A look back: Videsh Sanchar Nigam Limited (VSNL) has been the monopoly access provider for Internet services in India since 1995. Starting initially with the four metros it moved to about 42 cities all over India. The growth was slow to begin with, when considered in isolation from the other two state-run networks, namely, ERNET (which caters to the education sector) and NIC (which caters to the government sector).

As one can see from the table below industry is expecting exponential growth over the next couple of years.

The monopolistic nature of the earlier regime meant that users faced a shortage of access lines, poor quality of lines, and reliability problems. The users-to-access line ratio should ideally be between 7:1 and 10:1. It's now improving steadily from a situation that was as bad as 14:1.

Some issues: Given the increase in the number of subscribers, the ISPs will require thousands of additional phone lines for dial-up connectivity. For that DoT, MTNL (which operates in Delhi and Mumbai) and other private telephone operators must upgrade their services.

VSNL remains the only international gateway in India. It needs to substantially increase its current bandwidth of 125 mbps. It already has a 2.4 gbps FLAG (fibre-optic link around the globe). Besides, VSNL is ready to commission its SEA-ME-WE-3 undersea link of 10gbps capacity within the next three or four months. This should take care of the international bandwidth problem. This availability could attract most service providers to VSNL as the gateway.

Another problem is that of a national backbone for country-wide connectivity and interconnectivity among ISPs. The I-net provides the only countrywide link now, while DoT, which has about 75,000 km of fibre optic network is an ideal candidate for providing this backbone. Other public sector giants like Railways and Powergrid Corporation also have the infrastructure for this.

The private ISPs will not be able to offer reduced prices as a long-term policy since the infrastructure costs are heavy. Reduced pricing or parity pricing may just be an initial marketing tool. The infrastructure costs are nearly ten times higher when compared to other countries even though the service costs are lower. For instance, DoT charges a very high rate of Rs.15,000 per phone line for internet access and the ISPs ideally need one phone line for every 7-10 users. In India, the infrastructure provider is also the prime competitor (VSNL). Major price reduction would come when private operators start setting up their own gateways bypassing VSNL and when leased line rates are reduced.

There is absolutely no doubt that this market is bound to grow. The growth in this market is linked to that of the PC market, which is growing, especially in the home and small office segments. While PC prices are dropping, it is the access charges that have to drop to attract more users on the Internet. In most other countries Internet access is charged on a monthly basis and experts feel that such a scenario, with rates of about Rs.150-200 would be the ideal figure to look at.

But when access rates are slashed, margins too will suffer a squeeze. When that happens ISPs would have to look at e-commerce for a sustaining revenue. Margins in e-commerce will come from a large captive subscriber base, which can be acquired through lower access rates, good service, brand building and portal sites. Content more than connectivity will count in the longer run.