Internet: New Horizons, New Hopes

The year 1998 will go down as a landmark year for the

Indian Internet industry. On November 6, 1998 the government announced privatization of

Internet services, ending its monopoly through VSNL and DoT. Departing from the usual

stance of heavy license fees as seen in the telecom segment, the ISP policy allowed

unlimited number of players and zero license fees for the first five years and a token fee

of Rs 1 per year for the next 10 years. The policy has set the stage for a completely

deregulated operating environment.

The more the merrier



VSNL set the Indian Internet ballgame going on August 15, 1995. The services, which
initially catered to the four metros, have today expanded to a network of 42 nodes

operated by DoT and VSNL. In a span of four years, the number of subscribers has grown

with the March-end 1999 figure showing a growth of 180% to touch 240,000 from 85,000

during the same period in 1998.

The third quarter of 1998-99 saw the entry of private

players challenging the might of VSNL's monopoly. Chennai-based Satyam Infoway and

Pune-based Weikfield Mnemnoix were among the first players to launch their services in the

country. During this period, DQ estimates that Satyam notched up 10,000 and Weikfield

4,500 subscribers. VSNL accounted for the balance.

However actual Net usage is much higher rate as a majority

of the subscriptions are by the corporate sector and account to user ratio would be much

higher than the World standard of 1:2. On the other hand, Internet-related business raced

up by 100% to clock about Rs 195 crore compared to Rs 84.56 crore during 1997-98. Of the

Rs 195 crore, nearly Rs 134 crore was from ISP subscription. On the infrastructure front,

the government invited tenders for the Rs 85 crore, Phase I of the National Infrastructure

Backbone (NIB). NIB has been proposed as the national network for Internet nodes covering

over 549 stations providing connectivity to ISPs across the country.

Issues



Though VSNL's monopoly is expected to end in the coming years, private players
are already complaining about the dual role being played by the telecom giant—being

the infrastructure provider as well as a service provider. For example, Satyam's big dream

of taking on VSNL has been severely affected because of bandwidth constraints, again

provided by VSNL. Finally, this year it had to increase its bandwidth from 2 Mbps to about

8 Mbps to meet user expectation. Ecommerce, both business-to-business or

business-to-consumers, is yet to arrive in India. Partly because till now vendors and

consumers are not clear about the various issues pertaining to cyber laws. Though the

drafts for cyber laws were made by DoE and the Ministry of Commerce for quite some time,

the government did not table it in the Parliament during the last fiscal year. Other

issues like establishment of National Digital Certification Authority, providing global

telecom infrastructure in India at competitive tariffs and allowing private gateways to

ISP also cropped up during the year.

The year ahead—1999-2000



VSNL's monopoly will most probably get a jolt with several players jumping in at
the national and regional level offering Internet access and value-added services. Apart

from Satyam, Bharti BT, ETH Dishnet and MTNL have also announced big plans.

The National Telecom Policy and the TRAI recommendations

were announced at the end of the last fiscal year. The good news was the cut in the cost

of Internet leased lines from Rs 72 lakh to Rs 42 lakh. The bad news? TRAI recommended

increasing the ISP telephone rentals from Rs 380 to Rs 620 per line per point. Another DoT

circular, taking the industry by surprise, was the port charges of Rs 15,000 per line per

annum. Together with the TRAI recommendations, this would add to the cost of ISP players

by about Rs 24,000-Rs 25,000 per line per annum. Though the effect may not be apparent now

but assuming that an ISP with a port density of 1:10 for about 200,000 customers would

need about 20,000 telephones lines the recurring cost per annum to the players becomes

apparent.

We want gateways



Another demand of the industry has been to allow the setting up of gateways. Most private
ISPs like Bharti BT, Satyam Infoway and BPL Net have evinced interest in setting up their

own private gateways and do away with the dependence on VSNL for back-end connectivity to

Internet. Though the inter-ministerial committee set up by the government has cleared the

guidelines for setting up Internet gateways, private players can go ahead only after the

government takes the final policy decision. Given the instability in the current political

scenario it seems unlikely that the issue will be resolved soon. Until then, it is VSNL

with its over 80 Mbps bandwidth capacity for the operators.

On the NIB front, this year already had some bad news. The

tenders for the first phase of the NIB have failed to take off with the lowest bidder

ITI-IBM-Cisco combine walking out of the project. The order has been given to the

Crompton-Cisco combine but it seems doubtful whether the combine can meet the original

deadline of September 1999, given the lack of time.

The big picture



We expect the Internet base to hit 6.1 million users in the next two years. The
percentage of the PC installed base (4.74% during 1997-98) is expected to baloon to 36.61%

in 2001-02. IDC Asia-Pacific is more optimistic and projects eight million Internet users

by 2003-04. India will be the fastest growing country in the Asia-Pacific region. Internet

via cable is the big thing projected in India. As per statistics, cable has the advantage

over the PC if numbers are the criterion. It is estimated that the country has about 37

million cable connections relative to a 3.2 million PC base. However, it will take some

time for this medium to develop. The cost of laying fiber optic cables will prove a major

inhibitor for small players and expensive even for the biggies. Then there's the cost of

cable modems currently a stiff  Rs 15,000-25,000.

The share of home and the small business users in the Net

pie will increase. IDC India projects that the Internet penetration of the home segment

will increase from 12% during 1998-99 to about 27.4% in the next two years.

Correspondingly, the Internet penetration in the corporate segment is projected to

decrease from 79.8% to 55.4% in the same period.

E-commerce—Coming up, but clarity required



Lack of clear cut policies in India will continue to hinder the growth of e-commerce with
the the market in 1999-2000 being around Rs 380 crore, including e-commerce revenues. The

major component would continue to be through ISP subscriptions. As and when e-commerce

picks up in India, it will have a more local business focus replicating the worldwide

trend. In the USA, 93% of e-commerce is within the country. The same is the case with

Asian countries. In China the figure for e-commerce stands at 70%, while Korea accounts

for about 73%.

The bigger question



Assuming that the government is able to complete its NIB deadline on time, some
larger issues loom large. Will government agencies like VSNL, DoT and others manage fast

growth in the industry? Are these agencies in a position to provide bandwidth and other

basic infrastructure? Can they give service level guarantees and offer these services

within a stipulated time frame? Any ISP's demand can suffer if E1 lines or last-mile

connectivity are not available or the capacity of the exchange is not geared to take the

load.

Customers are waiting to get on to the information highway

and ISPs are only keen to provide services. Whether they can, it is only up to the

government and its multifarious agencies.

DATAQUEST