INTERNET: ...And Finally, a Silver Lining

At first glance, it is a year ISPs should best forget. A closer look,

however, showscause for cheer. The government conti-



nued with its commitment towards liberalization, with the highlight being the
divestment of VSNL to the Tata Group. VSNL’s strong position in international

long distance (ILD), national long distance (NLD), Internet and other

value-added services, combined with the Tata Group’s dominant presence in both

infrastructure and access services, promise to emerge as a huge force. The

opening up of the ILD space, access to more bandwidth and legalization of VoIP

were other events that kept the buzz going. Nevertheless, the impact of these

moves will be seen only this year and the numbers for 2001-02 are anything but

heady for Indian ISPs.

Consolidation continues



The shakeout that the ISP segment witnessed in the previous year continued

in 2001-02 as well, with only 140 of them remaining operational today, against

the 470 licensed ISPs in 2001. Large investments, steep operating costs and slim

margins contributed to many a decline. The health (or the lack of it) of the

industry was clearly gauged when 20 ISPs exited the market as soon as DoT

simplifying the procedures for this. While ISPs invested around Rs 5,000 crore,

they suffered accumulated losses of Rs 1,400 crore in the year under review. And

while Internet access expanded across the country, most ISPs continued to write

their accounts with red ink.

The Tatas acquired a 45% stake in VSNL Internet service providers contracted only 50% of the total bandwidth available in the country Having been plagued by low numbers in the consumer segment, ISPs are targeting corporates There are only 140 ISPs operating in the country now, against 470 licensed companies in 2000-01

As the existing focus on mass market failed to draw sufficient subscriptions

and revenues, ISPs began targeting the corporate segment. There were some high

profile launches–like Tata Nova and HCL Infinet–with the USP being on

value-added services. Sify also shifted focus to corporate subscribers,

announcing that it expected 60% of its 2002-03 revenues from this segment. To

provide the quality differentiation element, Sify acquired ISO 9001 2000 colors

for its data, network and customer relationship management services. Wipro Net

integrated with Wipro Infotech to provide corporate services like network

management. Bharti BT Internet merged with the VSAT division to form Bharti

Broadband Bharti Broadband Networks (BBNL).

Major ISPs: Action Time Satyam Infoway (SIFY): Sells its software development business to Satyam Computers for $6.9 million in cash. Acquired an ISO 9001, 2000 certification for its data and network services and customer relationship management services Now shifting focus to corporate subscribers and targets 60% of its revenues in ‘02 from this segment Data Access (NoW): Acquired BPL Innovision’s ISP business 700 corporate subscribers and 30,000 retail subscribers in no cash deal Dishnet DSL: Snaps ties with Tyco Telecommunications for its submarine cable project. Cuts project size, explores other options Wipro: Wipro Net integrated with Wipro Infotech to provide corporate services like network management Bharti Broadband Networks: Bharti BT Internet merged with Bharti Broadband as Bharti Broadband Networks Limited (BBNL) To roll out its Internet services with Bharti Touchtel’s telephony service roll out in Delhi, Karnataka, and Tamil Nadu

Size proved to be an advantage, and corporates preferred to have a single ISP

for all locations. Some ISPs even started looking at offering network and WAN

consulting, banking on their experience with their own networks. The fact that

every bank/corporate is planning to establish networks for its offices or

branches is good news for the ISPs wanting to enter this segment. ISPs like

Net4India, IceNet and others have already started offering these services to

corporates.

Consolidation continued with BPLNet getting out of this business segment.

Mergers and acquisitions were the flavor of the day. The Tatas’ 45% stake in

VSNL pitchforked them to the position of the biggest ISP in the country. Data

Access (NoW) acquired BPL Innovision’s ISP business with 700 corporate

subscribers and 30,000 retail subscribers in no cash deal. The deal will allow

NoW to extend operations in the South. WiproNet is also reportedly looking for a

buyer due to huge losses.

Rethinking the business model



A dire financial situation and a shrinking dial-up market, in terms of

value, meant that ISPs had to look for newer avenues to sustain growth, if not

escalate it. One way was to go after the corporates, which many ISPs did. There

was sudden interest in setting up of data centers, VPNs, and providing access

other than via dial-ups. Also, both incumbents and new entrants explored newer

ways to provide dedicated and better Internet access to corporates–DSL, fiber,

cable, and wireless radios were all tried. Besides this, older and new companies

re-engineered themselves to provide access solutions.

Internet penetration in India is still very low and stands at about 7 users

per thousand. Reasons for the low penetration mainly stem from high PC costs and

the high rate of Internet penetration among existing users. The Internet

subscriber base in the country is 3.7 million (source: ISPAI), while the users

are about 7 million (Frost & Sullivan). The reason for the user base growing

significantly faster than the subscriber base could be the widespread reach of

cybercafes and the low access rates therein.

A significant trend that marked out 2001-02 was the ISPs changing tactics on

the retail model front. For the first time retail access rates went up. While it

cost an ISP on average Rs 14-15 per hour to service a customer, it was only

realizing about Rs 7 from them. This coupled with high customer acquisition

costs in a fragmented market necessitated many ISPs to hike their access rates.

With the opening up of Internet telephony, ISPs can look forward to a slice of

voice revenue as well. Sify, NOW and Dishnet DSL also decided to acquire ILD

licenses.

Bandwidth scenario



A major announcement was made regarding the end of VSNL’s exclusivity and

the decision of the government to allow FLAG to sell bandwidth directly to ISPs.

This was preceded by a slash in bandwidth prices. The bandwidth situation in

India improved significantly and went up to 1.5 Gbps from 900 Mbps last year.

VSNL alone accounted for 1.2 Gbps. ISPs have currently contracted only 750 Mbps

of these.

ISPs’ enthusiasm for setting up their own international gateways has waned.

Now that the sale of terrestrial bandwidth has been thrown open, setting up

gateways does not appear to be a viable proposition. Bharti-Singtel is set to

start selling bandwidth by late 2002, bringing in more options for the

bandwidth-hungry ISPs.

This is expected to bring in 8.4 Tbps of bandwidth. A fall in access rates of

leased lines offered by VSNL and Bharti would augur well for ISPs, though they

might not immediately pass on the benefits to subscribers. Other implications of

the bandwidth glut would be improved quality of service for corporate users.

G2C, B2B pick up



There was plenty of action on the E-governance (G2C) front as the Center

pushed it in a big way. Almost all states announced plans to adopt e-governance.

While the most active are southern states like Andhra Pradesh and Karnataka,

other states such as Punjab, Haryana, Madhya Pradesh, and Gujarat have also

initiated large-scale projects. State governments are trying to spread the

benefits of e-governance in remote regions through initiatives like the Gramdoot

(Rajasthan, MP, and Haryana). B2B activities also picked up. Large enterprises

took steps towards e-enablement. Steps have been taken to e-enable some of the

large enterprises, both in the private (Mahindra & Mahindra, Asian Paints,

Sony, Ranbaxy) and public sector (DoP, LIC). However, most of the e-business

initiatives are driven mainly by future needs.

There are multiple external factors impeding e-commerce adoption. These

include limited Internet access among customers and SMEs, poor telecom and

communications infrastructure for reliable connectivity, and gaps in the current

legal and regulatory framework. The internal barriers are uncertainty of

benefits, security and fear of transparency, business partners, existing IT

systems and processes not geared for e-commerce.

Outlook



E-commerce in India is still at a nascent stage, but the total transaction

volume is expected to grow rapidly with the bulk of it expected to accrue from

B2B transactions. Even though recent attention has been on e-procurement, the

principal benefits of e-commerce are likely to accrue from collaborative

initiatives across an industry supply chain (sharing of inventory information,

collaborative product design, etc). Although B2C is also set to pick up,

analysts say the Internet is unlikely to become a key sales channel in any

industry in India and the overall penetration is expected to be less than 1% of

retail sales.

The consolidation phase in the ISP space is expected to continue with more

players opting for the exit route. Value added services would get a further

thrust with reduced bandwidth prices and an enhanced demand for quality and

services from the corporate segment. ISPs would also use the legalization of IP

telephony to sell services through pre-paid cards or post paid services by

paying an initial subscription fees. While Net4India, Caltiger, and HCL InfiNet

have already started offering pre-paid cards, Dishnet DSL is considering the

post-paid option. There are however some key issues such as revenue sharing

between the Network Provider and the Calling Card Issuer which need to be sorted

out. Unless this is resolved, there would be interconnecting issues, which could

reduce the proliferation of such services.

TEAM DQ