Broadband penetration in India has been dismally poor especially when
compared to the meteoric increase in mobile penetration. Mobile penetration has
benefited tremendously from one of the lowest call rates in the world ($.002)
along with handsets that are less than $15. For broadband penetration to
increase to meaningful levels, prices need to drop drastically. ISPs can easily
offer far cheaper broadband if they adopt advertising supported model and
subsidize the broadband connection itself. Ofcom in UK has backed the
advertising business model to help fund new investment in further penetrating
super fast networks. An advertising model can not only create a vibrant
ecosystem of Internet content providers, but create a virtuous cycle of even
more demand which the ISPs can offer at even cheaper prices. Without such a
cross-subsidized model, broadband penetration will continue to lag at levels
deleterious to the entire economy and keep the nation's dreams of a modern
digitally advanced country a distant reality.
India has one of the lowest numbers of broadband connections and at the same
time has one of the largest number of mobile phones in the world. Recent numbers
estimate that there are only 3.6 mn broadband connections, a penetration of only
0.003% while mobile penetration is at 30% with 7 mn new phone connections being
added every month. One critical aspect of the increase in mobile penetration has
been the declining prices of cell phones and call rates. Most carriers do not
charge more than $.002 per minute for calls and handsets are easily available
for $15. As the prices declined, the virtuous cycle of demand and supply kicked
in due to which operators could develop sufficient scale to offer cheaper rates
to an even greater number of customers. If ISPs can afford to drop broadband
prices (refer 'Prices for Broadband Access', clearly India's broadband prices
are on the higher side) to more meaningful levels, broadband penetration can be
quickly brought up to more meaningful levels. Driving down prices can be easily
achieved by changing the current business models and adopting an advertising
supported model that drives down prices of goods and services and connects
sellers with buyers in more efficient ways.
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Supply Drives Demand
In the 18th century, French economist Jean Baptiste Say postulated the
famous Say's Law which says that there can be no demand without adequate supply.
The more goods that are produced, the more those goods can constitute a demand
for other goods. The law certainly has proved itself in the widespread adoption
of mobiles in India and if applied to broadband, can certainly change the story
of the broadband market in India. As broadband penetration increases and higher
bandwidth networks become more prevalent, the opportunity to create whole new
industries is possible. Unleashing new products and services, will create a
positive feedback loop which will drive further penetration and create even
newer products and services.
The concept of supply drives demand is not new and is widely adopted across
other forms of communication. Television and cable have always been supported by
advertising. The user pays a fee of $3 for a monthly subscription and gets to
consume many different channels of entertainment, news, weather and education
all supported by advertising. The number of TV channels in India has exploded to
more than 400 channels but users haven't seen any increase in their monthly
cable bill. Take the case of Yahoo! or Google. Since the Internet appeared in
the mid 90s, these companies have provided most of its services free and yet
have been able to make billions of dollars in revenues. The very nature of the
Internet allows buyers and sellers to come together at a fraction of the cost of
more traditional methods like TV, newspapers or even outdoor advertising.
Imagine the state of the Internet if you had to pay every time you did a search
on Google, or read the news of your local news paper online. In fact many
analysts have argued that the future of Internet business is $0.00! It is not
the businesses will make less money, business will make even more money but
mostly at zero or negligible costs to the consumer. Free or subsidized prices
make the service more likely to be sticky while creating loyal customers who can
be profitably served through a variety of new offerings supported by
advertising.
Customers will adopt new digital services when the prices are dramatically
lower or there is new functionality. To drive broadband into the mass market,
prices have to drop and most services have to be available for free to the
consumer. Currently, the BSNL entry level pricing is Rs 250 for a GB of data
transfer with a 256 kbps with unlimited data transfer at Rs 750. This pricing
fails to make broadband a mass market, given the purchasing power in India, and
until ISPs can deliver broadband at more affordable prices to the customer,
broadband penetration will continue to languish.
Broadband operators need to rethink their business models by adopting
advertising as a primary revenue driver and offer consumers very inexpensive
broadband connections that can in turn drive more advertising revenue with more
products and services. Ofcom in UK has backed the advertising business model to
help fund new investment in further penetrating super fast networks. Ofcom, is
the independent regulator and competition authority for the communication
industries in the United Kingdom. The concept is 'behavioral targeting uses
consumers' browsing data to show them more relevant advertising'. According to
Ed Richards, chief executive of Ofcom “Such new forms of advertising could pay
for digital content creation and in turn fund the cost of investment of those
high speed [broadband] networks we also want to see deployed”. Pricewaterhouse
estimates that in 2007 the online advertising industry was estimated to be Rs
2.70 bn compared to Rs 80 bn for TV advertising. The US Internet advertising by
comparison was Rs 840 bn ($21 bn) in 2007, while TV advertising spend was at Rs
1,010 bn ($47B) in 2007 and steadily declining according to a Lehman Brothers
industry report. If we assume relative levels of advertising spend on the two
mediums, Internet advertising spend should be at least Rs 375 bn. However, we
are currently at 0.007% of relative spend on Internet advertising. If users in
the US were not subsidized by advertising, it is hard to imagine the market
would develop with one of the highest levels of broadband penetration and many
dynamic products and services.
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| Virtuous Cycle of
Advertising-driven Business Models |
An Evolutionary Approach
Currently few ISPs in India have adopted advertising as a core strategic
tool to drive their broadband business. Most ISPs have stuck to their roles as a
dumb pipe connecting to the home. In cases that they do provide products and
services, they are based on subscriptions fees that users are unwilling to pay
for. Our recommendation to ISPs in India is that they need to take a long term
strategic view of Internet advertising to drive revenues, and larger number of
customers paying for higher speed services by bringing down prices through
cross-subsidies.
As in markets across the globe, convergence is bringing all three screens of
television, mobile, and PC under one converged platform for a consistent user
experience. This is the holy grail of advertising where advertisers can push
relevant and contextual advertising for the user based on the behavioral and
contextual profile of the user. Most ISPs and operators around the world are
gearing towards this converged view of the world through rolling it features and
functionality in an evolutionary approach rather than a big bang revolutionary
approach.
To be ready for the converged three screen digital world, one of the first
steps ISPs should do is to create a portal that can essentially act as a
platform for advertising. On the portal, they could put content and information
relevant for the users, eg, account information, self serve customer service,
FAQ on Internet along with relevant information on news, entertainment and
sports. Creating a well designed portal interface can immediately drive eye
balls to the site, and drive crores of rupees in advertising revenues. Other
opportunities to monetize exist by sending pre-screen offers to subscribers
through their emails. Given India's recent consumer driven economy, advertisers
are prepared to pay top dollar based on the quality and demographics of the
subscriber base. A well designed video-portal with plenty of exclusive video
content, can create significant demand for higher bandwidth. However, it is
important to realize broadband video will not be attractive to a user who
chooses a 1G package. To make it a viable market, one must have a very low entry
point for unlimited bandwidth and then monetize the eyeball through advertising.
Other possibilities include having a custom software application that displays
contextual and behavioral advertising in lieu of lowered broadband rates, thus
driving both penetration and the adoption of high bandwidth services.
 |
One factor that may continue inhibit broadband penetration in spite of an
advertising subsidized ISP model is the low penetration of PCs in
India-currently at 3.6%. PC and laptop sales have been growing at a fast clip in
the last couple of years but to make compelling proposition for the consumer,
ISPs and PC manufacturers need to tightly bundle PC and broadband offers to
provide a seamless out-of-the box experience. Combining inexpensive broadband
offers packaged with sub Rs 10,000 PCs and making the widely available through
PC and retail channels are likely to address the three As of new product
penetration: Affordability, Applicability, and Availability. This could be an
easy target for the 40 mn homes who already subscribe to wireline telephone
system. Another approach could be to provide a seamless interface through IPTV
and Set Top Boxes (CAS) to the all ubiquitous TV, which is already present in
100 mn homes in India, eliminating the need to invest in a PC.
The benefits of broadband penetration to an economy have been well
documented. Increased broadband penetration can provide a powerful stimulant for
productivity growth. Better educated children in broadband enabled schools, a
more efficient government through e-governance initiatives and companies
delivering new and innovative services in broadband enabled economy can help
prop up sagging GDP growth rates in difficult global economic conditions. India
can easily escape the global economic crises by ensuring productivity increases
driven by broadband penetration.
In conclusion, the current strategies adopted by ISPs of not
cross-subsidizing broadband and passing the entire burden on the subscriber is
clearly not sustainable. ISPs need to aggressively partner with the advertising
ecosystem to drive broadband adoption and create a vibrant digital economy.
Inexpensive broadband pricing bundled with low-cost PCs can truly usher into the
digital age, a long held dream of government planners. Until pricing drops to
very affordable levels for the subscriber, broadband will not be a mass market
product, and continue to be a niche service available only to a few who can
afford it. As the case of mobile penetration in India has demonstrated, provide
a service at cheap prices and make it widely available and miraculous success
stories can emerge.
Himanshu Sahu
The author is assistant director, sales engineering IPTV & VAS, UTStarcom
vadmail@cybermedia.co.in
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