The Indian Market for Internet Service Providers

By : |May 10, 1999 0

Price wars – public vs. private ISPs
Do the 1994 telecom reforms and the liberalization of Internet services in 1998 have
anything in common? Barely three months have passed since India embarked on the path of
liberalizing the Internet services. Besides the premier Internet service provider, the
state owned Videsh Sanchar Nigam Ltd. (VSNL), just one private ISP, the Chennai based
Satyam Infoway, has commenced commercial services national wide till date. Banking on the
strength of its infrastructure and existing customer base, telecom majors VSNL and MTNL
have already started a price war. Both the companies are now drawing up plans towards
providing free Net access. MTNL started the trend by publicizing its plans of providing
free dial-up to its subscribers even before the commencement of services. But the decision
has been put on the backburner, thanks to the possible intervention of the Telecom
Regulatory Authority of India (TRAI). Caught between the price war of these public sector
giants are the private ISPs.

The availability of bandwidth
For private ISPs, the infrastructure provider is the competitor too. VSNL, MTNL and DoT
are the only providers of leased lines. Currently, DoT and MTNL are the main providers of
basic telephony services in India. With Internet services permitted via Cable TV, tapping
the 60,000 strong cable operators appear to be a remedy. Major cable companies like
Siticable and Incable have already received ISP licenses. Customers need to be convinced
on whether cable operators can provide quality Internet services. VSNL, which currently
enjoys 80 Mbps of international bandwidth, is now on the process of expanding it to 125
Mbps. Developing an international exchange requires large investments, which forces many
ISPs to lease the bandwidth from VSNL.

For 2 Mbps leased lines, VSNL currently charges
approximately $180,000 per annum. It buys the same from international carriers at an
approximate rate of $84,000 per annum. VSNL compresses its bandwidth by about eight times
and sells it. A 2 Mbps capacity bandwidth has a capacity of less than 64 Kbps.

The market – a quarter of a million and growing
The Internet services market in India generated revenues to the tune of $ 25.86 million in
1995. A majority of these revenues belonged to the value added services (Value Added
Services) segment of the market. There were 259,000 Internet subscribers in 1998, which
included ERNET subscribers also. Following the liberalization of Internet services in
November 1998, the market is expected to grow tremendously. The Indian Internet services
market generated revenues of $ 73.47 million in 1998. Aggressive marketing and demand is
boosting revenues in the market.

Value added services – that’s where the
money is

An increasing number of companies are also expected to provide Internet services in India.
At present, only VSNL has the infrastructure to provide high bandwidth connections.
Currently the cost of leased lines in India is very high. Since the new private ISPs
depend heavily on leased lines to provide their customers with efficient services, they
have to pay the asking price. Currently, the Value Added Services market generates higher
revenues than the access services market. In the Value Added Services market about 60
percent of the revenue comes from leased lines. In 1998, the access services and Value
Added Services market accounted for close to 38 percent and 62 percent of the revenues
respectively. The phenomenal growth in leased line services played the role of a catalyst
in Value Added Services generating higher percent of revenues. In 1995, the market growth
rate was 25.65 percent. The main reason for the high growth rate during 1998, is the
increasing demand for Internet services and Value Added Services from business and
residential customers. As on January 26, 1999, 65 licenses for provision of Internet
services have been issued.

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