Characteristics of the Indian ISP Market

The intensity of competition in the Indian market is very high given the fact that the Internet penetration level is still quite low. All the ISPs are fighting for a share in the pie, the size of that does not allow all the players to enjoy economies of scale.

Like most other Internet businesses, first mover advantage is quite critical. This is all the more so because the services are not very well differentiated and access is the main services being offered. Once an ISP can hook on to a particular viewer, it is unlikely that the viewer will change onto another ISP provided the quality of service is satisfactory.

Slow internet adoption – Even in the face of decreasing PC prices and decreasing access costs, the Internet growth in India has been anything but explosive, even though the base was so low. The primary reason for this is the low purchasing power in the country. So new players entering the market have to be realistic about the size of the market and the rate at which the market grows. They have to have a long-term horizon to look for payback on their investments in the ISP business.

Poor telecom infrastructure is a grim reality in India. This is a big bottleneck for all kinds of Internet-related services. Even though the Government is trying out various steps to smoothen out the difficulties, any ISP would definitely have to contend with situation. It would be impossible for most of the private ISPs to set up their own networking backbone. So, unless the Government takes the initiative to ensure that there is a national telecom backbone, which is hired out to the ISPs at competitive rates, it will be a difficult market for most of the ISPs.

High bandwidth cost - Currently, bandwidth is being leased from VSNL as it is the only agency having own international gateways. Leasing costs are high due to VSNL’s monopoly situation as well as the fact that due to low usage VSNL is unable to contract very attractive rates for hiring international circuit lines. It is expected that as VSNL goes in for hiring higher bandwidth (with increased Internet usage in India), VSNL will get this at better rates.

In India, the ISP market still refers to the access market. As the market matures and access providing becomes a commodity business, the ISPs will have to leverage on value-added services to remain competitive. In such a scenario, access subscription costs will form only a small portion of the total revenues of the ISP. The other services would be in the areas like web hosting, net solutions, virtual private networks and e-commerce backbone. ISPs are also trying to have their own portals wherein they can garner revenues from advertising. Right now, the players are competing based on prices, however, it is a game of not just lowering prices but trying to arrive at various kind of price packages.