According to DoT, India’s Internet subscriber base, which was 2.8 million at the end of the last fiscal, crossed the three-million mark—32,250,651 to be precise—on 30 June, 2001. And VSNL no longer remained the largest ISP in the country. Satyam Infoway and Caltiger romped home with the honors in the paid and free ISP categories respectively.

As of 30 June 2001, Satyam Infoway had an enviable subscriber base of 500,894 while Caltiger had an even bigger subscriber base of 682,565. VSNL, the largest ISP till 31 March 2001, saw a decline in subscriber base, from 630,970 then to 485,730 by June-end, thus getting relegated to the third spot. While the landmark achievement calls for a pat on the industry’s back, the declining health of operators and the slackening subscriber growth dampens the spirit of celebration.

Much Ado about Nothing

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. 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 fourth quarter, the Net subscriber base added this year could be at most 2–2.5 million. This will mean a less-than 100% growth over the March 2001 figure of 2.8 million subscribers. If one bears in mind that the ISP industry was supposed to bear fruits of privatization starting from the current year, the picture begins to look gloomy indeed.

Straws in the wind—so far just rumors—are now clearly visible. According to ISP Association of India (ISPAI), players are scrambling to get out of a now ‘non-happening’ sector. While, according to DoT sources, there are about 490 licensees and 130 operational ISPs in the country, but most of the players are only ‘technically operational’.

News of mergers and acquisition are starting to trickle in as well. Among those acquired are Sun Infonet, BPL and now Spectranet (company officials on being contacted did not deny the news). Bharti BT Internet got merged into Bharti Broadband, Wipro split its corporate access division from the consumer access, Zee now seems to be focusing more on cable access than dial-up, and Tata Internet is simply talking of getting merged with Tata Teleservices. And among those who appear to have vanished in thin air are Sigmaonline, which ran into trouble in a CBI case, and Exatt.net, whose plans proved to be too ahead of times. To talk of bigger shocks, Satyam Infoway too is reportedly in trouble. Satyam Computers is also keen to get out. 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, 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.

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. The ground beneath their feet suddenly became jittery.

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. The tails of ISPs are already raised.

VSNL and Satyam Infoway have been among the first to raise the tariff. The raises, however, are cautious and reflect a watchful approach. And this may be te beginning of a new trend. More ISPs are now publicly airing their predicament and it will not be a surprise if there is a more visible impact on tariff.

In retrospect, the biggest blunder that Indian ISPs committed was the neglect of value- added services. Living in an air castle of their own, players were too content with their bulging subscriber base and beautifully adorned websites, and paid scant attention to services such as VPN, Web hosting, Web designing, ASP, and network integration/management, which could easily have become alternative streams of revenue to subsist and probably thrive upon in bad times.

Landmark Policy Gone Bitter

When the Internet policy was announced in late 1998, Indian as well as international investors welcomed it, and called it to 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.

Right from the start, the position of a private ISP in India has been akin to that of a lightweight boxer facing Mike Tyson in a ring without a referee in place. To make matters worse, the sole bandwidth provider was also the incumbent competitor in providing dial-up services. VSNL was already the monopoly dial-up access provider with whom there was a head-on competition on one hand and who was also to be approached for that ‘exhaustible’ resource called bandwidth.

IT Task force committees submitted goody goody reports and members retired to their earlier roles in their respective organizations. 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 piles of files that constituted its recommendations. The ISP policy was no longer anybody’s child.

Bandwidth Bias

The lack of accountability on part of the bandwidth provider, 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 8-9 months. This is one of the reasons why only 30 out of the 220 proposals have become operational so far.

In particular, when it comes to submarine landing stations, the matter seems to get stuck between mutually conflicting parties in the government. Although private landing stations have been allowed, international conglomerates like FLAG have not got the permission to do business directly with private ISPs. If FLAG wants to land at premises meant for private ISPs, what could VSNL’s objections mean other than the fear of losing business, asks an ISP? Sure, the government must take immediate steps to do away of such biases. Otherwise, all talks of level-playing field are reduced to a joke.

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. For ISPs, separate licences 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 maintained 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, other 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 DTH which would enable ISPs to spread Internet faster into the remote locations is simply not gaining momentus. 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 clearer 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 Infinet and Tata Internet are clear that the only way to survive is to give 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.

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 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 2-3 new entrants, another 2-3 exit the space. The equilibrium is thus maintained.

Nareschchandra Laishram