The ISP SCENE: Innovate And Survive

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The ISP SCENE:
Innovate And Survive

Even as the market grows rapidly, opportunities will be reaped by only those players who continuously evolve and redefine their business strategies.

Circa 1995: VSNL launches its services in August 1995 and is the lone player.

Circa 2000: Post ISP deregulation, the DoT has issued licenses to nearly 200 players with 50 active players offering their services across the country. 

Although VSNL started its services in August 1995, it took some time for the private players to commence their operations. Further, the IT task force recommendation tabled and accepted by the government in toto during mid-1998 brought hope to the ISP industry. Yet it was only in November 1998 that the government announced its ISP policy and made private ISP a reality. 

Following the deregulation of ISP, within a year, 50 players have already jumped in to provide their services. Their optimism confirms their faith in the vast market potential of this segment.

Before figuring out what models ISP players have been trying to innovate or follow in India, it would be worthwhile to examine how global ISPs have developed peculiar models depending on the nature of service, the segment and value addition provided.

Also, the definition of ISPs have changed globally. It is no longer restricted to only access providers but has extended to other players not involved in providing access. So, classifying an ISP on the basis of its size and geographical coverage will not render the real picture of the dynamic business model the particular ISP would have adopted. For instance, an AOL model would be different from that of telecom giant AT&T’s model. However, one can broadly classify international ISPs into the following categories:

• Telcos like BT, AT&T, Deutsche Telekom, MCIWorldcom and the new IP revolutionaries like QWest, Level 3 and WorldPort. These companies are at the top of the tier of the ISP business and provide the backbone infrastructure and sell wholesale bandwidth to other ISPs. In India, VSNL would fit this bill in its capacity as bandwidth provider while at the regional level the WorldTel-Reliance combine, once it commences its services, could become a good example.

• Online service providers and content-based ISPs such as Compuserve and AOL where the focus is more on content and online services, read
  ecommerce.

• Cable operators like Excite@home and Telenet. Operators like Siticable, Incablenet, Hathway Cable and Datacom will be following similar models of making money on the cable network.

• IT players like IBM, Microsoft and Mitsubishi. 

• Brand driven players including free ISP players like Virgin Net, AT&T WorldNet, EarthLink and Freeserve. While most of the Indian ISPs are following the brand driven game, Calcutta’s Caltiger would be the only Indian company following the free ISP model.

Depending on the model an ISP follows, its business strategy and revenue streams are determined. If IT companies like Dell and IBM are entering the ISP segment space, it is not related to making money on the ISP business but is related to selling hardware and services. Then ISP becomes a value add to its business. So is the case of content-based companies like AOL and Bertelsmann that intend cashing in on ecommerce rather than accessing or selling services. Similarly, there would be a different revenue model for telcos like AT&T, MTNL and DoT where the money would flow in by leveraging on the telecom infrastructure. So the strategies and revenue streams would be directly proportional to the business model an ISP follows. 

Of course, it is not that the above mentioned categories are tight compartments since a player in one category would usually fit into another category. For example, AOL is not only one of the biggest players in the online service provider (OSP) category but also one of the biggest brand driven players. Similarly in India, VSNL is a bandwidth provider and brand driven player while Satyam Infoway is a content and brand driven player. 

Indian potential

In India it has only been a year since the private players came in. It is only now that we are witnessing some action in this market segment. Also, in the context of ISPs in India, by default it implies access providers while in the developed internet markets the access market is nearly saturated. Agreeing, Partha Iyengar, CEO, GartnerGroup, remarks, “In India the ISPs are still looking at connectivity charges as a major source of revenue, whereas the world-over the recognition has set in that basic connectivity is not a profit maker and is more or less becoming a free commodity.”

However, like any business that has its constraints, the Indian ISP market has been witnessing its own dynamic models and has been maturing for the last five years. Of course if you had a monopoly like VSNL did, the model would have been simple–provide access and cream off the market. Even post ISP deregulation, VSNL continues in the same mold of providing access and an ISP backbone, more seriously. 

Though it is too early to elicit any clear cut business model for the Indian ISP, yet in one year the players have already begun to segment themselves. This could well become the precursor to future models in the constantly changing market.

Unlike your traditional business model, the ISP market is unique as the business model in this case may not necessarily be the revenue model. So the money making proposition does form the core of an ISP business model. Says Alok Sinha, SP, Technical Marketing, Asia Pacific, IBM, “Access will be on the top of the business model but not necessarily occupy the same place in the revenue model.” 

The core of any business and revenue model for any ISP is access. This will continue until the market matures and other players like wholesale bandwidth sellers enter the market. This is because providing access is not the core competence of these players. However as of now, all ISPs are taking this route to establish themselves in the eyeballs or the subscribers game. Even in the access market, some sort of segmentation is quickly taking place with companies like Dishnet bringing in high speed access like DSL into the country, while others experiment with cable and other high speed media.

VSNL is projecting itself as a reliable access provider leveraging its role in bandwidth provision while players like Bharti BT and Net4India are on the single number access. 

Apart from occupying a place at the core of the business model, this will continue to be an important source of revenue especially for the medium and smaller guys in the coming period. However, for some of the bigger players, this component is going to lose its importance as they develop other sources of revenue. For instance, if Satyam Infoway develops online with the AOL OSP model, chances are it will drop its access rates to bring more eyeballs to its site and earn from ecommerce. However, few companies will continue to focus on this revenue stream as an important source. Comments N Arjun, CEO, Bharti BT Internet, “Access will become cheaper and cheaper–but there will be people paying for quality of service.” 

Another important trend already evident is the maximum innovation occurring on this front. First you had hourly rate pricing and the price cuts in this system. With the market growing and maturing, few players like Net4India and Caltiger are changing the rules of the game by bringing in unlimited and even free access. 

Currently outside the access core, ISPs are considering advertising as an important business and revenue component but money will go only to the players with big subscriber bases. The companies will also have to fight tooth and nail with established websites like Rediff.com, IndiaWorld and other sites. The next tier would be value-added services like web hosting, co-location, net solutions, virtual private network (VPN), domain names and ecommerce as part of both their business and revenue strategy. 

Industry sources claim that ultimately these value adds will become the main revenue stream and access revenues will dwindle. 

Most of the ISPs are still grappling with the value adds since the prime motive is to establish the serious-player-image in the nascent ISP industry. 

As of now most companies seem to be following a mix of access and content before moving on to ecommerce in the footsteps of international online service providers like AOL. Agrees R Ramraj, MD, Satyam Infoway, “The model of offering internet access and content is a successful model in the internet business”. Satyam Infoway has been very
aggressive on the content model which it later intends to roll out as the ecommerce model with a spate of tie-ups and takeovers. Tie-ups with banks like Bank of Madura, ICICI bank and takeover of IndiaWorld are a few examples. 

But how many will be successful will be directly proportional to the subscriber base. Besides, notching up a subscriber will be a kill-kill game in an increasingly crowded market. For example in Delhi, apart from all-India players like Satyam Infoway, Bharti BT, VSNL and Dishnet, we have local telecom majors like MTNL and upstarts like Net4India catering to the market. Many more are expected to join the fray. If the number of licensees are any indication, assuming that all the players will be launching their services, Delhi will have about 36 players in the coming months. 

In such a crowded market it will become increasingly important to segment and focus on niche areas rather than cater to the whole pie. Companies are fast realizing the same and launching their net initiative around this philosophy. Net4India is targeting the HSME (home small medium segment) and will offer services ranging from email to the home users to providing web design, hosting and networking solutions to its SME clients. Remarks Jasjit Sawhney, CEO, NET4India, “These are our differentiators and they will form a major component of our revenue model.” On the other hand, Dishnet is projecting itself as a serious access provider ranging from the low end of the market (via ETH hubs) to the high end through broadband technology like DSL and cable. Says Sivasankaran, Chairman, Sterling Group, “We are here to revolutionize the internet business by bringing in superior technology like DSL and not wait for its evolution.” Their business model rests on content, education and portal to cover the entire spectrum of the internet. Along the same line the differentiator for Satyam Infoway is, as Ramraj puts it, “Enabling business over a wire”. The company has been working towards it since 1997. In Calcutta, Caltiger has introduced its free internet service and this is the differentiator for this ISP. The smaller and regional ISPs are building local support and community that will keep them afloat in the cut throat market that is fast emerging.

So each company, be it the giant or the local player, is defining its business and revenue model and adopting its strategy. The final business and revenue model will be clearly drawn out in the coming months.

Gray areas

In spite of the hoopla, private ISPs have been experiencing their own share of problems. Primarily there has been the dual role of VSNL and DoT as infrastructure provider and competitor. One of the major concerns of the private players has been extricating themselves from dependence on VSNL for international bandwidth. Though the National Telecom Policy ‘99 professes to create an openly competitive environment, the final clearance for setting up gateways is still awaiting decisions. Most of the private players like Satyam, BPL and Bharti BT have evinced interest in setting up their own gateways and acquiring total control over the bandwidth.

Another big problem has been the poor state of telecom, especially the last mile connectivity, with the power vested in DoT and MTNL. However, even private players realize that until private basic telecom providers set up their operations they cannot do much on this front. Poor telecom infrastructure coupled with low PC penetration only adds to the woes of the industry. No wonder there is enthusiasm about internet over cable.

Since the entry of private players, the industry has been waging a head-on battle with the government and the DoT has resolved a few of them successfully. A case in point is the Rs15,000 access charge on ISP for each dial-up line which was sought to be levied but was quickly withdrawn. Since an ISP requires scores of them it would have substantially added to the ISP’s cost. Agrees Arjun, “The actual increase would have been much more than Rs15,000 and been in the range of Rs24,000-25,000 per line per annum.”

Inspite of the gray areas, ISPs have gone ahead to launch their services based on the business potentials and low entry barriers of the segment, proving quite successful in their endeavors. 

The future 

Is the model going to remain the same in the coming years? Well, that’s a million-dollar question with no sure shot answers. The ISP business is a tricky ballgame with very fluid rules. So attempting to figure out the trend for the next two-three years would be like forecasting the end of the world and failing miserably, like the many who have done so. Even industry folks acknowledge that the longest duration for which they can realistically predict is about a year. It seems venturing beyond that is treading dangerous ground.

But a few trends are already available based on local and international data. Firstly, access is not going to be the key revenue generator. The players will constantly try to source new streams of revenue and will segment their services to cater to either the corporate or individual segments. Further, the bigger players will start moving in towards value added higher margins while the smaller ones will focus on local content and ecommerce. Agrees Tushar Gupta, Director, Operations, Sure Vin Consultants, “Our aim will be to develop our local portal www.ghaziabad.net as a backbone and important component of the local business and information source focussing on the needs of the local community.” Larger players like Wipro Net, leveraging on Wipro’s corporate expertise, are moving towards providing higher margin services like application services, VPNs and managed network services. 

Comments Atul Pradhan, Director, IT consulting, KPMG, “As of now Indian ISPs have been offering access as a commodity and not many value added services. However, the value added services are clearly a part of their business plan and we shall see more and more of them in the next few months.” Endorsing this view, Anil Batra, President, India and SAARC Region, Cisco Systems India, remarks, “The ISP business usually begins with providing access to the internet and then graduates to higher value-added services like hosting servers, VPNs, video on demand and others eventually leading to ecommerce services. “

Secondly, the market is going to witness a continuous phase of fragmentation and consolidation. Though this sounds contradictory, yet worldwide data endorses this view and it is expected to happen in India too. 

For example, in Australia it
was predicted that since 1994 an eventual shakeout will reduce the market player size to about 5-10. But on the last count there were about 700 active players spread across the continent.

Alongside this has been the great amount of consolidation via mergers and tie-ups in all active internet markets. The same pattern will be witnessed in the country and the consolidation phase will take some time to manifest itself as the number of players are still growing.

Forecast

By the end of the next fiscal you would see the roll out of the basic telecom infrastructure by private players, adding a new dimension to the ISP business.

Unlike the current scenario where telcos are retaining the revenue from calls made to an ISP, changes are anticipated and internationally followed models are likely to be adopted. The industry is likely to adopt the global strategy of tying up with a telco in a revenue sharing agreement to release innovative bundles. Also, this would be the ideal time for a whole lot of segmentation in the industry on international lines and we too would see a host of wholesale bandwidth providers, OSPs, free ISPs and other business models. Apart from Bharti BT setting up fiber optics in Madhya Pradesh and Tata Teleservice laying its network in Andhra Pradesh, the WorldTel-Reliance combine is tying up with various state governments. This is going to be one key infrastructure provider setting up an internet backbone in seven states at an investment of Rs4,500 crore.

Finally, it is the upsurge of local content. If the companies and the government are serious about taking the internet to every nook and corner of the country, it is imperative to build the local content. Dishnet has already built its Tamil portal ‘minnambalam.com’ and others are in the process of doing so. The above two combined will see new opportunities like web server farms coming up in the country.

Everybody agrees that the business of the millennium has taken off and will change the
way we interact with one another. ISPs are also redefining the way business is conducted in the
country and you will continue to hear big news about this market space. Though the market will witness a high fatality rate, yet business will continue to grow by leaps and bounds. You will see
innovation transforming from a rare achievement into a staple diet for the ISP. As the market matures you will witness cut-throat competition and even free services, thus including all the ingredients of a good ‘masala’ movie... but with a difference. The innovative will have a long successful run while for the mediocre it will be a quick flop. But you, the viewers, will have entertainment, anyway.

Yograj Varma

in New Delhi