INTERNET SERVICES: Broadband Takes Off

The financial year 2004—05 was a watershed year in the history of Internet
services in India. After a long wait, TRAI put forward its recommendations on
broadband services and Dayanidhi Maran, minister for communications, unveiled a
policy in October 2004. As it turned out, the Broadband Policy 2004 was not
merely about Internet access at speeds over 256 kbps. It also outlined some
ambitious targets for overall Internet literacy and set the stage for higher PC
penetration, e-governance, and other related services.

According to V&D estimates, the Internet access market in FY 2004-05 was
Rs 1,592 crore, a marginal jump of 1.2 percent over FY 2003-04. This rise was
not due to the dial-up susbcribers, where the major portion goes as call
charges. The services like internet telephony, always on broadband, and
increased corporate usage contributed to this rise.

On
31 March 2005 there were 5,554,297 Internet subscribers, a jump of over 22
percent from FY 2003-04, and users were almost 35 million. The Internet
penetration level has gone up only slightly from 0.4 percent to a little above
0.5 percent.

There were only 879,357 subscribers who had an always on 48 kbps or above
connectivity. Of this only 182,987 had 256 kbps plus or broadband connection.
This means the ISPs, specially BSNL and MTNL, on whom government is pinning lot
of hopes, have to muster over 2.8 million broadband subscribers between April
and December 2005. Till now BSNL/MTNL together have managed some 110,000
broadband subscribers since the services were launched in early 2005. The three
million mark seems an uphill task if not an impossible one.

Dial-up Still in Vogue

The dial-up or narrowband services still occupy a major portion of the
Internet access market. Almost 84 percent of the subscriber base in India is
still dialing into the cyberspace. The dial-up segment has grown over six
percent in FY 2004—05. BSNL, VSNL, Sify, and many regional ISPs have
registered increase in dial-up users.

Low operating margins and price squeeze by bandwidth providers has forced
many to shut shop. Even the largest private ISP, Sify, showed a decrease in its
dial-up revenues. Today, there are 172 ISPs in business, down by 17 from March
2004.

BSNL-MTNL have forced prices to dip as low as six paise per minute and on
certain days it is almost free. At such price points, it is impossible for
standalone ISPs to stay in competition, as they have to buy bandwidth and also
pay call charges to the telcos.

Despite this, it would be wrong to think broadband would wipe out dial-up. In
the US, dial-up access is still as popular as always. Reason: unlike always-on
connections-where the users are tied to phone lines, cables, or wireless
modems-through a dial-up subscription users can get connected from anywhere.
Though speed is a constraint, this freedom is attractive to students and small
users who do not need high download speeds but want to be connected from
whereever they are.

V&D estimates  CyberMedia Research V&D estimates  CyberMedia Research

Bundled dial-up and broadband are being offered by companies like VSNL. This
CLI based connectivity gives users the freedom to access their account from
anywhere in the country.

Also, there has been no major shift from dial-up to the broadband services.
Due to low price points users prefer broadband to dial-up even if they do not
need high speeds. The split between migrated subscribers and new ones is almost
equal. In many cases, users have retained dial-up connections even after
subscribing to broadband. One reason for this being the initial schemes of a
free telephone with every BSNL/MTNL connection.

ISDNs Take a Beating

There was a five percent drop in the number of ISDN lines in FY 2004—05.
The slide from 12,782 lines in FY 2003—04 to 12,204 in FY 2004—05 happened
mainly due to the corporate preference for broadband. This downward trend would
continue this year too as benefits of broadband are realized.

Price Points Make or Break

Another aim of the broadband policy was to make Internet access affordable,
especially the broadband access. BSNL hit the bull's-eye with its Rs 500
scheme for 1Gb data download, and so did MTNL. This led to initial rush for
bookings and BSNL and MTNL had a waiting list of over 150 lakh. Now even the
private ISPs have come out with low tariffs.

However, it is being debated whether such low tariffs are sustainable. The
cost of connecting a subscriber is more than Rs 500 and rates cannot go below
this. And, if volumes are missing it would be difficult to sustain the broadband
services.

Bandwidth Price Squeeze

Perhaps the policy makers had anticipated this, so they provisioned a review
of the domestic and international bandwidth prices regularly. Today, almost 70
percent of the Internet access cost is that of bandwidth. If this is reduced,
end user will benefit. TRAI recommendation of reducing the bandwidth costs by
almost 70 percent is stuck in legal hassles and is being reviewed. However, the
recommended prices were already being offered in the market. Clearly
negotiations are more important than policies in bringing down prices.

On the other hand lot of hue and cry has been made about BSNL-MTNL charging
less from their end user than what they are charging the ISPs. This issue was
put before TRAI and consultations were held, with no results so far. The problem
arises because most of the telecom operators are competing with standalone ISPs
and in a competitive market such price squeezing happens.

Almost 83 percent of the Internet subscribers are with the top five service
providers in FY 2004—05. And, except Sify, all of them have some stakes as
integrated telecom operators. The standalone ISPs have to rely on BSNL, MTNL,
VSNL, Reliance, and Bharti for bandwidth and last-mile connectivity. This gives
the telecom operators room to play with pricing, while competing with ISPs for
the same customers.

Disconnecting VPNs

The private ISPs were hit hard when DoT ordered that current ISP licenses
did not allow VPN services. A new license was to be taken for Rs 10 crore for
offering VPNs. This proved too steep for many ISPs and they stopped VPN
services, a major source of their revenue, with dial-up revenues going down by
the day. Sify, a major VPN player, paid the fee and continue the services. But
the controversy rages on and TRAI is still to clarify whether VPN services are
part of the ISP license or not.

Focus area: IP Telephony

Minutes of usage on Internet telephony jumped almost 104 percent in FY 2004—05.
From 70 million minutes in FY 2003—04 it has gone up to 143 million minutes.
Most of these are calls out of India. Termination of IP calls on PSTN numbers
remains a problem area. As of now, call can be terminated in India only on an IP
device or a computer.

There is a demand to allow international and domestic long-distance calls to
and from normal phones over IP. This would make calls cheaper and also increase
minutes of usage. But this will also dent the revenue of telecom operators,
particularly BSNL, for whom a major revenues comes from long distance
interconnect charges-and the government would definitely not want to kill its
golden goose.

V&D estimates  CyberMedia Research

But opening up of IP telephony would also attract things like ADC and IUC-it
is their absence that makes Internet calls cheap. ADC and IUC would change the
cost dynamics making the whole thing costlier.

Wireless, the Way Forward?

The broadband policy rejected the demand for local loop unbundling. Though
there was no clear direction to share the copper with private players, it
suggested that commercial arrangements between the concerned parties could be
explored.

V&D estimates  CyberMedia Research

Monopoly of copper gives BSNL-MTNL a competitive edge, and other broadband
service providers are either going for fresh investments in last mile or are
going wireless with a fiber backbone. VSNL, offering broadband in 41 cities,
announced its metro Ethernet project and is investing heavily in last mile
delivery.

Though wireless eliminates many problems of a wired environment, in practice,
256 kbps plus speeds are not easily delivered over it and broadband applications
like video on demand and streaming video are not successful. For sub-256 kbps,
wireless is good and has emerged as competitor to cable and Ethernet.

Wi-Fi wants acceptance

Like broadband, Wi-Fi hotspots were also in the news last year. But in the
public domain, their numbers would not be more than 500 through out India.
Hotels and corporate offices are adopting Wi-Fi for Internet access. Some
factors limiting their higher adoption are: few Wi-Fi-enabled laptops, seamless
connectivity on the move, and security issues. Where Wi-Fi hotspots have been
created in public places, pricing and quality of service have been an issue.

Content Remains in Exile

Content remained only a debated issue. The only development last fiscal was
shift of focus from content for general Internet to content for broadband
services. Focus over localized content has now given way to data- and
multimedia-rich content for high-speed connections. Almost all broadband service
providers have some plans for content delivery but not really as a content
development. Tie ups have been entered into or are being finalized between
content developers and service providers. Some pilots were done last year, and
this fiscal might see some concrete projects.

Live TV, webcasts, streaming audio-video applications, gaming, software on
demand, etc; the list goes on. The fact is, for Indian Internet users e-mail is
the killer application.

There was no major market demand for other applications, which were being
pushed to the customers rather than being demanded by the consumers. In future
people might use them but for now, e-mail and low-bandwidth applications take
the day.

Even if, somehow, broadband could be made widely available with content in
local languages, the absence of even functional literacy among a large part of
the population would keep that programming or content far from the users. The
reason for more TVs than PCs in India is that TV channels do not need education
to be understood. But for mass usage over broadband, basic education is a must.

Connectivity First-Speed and Content Later

At the moment government's primary objective should be to increase the PC
and Internet base. Speed and content would come with the market demand. If there
were no PCs and no connectivity, high-speed, low-speed, local or alien content
would be non-issues. Despite policy thrusts and technology making PCs cheaper,
their concentration remains in few pockets. Schemes like connecting 560 district
headquarters first, and then connecting the villages or local connecting
business centers (e-mandi, e-chaupal, etc) are some time away but would help
create demand by spreading awareness about benefits of Internet.

Till March 2005, only 14 PCs were available for every 1,000 people. The
mobile revolution in India is an indication that if prices are brought down
technology can be taken to the masses. It was due to a price drop of almost 50
percent between 1997—2004, the 14 PC figure could be reached. Also, with
prices dropping, more PCs were bought in areas other than metros. And, to
support this trend we need to further push down the prices. Sub-Rs 10,000 PCs
have made it to the headlines, but not to the desktops. Innovative finance
schemes, government funding, partnerships between various stakeholders, and
replicating successful models from Malaysia, Thailand, Indonesia, would help.

Cyber Cafés Struggling

Number of cyber cafés dropped 14 percent, from 10,237 in FY 2003—04 to
8,791 in FY 2004—05. Sify had the largest number of cyber café accounts, and
2,437 franchised and 34 company-owned cafés. Reliance Infocomm also promoted
public access through its close to 241 web worlds (till March 2005). Tata
Indicom also initiated True Value hubs for the broadband experience and Internet
retail shops. These initiatives were in addition to BSNL's Sanchar Dhaba
project, which act like community information centers. Though BSNL has the
government's backing and financial strength to continue with loss making
dhabas, private players would quit the business if profits continue to plunge.

V&D estimates  CyberMedia Research V&D estimates  CyberMedia Research

Looking Ahead

Financial year 2005—06 would be the year of expansion. Almost all the
service providers are looking at taking their offerings beyond the metros. BSNL
is already operating (or planning) in 235 cities, and would link the district
headquarters this year. It has already placed order of 7.5 lakh ports and is
coming out with an expansion tender in FY 2005—06. Similarly, MTNL is
expanding in Delhi and Mumbai. Optimum utilization of available copper pairs
would be the key for both.

In the last quarter of FY 2004—05, Reliance entered the broadband market
and had almost 60,000 customers including 400 corporate houses. With a fiber
backbone of over 80,000 Rkm and plans on bring fiber to the building (FTTB),
Reliance Infocomm would be a force. Similarly, VSNL under Tata Indicom brand,
would expand its presence from 41 cities, and also has plans in content
delivery.

Since launch of the broadband policy, Bharti has been aggressive with tariff
plans and innovative schemes. From the present 50-city presence it would add
another 27 this year. The bundling of DSL with the phone lines would be key for
the Bharti this year.

Sify is going strong and would consolidate its position. Being very strong in
the always-on segment, it would compete with telecom operators. Similarly, Iqara
would be concentrating on taking services to the masses, beyond the apartments,
and consolidating its presence.

But the key for all the ISPs, integrated or standalone, would be quality of
service and value added services. It is easy to garner volumes and provide
connectivity but maintaining the numbers and keep the consumers logged on for
longer periods is difficult. Companies like Primus India have been working on a
low cost, no-frill model and have been successful in braving the shake-out
period. Similarly, Net4India, IceNet, Data Infosys have adopted different types
of services to survive. Though no major shake out is foreseen in the industry,
the marginal players would quit and ultimately it would be the survival of the
biggest, integrated, and the smartest players.

Regarding policy, the regulator would be trying to shed its image of helping
DoT in creating monopolies. Clear guidelines on leased lines (both domestic and
international), clarity of ADC, and some reform in the Internet telephony area
can be expected from TRAI this year.

Anurag Prasad