Netmania And The Art Of Monopolist Pricing

Krishan Gopal runs Sathyarthi Services a quintessential downmarket PCO. Out of a cubicle crammed with three phones, a fax and a PC, he offers Internet access, fax, e-mail and STD/ISD facilities. His netuser-profile varies. Perhaps two-thirds of his repeat custom comes from those who head straight for steamy chatrooms and adult sites, admits an embarrassed Gopal. Other include the resume-maniacs and some surfers driven by random curiosity.

At Rs 75 for 30 minutes and Rs 130 an hour, he generates enough business to contemplate expansion. As a committed net-user he feels: Some people will always prefer not to have a net connection available to the kids at home. He would love the advent of another Internet Service Provider (ISP) or six Then I could choose the one with the best service.

 

Gopal will have to wait at least a year before he gets choices. The tangle of legal jurisdiction will take that long to unravel after Telecom Regulatory Authority of India (TRAI) struck down Department of Telecommunications (DoTs) prototype ISP scheme last Tuesday and DoT may appeal. DoT hadnt moved quickly on its ISP scheme anyhow. In the six months since the Jalan Commission recommendation for ISPs in August, some 30 million new netizens have logged on. By next year, another 50-60 million will have. Few will be Indians because the Videsh Sanchar Nigam Limited (VSNL)/DoT combine charges exorbitant tolls for Internet access.

This is a classic case of a monopoly exploiting strong demand. Jalan estimated eight-fold growth in six months from suppressed demand alone. VSNL director (operations) R K Gupta has it that the local net population rises 20-25 per cent each month and could reach 2 million from the current userbase of 80,000 by 2000. Thats a long haul from 2,000 subscribers in August 1995. But it should have come a lot cheaper.

VSNL/DoT is high on the list of expensive ISPs. Its also among the least reliable due to poor DoT/ MTNL local networks and overloaded access numbers. Where DoT provides the connectivity in smaller towns, customer costs are even higher since STD rates are charges are extra.

An Indian pays Rs 10,000 per 500 hours for Internet access on a maximum 33.6 kilobytes per second (kbps) modem. He pays more per hour in the 100 hours/ 250 hours schemes. Data-transfer rates are low, sometimes barely 300 bytes per seconds, because of low-grade local lines. Apart from Rs 20 hourly for access, Indians also pay local call charges at another Rs 20 hourly. The total cost is Rs 40 or just above $1 per hour in the six cheap centres (the four metros plus Bangalore and Pune), in which users are not charged STD rates for access. In cities where STD charges have to be factored in, the costs per hour could be far higher.

Worldwide, customers pay about 2 cents per hour inclusive of local charges (see table). Of course, average is misleading. Telecom charge structures vary: some, like India, have timebound charges for local calls; US, Norway, Canada and Finland offer it for free. Some, like UK, charge a flat per connection fee.

But in a random survey of tariffs across 70 nations, we couldnt find a single country where Internet access costs more than India. Even in France and Singapore where ISP charges are high, toll-free schemes cancel out local charges.

Many tariff structures were 60-70 times cheaper. The vast majority of customers get larger mailboxes, cleaner lines and unlimited 24-hour access and service/ support for 2 cents or less. The ratio of Indian Internet connections to PCs is abysmal. People share connections, hack into accounts, pay Gopal and his ilk for 30 minutes access. Only one in 12 Indian PC owners has an Internet account. Worldwide, 60 per cent of PC-owners dial up. A PC without net access is like a TV without cable. And a dial-up net connection is actually cheaper than cable TV in many places.

Worldwide payment schemes are monthly, hourly, ans so on, with special services, discounts, and carryovers available. DoT/ VSNL has flat rates payable annually or for 100/250/500 hours, whichever is earlier. This creates the customer bases for Gopal and Co to charge premiums to the 30-minute-a-week e-mailer.

As Gupta himself points out: The entry of ISPs would help, but being an ISP is not a money-making venture anywhere in the world unless a whole list of value- added services are introduced. Plain vanilla ISP service from VSNL/DoT is painful enough, forget about value-addition. About 15-20 dial-ups before getting a connection is normal. There is no switching facility when access numbers overload at peak hours. Customers pay and wait for connections. Several times, VSNL has stopped connecting new accounts since it cannot handle extra traffic. The concept of toll-free access has bounced between government departments until conveniently forgotten. According to VSNL sources, DoT has sat two years on a proposal to allow reduced rate Internet access.

Apart from ignoring shorthour demand, another lacuna is lack of training schemes. Niraj Jain has exploited that with her outfit, Creations, which offers computer/multimedia courses in Delhis Vasant Kunj. Besides charging a yuppie clientele for access to hawk online resumes, she set up a net training course when she realised VSNL skimps here. She had paid Rs 1,500 for an eight-hour VSNL training course and got two hours training plus an assurance of help in case of problems. Last month, Jain also introduced a Club membership at Rs 1,000 for 12 hours net-time.

It isnt just dial-ups or training, professionals also pay more. High-speed 64 kbps leased lines (LLs) are also at large premiums to world rates. Such lines carry 2-3 times of dial-up connection data and cost Rs 7.84 lakh annually after a much-touted discount. There is a one-time installation charge of Rs 20,000. In contrast, Singapore Telecom (Singtel) offers the same (and higher baudrates of 128 kbps plus) lines at less than Rs 5 lakh annually. And Singtel is expensive Euro-American service providers offer you 64-kbps and higher access at much lower rates. No wonder there are only 300 LL customers.

Since Indian ISPs will not be allowed to bypass VSNL, their economics will be equally skewed by leased line rates. The chart Cost connections gives ballpark connectivity and server-hardware costs for an Indian ISP with 5,000 customers. The ISP has to reckon with a cost of over Rs 6 crore simply on hardware. Of that, Rs 4.7 crore goes out in leasing and laying 64 kbps lines. Worldwide, that cost could be cut by at least 33 per cent. Indian ISPs will be playing against loaded dice just as Indian surfers already are.

VSNLs apologia for high costs is simple, says Gupta: Price reductions are based on the economies of scale. More subscribers allow us to bargain for better prices. The bulk of our connection gateways is with the US which are most expensive. Initially, we were paying $36,000 a month for a 2MB connectivity. Now its down to $20,000 a month. (VSNL has a total capacity of 50MB for connectivity.) European gateways are cheaper, at $13,000 a month. The other networks we access are from Italy, Singapore, Canada and Japan. There are now nearly 30 nodes across the country of which VSNL has about 6-8 and DoT will not allow us to put up any more.

The problem here is that any netsurfer who wanders through Access Provider tariff charts will suspect that VSNL lost out when it went bargaining for gateway connections. And now, it has painted itself into a corner. If it allows private ISPs to connect to other gateways, it will get priced out of the game. If it drops tariffs to near world levels it will need to expand volumes by 5,000 per cent to even maintain the same turnovers and there just arent that many PCs in India. Perhaps the TRAI has done DoT/VSNL a massive favour by delaying private ISPs. And never mind what happens to the customer.