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The financial year 2004–05 was a watershed year in the history of Internet services in India. After a long wait, TRAI put forward its recommendations on broadband services and Dayanidhi Maran, minister for communications, unveiled a policy in October 2004. As it turned out, the Broadband Policy 2004 was not merely about Internet access at speeds over 256 kbps. It also outlined some ambitious targets for overall Internet literacy and set the stage for higher PC penetration, e-governance, and other related services.

According to V&D estimates, the Internet access market in FY 2004-05 was Rs 1,592 crore, a marginal jump of 1.2 percent over FY 2003-04. This rise was not due to the dial-up susbcribers, where the major portion goes as call charges. The services like internet telephony, always on broadband, and increased corporate usage contributed to this rise.

On 31 March 2005 there were 5,554,297 Internet subscribers, a jump of over 22 percent from FY 2003-04, and users were almost 35 million. The Internet penetration level has gone up only slightly from 0.4 percent to a little above 0.5 percent.

There were only 879,357 subscribers who had an always on 48 kbps or above connectivity. Of this only 182,987 had 256 kbps plus or broadband connection. This means the ISPs, specially BSNL and MTNL, on whom government is pinning lot of hopes, have to muster over 2.8 million broadband subscribers between April and December 2005. Till now BSNL/MTNL together have managed some 110,000 broadband subscribers since the services were launched in early 2005. The three million mark seems an uphill task if not an impossible one.

Dial-up Still in Vogue
The dial-up or narrowband services still occupy a major portion of the Internet access market. Almost 84 percent of the subscriber base in India is still dialing into the cyberspace. The dial-up segment has grown over six percent in FY 2004–05. BSNL, VSNL, Sify, and many regional ISPs have registered increase in dial-up users.

Low operating margins and price squeeze by bandwidth providers has forced many to shut shop. Even the largest private ISP, Sify, showed a decrease in its dial-up revenues. Today, there are 172 ISPs in business, down by 17 from March 2004.

BSNL-MTNL have forced prices to dip as low as six paise per minute and on certain days it is almost free. At such price points, it is impossible for standalone ISPs to stay in competition, as they have to buy bandwidth and also pay call charges to the telcos.

Despite this, it would be wrong to think broadband would wipe out dial-up. In the US, dial-up access is still as popular as always. Reason: unlike always-on connections-where the users are tied to phone lines, cables, or wireless modems-through a dial-up subscription users can get connected from anywhere. Though speed is a constraint, this freedom is attractive to students and small users who do not need high download speeds but want to be connected from whereever they are.

V&D estimates  CyberMedia Research V&D estimates  CyberMedia Research

Bundled dial-up and broadband are being offered by companies like VSNL. This CLI based connectivity gives users the freedom to access their account from anywhere in the country.

Also, there has been no major shift from dial-up to the broadband services. Due to low price points users prefer broadband to dial-up even if they do not need high speeds. The split between migrated subscribers and new ones is almost equal. In many cases, users have retained dial-up connections even after subscribing to broadband. One reason for this being the initial schemes of a free telephone with every BSNL/MTNL connection.

ISDNs Take a Beating
There was a five percent drop in the number of ISDN lines in FY 2004–05. The slide from 12,782 lines in FY 2003–04 to 12,204 in FY 2004–05 happened mainly due to the corporate preference for broadband. This downward trend would continue this year too as benefits of broadband are realized.

Price Points Make or Break
Another aim of the broadband policy was to make Internet access affordable, especially the broadband access. BSNL hit the bull's-eye with its Rs 500 scheme for 1Gb data download, and so did MTNL. This led to initial rush for bookings and BSNL and MTNL had a waiting list of over 150 lakh. Now even the private ISPs have come out with low tariffs.

However, it is being debated whether such low tariffs are sustainable. The cost of connecting a subscriber is more than Rs 500 and rates cannot go below this. And, if volumes are missing it would be difficult to sustain the broadband services.

Bandwidth Price Squeeze
Perhaps the policy makers had anticipated this, so they provisioned a review of the domestic and international bandwidth prices regularly. Today, almost 70 percent of the Internet access cost is that of bandwidth. If this is reduced, end user will benefit. TRAI recommendation of reducing the bandwidth costs by almost 70 percent is stuck in legal hassles and is being reviewed. However, the recommended prices were already being offered in the market. Clearly negotiations are more important than policies in bringing down prices.

On the other hand lot of hue and cry has been made about BSNL-MTNL charging less from their end user than what they are charging the ISPs. This issue was put before TRAI and consultations were held, with no results so far. The problem arises because most of the telecom operators are competing with standalone ISPs and in a competitive market such price squeezing happens.

Almost 83 percent of the Internet subscribers are with the top five service providers in FY 2004–05. And, except Sify, all of them have some stakes as integrated telecom operators. The standalone ISPs have to rely on BSNL, MTNL, VSNL, Reliance, and Bharti for bandwidth and last-mile connectivity. This gives the telecom operators room to play with pricing, while competing with ISPs for the same customers.

Disconnecting VPNs
The private ISPs were hit hard when DoT ordered that current ISP licenses did not allow VPN services. A new license was to be taken for Rs 10 crore for offering VPNs. This proved too steep for many ISPs and they stopped VPN services, a major source of their revenue, with dial-up revenues going down by the day. Sify, a major VPN player, paid the fee and continue the services. But the controversy rages on and TRAI is still to clarify whether VPN services are part of the ISP license or not.

Focus area: IP Telephony
Minutes of usage on Internet telephony jumped almost 104 percent in FY 2004–05. From 70 million minutes in FY 2003–04 it has gone up to 143 million minutes. Most of these are calls out of India. Termination of IP calls on PSTN numbers remains a problem area. As of now, call can be terminated in India only on an IP device or a computer.

There is a demand to allow international and domestic long-distance calls to and from normal phones over IP. This would make calls cheaper and also increase minutes of usage. But this will also dent the revenue of telecom operators, particularly BSNL, for whom a major revenues comes from long distance interconnect charges-and the government would definitely not want to kill its golden goose.

V&D estimates  CyberMedia Research

But opening up of IP telephony would also attract things like ADC and IUC-it is their absence that makes Internet calls cheap. ADC and IUC would change the cost dynamics making the whole thing costlier.

Wireless, the Way Forward?
The broadband policy rejected the demand for local loop unbundling. Though there was no clear direction to share the copper with private players, it suggested that commercial arrangements between the concerned parties could be explored.

V&D estimates  CyberMedia Research

Monopoly of copper gives BSNL-MTNL a competitive edge, and other broadband service providers are either going for fresh investments in last mile or are going wireless with a fiber backbone. VSNL, offering broadband in 41 cities, announced its metro Ethernet project and is investing heavily in last mile delivery.

Though wireless eliminates many problems of a wired environment, in practice, 256 kbps plus speeds are not easily delivered over it and broadband applications like video on demand and streaming video are not successful. For sub-256 kbps, wireless is good and has emerged as competitor to cable and Ethernet.

Wi-Fi wants acceptance
Like broadband, Wi-Fi hotspots were also in the news last year. But in the public domain, their numbers would not be more than 500 through out India. Hotels and corporate offices are adopting Wi-Fi for Internet access. Some factors limiting their higher adoption are: few Wi-Fi-enabled laptops, seamless connectivity on the move, and security issues. Where Wi-Fi hotspots have been created in public places, pricing and quality of service have been an issue.

Content Remains in Exile
Content remained only a debated issue. The only development last fiscal was shift of focus from content for general Internet to content for broadband services. Focus over localized content has now given way to data- and multimedia-rich content for high-speed connections. Almost all broadband service providers have some plans for content delivery but not really as a content development. Tie ups have been entered into or are being finalized between content developers and service providers. Some pilots were done last year, and this fiscal might see some concrete projects.

Live TV, webcasts, streaming audio-video applications, gaming, software on demand, etc; the list goes on. The fact is, for Indian Internet users e-mail is the killer application.

There was no major market demand for other applications, which were being pushed to the customers rather than being demanded by the consumers. In future people might use them but for now, e-mail and low-bandwidth applications take the day.

Even if, somehow, broadband could be made widely available with content in local languages, the absence of even functional literacy among a large part of the population would keep that programming or content far from the users. The reason for more TVs than PCs in India is that TV channels do not need education to be understood. But for mass usage over broadband, basic education is a must.

Connectivity First-Speed and Content Later
At the moment government's primary objective should be to increase the PC and Internet base. Speed and content would come with the market demand. If there were no PCs and no connectivity, high-speed, low-speed, local or alien content would be non-issues. Despite policy thrusts and technology making PCs cheaper, their concentration remains in few pockets. Schemes like connecting 560 district headquarters first, and then connecting the villages or local connecting business centers (e-mandi, e-chaupal, etc) are some time away but would help create demand by spreading awareness about benefits of Internet.

Till March 2005, only 14 PCs were available for every 1,000 people. The mobile revolution in India is an indication that if prices are brought down technology can be taken to the masses. It was due to a price drop of almost 50 percent between 1997–2004, the 14 PC figure could be reached. Also, with prices dropping, more PCs were bought in areas other than metros. And, to support this trend we need to further push down the prices. Sub-Rs 10,000 PCs have made it to the headlines, but not to the desktops. Innovative finance schemes, government funding, partnerships between various stakeholders, and replicating successful models from Malaysia, Thailand, Indonesia, would help.

Cyber Cafés Struggling
Number of cyber cafés dropped 14 percent, from 10,237 in FY 2003–04 to 8,791 in FY 2004–05. Sify had the largest number of cyber café accounts, and 2,437 franchised and 34 company-owned cafés. Reliance Infocomm also promoted public access through its close to 241 web worlds (till March 2005). Tata Indicom also initiated True Value hubs for the broadband experience and Internet retail shops. These initiatives were in addition to BSNL's Sanchar Dhaba project, which act like community information centers. Though BSNL has the government's backing and financial strength to continue with loss making dhabas, private players would quit the business if profits continue to plunge.

V&D estimates  CyberMedia Research V&D estimates  CyberMedia Research

Looking Ahead
Financial year 2005–06 would be the year of expansion. Almost all the service providers are looking at taking their offerings beyond the metros. BSNL is already operating (or planning) in 235 cities, and would link the district headquarters this year. It has already placed order of 7.5 lakh ports and is coming out with an expansion tender in FY 2005–06. Similarly, MTNL is expanding in Delhi and Mumbai. Optimum utilization of available copper pairs would be the key for both.

In the last quarter of FY 2004–05, Reliance entered the broadband market and had almost 60,000 customers including 400 corporate houses. With a fiber backbone of over 80,000 Rkm and plans on bring fiber to the building (FTTB), Reliance Infocomm would be a force. Similarly, VSNL under Tata Indicom brand, would expand its presence from 41 cities, and also has plans in content delivery.

Since launch of the broadband policy, Bharti has been aggressive with tariff plans and innovative schemes. From the present 50-city presence it would add another 27 this year. The bundling of DSL with the phone lines would be key for the Bharti this year.

Sify is going strong and would consolidate its position. Being very strong in the always-on segment, it would compete with telecom operators. Similarly, Iqara would be concentrating on taking services to the masses, beyond the apartments, and consolidating its presence.

But the key for all the ISPs, integrated or standalone, would be quality of service and value added services. It is easy to garner volumes and provide connectivity but maintaining the numbers and keep the consumers logged on for longer periods is difficult. Companies like Primus India have been working on a low cost, no-frill model and have been successful in braving the shake-out period. Similarly, Net4India, IceNet, Data Infosys have adopted different types of services to survive. Though no major shake out is foreseen in the industry, the marginal players would quit and ultimately it would be the survival of the biggest, integrated, and the smartest players.

Regarding policy, the regulator would be trying to shed its image of helping DoT in creating monopolies. Clear guidelines on leased lines (both domestic and international), clarity of ADC, and some reform in the Internet telephony area can be expected from TRAI this year.

Anurag Prasad