ISPs need to chant the value mantra to rev up revenues

Prachi Verma in New Delhi

Value-added services targeting the corporates will be prime revenue drivers for the Internet service providers (ISPs) and will continue to contribute over 75 per cent to the total ISP revenues in the next 2 to 3 years, according to ICRA.

According to a ‘flash report’ conducted by ICRA, the current ISP market is pegged at Rs 1000 crore, of which value-added services alone contributes 75 per cent. The rest (25 per cent) is contributed by the dial-up services in the home-user or retail segment.

“We expect dial-up services to increase in absolute numbers in the next two to three years, as these services are still untapped. Despite the growth in dial-up services, value-added services will continue to contribute at least 75 per cent to the total ISP revenue,” ICRA executive director Amul Gogna said.

Value-added services will continue to be a sticky spot for ISPs purely because corporates have relatively lower price elasticity towards access charges. However, as most of them use the Internet to support business applications, their focus will be on access speed and service reliability, the report said.

Hosting and application services market would start shaping up during 2002 next year as domestic bandwidth availability increases.
There will be an increased demand for value added services including hosting, video-conferencing, application services, Intranet services, extranet services, virtual private networks and unified messaging services, according to the report.

The demand for Internet services from both retail and corporate customers is expected to grow —- by at least 25 per cent in the case of corporates by 2004. This growth, combined with increased bandwidth availability (and declining costs of bandwidth), is expected to result in a sharp increase in data traffic and a rise in demand for value-added services such as web hosting, virtual private networks, unified messaging and a host of broadband applications.

Of the 437 private ISPs that earlier managed to get an ISP license, about 100 are operational and further ICRA expects only a handful of them to survive the next three years.

“We are expecting a consolidation in the Indian ISP industry, which will reduce existing ISPs to a handful. This will be similar to the developed countries where only 4 to 5 ISPs have survived and are now catering to the entire nation,” Mr Gogna explained.

The growth in the subscriber base during the last two years has been largely contributed by low dial-up access charges. Undercutting during the year 2000 resulted in increased pressure on incumbents to price their products at competitive levels.

As a result of substantial rate reductions during the last two years, revenue growth in the ISP market is estimated to have lagged growth in subscriptions.

Further, many companies have found it difficult to generate adequate cash flows from their business model of low access charges for narrowband access.

With declining inflow of venture capital funds, many ISPs with low access charges have been unable to generate sufficient cash to invest in expansion and improvement of service quality.