Private ISPs in India - An Outlook White Paper

Monday, October 18, 2010

7:53 PM

Outlook White Paper:

Private Internet Service Providers in India
© 1997, 1998 Anindo Ghosh.
This is a copyrighted document, with both copyright and authorship residing with the author, Anindo
Ghosh, of New Delhi, India. This document is not a commissioned article, and as such, no other
individual or organization can distribute or lay any claims to the use of this document. Anindo Ghosh
solely reserves all rights on the use, further publication and distribution of this document.
Document Dated: 15th October, 1997
Contents:
• Introduction
• The History
• Entry of VSNL
• The Private ISP Outlook
• Potential Opportunity Areas
• Pointers for Success
• Budgetary Outline
• Foreseeable Problems
• Concluding Observations
This document was originally written as an introduction to the Private ISP scenario in India, for clients who had
retained the author as consultant for setting up ISPs in India. The audience consisted primarily of potential
investors with little or no knowledge of the Internet and its technologies and terminology. Hence some very basic
terms are explained in the footnotes. Further, as this document predated the release of the official Internet policy
document, some points raised in this document may not hold true. However in the main, this document is still fully
applicable to the Indian Internet scenario. All opinions and value judgements are solely the authors personal
viewpoint. With this publication of the document on the Internet, it is thrown open for criticism and discussion.

Introduction
The recent directive by the Government of India to permit operation of Internet services
by private Internet Service Providers (ISPs) in India has aroused a lot of interest
amongst various parties throughout the country. In this light, the following white paper
has been designed to bring the various aspects of ISP privatization into perspective. On
one hand, certain misconceptions and fallacies are dispelled, on the other hand, sectors
of opportunity and feasible strategies are mentioned. This document is not designed to
be a comprehensive project paper, only an introduction to the subject. Detailed project
papers would be developed for interested clients on receipt of appropriate retainers and
work orders.

The History
Internet access in a sense came into India in the early 90’s. ERNet, a division of
Department of Electronics (DoE), and NICNet (Department of Statistics) made the initial
inroads in this field. Both ERNet and NICNet are Government projects, but with very
different charters and growth histories.
The ERNet (Educational and Research Network) project was designed to provide
Internet connectivity to the premier educational and research institutions of India, while
NICNet was assigned the provision of Internet services primarily to Government
departments and organizations. Under the guidance of Dr. S. Ramakrishnan, Director,
ERNet grew from a low-bandwidth, unreliable, shell1 and UUCP2 based Internet service
to become the first to provide full TCP-IP3 access to dial-up modem4 customers through
SLIP5 accounts around 1993. This was followed by an upgrade to a nationwide V-SAT6
network and passably high-reliability services by 1996. The shaky technical skills of the
network management group at ERNet Delhi have perhaps been its weakest point.
NICNet was designed to provide V-SAT and dial-up Internet access primarily to
Government departments. It began with shell-only access, at 2400 BPS, but now
provides high speed TCP-IP access through 64 KBPS V-SAT links. Technologies were
also upgraded to follow current trends, under the guidance of Dr. Sheshagri, Director.
NICNet may not quite match world ISP standards, but it is not too far behind.
ERNet and NICNet are thus India’s first ISPs, though their operations have been
shackled by the restrictions put upon them by Government regulations and policies of
the Department of Telecom (DoT). Despite this, they were doing quite well in providing
the essential Internet services to an Internet-starved India, until the advent of VSNL
Internet services and the restrictive clampdown that followed.
Another provider of Internet services that preceded VSNL is the Software Technology
Parks of India (STPI) Internet service. Again, this service was permitted only for a
restricted audience, the software exporters falling under the STP scheme of the DoE.
STPI has been providing high-end Internet services through leased lines and dial-up
links, in and around several of the Parks, including Bangalore, Hyderabad and NOIDA,
through the respective SoftNET networks. Of these, the NOIDA network is perhaps the
most ambitious, the most technologically sophisticated, and also the most complex ISP
in India. This network, titled the National Capital Region IP Network (NCR-IP7), reaches
software exporters in and around New Delhi, Gurgaon, and NOIDA. Connectivity is
provided via CDMA and TDMA radio networks, Ethernet LANs and dial-up lines.
Currently dial-up access is only available to the STPN network administrators due to
VSNL-imposed restrictions.
Entry of VSNL
On 15th August 1995, VSNL launched the Gateway Internet Access Service, for
providing public Internet access. Initially, DoT allowed VSNL the license to operate this
service only in the 4 metros. By the VSNL charter, it is supposed to only provide
international telecom gateways, not end-user services. Thus the name "Gateway
Service" was used to cover up for direct service provision.
Starting with only dial-up shell and PPP8 access in the 4 metros, VSNL followed with
leased-line access to subscribers, followed by the setting up of points of presence
(POP) in Bangalore and Pune. The DoT has turned a blind eye to these license
violations, and tacitly helped VSNL with post-facto ad hoc permissions along the way.
VSNL has, since the inception of GIAS, portrayed itself in the press as India’s only
legitimate ISP, while forcing many restrictions on the other ISPs through DoT
regulations and the telecom policy. The Telegraph Act of 1885, a pre-independence
British law, has been repeatedly invoked by VSNL and interpreted to give itself
extended powers while forcing the other ISPs to curtail their operations.
The Private ISP Outlook
The monopolistic practices of VSNL, coupled with undoubtedly high investments to
increase service capabilities, have had two results:
• VSNL has successfully erased the existence of the older ISPs from public consciousness,
through a high level of PR, promotional and marketing efforts.
 • It has established a level of service that will be difficult for a new Private ISP to match without
extremely deep pockets and a willingness to accept losses for a couple of years at least.

Facts to be kept in mind by potential Private ISPs:

• VSNL is not the only existing ISP they will have to compete with.
• VSNL and the DoT have a history of changing rules to suit themselves
• There is not yet any effective appellate body for telecom related disputes against VSNL or the
DoT, though this is expected (not definite yet) to change in the near future.
• Any new player will be entering the field to compete with VSNL infrastructure already in place.
• VSNL has a high spending capacity for marketing and infrastructure investment that is nearly
impossible to match.
• VSNL will defend its existing areas of operation, both GIAS and international voice telephony,
which is threatened by Internet telephony.
• Public awareness of VSNL GIAS services is high, and establishing credibility will not be easy for
Private ISPs.
• Availability and reliability of dial-up telephone lines and terrestrial leased lines are dependent on
the local telephony agency such as MTNL. Track records are not reassuring especially in non-
metro telecom circles.
• Many new technologies like Cable Internet are currently forbidden due to a combination of
Telecom and Broadcasting laws.

Potential Opportunity Areas

• Non-metropolitan cities where competition from other private ISPs as well as VSNL would be less
intense. Here marketing expenses would be lower, and a market could be created through
seminars and workshops. Private ISPs entering at a later date would have to contend with
established loyalties. Primary target audience would be dial-up customers.
• Regions with high corporate activity, such as parts of Haryana, Lucknow, Agra, Ghaziabad, Goa,
Kanpur, Jamshedpur, Nagpur, Chandigarh, Amritsar, Dehradun et cetera. In these areas, it would
be easier to get sufficient leased line subscribers from among research centers, private educational
institutions, corporate headquarters, major manufacturing facilities and export houses, to make the
initial set-up viable and self-sustaining. Dial-up customers would provide growth potential, with the
backbone paid for by leased line customers.
• Tourist and resort areas: Many premium hotels and resorts will require cyber clubs with Email and
surfing facilities, for which leased lines are needed. Educating these potential customers through
seminars, and providing very reliable service quality can capture these markets. Pricing for such
clients can be higher, thus ensuring lower risk, though with moderate growth potential due to
saturation. Clients would not switch providers easily if quality is maintained.
• Provision of wide range of ancillary services: Due to Internet access being a recent phenomenon,
there is a dearth of related skills, such as information research and retrieval from the Internet, high-
end technical support and consulting, and end-user training for leveraging the Internet. This is
especially true of non-metropolitan areas. Further, small cyber-clubs with trained personnel for the
public to walk in and use for Email and Web surfing, much like the ubiquitous PCOs, would
generate high revenue. Private ISPs with such services as part of the initial offering would gain high
market share and customer loyalty.
• Regions with poor telecom infrastructure and high industrial density. These areas are ideal for
provision of radio-based leased line Internet access, which bypasses terrestrial leased lines and
provides the highest reliability. High concentration of automotive or steel goods manufacturers
would be a good starting point.
Pointers for Success
The key factors for success of a Private ISP will be a technical edge, financial capability
to sustain losses over at least two years, high marketing and promotional budgets,
strategic alliances with ancillary service providers, and lobbying power with the central
and state governments. These can be further examined further:
 • The technical edge: The track record of ISPs in India, VSNL and the others before it, has been
badly marred by poor service quality. Many Internet users would happily switch to a new private ISP
if given a guarantee of reliability. "95% Uptime" and "Quality of Service" (available bandwidth)
guarantees, while commonplace in the developed countries, are non-existent in India so far.
Serious Internet users, especially those who depend upon it for business eagerly await such
guarantees. Once credibility is established, pricing can even be higher than competitors’. This
technical edge can only be established and maintained by proactive, aggressive network design by
experienced consultants, coupled with a 24 hour Network Operations Center manned by well-
trained experts in all aspects of ISP operation. Further, consultants must be available on 24-hour
standby retainers. Close association with the ERNet and NCR-IP ISPs has shown that
customers are extremely sensitive on issues of service outage and unavailability of latest
technologies.
• Financial sustaining power: The private airline industry in India makes a suitable parallel to
what is likely to happen with Private ISPs. Many private airlines started up, but with high levels of
competition and price wars, coupled with changing government regulations, several could not
continue sustaining losses. The recent closing down of several of the new private airlines has made
the market much more lucrative for those airlines which survived, so profit margins have shot up,
and huge returns on investments are expected in the next few years. The same will happen with
Private ISPs, since the scrapping of license fees for Private ISPs will allow many Private ISPs to set
up services. Those that survive stand to gain excellent financial returns in 3 to 4 years.
• High marketing and promotional budgets: The opening up of ISP services without a license
fee by the DoT will result in many service providers in each region, and therefore inevitable
cannibalization of each others market share by these providers. The only way to gain an edge in
market share is by developing a larger audience base through regular Internet technology
awareness seminars and workshops, coupled with aggressive marketing, promotional campaigns
and schemes. Every potential customer converted by a competitor would potentially recommend
that competitor to other customers too. This is especially true in this industry as the newness of the
field makes any user with even a month’s experience a relative expert for the novices.
• Strategic alliances with ancillary service providers: Potential customers will look for additional
services besides Internet access, such as technical consulting, training, assistance in seeking
information from the Internet, Web site design services, Internet advertising consultants, and
newsletters about Internet resources. It is nonviable for the ISP to maintain full time staff for all
these services that would be required from time to time. However, these services will be a source of
additional significant revenue, for the ISP and third party service providers it is allied with. Within a
year or so of operations, revenue from this sector would be 25% or more of total revenue.
• Lobbying power with central and state Governments: Again drawing a parallel with the
private airline industry in India, this would be an important factor for any realistic ISP business plan.
Going by track records, the ground rules for the industry will be changed repeatedly through
unilateral policy announcements by various related Government departments. Like in the airlines,
those startups who are able to get prior knowledge of upcoming changes in policy, and have the
power to influence these changes, will have better chance of survival as well as the possibility of
eliminating competition. This is a reality in Indian Telecom that can not be ignored.
Budgetary Outline
Budgetary estimates of cost can only be made in very general terms until the exact
terms of the Private ISP policy are announced. There may be many hidden cost factors
that the DoT throws in. Further, the costing would vary widely depending on the initial
level of service offered, and existing telecom infrastructure in the target region. The
ballpark budgetary figures for one year of operation are as follows:
• Initial set-up, equipment, and bandwidth purchase (for 1 node): Rs. 4 Crore
• Manpower, personnel training, consulting fees, operating costs: Rs. 3 Crore
• Marketing and promotional activities, technology upgrades etc: Rs. 1 Crore
• Additional node set up and operating cost (in same region/state): Rs. 1 Crore
• Therefore, it is safe to start planning on a budget of 10 crore or so, for first year of
operation.
Foreseeable Problems
• Interconnection of networks is not permitted by the Telecom policy. Thus, if an ISP has multiple
points of presence, it is not permitted to interconnect them directly, all connections must be via
VSNL. This is very expensive in terms of bandwidth requirements, and requirement of multiple
Network Operations Centers (NOC)
• Laws are in existence in India that can be interpreted to read that transmission of data with any
form of encryption is illegal. Onus of prevention is upon the service provider concerned. However,
much of current Internet technology, including secure Web servers, PGP encrypted Email, and
Virtual Private Networks, are based on encryption. Prevention may be technically impossible, and
this could be used as grounds for revocation of a Private ISP license.
• A significant source of revenue for VSNL comes from being the sole international trunk carrier for
voice calls. Revenues of between Rs.500 Crore and Rs.1500 Crore could be threatened over the
next few years if Internet telephony becomes popular. Therefore, VSNL is bound to demand
prevention of Internet telephony by Private ISPs. Again, prevention may be technically impossible,
by the very nature of technology used for voice communications on the Internet. This could be used
as grounds for strictures on ISPs.
• Monitoring of Internet usage may become a prerequisite in India. Though there is no censorship
of Internet content in existence in India at the moment, such restrictions have been proposed by
VSNL and could come into force at any time. Such content monitoring, for prevention of
pornography et cetera would raise the network management costs by at least 100%. Further, the
quality of service would automatically fall with such restrictions.
• Since all international trunk bandwidth to the Internet will still be controlled by VSNL, all Private
ISPs will have to buy bandwidth from VSNL. Prices to be fixed for this bandwidth by VSNL are not
yet known, and this could have significant impact on the set up and operational costs of ISPs, as
there is no alternative provider available. Further, control of upstream bandwidth by VSNL means
that monopolistic action by VSNL to protect its existing GIAS Internet service markets is possible
and likely. Further, competition would be on a very uneven playing field, in any sectors where VSNL
is already an established service provider.
• Availability of high quality telephone and POTS exchange facility in a given target region will play
a significant role in quality of service for ISPs. Those opting for their own fiber-optic exchanges with
500 or more MTNL lines would definitely have higher service quality, though at a high initial
investment. This investment would only start paying off with at least 4000 heavy use subscribers.
• Many other risk factors exist, that are difficult to predict at this time. Among them are changes in
policy, possible high VSNL tariffs, ceilings or floors on service pricing, restrictions on type of use,
permissions for operating cyber-clubs, and so on.

Concluding Observations
The setting up of a Private ISP has potential for high returns on investment, but with
high risk factors. The initial investments are significantly high despite the Government’s
decision to scrap license fees. This field will be intensely competitive, and only a few
service providers will survive the first two years of operation. Those that do survive,
stand to gain anywhere up to 70% ROI per annum over the following years. However,
the entire window of operation is not more than a decade, as technologies like Iridium
(low-orbit satellites providing global public Internet access) will start entering India with
very low service tariffs.
A service that is not well designed right from the planning stage will not be able to
survive, so the use of expert consultants, and well trained personnel is critically
important. Further, the service must be designed to adopt new Internet technologies as
early as possible, regardless of cost. Resource planning should be done with buffer
capacity of 100% or more, to cope with bursts of growth. Local connectivity options
other than POTS, such as Radio, should be given preference, so that the service is not
at the mercy of the weather and the telephone departments.
This document is an attempt to reflect the ground realities in India, which are very
different from the book of rules that ISPs in other countries are subject to.
Foreknowledge of these realities will mark the difference between success and failure
for every Private ISP in India.

Footnotes:
1
Shell access:
Internet access supporting only textual interfaces, with Unix or Unix-like operating
system commands. Requires "logging in" to a Unix-type user account, and then
operating via textual commands or text-based menu systems. Shell access does
not use the TCP-IP network protocols between the user (client) end and the
servers. Therefore, applications like Netscape, NFS file sharing, and Internet
telephony can not be used.
2
UUCP:
Unix to Unix Copy Program, an early Internet Electronic mail transfer protocol
that is still used in many legacy Email situations, and in situations where
connection reliability is very poor.
3
TCP-IP:
Transmission Control Protocol / Internetworking Protocol, a whole suite of
networking protocols that form the basis of the Internet. Often extended in
meaning to cover the entire Internet Protocol (IP) suite, including UDP and ICMP
protocols, as distinct from TCP. TCP-IP access is required for operation of IP-
dependent applications like Netscape, Internet Explorer, mIRC, Internet telephony
and video, and many other modern applications.
4
Dial-up modem:
As opposed to leased-line modems, this device is connected between a computer
or Data Terminal Equipment and a conventional POTS analog telephone line. Used
to dial in to a corresponding modem at the service provider, and connect to the
Internet or other services (e.g. INET X.25 network).
5
SLIP:
Serial Line Internet Protocol, one of the more popular protocols for IP access
over dial-up and analog leased lines. Now commonly superceded by PPP, though
still in use by some ISPs. See also: PPP.
6
V-SAT:
Very Small Aperture Terminal, satellite-based digital communication system
consisting of 1.8 meter (usually) diameter satellite dishes establishing point-to-
point connections, often via a V-SAT hub, a central switching system.
Bandwidths can be from 2400 BPS to 256 KBPS. Communication delay is high,
due to the two satellite hops between endpoints, and hub latency.
7
NCR-IP Network:
This network was originally designed and implemented by the author, in a
consultant capacity, for STP NOIDA. The project was executed, from
conceptualization to final implementation, between March 1996 and February
1996. (Reference contact: Mr.P.S.Narotra, Director, STP NOIDA, Tel: +91 11 436
3108).
8
PPP
Point to Point Protocol, currently among the most popular protocols used for
dial-up TCP-IP access. Variations like Multilink PPP are supported by some ISPs,
allowing use of multiple modems for increased bandwidth.
About the Author:
 Anindo Ghosh has been a consultant for large network design and implementation for
nearly a decade, and has been specializing in Internet related network solutions for the
last 3 years. His design and implementation of the National Capital Region IP Network,
a project of the Software Technology Park, NOIDA, makes him one of the few
consultants in India with experience in design of a modern ISP using leading edge
technologies. The NCR-IP Network uses Windows NT and Silicon Graphics servers,
network routers from CISCO and Network Dynamics, and communications media
including digital radio, Ethernet and dial-up modems. The network connects the
software export units in the National Capital Region to the Internet, and hence has
been designed to keep pace with their high-end Internet access requirements. The
entire network was conceptualized, designed, implemented and maintained during the
initial 6 months, by the author. During this time, STP NOIDA personnel were trained in
the operation and management of the network, and it is now fully operated by them.

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