The Hindu Business Line : Blow upon blow

Some recent moves by the Government are leaving stand-alone Internet service providers a worried lot. Is the sector headed for a `make or break' battle?

THE HEADACHE gets worse - N. Sridharan

Stand-alone Internet Service Providers (ISPs) in the country are a worried lot these days. Worried that they may have to either cough up huge amounts of money and compete with large integrated telecom companies or face the prospect of closing down business.

The reason for their loss of sleep is a proposed change in policy for Internet service providers being contemplated by the Government that could impose an entry fee, an annual licence fee and introduce some key restrictions.

The Department of Telecommunications (DoT) has written to the Telecom Regulatory Authority of India (TRAI) seeking recommendations on various issues, including measures to curb large number of ISP licences, grey market operations and address level playing field vis-à-vis other licensed telecom service providers.

While ISPs say the proposed change in policy will force the stand-alone Internet players to the brink of extinction, DoT officials say that despite the liberal policies in the past, the Internet segment has not achieved the desired growth.

"We want an effective, regulated and forward-looking ISP licence. Though a large number of ISPs (389) have been licensed to operate Internet service today, the top 20 ISPs provide Internet services to 98 per cent subscribers. Internet Telephony has been permitted to 128 ISPs, however only 32 of them are presently providing Internet Telephony."

DoT officials say the growth of the Internet and broadband is slow and with the present growth, achieving the target of 18 million Internet subscribers and 9 million Broadband connections by 2007 is not likely.

Concern over misuse

Apart from blaming the ISPs for not doing enough, DoT sources say that the Government is extremely concerned over the misuse of the Internet network by some ISPs for routing grey market long-distance telephone calls illegally.

"Government is concerned with increasing grey market and resulting loss of revenue. These necessitate urgent review of policy of Internet services as well as ISP licensing conditions," says a DoT official. According to industry estimates, Government may be losing as much as Rs 70 crore a month due to illegal routing being carried out by grey market operators using an ISP's network.

`Singled out'

Internet operators, however, claim that they are being singled out for action even as large fixed-line operators are being allowed to go free despite similar offences being unearthed recently. "We are not saying that ISPs caught doing illegal activity should be left alone. But why is the entire ISP industry being asked to pay the price for the mistakes of a few?" asks Rajesh Charria, President, Internet Service Providers Association of India (ISPAI).

The ISPs say that some of the other Government policies announced recently have been more damaging to their business than ever. "It is quite clear that the policies being made are aimed at systematically making the business case of stand-alone ISPs very poor," says Charria.

Some recent decisions

A closer look at the some of the recent decisions by the Department of Telecom may give an impression that the ISPs' fears are not misplaced.

For instance, the Department of Telecom last year decided to ask ISPs to pay an entry fee and an annual licence fee if they wanted to offer Virtual Private Network (VPN) services.

VPN services formed a major source of revenue for most of the operational ISPs as it involved giving leased lines to large corporates who wanted to connect their various branch offices. The services were being offered by the ISPs for the past five years without paying any fee. DoT justified its decision by saying that it was done to ensure a level playing field with large integrated telecom operators who also offered the same services under long distance licence by paying an entry fee.

While the DoT move, no doubt, levelled the playing field, the Rs 10-crore entry fee forced most of the ISPs to give up the business. Only a few Internet firms such as Sify, HCL and Hughes could afford to pay the entry fee.

Another decision that dealt a severe blow to the ISPs was DoT's decision to keep unrestricted Internet Telephony as part of the long-distance licence. Even cellular operators were allowed to offer Net Telephony. Once again, it was only the top three to four ISPs who had the financial wherewithal to acquire a long-distance telephony licence.

That's not all. Fresh applications for ISP licence from 50 companies, including foreign ones, have been kept on hold by DoT for the past eight months without assigning any reason.

Contrast this to the time when the Government opened up Internet services way back in November 1998, when VSNL's monopoly was ended and private operators were allowed to offer Internet services by paying a token amount of just Re 1. The terms and conditions of the ISP's licence were extremely liberal with no licence fee and allowing for an unlimited number of players. ISPs could set their own tariffs and even their own international gateways.

Over the last few years, DoT has issued licences to over 700 potential Internet Service Providers. But now ISPs feel that the Government seems to disinterested in giving out more licences and therefore is blocking fresh applications.

Says Amitabh Singhal, former President, ISPAI, "These companies are afraid to come out and speak because they are scared of a counter action by DoT. Doesn't that speak volumes of the attitude that DoT is having towards this segment?"

And adding fire to the ISPs' ire is the latest move from DoT, which has initiated a process that could impose additional financial burden on a sector that has not been doing too well. While the subscriber base grew more than 200 per cent per year, from 0.28 million in March 1998 to 3.04 million by March 2001, from April 2001 onwards, the growth rate started declining and was reduced to just 7 per cent at the end of March 2003.

TRAI's stance

To make matters worse for ISPs, even TRAI agrees with the Government's move to revamp the ISP licence regime. "There are a number of clauses in ISP licences which are either not relevant or require modifications to cater to the latest technological development and to encourage Internet penetration. The review of some other clauses has been necessitated on account of amendments in the licences for other telecom services," says a TRAI official.

ISPs, on the other hand, are not buying the Government line. "There a number of issues in the consultation paper floated by TRAI which, if implemented, will sound the death knell for ISPs. While technological advancements have to be accommodated, TRAI is questioning the very existence of a large number of ISPs who suddenly have become a burden on the sector," says Charria.

TRAI officials, however, say the concerns are misplaced. "What we have said is that the large number of ISPs with limited scope of service under ISP licence is affecting the viability of ISP business. We need to discuss the need and role of such a large number of ISP licensees, especially considering their limited subscriber base and virtually no contribution to Internet growth. Low entry fee encourages non-serious ISP players to obtain ISP licences. Telecom is a serious business market and there is an urgent need to regulate the industry," says a Trai official.

ISPs fear that the proposed policy changes may cripple them in such a way that they will not be able to take advantage of technologies such as WiMAX, which, by the way, is being held up as a service that can give small ISPs a leg-up in competing with large telecom companies in the wireless broadband space.

But with TRAI and DoT seeming to be on the same side, ISPs are gearing up to slug it out in a tough battle ahead of them.

But the concern is that since ISPs lobbyists haven't had much success in influencing Government decisions in the past, unlike the richer and stronger mobile companies, this battle could either make the industry or break it, just like what happened to paging companies a few years ago.

tkt@thehindu.co.in

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