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TECH TALK: The Indian Internet: ISPs

March 20th, 2001 · No Comments

Internet Service Providers (ISPs) provide the pipeline to consumers to get on the Internet. After a lull in India, action has hotted up with the entry of the Tatas into this sector. There are nearly 100 ISPs in India – some are national, while some others are localised. In all cases, the challenge is quite straightforward: how do you make money at Rs 5-7 per hour?

The honest answer: you don’t. In simple terms, there are 3 components to an ISP’s cost structure: bandwidth, technology and operations. Both bandwidth and technology are much more expensive in India than in the US. When AOL charges USD 22 per month for access, its costs are probably around half of that (USD 11, or roughly Rs 500). Since local calls are free in the US, the customer is not incurring any additional costs.

In India, even assuming that the lower operating costs more than offset for the high costs of bandwidth and technology, ISPs need to make at least half as much (Rs 250) to break even. Assuming connectivity of about 20 hours a month, it means that an ISP needs to charge Rs 12-13 per hour to thrive. What customers are paying ISPs is half of that. The irony is that customers are actually paying the telephone company nearly Rs 500 for the connect time. So, while for an Indian customer, Internet access is significantly more expensive, the ISP only makes a fraction of that money.

So, what ISPs need to do is to look at creative ways of bridging the gap of about Rs 100 per month. This could come from running a portal and targeting advertisers (we will discuss this aspect of the business tomorrow), but then that has its own costs. What the ISP needs to do is to actually think of leveraging the customer information and relationship. The model which exists is AOL, which has smoothed out the ups and downs of the advertising and ecommerce market with the steady monthly subscription service. AOL is able to do this because it has the customers’ credit card information and is therefore able to bill easily every month for services utilised.

In India, most of the Internet market is actually pre-paid. Customers are buying either hours or months by paying in advance. So, the ISP collects the money up-front. This means that the ISP doesn’t have to worry about collections and bad debt. It is very much like how half of the cellphone market now is. What the ISP should look at doing is to convert this money into a currency.

Customers can use the money lying with the ISP to pay for premium services and for ecommerce, even without the use of a credit card. When the money gets over, the customer goes and gets a renewal/refill pack. This way, the ISP becomes more than just a pipe, it becomes a consolidator of services and starts to have a billing relationship with the customer. Very much like what AOL has in the US: while it is post-paid there, in India it needs to be pre-paid since the cost of collection may be quite significant. This is also similar to what some of the cellphone companies are thinking in terms of m-commerce.

Thus, if an ISP can encourage a customer to purchase Rs 1000 worth of goods online and collect a commission of 5%, it can make an additional Rs 50 online. It also has the advantage of float from the customer and credit from the suppliers, which may enable an additional revenue of 1% (Rs 10) per month. As customers feel more comfortable with this approach (which is an alternative to credit/debit/smart cards), the likely spends per month may go up. With that, so will be the ISP’s negotiating power with the ecommerce and service providers.

Thus, ISPs need to be innovative in leveraging the customer relationship. Increasing subscriber base with appropriate monetisation can help create a positive spiral, and therefore the foundation for a profitable business. ISPs have to become profitable if India needs to achieve its Internet dreams of 70-100 million Internet users in the next 3 years.

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