80% ISPs fall off infobahn

DECLINE OF ISPs

Most ISPs undervalued their services while operational costs soared.

This is the first of a two-part series on the state of ISPs in India

Eighty per cent of the over 700 private Internet service providers (ISPs) in India have shut shop in the past four years. Flawed business models, changes in technology and delayed regulatory policies have combined to sound the death knell for many ISPs.

ISPs began exiting the scene about four years ago when cracks appeared in their business models. Explains Amitabh Singhal, president, Internet Service Providers' Association of India (ISPAI),

"While the operational costs for ISPs remained high, most undervalued their services and expected the balance to be made up by increasing subscriber numbers and revenues from advertisers."

Subscriber bases never went anywhere near projections for a host of reasons. ISPs depended on state-run BSNL, MTNL and VSNL for access lines, international private leased circuits and international leased line ports.

"These service providers were non-committal on the quality of service (QoS) for the inter-connections they provided. Without QoS, customers decided they were better off associated directly with BSNL and VSNL," said an executive of a company that exited the business in 2003.

High tariffs for international and domestic leased lines sent most ISPs packing. ISPs had hoped that regulation would take care of the high tariffs for international and domestic leased lines.

"ISPs expected the Telecom Regulatory Authority of India to lower tariff ceilings in 2000-01, but this was addressed only in 2005. The wait was too long," said an executive with a leading private ISP.

Another blow for the ISPs was the "blatant discrimination and arbitrary conduct on the part of service providers to exclude them from the discount structure made available to others", said Singhal.

Despite numerous representations from ISPs, service providers that owned infrastructure never extended the facilities to others that provided competitive services.

"For instance, if Trai had put a Rs 100 ceiling for a certain capacity and for a particular distance across major cities, BSNL would charge Rs 70 from us and just 40 from their own subscribers," said a member of the ISPAI.

ISPs had been appealing to Trai against BSNL's decision to charge them 75 per cent more than other customers, he added.

All basic service operators also had their own ISP operations and extended infrastructure, leasing and provisioning facilities only for their own operations.

A vertical price squeeze, too, took its toll. "Players like BSNL could afford to reduce tariffs for MPLS VPN without a commensurate reduction in leased-line tariffs for other ISPs. This is equivalent to reducing the price of curd, without reducing the price of milk," said an executive with a private ISP.

In their attempt to increase revenues, ISPs in February 2003 pointed out that they were eligible for termination charges from other service providers.

This was because calls originating in other service providers' network were terminated on private ISPs network. "To our utter surprise, we continue to be left outside the inter-connection usage charge regulation," Singhal said.

The department of telecommunications' January 2005 norms took away the virtual private network, the last of the profit making services, from the surviving ISPs.

The licence fee for ISPs offering VPN services was raised to Rs 10 crore (from Re 1 earlier) in addition to a revenue share of 8 per cent. This had resulted in only five ISPs, out of the over 100 offering these services, applying for new licences.

The scenario can be best summed up by the fact that more than 100 new ISP licencees in the last two years are yet to begin operations.

Falling apart

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• Flawed business models, changes in technology and delayed regulatory policies spell doom for ISPs
• Most ISPs undervalued their services and expected to make up through increasing subscriber numbers and advertising revenue
• High tariffs for international and domestic leased lines hit bottom lines
• ISPs bemoan the 'blatant discrimination and arbitrary conduct of service providers'