The beleaguered paging operators have long since migrated to the more lucrative BPO segment. Now, it is the turn of the internet service providers (ISPs) to move into the long distance telephony segment in search of greener pastures. With telecom operators being allowed to offer unrestricted VoIP services, the ISPs are finding their traditional turf being increasingly invaded.
As it is, this space is overcrowded. There are 153 ISP licence holders, with a total subscriber base of 6.93 million as in March 2006. However, only eight of these are major national players with a presence in more than 15 cities, accounting for over 90 per cent of the market.
In such a scenario, a shakeout is inevitable. To survive the tough competition, ISPs are devising various value-added services as a key part of their new revenue models. Access charges and advertising are not the only primary sources of revenue now; activities such as web hosting, portal services, b2b exchanges and even e-commerce are increasingly being seen as important revenue streams.
The most significant revenue source, however, appears to be corporate services, with a special focus on virtual private networks (VPNs). Sify, for instance, gets 40 per cent of its revenue from corporate services (such as consulting, website design and development, web hosting and VPNs); 42 per cent from access; 10-12 per cent from portal services; and the balance from cyber cafes.
City-specific and smaller operators are also forging tie-ups with the major service providers. This is crucial for survival and to prevent being swallowed up by the bigger fish.
What is the reason for the ISPs’ current predicament? For one, internet usage has come down sharply. As per a Telecom Regulatory Authority of India report, internet usage has declined from a monthly average of 305 minutes per subscriber to about 175 minutes over the last one year. Further, internet access charges have been reducing, from Rs 40 to Rs 15 per hour, thus adversely impacting ISP revenues. In fact, many ISPs have had to close shop.
Industry experts also point to the lack of policy direction from the government. In the beginning of 2006, the Department of Telecommunications (DoT) relaxed the national long distance (NLD) and international long distance (ILD) entry fee to Rs 25 million. Simultaneously, the revenue share was reduced from 15 per cent to 6 per cent of the aggregate gross revenue. The government also decided to do away with IP-II and IP-VPN licences, and allowed ISPs with the existing IP-II/IP-VPN licences to migrate to NLD/ILD service licences.
However, the lower ILD/NLD licence fee is still beyond the capacity of most cash-strapped ISPs and will adversely affect the small and medium ISPs.
As per the new guidelines, ISPs offering domestic and international VPN services must also obtain an NLD and ILD licence respectively. Hence, ISPs account for over 50 per cent of the new applications for long distance telephony licences.
Of the 17 new applications for NLD licences, eight are from internet companies: these are Sify, HCL Infinet, Hughes Network, Apaksh Broadband, Tulip IT, Dishnet Wireless, Aksh Broadband and i2i Enterprises.
And of the seven new applications for ILD licences, four are from ISPs, which have been in the business for over a decade.
The reason for the shift in status among the ISPs is the unsustainable business model of a standalone ISP. Analysts point out that with internet dial-up usage dipping 41 per cent, ISPs can no longer depend upon retail users for survival. Even in this segment, it is the large integrated operators ?? BSNL, VSNL and MTNL ?? which account for more than 70 per cent of the subscriber base.
Moreover, some of the business segments that have so far been revenue earners for internet operators have been removed from the purview of their licence. “The two most important services being offered by the ISPs ?? VPN services and internet telephony ?? have been brought under the long distance licence. This will further kill the standalone ISP business in India,” states a telecom analyst. VPN services, which are used by large corporates and institutions to connect their offices across various locations, have so far accounted for almost 40 per cent of some of the ISPs’ revenues.
In January last year, the VPN services offered by ISPs became a contentious issue between them and DoT. DoT decided that VPNs should be treated as a new service. Hence, amendments were made to the ISP licence whereby ISPs were required to pay an entry fee of Rs 100 million, Rs 20 million and Rs 10 million for categories A, B and C respectively to provide VPN services.
Another bone of contention is VoIP service. Under the terms of the amended UASL, ISPs will continue to offer restricted internet telephony while access providers are allowed to provide unrestricted internet telephony as well as internet and broadband content. Hence, while the existing ISPs can offer internet telephony services for overseas calls, access providers can do so for domestic long distance calls as well.
Interestingly, however, not a single access provider has since launched this service in India. Analysts cite the lack of competition in this segment as the obvious reason.
According to Arun Jindal, chief operating officer, Estel Communications, “Once telecom operators enter the VoIP business, ISPs will have to find another business, which may further decrease their number. In today’s competitive world, standalone ISPs cannot survive.
In fact, ISPs are facing a similar situation as paging companies had in the past when they were forced to quit their business after text messaging became a part of cellular services. “While the larger operators, who can afford to cough up Rs 25 million, are migrating to the long distance segment as a survival strategy, the fate of a hundred other ISP licensees hangs in balance,” says an ISP executive.
Another important survival strategy for ISPs who are standing on the brink of extinction is broadband connectivity. The next big milestone in the Indian telecommunications industry, it has the potential to replicate the success of the Indian mobile segment. The broadband subscriber base has grown by 636 per cent over the last one year.
Yet the pace is not brisk enough considering the 3 million broadband user target of 2005. “By end-2005, at least 50 per cent of all internet subscribers were expected to be broadband users,” says Deepak Maheshwari, secretary, Internet Service Providers Association of India. “Some key policy and regulatory initiatives are needed to accelerate the proliferation and adoption of broadband in India.”
However, reduced tariffs have led to a growing interest in broadband. In fact, while connections have become cheaper, supply has been unable to keep pace with the growing demand. One key issue on the supply side is last mile access. Competition for broadband is constrained due to lack of access to the last mile, which has not been unbundled. Local loop unbundling (LLU) needs to be undertaken so that ISPs can share the access networks of basic service operators.
Worldwide, a surge in competition for broadband access has been spurred by LLU. According to Analysys Consulting, “The economics suggest that LLU will reduce prices and increase margins.” However, local loop owners are reluctant to accept the inevitable and hence government intervention is necessary.
Another major constraint is the high tariff of leased lines. Currently, 1.5 million broadband subscribers are using cable or DSL as the last mile, with a connectivity speed of below 256 kbps. Thus, while these subscribers are on broadband technology, they do not yet have access to broadband speed. Once the leased line tariffs are revised, most of these subscribers would have access to higher connectivity.
Thus, broadband connectivity could offer a new lease of life to the ISPs. Analysts looking at this market, therefore, foresee the ISPs emerging in three directions: those providing infrastructure (bandwidth); select national-level players with a focus on corporate services; and small players in tie-ups with the major ISPs to provide front-end operations.
