ISP Business: Down but not out 

The Internet industry in India has been in a major spot of trouble ever since the dot-com bubble burst. More than 500 ISPs have taken up licenses and more than 100 of them are operating services. But, the industry has not had much to boast of other than a paltry 3.5 million subscriber base, without anybody really making money on it, save probably the monopoly international bandwidth provider. It’s probably a case of gold rush turning into a mirage.

What are the major issues that this industry faces? And more significantly, is there a future for pure-play ISPs? To discuss these topics and more, VOICE&DATA organized a panel discussion at Chennai. The panel included Shrikant Joshi, president (access media), Sify; VG Suri, associate V-P, Dishnet DSL; Jasjit Sawhney, CEO, Net4India; Ashok N Shah, executive director, Roltanet; Karthik Bhaskaran, head–south (ISP operations), Hathway; and Sekar, managing director,
Mynet.

Excerpts: Industry slowdown

Shrikant Joshi, Sify: I think the start of this industry was right. The government had the right thoughts and right intentions.

But many of the intentions did not match with the reality. The monopolistic institution and BSOs continue to result in high control and regulations on wholesale side of the business, infrastructure, and links. TRAI has not yet put its attention on ISP side of predatory pricing.

Jasjit Sawhney, Net4India: I don’t think it’s any secret as to why business has not taken off. It is a combination of policies, predatory pricing, and incorrect business model. In the ISP business worldwide, cash losses have been there, but the financial market was there to support that, because it is a infrastructure-led business. You have to reach a certain scale before you can turn it around; it’s a far longer return-on-investment period. The government basic service providers not allowing the ISPs to share infrastructure with them forced ISPs to set up parallel infrastructure of their own. A few years ago, I had said there won’t be many people around in two to three years. And it’s true that there aren’t many people around; people have gone into niche areas. Probably that’s where the industry is right now. As far as the future is concerned I think it’s very good. India is growing, if you look at the type of customers–the corporate ones. They have not really adopted the Internet yet. It is a very major productivity tool for them. From that point of view, growth is tremendous and with prices coming down, VSNL getting corporatized, the future looks much better than it did about 18 months ago.

VG Suri, Dishnet DSL: The failures of ISPs could be primarily due to the rush, which happens in many new economies. I
understand that 480 licenses were issued; of which 180 became operational to follow the US model, where a lot of small successful ISPs were captured by big players at a huge cost. Seeing this, a lot of people became operational to add value and sell it to big players, which didn’t happen.

Ashok N Shah executive director, Roltanet " Smaller ISPs are finding it difficult to survive in B- and C-class cities. BSNL, with low cost of provisioning, poses a big threat." Jasjit Sawhney CEO, Net4India "You have to reach a certain scale before you can turn it around; it’s a far longer return-on-investment period that we have here." Sekar managing director, Mynet "ISP is the only industry where one does not calculate the cost and sale. I don’t know why we are selling and how we are selling."

Ashok Shah, Roltanet: I believe the future growth is going to come from the smaller, B- and C-class cities. And there, clearly, the smaller ISPs are finding it difficult to survive. And we see that the incumbent BSNL is coming in very strongly because it has been there for a very long time and the cost of its infrastructure has depreciated over a long period of time. For it, it’s just adding up another service to a large portfolio of services. And that became very apparent with the company’s entry into the cellular market. We have seen how BSNL took people by surprise in the cellular market.

Karthik Bhaskaran, Hathway: At Hathway, as we have cables that are already into the homes, so there is no question of us as an Internet division spending more money in terms of infrastructure. We have already invested on that. That’s why last year we broke even; and this year we are pushing for cash profits. Moreover, we are not spreading too wide. We are doing very selective area-wise distribution of our Internet services. Take Chennai for example. We are not present all over the places in the metro, but over pockets for which we do a lot of strong pre-sales service. We follow the same business plan in Hyderabad, Mumbai, Bangalore, Pune, and Nasik. What is more exciting for us now is CAS. This is new to us and new to the entire industry. So my counterparts in CATV are studying the whole picture and then we will come down to projecting Internet over that. But currently, we are very excited.

Sekar, Mynet: The future may be very good and there are good potentials, but at present the position is very bad. Still, if TRAI intervenes, basic service operators will come to real life, and then there is definitely good scope. As a C-class ISP, I know almost all my customers. Mostly, I know exactly what their problems are. And I have a personal rapport with them. But when it comes to pricing, the same customers back out. But for the effort I have put in, I should have backed out of this ISP business. The government has to look into this.

Integrated SPs

Nareshchandra Laishram, moderator: Integrated service providers are coming up. You have companies like BSNL, Bharti, and the Tatas providing all kinds of services, including Internet services. And we are seeing lot of leverages happening from one service to another. Now we are hearing that BSNL is going to provide preferential kind of pricing for its existing telephone subscribers. This development spells significant impact on the ISP sector.

Nareshchandra Laishram moderator "There is a lot to focus on quality of services, and I also think that there is a large scope for adding a number of value-added services." Karthik Bhaskaran head–south (ISP operations) Hathway "We are also carrying entertainment into the home on the same cable. So we can’t have more than 15 minutes of downtime in one go." VG Suri associate V-P, Dishnet DSL "in short term, ISPs can use the copper that BSOs have deployed, but in the long run they have to look at the last mile of their own."

Shrikant Joshi: The ISP area is very different from telecom area. We have had Bharti giving Internet free for two years in many parts of the country through Mantra. Yet, provisioning the skill sets required for ISP are different from the skillsets required for telephony. Many of these guys said they could do everything. I think a lot of specialization will be forced on these people. They will have to focus their attention on issues like the basic telephony versus mobile telephony war that’s going on.

Sekar: Is there any need for C-class ISPs? That we will have to see in the near future. Basic service operators are providing Internet access, based on the CLI technology; so they don’t even need an Internet account to access dial-up. Then why do we need pure-play ISPs? And Reliance is giving Internet for free. Whether those models will stand in the long run, we don’t know. But if this policy continues, then there is no need for pure-play ISPs at all.

Tariffs

Rajiv (of Cisco Systems, in the audience): Why, despite knowing very well that price points of Rs 5—7 won’t sustain it beyond 6—12 months, did the ISP industry go down that path?

Sekar: ISP is the only industry where one does not calculate the cost and sale. In textiles we have a costing to make some profit and then sell, otherwise we do not sell. Here we are selling, and I don’t know why we are selling and how we are selling.

Shrikant Joshi: The fact also remains that the valuation went up so much that we didn’t have to talk of Rs 5 or Rs 6; it was zero rupees. And then someone had a customer base of 7 lakh for free. And the moment the free fellow brought down the tariff to Rs 4 or 5, that 7 lakh became 20,000. So who is your customer? If he does not pay a fair price, is he is your customer? The real test of the customer is one who pays a fare price for the service.

Quality of Service

Ashok Shah: If for a moment we look at what goes into providing a dial-up access service, you will see that the major portion of the cost goes into the infrastructure. And the providers of these themselves are also competing in dial-up. As a result, the kind of pricing and the kind of schemes that they come up with to provide infrastructure to an ISP is sometimes very different from what they utilize for their own Internet services. So your hands as an ISP get tied down and to a certain extent quality of service has to suffer.

Shrikant Joshi: To survive and grow in the ISP business, we have to take the blame for everything. Not only MTNL, the Yahoo! server not working is also our problem. So at the front-end, from the customer we take the beating for anything and everything that he doesn’t get. This has forced us is to be enormously consumer-focused to see that somehow we deliver. To deliver better QoS, we have invested on world-class MPLS routers for our backbone. The new service providers are little more responsive. But we have to build enormous redundancy. One STM 1 does not guarantee anything. So we need to build redundancies all across. We have to build the national backbone, which is again, DS3 for us now. But all this, while increasing the quality of service, increases the cost as well.

Karthik Bhaskaran: There is a basic difference between other ISPs sitting here and my organization: a lot of ISPs are looking for value-add, we started off Internet as a value-add. So when one keeps that in mind one sees where we have reached now. Many of the issues discussed here don’t really affect or are relevant to the kind of business we do. We are also carrying entertainment into the home 24 hours on the same cable. And so at any point of time we can’t afford to have a downtime of more than 15 minutes.

Enterprise Market

Shrikant Joshi: I think the corporate side of the market is doing very well. Not only can they use Internet telephony for international calls, most of the corporates have many branches. If you look at the corporate communication costs, inter-branch calls is a very big area. Now basically we have put an IP box at one end and another IP box at the other end. The cost of the call is free but he is paying for the bandwidth at both the locations. Once the box is in, he is using it for international calls too.

Rajiv (in the audience): The ISP segment by itself has not proven itself to the enterprise, barring a few cases here and there where you have selective customers. But it’s got a bad name now. When I am saying the bad name, I mean the attitude of the customer, which is, “Let me check it out first and then I will try it out.” There is no such thing as “I have this need, let me select an ISP. Unless ISPs push, enterprises won’t open up. This year is critical and I am saying that because somehow the Indian industries are slowly realizing the power of outsourcing. The HPs and other such companies of the world and even the smaller IT companies are taking away the business which to my mind legitimately belongs to you. The economies of scale in case of ISPs will be much better than in the case of systems integrators but since you don’t have the level of confidence with the enterprise that’s going to be ineffective. To my mind that’s going to be a big challenge because once you earn the confidence, price points really do not matter and then it’s a question of what is the right pricing between the two companies. ISPs are not realizing this opportunity.

Nareshchandra Laishram: Coming to enterprise users, Voice&Data recently surveyed 109 enterprise customers across. And we found out that ISPs were having the least customer satisfaction as compared to all other telecom services, with major players like Satyam, and Dishnet not even featuring among the top major customer satisfaction players. So I think, this industry has to focus a lot on quality of services, and I also think that there is a large scope for adding a number of value added services. That is from where I think the industry can actually increase its prices; otherwise the subscribers won’t accept a price increase.

Private Infrastructure Providers

VG Suri: To address the lack of credibility of ISPs and on the reliability of service part, I would like to share my company’s experience with you. We are moving away from government agencies to private BSOs that have been able to give back-to-back SLAS. I strongly feel that we are moving in the right direction. We are looking at quality in a serious way and we also are demanding a fair price from customers to offer quality services.

Shrikant Joshi: I think that most of the private players are different from government players. They have huge capacities; so they have quality-of-service norms and the promises are significantly superior to the government monopolistic situations, which we face. That, I see as an improvement.

Audience: Okay, it’s good that private BSOs are coming into the picture. Now let’s take people like Net4India, Dishnet or Sify who are looking at all-India presence. In a way, at some point of time in some areas, you have to be dependent on BSNL. In Mumbai, you have Hughes Tele.com; in Chennai you have Touchtel, and in Delhi you have Tata. But that’s not an all-India presence. The other issue of quality of service has to be anyway addressed, whether you have a private BSO or not.

Shrikant Joshi: The subscriber base of ISPs, 5 lakh, is not a scale. The subscriber base of 40 million, on which BSNL and MTNL are sitting, is the scale. So for this new telecom war that is happening, I think the country will move more to mobile than basic telephony. I think Tata Teleservices will have 70 percent mobile subscribers and only 30 percent fixed. So far telecom revolution is going to be happening more on the mobile side and not so much on the basic side. On the basic side, even if BSNL opens up, sometime in the future, its copper is 50 years old or 70 years old and the impetus for them to put a new copper will be very less. They are not going to change the copper for one ISP.

DSL

Nareshchandra Laishram: DSL is something that’s very dependent on copper. But ISPs don’t own the
copper. That is owned by BSOs, primarily the government operators. And they are in no mood to share
this copper with you. So where do ISPs with broadband niche go from here?

VG Suri: Henceforward, the total BSO wireline capacity growth is going to be a couple of lakhs here and there. If that is the addressable market for broadband, then trust me two years down the line we will be again sitting here and debating. That’s the point. Most of the new BSOs are taking the wireless route. So if ISPs have to survive, in short term they can use whatever copper the private BSOs have deployed, but in the long run they have to look at the last mile alternative of their own.

Nowhere in the world, including the western world, has the incumbent or anybody opened up their last mile.

Rural Internet

Shrikant Joshi: The government has said that it’s going to have something like an USO. In the big telecom space also people have not fulfilled their USO obligation, which is part of their licensing agreement. When an ISP is struggling to make money in Chennai, nobody is going to go further up to Salem and create one more port and then take a link between Salem and Chennai and pay BSNL. In fact, our total revenues would be far less than the total Rs 2,000 crore we give to BSOs. I do agree that computer sales is now shifting to next developed cities enormously. But having learnt from the past, there does not exist any viable business model today.

Audience: The Internet growth so far has predominantly been in the urban areas. But, the key issue is in terms of the content in the local language. That is going to be the key growth driver in the non-urban areas. The BSNLs already have the infrastructure in place. They just need to leverage it slightly by adding some more equipment and they can get more revenue.
On the other hand, an ISP has to set up everything–equipment, people, billing–afresh.