
'06-07, thereby asserting a growth of 13% over last year's revenue of Rs 371
crore. This is despite showing a dip of 8% in the overall subscriber base.

Sify's dial-up subscriber base dropped 40% from 1,36,331 to
81,670 by the end of the fiscal. The public access through iWay chain of cyber
outlets has dropped by 9.2% , falling from 572,724 at the beginning of the year
to 519,466 by end of the fiscal.

However, as a counter measure to stay competitive, Sify has been
able to leverage its 'Hybrid Broadband Business Model', over the past few
years for scaling up broadband across the country. The hybrid model leverages
the strengths of Sify as an ISP and the strengths of cable operators in having
'right of way', and the network required to connect customers at a marginal
cost. This innovative approach has shown good results for Sify.

As of March 2007, Sify touched 53,195 broadband subscribers, and
has managed to add 12,752 broadband subscribers during FY 06-07. Apart from this
Sify is also serving 162,311 high speed subscribers across the country using
hybrid business model.

Garnering around 6 lakh subscribers at the end of March 2007,
Airtel's broadband subscriber base has grown by over 270%. Broadband and
wirleline services revenue is up by 50% , and it contributes 12% of the company's
total revenues. The broadband and wireline segment of Bharti Airtel has an ARPU
of Rs 1,112 per month.

During 2006-07, the overall investment in the segment was close
to Rs 4,499 crore, the second highest after investments in the mobile services
segment. The company provides its broadband (DSL) and telephone services (fixed
line) in ninety-four cities.

In a move to boost the usage of broadband for individual
customers, Bharti Airtel tied up with laptop manufacturer Lenovo in November
2006, for bundling broadband connections and R-Connect cards with Lenovo
desktops and laptops respectively. Similarly in June 2007, it began its
partnership with HCL Infosystems to offer a bundled broadband connection with
every HCL PC.

Airtel also partnered with Indiagames to offer Games on Demand
Service as part of its endeavour to offer rich broadband content to its
customers. This is in addition to a variety of content services such as music
downloads, video messaging, and Online Test Preparation packs for GRE, GMAT,
SAT, and MBA.

The pioneer of Internet and international service in India, VSNL
has taken the lead in offering innovative wireless broadband services with the
launch of WiMax services in February 2007. It has registered around 1.8 lakh
broadband subscribers of which 40% come from small enterprises.

To beef up its domestic broadband base, VSNL has bought Direct
Internet and its Primus India subsidiary for Rs 75 crore, and is reported to
have picked up the Internet business of 7 Star, a cable operator based in
Mumbai. Rather than building out its own fixed broadband network, the company
has partnerships with various cable service providers across India, and in some
cases it's shelling out cash to help them lay more cable.

In another first-of-its-kind move, VSNL was awarded franchisee
rights for running of Cyber cafes at 68 railway stations across the country to
create user-friendly public Internet access points for customers in railway
stations. It plans to install 100 Wi-Fi hotspots by 2008. It has also initiated
the WiMax rollout across the country targeting Mumbai, Bangalore, and Delhi in
the first phase. The plan is to cover 120 towns (400 sites) by March 2008 for
enterprise, and five towns (1,300 sites) for retail.

On content side the company is focusing on education and
entertainment (gaming, video on demand, music) and other applications like VoIP,
security, and SMB hosted applications

As per V&D estimates, the total Internet subscriber base of
Reliance Communications as of March 2007 is close to 6.6 lakh growing 60% over
the previous fiscal. This includes wireless broadband data card customers,
retail customers of Reliance Web Worlds as well as enterprise customers. There
are over 3.6 lakh wireless Internet customers on Reliance network.

Reliance Communications launched its enterprise broadband
services in the first half of 2005, focusing initially on the top 40 cities in
India. Currently Reliance Communications has over 488,600 buildings directly
connected to its network, and over 6.2 lakh access lines, covering 18 circles.
It has an enterprise customer base that includes over 800 of the top 1,000
Indian enterprises, and MNCs and is expanding rapidly in the SME segment.

It is worth noting that the company's broadband business unit
offers a wide portfolio of enterprise voice, data, video, Internet, and IT
infrastructure services serving the enterprise segment. These services include
national and international private leased circuits, broadband Internet access,
audio and video conferencing, MPLS-VPN, Centrex, and managed Internet data
center services.

Company's overall investment in the broadband business segment
as of March 2007 was Rs 3,176 crore that is 10% of its overall investment. In a
bid to reach beyond enterprise, Reliance Communications launched WiMax for
residential consumers in Bangalore, early this year.

YOU Telecom has not only managed to capture a significant mind
share as against more established telecom operators-cum-ISPs, but also has
continually innovated its business strategy. With a focus on strengthening
enterprise segment offerings, YOU Telecom acquired Gujarat-based IceNet in an
undisclosed cash deal in April 2007.

Currently operating in twelve cities, it is looking to expand
further in tier-2 cities, and has invested over Rs 4,000 crore in
infrastructure. It is currently focusing hard on providing unique services
including VoIP services, strengthening its SME focus offering not just
connectivity solutions, but also integrating networking needs. The company has
also applied for an overseas license for VoIP. It expects to grow its VoIP
subscriber base from 1,000 currently to 40,000 by end of March 2008.

Its revenue for the FY '06-07 is pegged at Rs 80 crore, 70% of
which comes from retail and remaining from the SME segment. Over the next year,
You Telecom expects the equation to be equal between the two.

The Way Forward

Overall, the industry is optimistic and raring to go forward on the
objectives set for 2010 of achieving the Internet user target of 4 crore, and
the broadband subscriber target of 2 crore.

Emphasis is on improving the quality of service and providing
good connectivity. The differentiator for the end customer will be these two
critical factors, as the access rates more or less remain the same from all
ISPs.

While enterprise product offerings will continue to largely
drive the revenue, the business models of the ISPs can expect to evolve further,
as they race against each other to capture the mind-share. Stand-alone ISPs will
have to transform into being close to a teleco offering wide ambit of services
while large telecos will have to focus on their ISP role to cater to individual
customers heavily. Either ways the consumer wins.

The wish list of the ISP from regulation point of view is
precise, and that is to encourage the growth of the industry and not restrict
its role. In order to imitate the success of the mobile telecom operators,
regulation must allow independent players to thrive, and add more innovative
services like IPTV. ISP players are of the opinion that opening up the license
regime rather than dividing it into national and state based license will only
hamper the reach of broadband.

More action is needed than mere desire to achieve the broadband
dream. And, the first step lies in rebooting the ISP industry by adequate
regulation, and not imposing stifling policies.

Malovika Rao


malovikar@cybermedia.co.in