Numbers Don’t Amount to Much

India’s Internet subscriber base, which was 2.8 million at the end of the
last fiscal, has crossed the three-million-mark–3,225,651 to be precise and
that’s according to DoT. VSNL no longer remains the largest ISP in the
country. Satyam Infoway and Caltiger have romped home with the honors in the
paid and free ISP categories respectively. As on June 30, 2001, Satyam Infoway
had an enviable subscriber base of 500,894 while Caltiger had an even bigger
share of 682,565. VSNL, the largest ISP till March 31, 2001, saw a decline in
the subscriber base from 630,970 to 485,730 by June-end, thus getting relegated
to the third spot.

Much ado about nothing

While this landmark achievement calls for a pat on the industry’s back,
the declining health of operators and the slackening subscriber growth has
dampened the celebration spirit of ISPs. Accustomed to growing at a rate of more
than 200% since their introduction in 1995, Internet services have had to
contend with a much lesser growth rate this fiscal.

Though one quarter alone may not be truly predictive of the entire year, a
weak trend in the first quarter and a damp mood in the next are surely
indicative of a bad fiscal. During the April-June (AMJ) quarter, the Internet
subscriber base grew by only about 400,000 in spite of free accounts and
discounts. Considering even the typical Indian windfall in the fourth quarter,
the Net subscriber base added this year could be just 2—2.5 million at the
most. This will mean a less-than 100% growth over the March 2001 figure of 2.8
million subscribers. If one bears in mind the fact that the ISP industry was
supposed to bear fruits of privatization starting from the current year, the
picture begins to look very gloomy indeed.

Straws in the wind are now clearly visible. According to the Internet Service
Providers’ Association of India (ISPAI), players are scrambling to get out of
a now ‘non-happening’ sector. And the association describes this as just a
beginning. The worse is yet to happen. A Department of Telecommunications’
official revealed that there are about 490 licensees and 130 operational ISPs in
the country, but most of the players are only ‘technically operational’.
These ISPs are either new or haven’t expanded beyond a few hundred
subscribers.

News of mergers and acquisitions are starting to trickle in as well. Among
those acquired are Sun Infonet, BPL and now Spectranet. Bharti BT Internet
merged with Bharti Broadband, Wipro severed its corporate access division from
the consumer access wing, Zee seems to be focusing more on cable access than
dial-up, and Tata Internet is simply talking of merging with Tata Teleservices.
And among those who have vanished from the scene are Sigmaonline, which ran into
trouble in a CBI case, and Exatt.net, whose plans proved to be too ahead of the
times. But among the bigger players, Satyam Infoway too is reportedly in
trouble. Satyam Computers also seems keen to get out of this loss-making
venture. Analysts have put the debt of this ‘dot-com acquirer’ at Rs 600
crore.

What went wrong?

Just a year ago, it was fashionable to be an ISP. In a world of flashy
venture capitalists, the valuation of an ISP was indeed tied to the number of
subscribers that it had. Early entrants like Satyam Infoway, Bharti BT Internet,
Dishnet, and Pacific Internet went all out for eyeballs. And state-run companies
like VSNL and MTNL went on a tariff cutting spree, forcing others to follow
suit. Free ISPs sealed the trend by making a joke of the paid model.

However, early this year, this dial-up model became unsustainable worldwide.
It suddenly didn’t matter that you had millions of subscribers. What was
important was how many paid subscribers you had and the revenue that you were
getting from them. According to ISPAI, 90-95% of the Indian Internet services
market is made up of dial-up services. While the average revenue being realized
per subscriber is Rs 7-9/hour, the cost of providing services amounts to Rs
15-18 per subscriber. If this model continues, it threatens to consume the
dial-up market. VSNL and Satyam Infoway have been among the first to raise the
tariff.

The biggest blunder that Indian ISPs committed was the neglect of value-added
services. Being too complacent with their burgeoning subscriber base, they paid
little attention to services such as VPN, Web hosting, Web designing, ASP, and
network integration/management, which could easily have become alternative
streams of revenue.

Policy gone haywire

When the Internet policy was announced in late 1998, Indian as well as
international investors welcomed it, and called it one of the best-engineered
policies of the government. However, less than three years since then, it has
become a classic example of a good policy not implemented properly. While a
radically open market policy attracted a huge number of players, lack of
responsibility created many roadblocks. Pricing was left to market forces and
principles like a free interconnection regime, better use of technology and
level-playing field were kept on the backburner.

DoT, having taken all the kudos for a successful licensing spree, shifted its
attention to other important issues like new cellular, basic and long-distance
licenses. TRAI chose to remain buried in the files that constituted its
recommendations. The ISP policy was no longer anybody’s baby.

The lack of accountability on part of the bandwidth provider and state ISPs,
created one of the biggest bottlenecks. Not only was the bandwidth exorbitantly
priced, there was no guarantee of redundancy or quality-of-service on the
bandwidth links that the monopoly operator provided. As a result, providing
corporate services was not possible without investing heavily on back-up links
and additional technologies that would improve the access reliability and
quality.

It was only after considerable time and pressure that the government yielded
to the demand of opening up the use of private international satellite gateways.
But it was too late by then. Even today, getting all the clearances is not an
easy process, and takes up to 8-9 months. This is one of the reasons why only 30
out of the 220 proposals have become operational so far.

Denial of service

Providing corporate services and setting up private gateways used to cost a
lot and people were getting confused about how long it would take to realize
profits out of the ISP business and how much more investment needed to be sunk
in.

ISPs complain that they have not been allowed to provide even those services
that are logical extensions of existing ones because of artificial/unfair
regulatory injunctions imposed by the government. Two such services that are
spoken of are unified messaging services (UMS) and Internet telephony. The
government has allowed only fixed service providers, cellular mobile telephony
service providers and cable access providers to provide voicemail/audiotex/UMS
as a value-added service. For the rest, including ISPs, separate licenses for
separate short distance calling areas (SDCAs) will be issued, each bearing a
cost of Rs 3 lakh as the bank guarantee.

In case of Internet telephony, the government first imposed a ban for three
years in which the industry says the country lost a good chunk of the $50
billion market, as estimated by Anderson Consulting. As a result of the ban,
services such as Net meeting and call conferencing could not be provided as
well. The government has now come out with a policy for long-distance telephony
that allows the introduction of less than toll-quality voice services using VoIP.
But the necessity of paying an entry fee of Rs 25 crore and another Rs 25 crore
as bank guarantee could limit the number of ISPs who would be interested in
jumping into the fray.

The story does not end there. The policy on direct-to-home, which would
enable Internet service providers spread the Net faster to remote locations, is
simply not gathering moss.

The suggestion to allow return-only International satellite gateways without
licensing got struck down. According to ISPs, the government has been totally
technophobic. As a consequence, technologies that could have reduced the cost
have not been allowed.

Corporate hope

Amidst all the negative trends in the ISP market, there are some positive
signs too. There is consolidation in the market, with the serious ISPs growing
much faster through acquisitions. Not only is this trend affecting larger ISPs
like Data Access, even B-category ISPs are known to be trying to get bigger by
buying out C-category ISPs.

Corporate services and value-added services seem to be the buzzwords doing
the rounds these days. Companies like Global Telesystems have shown that one can
succeed only by remaining focused. Global Telesystems, which was already a
dominant data communications player when the ISP policy was announced, did not
jump onto the subscriber-base bandwagon. Instead, it stuck to its corporate data
communications/e-commerce services–and it paid off. Many others are following
suit today.

There is a realization that it’s the quality of customers that matters and
not the number. Satyam Infoway, for instance, is more bullish on its corporate
services than any other of its ISP divisions. Wipro Infotech too has pushed the
Netcracker burden aside to focus completely on providing services to corporates.
New ISPs like HCL Infonet and Tata Internet are clear that the only way to
survive is to provide value for money and provide a basket of value-added
services in addition to reliable Internet access. The corporate Internet user is
at the center of their plans.

In fact, it may be worthwhile looking at the ‘laissez faire’ model that
the US has. More than 4,000 ISPs operate there, with a few companies being very
big national ISPs and the rest thriving on the niches. Most of the ISPs have
localized services. There are also those who specialize in access technologies
such as DSL, cable, and wireless. The market is such that for every new entrant,
another exits the space. The equilibrium is thus maintained.

Nareschchandra Laishram/Voice&Data