INTERNET SERVICES: Dial-up Still Holds Its Ground

There is some good news for Internet service providers this year. The
subscriber base has jumped by almost 24 percent to reach 4,150,117. The revenues
from these services also witnessed a hike of 22 percent to gross Rs 1,573 crore.

After a lot of policy turmoil and wrong reporting of data, the industry
finally appears to be settling down and getting its act together. However, it
would be unfair to presume that there was all-round growth among the Internet
service providers. While the public sector ISPs—BSNL and MTNL—scored on
netting the dial-up subscribers, the private players took up broadband and
Internet telephony to keep themselves going.

Like many previous years, the trend of ISPs shutting shops continued. Besides
many small players, two of the bigger ISPs that withdrew from dial-up Internet
services were Data Access (NOW) and Bharti (Mantra). From 1 December 2004, the
international long distance player would close down its retail Internet service
offering that is currently offered under the brand name NOW. The company has
around 30,000 post-paid and 10,000 pre-paid subscribers.

Bharti´s Mantra is another major brand that could not sustain on low
returns from the dial-up business and it has closed down on new connections.
Though Mantra still exists and has over one-lakh users, the company is now more
bullish on the high ARPU DSL offering that is being marketed to its fixed line
customers.

Market Trends

The dial-up segment has over 90 percent market share but got in less than 30
percent revenue share due low APRUs. During the year, there were constant
efforts by BSNL and MTNL to offer innovative packages to attract dial-up users.
This included a flat monthly charge of Rs 750 for unlimited use by MTNL and, a
Rs 99 plan for students from BSNL. Unlike pure-play ISPs, being telecom
companies, they could afford to absorb the loss on phone call rate in such plans
and reduce the tariffs. This resulted in their virtual monopoly over the dial-up
market. However, they are yet to become active in the DSL and other residential
broadband segments.

In the DSL space one company that clearly had an edge was Dishnet, which was
taken over by Tata´s VSNL, this year for Rs 270 crore. Bharti also made major
inroads in the DSL segment. On the other hand, companies like Sify and Net4India
realigned themselves to the broadband services. In fact, Sify continued to lead
the cyber café sector with over 1,700 branded cafés and more than 408,000
subscribers.

Among the access technologies, growth in leased lines contributed to the
revenue jump in a big way. Though the market share of leased lines is less, the
high value connections—going up to almost Rs 2 lakh for a 2 Mbps line—results
in major revenue collections. The number of customers jumped from 8,077 in FY
2002–03 to 12,782 in FY 2003–04.

V&D estimates CyberMedia Research

But, it was the Internet through cable that has taken center stage. Almost
every ISP—except BSNL, MTNL, and VSNL—is offering this type of connection
either through Ethernet cards or modems. With a speed of 64 kbps and above for
Rs 800 per month, cable Internet holds around two percent of the market share
and is growing faster than DSL. Cable Internet works on a revenue-sharing model.
In it, the ISP gives bandwidth to cable operators and oversees the last-mile
network, which is laid by the local operator. Thus, ensuring the quality of
service.

Internet Telephony

Internet telephony proves to be more profitable for the ISPs than pure
access services. For an ISP, the average return from an hour of surfing on the
Net comes to less than Rs 10 while one minute of voice over IP brings them
almost Rs 4. Till 31 March 2004, DoT had permitted 121 ISPs to provide Internet
telephony services and 43 of them have already started operations are providing
services.

However, there are a few constraints that hold back this service from
actually posing any threat to the telcos who offer long distance voice services.
Internet telephony services are permitted only if the call is made from a PC in
India to another PC or a phone. You still cannot dial a PC user or terminate a
voice communication to a telephone within India.

According to VOICE&DATA estimates, in the FY 2003–04 over 90 million
voice minutes were used over the Internet. US, UK, and Canada were the major
termination destinations. West Asia is still not that hot, as the termination
charges there are higher than in the Western nations.

High on Bandwidth Capacity

The 572,675 route kilometers of optic fiber laid by players like BSNL,
Reliance Infocomm, Bharti, and RailTel ensured that there was no problem on the
domestic bandwidth side. And on the international side, VSNL, Data Access,
Bharti Telesonic, and Reliance Infocomm have made sure that India is hooked on
to the global traffic.

More than the capacity, problem lies in the pricing part. Broadband access
prices are directly linked to the bandwidth cost. However, the service providers
are not buying these because the cost for a 256 kbps line comes to almost Rs
2500–4500 per user per month. Bandwidth being 60–80 percent of the total
access cost, it has to be brought down to Rs 400–500 levels for broadband to
be affordable. In its broadband wish list, TRAI listed the high prices of
domestic leased circuits and international circuits as one of the major hurdles
preventing growth of Internet and broadband services. It has released a
consultation paper on domestic leased circuits, proposing a downward revision of
tariffs.

It has also recommended the establishment of two more NIXI nodes at Chennai
and Kolkata, apart from Delhi and Mumbai, would further reduce the dependency on
international bandwidth for domestic Internet traffic.

The Issues

Regulatory issues have been the major roadblocks in the Internet services´
growth map. Though TRAI has been putting up recommendations to help increase the
user base and usage levels, many more proposals are still doing rounds in the
Department of Telecommunication. Such as, the dial-up access rate has been a
bone of contention for long now. Even after charging just 10 paise per minute as
the Internet service charge, at Rs 24–30 an hour a customer´s the monthly
bill can become unaffordable. It makes better economic sense, for many, to go to
cyber cafés and pay only Rs 15–20 per hour, and even avail the value adds
that the branded cyber cafés offer. On top of it, the revenue-sharing model
between telcos and ISPs has not made good business proposition.

V&D estimates CyberMedia Research

Even though tax reductions and other government initiatives have brought down
the cost of access devices like PCs, they are far from reaching the masses like
TVs or music systems.

From the consumer´s perspective, broadband gives the best user experience
but most consumers are still not ready to shell out Rs 1500–2000 per month for
it. Absence of localized content is also a factor that hurts the home user who
rarely goes beyond online chat rooms or e-mails.

Opening up of the Internet sector ensured that the customers got a better
deal and that no company had a monopoly. But 10 years down the line, it appears
that the telecom companies have gained an upper hand, with very few private ISP
being able to emulate their success. This has been because the infrastructure
that is used by stand-alone Internet service providers is owned by the telcos.
Being ISPs themselves—such as BSNL and MTNL—telcos are in a better position
to give more cost-effective packages. To ensure a level playing field, Internet
Service Providers Association of India (ISPAI) has proposed retail minus
pricing.

Another model that has been successful in the Southeast Asian countries is to
have a flat charge for access, say of Rs 150–200 per month. In this, the
customer gets a certain bandwidth and both the service provider and the telco
enter a revenue-sharing agreement.

All this has been coupled with a demand to open up the local loop, for
telecom companies to provide last-mile access especially for DSL connections.
But BSNL and MTNL, who have had the copper and fiber already in place for some
time now, have not incorporated these recommendations into their strategic
business decisions.

The Players

The Department of Telecommunications had issued 385 Internet service license
as on 31 March 2004. Of these, 64 are category A licenses, 128 are for category
B, and 193 are for category C. However, there are only 189 companies who have an
active subscriber base in the various circles. Of these, the top five players
command a 70 percent market share. In fact, there are 122 ISPs who have less
than 1,000 subscribers.

BSNL (with over 934,950 customers) and MTNL (with 587,488) have a neat 36
percent of the market. Most of their subscribers are on the dial-up connections.
In fact, these two are among the few ISPs who have shown a rise in the dial-up
users. Even though they are the market leaders and would continue to offer
dial-ups at cheaper rates, the PSUs are also looking for change in their access
business mix. The market can expect a new series of broadband offerings from
these two and their entry in the broadband space is likely to trigger a tariff
war.

VSNL has also been realigning itself, to suit its business requirements,
through acquisitions. The company, which was already in the top dial-up club,
took over assets of Dishnet DSL to enter the DSL market in March 2004. With a
subscriber base of over eight lakh dial-up and 25,000 DSL customers, the company
has been offering a host of access services for the enterprise and the home
users.

V&D estimates CyberMedia Research

Among the private players, Sify is one of the few service providers that has
survived in the sinking dial-up market. Sify has also been offering broadband
services to about 23,300 subscribers through 350 cable operators. In the
corporate segment, the company has given 561 wireless connections and 1,691
leased lines. On the Wi-Fi front, Sify has hotspots in Delhi, Chennai, and
Bangalore.

Another significant Internet service provider is BG Broadband. The company
has been offering Internet access over cable and fiber optics since 2001 and
currently has a subscriber base of over 33,000. The company started from Surat
and Baroda in Gujarat and has now expanded to Hyderabad, Bangalore, Chennai, and
Gurgaon. The company gets almost 75 percent of its revenues from home and SME
segment and is planning to invest almost $25 million for expansion.

Net4India, which started with web hosting and dial-up services, has also
shifted its focus to broadband services and IP telephony.

Another government utility company, RailTel, has also started its Internet
services from a café at the New Delhi Railway Station. The café is run by Sify
and it offers video conferencing apart from the usual surfing services. But, as
a company, RailTel also provides bandwidth to smaller ISPs and is planning to
expand its café network to 50.

There are companies like Primus who—have an ISP license but are not
catering to retail customers and instead focus on enterprises—are working on
an interesting model. They give bandwidth to firms like Hotwire who in turn
cater to the retail customers through cable operators, and the billing is done
for Primus. In between the customer and Primus, Hotwire gives complete customer
support and is responsible for quality of service. Hotwire and HFCL Connect will
use the same model for giving services in 70 Punjab towns.

What Next?

Though dial-up has not been a profit-making proposition for many, with
almost 90 percent subscribers using it, writing it off is not easy. Even in
countries like the US, dial-up forms a sizeable number of the surfing population
and co-exits with broadband services. However, the future definitely belongs to
DSL, Internet through cable or fiber to home, and wireless services. With cable
TV reaching over 50 million households today, ISPs are seeing them as potential
Internet users too. Even if 10 percent of these households were converted into
Internet homes, it would give a massive boost to the industry.

Going by the Korean experience, DSL has the real potential to increase
broadband penetration. The network infrastructure is already there and if the
telecom companies devise a way for ISPs to use their last mile, there is no
stopping the DSL.

Given the geographical diversity of India, wireless and DTH services are also
contenders for a major chunk of the pie. Though the initial cost for these
services is high, given that the huge rural population is still to be wired,
they are well suited to take the information superhighway to the remote corners
of India.

Anurag Prasad