ISPs: Changing Track Mid-way

The saga of the ISPs started in November 1999, when over 400 of them were
granted licenses for starting operations. At that time, the business model
hinged on deriving revenues primarily from dial-up connections. Nearly two years
after that, the business model of most ISPs has undergone a drastic shift. The
focus is now on corporates and on offering them a diverse mix of value-added
services.

The profitability factor

A few months ago, it was quite common to find ISPs slashing
their access rates in order to increase their client base. Recently, this
tradition was broken by the announcements of hikes in the access rates by some
ISPs. Reasons for this? After the initial mad scramble for starting operations,
ISPs battled to garner as many users as possible, and played on the price
factor. The price war lead to access rates falling well below the Rs 10-per-hour
figure. But given the high customer acquisition costs, the revenues from that
segment proved to be insufficient to cover costs. This necessitated a hike in
access rates.

Says Jasjit Sawhney, CEO, Net4India, "Internet companies
in the rush to get customer mind-share under-priced their access packages
without making much room for alternate revenues. They are now considering
alternate revenue streams." He adds that the recent move by the government
to impose a 5% service tax on ISPs will further worsen their prospects.

Madappa PB, V-P, marketing, NetKracker, is of the opinion
that the price hikes are an indication of the market maturing. He elaborates,
"Till a year ago, with more than 150 operators, supply exceeded demand. The
price war that ensued made consumers appreciate the value of brands that offer
genuine value."

While internationally ISPs have 3 streams of revenue–access
fees, revenue sharing with telecom companies and revenues from e-commerce, most
Indian ISPs just had access fees as their primary revenue stream. Except for
large ISPs like VSNL, which already have a critical mass, others with higher
overheads will have to rethink their strategies.

Agrees Shirish Kanetkar, country manager, Unisphere Networks
India, "The ball game has changed to that of profitability". Ashok
Juneja, CEO, Bharti Broadband Networks, concurs, "As revenues from the
consumer segment were insufficient, most ISPs have now joined the bandwagon to
woo corporates. The corporate segment has a potential of providing higher
revenue streams owing to their large bandwidth requirements and their propensity
to purchase value added services that could be."

The value-add drivers

IDC India estimates the value-added Internet services market
to jump to $634 million by 2004 from a mere $14 million in 2000. The real push
towards value-added services will occur after 2002 with BSNL’s monopoly coming
to an end. The setting up of gateways–both satellite and submarine besides the
building of the national backbones should help in sufficient availability of
bandwidth by early 2003. It will be around this period that the hosting services
and application services market will begin to look up with the improvement of
bandwidth availability.

According to IDC India, the key value-added services that
will drive the growth will be virtual private networks, unified messaging
services and Internet telephony. Maddappa of NetKracker says, "In order to
survive, ISPs will have to consider key factors such as size of operations,
pricing, cost control, availability and brand image".

Rahul Sawroop, president, enterprise solutions, Satyam
Infoway, adds, "The shift towards value-addes services has already started.
Bandwidth availability will no doubt improve and will be of higher quality
besides having SLAs to a large extent. ISPs focussing on corporates will build
revenue streams based on value-added services rather than just selling
bandwidth."

Juneja of Bharti Broadband talks about his firm’s focus on
two key segments–the SMBs and the high end users. He adds, "Bharti
Broadband has drawn a blueprint for a three-tier architecture called Network
three (including Internet, voice telephony and VSAT services) to provide
broadband services".

Revenue sharing: Major concern

While most ISPs do seem to be enhancing their focus towards
corporates, certain factors will differentiate the winners from the also-rans.
Revenue sharing with the telecom provider is one such critical issue. Only when
this issue gets sorted out, will the value-added service market take off.
According to Vibhas Amawate, assistant manager, IDC India, the differentiator
between the winners and the losers will ultimately be the ability to straddle
all levels of the value chain. "Basic telecom providers who enter the
Internet service provider market will thus have an inherent advantage,"
says Amawate.

The shift to value-added services is thus clearly on. But as
in the case of most ambitious business ventures, what one looks forward to is
the successful implementation of a profitable business model. Any takers?

Amit Sarkar in New
Delhi