Over the last few years, the Indian bandwidth market has grown at an exponential rate. According to research firm TeleGeography, India’s international submarine cable capacity has grown from a mere 31 Gigabits in 2001 to a total installed bandwidth capacity of 19-20 terabits and a lit-up capacity of 500-700 Gigabits. This exponential increase in capacity is primarily due to the acquisition of six major undersea cable networks by Indian telecom players like Reliance Communications, Videsh Sanchar Nigam Limited (VSNL) and Bharti Airtel.
Bandwidth demand has been almost doubling over the last couple of years, according to Srinivas Addepalli, vicepresident, corporate strategy, VSNL.The sharp rise in demand for bandwidth in recent years can be attributed to the demand for data services and other bandwidth-hungry applications such as video clips, mobile TV and IPTV. In addition, the mushrooming of business process outsourcing (BPO) companies ?? the largest consumers of international bandwidth ?? across the country will only make the demand for bandwidth head north in the future.
The broadband segment too, which has witnessed an impressive growth rate of 600 per cent over the last one year, is a key factor in the growth of domestic bandwidth, says Addepalli. The surge in demand in the enterprise sector is another factor.
High bandwidth tariffs
However, despite the surge in demand, the installed bandwidth capacity far outstrips the current bandwidth requirements of 100 Gigabits in the country. “It may take three years before even this capacity is used,” says Addepalli. At present, bandwidth usage in India is only one-tenth the global demand.
Bandwidth demand has not kept pace with supply primarily due to high bandwidth tariffs. While India boasts of the lowest mobile tariffs in the world, bandwidth tariffs represent the other end of the spectrum. Current bandwidth prices are almost six times higher than global prices on some international routes, according to industry sources. Says Rajesh Chharia, president, ISPAI: “International bandwidth prices in India are very high vis-? -vis the prices in the global market as only four players dominate the market. This constrains the demand for bandwidth.
According to a report by TeleGeography, Indian bandwidth prices will continue to remain high in the foreseeable future. This is primarily because while many cable operators in the Atlantic, Pacific and intra-Asian region have undergone substantial financial reorganisation and have written off the cost of cable construction, operators of Indian submarine cables do not have the luxury of disregarding the sizeable investments needed to construct a new submarine cable when pricing capacity on their systems.
Moreover, the sheer volume of lit capacity on transoceanic systems, and the demand for this capacity, far outweighs the lit supply and demand on systems connected to India. At the end of 2006, the lit capacity of transatlantic submarine cables will be approximately 5.5 Tbps, compared to 0.7 Tbps for the India-Singapore route.The capacity of individual cables also varies substantially. For example, the capacity of the VSNL transpacific cable is 1.88 Tbps, while the Apollo transatlantic cable operates at 1.28 Tbps. In contrast, the capacity of the SeaMeWe-4 and i2i cable system is only 160 Gbps.
Finally, the unit cost of Indian systems is about $93,000-$157,000 compared to $12,000-$20,000 for transoceanic cables. As demand for capacity in India continues to grow, unit costs will fall substantially. However, it will be decades before the unit costs can approach those found on the trans-Atlantic and transpacific routes.
However, contradicting this, Addepalli says, “International bandwidth prices in India are reasonable given the current demand levels. Indian companies together have invested close to $1 billion in submarine cable infrastructure in the last threefour years and prices have fallen over 90 per cent over the period. Tele Geography Research suggests that if prices are reduced considerably from current levels, it would be difficult to recover the investments.
Analysts have also warned that too much undercutting could result in the new bandwidth operators heading down bankruptcy lane like their US predecessors.They point out that Indian players could use cheap capacity to launch more bandwidth price wars and further undermine the economics.
The glut in the international bandwidth market had resulted in many American companies going bankrupt. In fact, studies show that only 14 per cent of the available bandwidth was being used, which forced many of these companies to sell the infrastructure, which was bought by Indian companies.
“Former owners of firms such as Global Crossing, Tyco and MCI faltered because of their poor understanding of the economics of bandwidth. There is little evidence that the new owners of this infrastructure are inherently superior custodians,” says a market analyst.
It is imperative that steps are taken to boost the momentum of demand for bandwidth in the country so that it keeps pace with supply.
Government initiatives
In an attempt to increase the demand for the bandwidth market, the government initiated a series of measures in 2006.
In early 2006, the Department of Telecommunications (DoT) lowered the entry barrier for the international long distance (ILD) segment by reducing the licence fees and revenue share so that more operators could enter the market. In mid-December 2006, the Indian government accepted the recommendations of the Telecom Regulatory Authority of India (TRAI) for resale of bandwidth. The resellers must pay an entry fee and provide a financial bank guarantee of Rs 0.1 million each. They should also have a net worth as well as paid-up capital of Rs 0.25 million. They will be permitted access to 74 per cent FDI and will be charged a licence fee of 6 per cent of their adjusted gross revenue (AGR) or Rs 0.5 million, whichever is higher. DoT also decided to make it mandatory for existing cable landing stations (most of which are owned by VSNL) to give access to all operators in a non-discriminatory manner.
While initially this move was opposed by VSNL and Bharti on the grounds that it would discourage creation of infrastructure and disturb the level playing field since ILD operators have paid an entry fee, DoT officials dispelled the notion since adequate infrastructure was already in place and therefore the need was to increase competition by allowing resellers. This was also in line with international practices.
In countries such as Germany, there are 27 resellers offering international bandwidth compared to five licensed ILD operators. Similarly, in the US, of the 32 bandwidth providers, 26 are resellers, making bandwidth available at rockbottom prices.
This move will result in a reduction in bandwidth costs, which will help bandwidth-dependent companies like call centers, BPOs and telecom and media companies compete with global majors. In fact, according to analysts, bandwidth prices could drop by 20-25 per cent.
According to TRAI Chairman Nripendra Misra, this move will enhance competition in international private leased circuits (IPLCs) through the entry of resellers, who will be non-facilitybased operators.
Indian bandwidth market
Looking at bandwidth demand in India, usage by banking and financial services institutions is significantly higher than the average bandwidth requirements of small companies because of data volumes. Also, IT/ITeS companies have greater need for bandwidth than manufacturing companies.
However, those adopting higher bandwidth are also doing so because of the recent fall in prices. Addepalli agrees, “The fall in international bandwidth prices is enabling Indian businesses to connect efficiently to customers and suppliers worldwide.
He adds that small enterprises have gained due to improved service levels brought about by competition. Customers are also benefiting from new innovative products like bandwidth-on-demand, variable charge IPLC, and so on.
Large gateway service providers including Reliance/FLAG, VSNL and Bharti are consolidating their gains and working on making bandwidth much cheaper for consumers, as well as tying up with international players.
Flag Telecom, for example, signed a contract with T-Com, Deutsche Telekom AG’s broadband and fixed line business, to provide additional broadband connectivity between Europe and the US.
VSNL and the East African Submarine Cable System are in talks to merge their respective undersea cables linking India and Africa to Europe. The move would make the proposed undersea cable the second largest joint undersea cable. VSNL is also investing $600 million to build two new submarine cable systems, one between India and Europe and the other, intra-Asia, in partnership with carriers in these respective regions.
BSNL has entered into an agreement with state-owned Sri Lanka Telecom to lay an undersea cable, and Reliance Communications is in talks with Lanka Bell, one of Sri Lanka’s privately held wireless operators, to lay an undersea cable linking India and Sri Lanka. The $25 million project will also have a cable from Sri Lanka to the Maldives.
The change in telecom rules is also prodding players like Sify, HCL and Tulip IT Services to act more like traditional telecom operators, not just IT companies. That, in turn, could lead to more sharing of telecom resources among different players competing in the expanding market as there is a tremendous amount of bandwidth available in the country, and a single player does not have the ability to have the required amount of customers, nor can it provide the entire infrastructure for the backhaul.
Tulip, for example, has recently reached an agreement with NTT Communication India, a subsidiary of NTT Communications, to provide connectivity services on Tulip’s MPLS network to NTT Communication’s global customers based in India. Now, with more bandwidth being available, end-toend control is possible.
Clearly, the initiatives of telecom carriers, the rise of the BPO sector, proliferation of MNCs, and growth of the domestic economy spell promising times ahead for the international bandwidth market for India. This market is set to grow at a very healthy compounded annual growth rate of 43 per cent over the next five years according to industry experts.
