Internet providers: Caught in their own web

Something similar happened to Rajat Bhattacharya (name changed). When he walked into his posh South Mumbai office last month, he was shocked to hear that the ISP where he had been working since he graduated from engineering college had decided to shut shop. Thankfully, he had his degree to fall back on, and he was absorbed by the parent company that owned the ISP. Others were not that lucky.

‘‘After a three-month notice, almost 90 per cent of the team has been asked to put in their papers,’’ said an official of BPL Net which recently decided to close operations.

At Wipro Net, the 100-odd employees were absorbed by Wipro when its ISP division decided to shift its existing subscriber base to Sify (Satyam Infoway).

Both these companies, and several others like them, had entered the ISP space with dollar dreams. The formula was supposed to be simple: watch the user base grow and make millions as more people get hooked on to the net.

Towards the end of the ’90s, however, as suddenly as they had appeared, the ISPs started dying out. By 2000, more than 150 of the 550 ISPs had returned their licences, leaving just about 215 operational ISPs in the country. The few that remained had to undergo major changes.

The survivors are working hard to stay afloat. The ISP market is now transforming from high volume-low value to low volume-high value services. The lesson learnt? A high number of users doesn’t necessarily translate into revenues. The trick is to retain these users. Increased competition in the basic access market is driving ISPs to look at alternative revenue models.

It’s no longer feasible to provide only internet services. Users want much more. So the new business models are now driven by revenues from managed network services, e-commerce, security and content applications.

New applications are always attracting more users, like for example, Voice Over Internet Protocol (VOIP), web hosting and so on which some ISPs provide using their present backbone. Analysts say the consolidation will continue. Thus, as the number of subscribers and usage maturity of subscribers grow, only ISPs that can meet user expectations will survive.

What went wrong?

The pricing strategy of ISPs was totally flawed. ‘‘The subscriber base, which saw dramatic growth in the early 1990s, started to slow down towards 2000,’’ says Amitabh Singhal, Senior Vice-President, Internet Service Providers Association of India (ISPAI).

Kiran Karnik, President of Nasscom, explains the fall in the number of ISPs as, ‘‘Consolidation, survival of the fittest… that is, the ones who were able to meet the huge upsurge in Internet demand while keeping quality and service levels in place explain clearly the equation of increase in demand and fall in the numbers of ISPs.’’ Besides, the market then was plagued by the ‘free Internet access packs’, an attempt to increase mind share and subscriber base. The assumption was that these ISPs would convert their free subscribers into paid users in the near future. The strategy, however, did not work as envisioned. Free ISPs had to stop their free services and started charging for their services, leading to a huge drop in its subscriber base. Caltiger is a good example of this failed strategy. Very few ISPs had the sustenance to continue. So a large number of them either closed down or merged with others.

Wipro sold its ISP business and Tatanova from the Tata stable was merged with VSNL. In fact, Desai says some prospective ISPs, witnessing the state of the market, simply did not start .

But Net users rising

The disappearance of ISPs did not deter the growth of the subscriber base. According to estimates by IDC India, there were 2.4 million subscribers in 2001 and 3.1 million in 2002.

This figure is expected to polevault to 8.26 million by 2006. Internet users fall into two categories: residential and business. ‘‘Increasing penetration of PCs in the case of residential users has had a positive impact,’’ says V Shekhar Avasthy, Head, Internet, Communication and Convergence Research in IDC India If a household has a PC and a phone line, it automatically leads to all family members becoming users. Thus, with one subscription, you get multiple users.