Let's face it. The hype over ISPs is over. The standalone access model, which attracted hundreds of players, is dying, if not already dead. Of the 500 companies that bagged licences (212 of them, including bigwigs like Bharti, Tatas, HCL, Wipro and BPL, entered the business), most have closed shop and returned their licences. Even the handful of survivors have either merged with companies that offer a range of net- and telecom-related services or have themselves ventured into newer businesses.
VSNL MD S.K. Gupta agrees that, in the near future, providing value-added services will become critical rather than continuing as pure-play ISPs. True, because no ISP has made money, apart from a few small ones that operate in niche areas. As on March 31, 2002, according to estimates by the Internet Service Providers Association of India (ISPAI), while the industry invested close to Rs 6,000 crore, its accumulated losses were around Rs 2,000 crore.
So, what went wrong? Well, almost everything. To begin with, projections about potential market size were exaggerated. Then, the revenue model itself was wonky with existing policies again carving into the ISPs' bottomlines. Finally, competition from telecom players spelled doom for the nascent industry. Within no time, it was obvious that the business, built on high costs, low revenues and shaky strategies, could only go one way: offline.
Getting enough customers was always going to be dicey, what with 212 providers in the fray. What proved worse was that home PC buyers shied away from getting Net connections. While the industry thought there would be 4.5 million retail users by March 2002, the actual number stood at 3.2 million. In the recent past, the numbers have been really dismal: the number of new connections, which witnessed a quarter-on-quarter growth of over 50 per cent last year, rose by a mere eight per cent last quarter.
Companies that had initially built their business models on the basis of low user charges and high revenues from advertising and e-commerce, went down fast since the revenues did not materialise. Remember Caltiger and Jain Internet which launched free access services hoping to garner volumes and earn profits from advertising? "Indian ISPs had a volumes-driven model where eyeballs mattered. But that did not translate into revenues through e-commerce or advertising," explains ISPAI secretary Amitabh Singhal.
Couple that with the fact that the cost of infrastructure worked out to nearly Rs 15,000 per subscriber (on the basis of a subscriber-to-port ratio of 1:10). Add to that gateway costs (VSNL's was the sole gateway for several ISPs till last year), bandwidth costs and administrative expenses, and you had a business model that was unsustainable. To get out of the situation, ISPs hiked their rates.So prices have increased by over 30 per cent in the last one year or so after having fallen by 50 per cent in the early part of 2001.
When that happened, regular Net users, already hit by rising telephone bills, went in for cheaper options like surfing from their offices or cyber cafes. In metros like Delhi, Mumbai and Calcutta, cyber cafes charge between Rs 10-20 per hour, which is lower than what you will pay if you are surfing from home. In India, where the Net is mostly used to check e-mails, it seemed pointless for a customer to have a connection on his home PC.
ISPs also suffered due to government policies, which did not allow equitable sharing of revenues with the telecom companies, being mostly state-owned. At today's rates, a customer coughs up Rs 30 an hour. Of this, Rs 24 goes to the telephone firm and only Rs 6 accrues to the ISP, whose running costs per subscriber works out to Rs 16. Says Bharti's Juneja: "This is bleeding the ISPs. The government is earning all the money, from both the ISPs and the customer (whose telephone bills too go up)."
The last nail in the ISP coffin came in the form of competition from the telecom players. mtnl introduced its pay-per-use model in Delhi and Mumbai recently, while bsnl has decided to launch a national service in a phased manner. Being telecom service providers, they are in a position to cross-subsidise access charges with phone rates. Agrees VSNL's Gupta: "The disparity between mtnl/bsnl and the rest of the ISPs was so high that it didn't make sense for the latter to remain in the business."
While firms like Wipro and BPL folded up their operations, others like Satyam and HCL created a new model that focused on corporate and institutional customers to earn revenues. A few like Net4India expanded their range of services. For instance, Net4India's Sawhney feels that the next phase of growth in Net usage will come from voice and data transfer. His company has placed its bets on Net telephony and voice-over-internet-protocol. At least 15 other ISPs, such as Satyam, Data Access, HCL, Dishnet dsl and iServ India, have also shown interest in Net telephony.
Such strategies might help a few ISPs to stay afloat. The opening up of the International Long Distance (ild) services to the private sector offered another route for survival. Initially, desperate ISPs made a beeline for it, but few remain now primarily due to lack of capital. Six months on, only Data Access has started ild services.
Value addition, say experts, will be the name of the game in the future. Aimed at the corporates, this will be the prime revenue driver for ISPs and is expected to contribute over 75 per cent to their total revenues in the next 2-3 years. According to a recent idc study, this value-added service segment alone is expected to grow at a compounded rate of over 159 per cent to touch around Rs 3,011 crore in India by 2004.
In the long run, however, the number of internet subscribers has to grow at a faster pace. The light at the end of the tunnel comes in the form of yet another optimistic Nasscom forecast, which states that the number of subscribers will increase to 7.7 million by 2004-05. Even this figure is laced with a few ifs: if the PC population crosses 50 million, PC penetration levels in the country go up to 13 per 1,000 people, and hardware prices plummet by 40 per cent.
That's just too many uncertainties for an entrepreneur who has to pump in hundreds of crores into his business!
