With the government bringing VoIP and VPN services under the purview of NLD/ILD licences, internet service providers (ISPs) have been feeling increasingly threatened. TRAI’s new spectrum policy, allowing UASL and cellular service providers to access broadband wireless spectrum in the 3.4-3.6 GHz band used by ISPs, is also likely to impact them adversely. Sector experts discuss ISPs’ concerns regarding these policies, and solutions to remain profitable…
How has TRAI’s new spectrum policy affected ISPs?
Rajesh Chharia: TRAI’s spectrum policy will definitely affect ISPs negatively. This is because paying the spectrum fee set by TRAI does not make business sense for many ISPs. The relatively smaller Class C ISPs can support only a few hosts online at a time and hence, cannot afford to pay the high amount demanded by TRAI for spectrum. Class A ISPs, on the other hand, can support as many as 16 million hosts online at one time and hence, can spend a lot on spectrum. Also, as many ISPs offer internet services only, they primarily have a single source of income. Integrated operators, however, offer several services and hence have multiple income options. They can easily afford the spectrum fee and are able to offer many services such as Wi-Max.
Bhaskar Sayyaparaju: TRAI has recommended an additional charge wherever wireless spectrum is used. The resultant cost increase would be significant. A closer examination reveals that the consequences of such a spectrum policy are counter-productive. The government plans to increase the internet subscriber base to 70 million in the next two years. From a consumer perspective, today’s cost structure is unsustainable for such an increase. We have expressed our concerns to DoT regarding TRAI’s recommendations.
Prashant Singhal: TRAI’s spectrum policy is steadily moving towards broadening the umbrella of services offered by an operator. Today, the 12 operators, of differing models and scales, are far more profitable than the 404 ISPs in India. Of the 570 ISP licences issued, 166 have been surrendered. Of the remaining, only 129 have purchased internet telephony licences, and only one, VSNL, has seen profitability.
Internet market growth has been sluggish after initially taking off (200 per cent growth in subscribers annually between 1998 and 2001, 30 per cent in 2004, and 23 per cent in 2005). Now, however, the market is being opened to other sectors.
On September 27, 2006, TRAI allocated 200 MHz of broadband wireless application (BWA) spectrum in the 3.4-3.6 GHz band. This is to be allocated to ISPs in addition to universal access service licence (UASL) holders and cellular mobile service providers (CMSPs). This is clearly a threat to ISPs. However, it is definitely forming the path leading to an integrated market.
Since VoIP and VPN services have been brought under the long distance licence, how have ISPs been affected?
Rajesh Chharia: VoIP and VPN services, originally introduced by ISPs, were removed from the ISP licence in 2005 and brought under NLD/ILD licences. Ever since, VoIP services have been opened up for integrated service providers and basic service operators, they have been able to both bring and send traffic. However, for ISPs, this is a restricted service as they can only send traffic. If the government wants VoIP to penetrate in a big way, it should open the unrestricted policy for ISPs too.
Also, currently, ISPs are charged 6 per cent of their adjusted gross revenue (AGR) as annual licence fees. They are also paying 12.24 per cent service tax. This is to our detriment as illegal service providers (who have not acquired an ISP with telephony licence like Yahoo!, MSN, Vonage, Skype, Bandtel, Euros, Impetus, Infoglobal, Net2Phone, Dialpad, Packet8, Mediaring and Novanet) are capturing the market share of internet payment service providers (IPSPs) and ISPs. Since the unregistered service providers do not pay service taxes, AGR, etc., they are able to offer up to a cost differentiation of 25 per cent. IPSPs and ISPs, on the other hand, are unable to conduct proper business due to heavy taxation.
The main problem is that, as these companies lack infrastructure in India, they do not accept payment in India or in Indian currency. This violates the rules of the Foreign Exchange Regulation Act. Also, in spite of having development offices in India, they do not pay the AGR revenue share and service tax applicable to them. They also pose a big security threat as the authorities would be unable to track calls since these non-licence service providers do not provide and are not bound to provide call details to the authorities.
Archana Sasan: The ISPs have been adversely affected as this measure implies that a service provider with a long distance licence can now offer the services that earlier could only be provided by an ISP. Hence, with a long distance licence, a service provider can now not only provide long distance services but also some internet services. The end of ISP monopoly in the internet segment has had an adverse impact on their revenues, more so because long distance licence fees and revenue share have also been decreased recently, giving a further impetus to new operators to enter this segment.
Bhaskar Sayyaparaju: This move has impacted us adversely. We have started paying a higher licence fee for these services. And we have to compete with telephone companies providing unrestricted services. These companies can make a VoIP call from a PC to a public switched telephone network (PSTN), but ISPs like us cannot make such a service available. Despite being an incumbent, we face disadvantages. For instance, the government is asking us to pay additional revenue of 6 per cent of AGR.
Prashant Singhal: The existing long distance players will now be happy to have access to the corporate data market. However, the seven ISPs that had VPN licences must now face a lot more competition. They had earlier leveraged an amendment to their ISP licence agreement and purchased rights to offer IP-VPN services (November 2005, DoT press release), but cannot do so any more without buying an NLD/ILD licence. This has been a great setback to the industry.
The VPN market is set for future growth. The industry, estimated at $200300 million as of today, is set to grow to about $2 billion by 2010. In the interim, the market will see the entry of many major international operators with about eight major players by 2010. The market has been progressively pulled out of the exclusive grasp of ISPs. Larger international companies would bring in more investment and surely, greater growth. Indigenous ISPs, however, may find it hard to compete on their own.
Going forward, it is estimated that licensing would be largely unified and larger operators with the option of offering a host of services under one licence would dominate the landscape.
What are some of the options before ISPs to increase revenues?
Rajesh Chharia: It is essential to tackle the problem regarding non-licensed service providers (as mentioned earlier). This will definitely help increase ISP revenues. We have taken the matter to the communications and the finance ministries, and are expecting some negotiations. Till then, we are directly contacting call centres and informing them that the services of the unregistered service providers are illegal and only registered ISPs are licensed to market the product. We have demanded that DoT publish this information in relevant newspapers, guiding users appropriately. Once the public becomes aware, 80-90 per cent of the people could shift to ISPs.
Second, it is essential to unbundle the local loop, but specifically for focused ISPs and not for integrated operators like Bharti, Reliance and the Tatas. ISPs would then pay the basic service operators for using the local loop. This will not only increase revenues for ISPs but also enhance broadband penetration. Against a target of 3 million broadband subscribers by end-2005, we have achieved only 0.9 million, and against the target of 7 million by end-2007, we have only touched 2 million till endNovember 2006.
Archana Sasan: ISPs have realised that the only way to survive is to increase the kind of services they offer. The age of convergence has dawned and ISPs represent the next wave of communication companies crossing the line as they struggle to find profitability and survival in a very crowded market. New types of services such as triple-play and quadruple services are the next-gen options, which the ISPs are seeking and beginning to exploit.
Bhaskar Sayyaparaju: VoIP is a focus area for us. However, we cannot offer long distance telephone service within India. We can make a PC-toPSTN call internationally, and in this field, we are investing money to increase our revenue base from a VoIP perspective. Also, ISPs can initiate wide adoption of broadband to expand revenues. India is still at a very nascent stage with around 5 million broadband subscribers. This figure should ideally be somewhere around 10 million. Since broadband is really the core area of expertise of ISPs, they have immense potential to expand. Providing content can also be a focus area. Value-added services in the form of compelling content are definitely a revenue generator. Stress can be laid on several areas such as commerce, entertainment and knowledge content.
Prashant Singhal: Liberalisation of NLD/ILD licences (reduction in the one-time entry fee as well as net worth of Rs 25 million) and IP-VPN being brought under the same could be an escape route for ISPs. The corporate data market, unlike the ISP market, is set to grow, but could see great competition and foreign participation. By 2010, the corporate data market will have six-eight nonfacility-based operators and the majority equity would be foreign held. Thus, some ISPs could invest in this side of the business, which is already profitable, before the market is captured by competition.
The other option could be to focus on retail broadband and establish a greater presence and brand value in this section. This holds value, especially with the impending emergence of the wireless broadband medium for telecom growth. Diversification into other sectors will hold the key for ISPs.
What steps are needed to revive the ISP industry?
Rajesh Chharia: These have already been mentioned above.
Archana Sasan: The ISP industry is realising that the age of convergence has arrived. The lines dividing telecom operators and ISPs are blurring to the point of being unrecognisable. Everyone wants to become a one-stop shop to fulfil customer requirements. Traditionally, ISPs have been providing data services at a flat rate. This structure leaves little room for expansion. While an ISP can add more content, this is not a key differentiator in today’s competitive telecom market. Customers want multiple services, such as internet, cellular, local as well as long distance. And they want to go to one provider to buy these. Multi-facility service providers who successfully create a unified view for each customer gain a competitive edge, which helps them hold onto existing customers and attract new ones. This is the main step that ISPs should undertake.
Another key area for ISPs to focus on is the availability of internet in rural areas. A creative mix of services and pricing should enable ISPs to spread into these poorly penetrated areas. This is also relevant as it would take time for convergence of technologies in rural areas. Hence, standalone ISPs, not functioning as onestop shops, have a fair chance of survival in the long-term in semi-urban and rural areas where the competition would be less.
Meanwhile, the government should take long-term steps to facilitate convergence of technologies. Only these can ensure that ISPs and the telecom industry survive in an increasingly competitive world where new technologies are emerging every day. This is the time to realise that the ISP industry cannot be revived in isolation.
Bhaskar Sayyaparaju: As discussed in the previous couple of questions, telephone companies have much more advantage over pure-play ISPs like us. We should be given a similar opportunity as the telephone companies; we should be able to offer telephone services, such as VoIP, as well. In the US, for example, there are services like Vonage, a pure-play VoIP service in a PSTN-toPSTN set-up, where an ISP can issue a telephone number. We cannot provide this service in India today. Hence, a level playing field is not available.
The PSU incumbents also currently have last mile access. It would be advantageous if it is unbundled. Consequently, we would be able to increase the reach of our internet services, decrease tariff and provide even more compelling services without having to set up a lot of infrastructure to make the last mile connection. Finally, some ISPs like us, which are highly experienced in the market segment, should have access to the Universal Service Obligation Fund to connect rural areas with the internet. This would be valuable for everyone concerned.
Prashant Singhal: In the long run, we are moving towards convergence of licences, where an array of services could be provided by a single provider. This would be possible in the next few years, when the Indian market, especially the urban market, progresses towards maturity.
PC penetration has been a key enabler as well as a stumbling block in the country’s internet market. While there are over 50 million internet users here, according to the authorities, there are a little more than 7 million subscriptions. Most users access the internet from just a little over 10,000 cyber cafes. Thus, while the PC market needs to be given incentives to further penetrate the market, cyber cafes too need to be promoted. ISPs themselves could use this as a strategy as they already endorse almost 90 per cent of the cafes in the country.
Broadband is another area that could be promoted. With a penetration rate of less than 0.1 per cent, the broadband industry could become a big growth market and revenue source for ISPs.
