The dispute between small ISPs and Centre reflects the weakness of the Internet economy

Imagine a network of private highways that are reserved only for Fords to zip through, devoid of any other brands. Think of the prices Ford could charge. Think of what would happen to innovation when building the best car mattered less than cutting a deal with the highway’s owners.

These were the words of Tim Wu, a Columbia law school professor, who warned members of a U.S. House judiciary committee that this could be the fate of the Internet.  That world might not be too far off. Last month, the government decided to levy on stand-alone Internet service providers (ISPs) a licence fee of 4 per cent of their adjusted gross revenue (AGR). This is a huge jump from earlier notional licence fee of Re 1 only.

For bigger players who provide telecom and Internet-telephony services, such as Airtel or BSNL, the fee will be 7 per cent - a one percentage point hike from the earlier 6 per cent.

With this order, the government has unwittingly become the de-facto controller of the private highway, allowing big telecom companies to rule the roost on the roads, pushing smaller and mid-sized ISP’s into the ground.

Independent and local ISP’s operate on thin margins, and cannot absorb the cost of such a levy. The result will be an increase in prices for their small, lower to middle-class, customer base.

The emerging dispute between small ISPs and the government underscores the core weakness of the Internet economy. In order for millions of Indian citizens to reach the multitude of online services that compete for their attention, they must first get past the bottleneck that is not competitive at all: broadband access.

The decision to levy such a fee is driven by the government’s intent to address alleged underreporting of revenue by the large companies that derive most of their revenues from telecom services. Telecom licences attract larger revenue shares of up to 10 per cent. The government has found some of these companies reporting their telecom revenues under the Internet to pay a lower fee.

“Instead of taking action against the big players for their wrong-doings and failing to audit them properly, they are penalizing the smaller ISPs. This is a disaster. An increase of four per cent of the annual licence fee would cascade and lead to an effective fee of 21-28 per cent as smaller ISPs would be taxed multiple times, as we purchase bandwidth from the telcos,” said said Rajesh Charia, president of the Internet Service Providers Association of India (ISPAI).

Thin margins

For most independent ISPs, small margins are inevitable in an era of dropping broadband prices due to competition even as last-mile costs such as setting up infrastructure have remained more or less unchanged over the years.

“For instance, if I wanted to give a 2 mb line to a company which is 10 km away from my point of presence, ten years ago, we would charge around Rs. 37 lakhs with the last-mile costs being Rs 1 lakh.

The same job now, we would only be able to charge Rs 1 lakh for it, with last-mile costs being Rs 50,000,” said Manoj Aggarwal, CEO, Karuturi Networks, a Bangalore-based ISP with annual revenue of Rs.7 crore.

“Our earnings before interest, taxes, depreciation and amortization (EBITDA) margins, which were once around 33 per cent, have already dropped to less than 10 per cent. If this fee comes into place, this business cannot stay viable. We are too small to be able to absorb this, many small ISPs will have to wind up as customers will choose bigger companies instead,” said Mr. Aggarwal

Today, most Indians have a choice of at most three broadband providers – BSNL, Airtel and MTNL – which control over 80 per cent of the subscriber base.

For slightly bigger stand-alone ISPs, such as Tikona or Sify which boast revenues of over Rs.100 crore, all that remains is a waiting game to decide whether to pass on the cost to the consumer, or try to absorb some of it.

“At a time when this industry requires encouragement, this fee seems rather puzzling. Either way, once the big players such as BSNL decide on how much to decide to absorb and how much to increase prices by, we will be forced to follow suit. As they control the majority of the landscape – we can only mimic their actions in the coming days,” said Prakash Bajpai, CEO and Managing Director, Tikona Digital Private Networks Ltd.

While the ISPAI is intent on approaching the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) to challenge this new fee, officials at the Department of Telecommunication (DoT) maintain that the decision was an inclusive process.

“It (decision to hike the fee) has been done on the basis of the Minister and the TRAI which has had a round-table conference with all the stake-holders concerned,” said Mr. Nitin Jain, Deputy Director General, Data Service, DoT, while refusing to comment further.

Equal opportunities

The debate, however, has brought into light other policies which are highly skewed in favour of bigger players. Voice-data services are out-of-bounds for small to mid-sized ISP’s, as it usually requires a licence fee, which they cannot afford.

“By April 13 2013, this fee will be equal for all ISPs – a grand 8 per cent. If the government wishes to treat all ISPs equally, why aren’t we allowed to compete and offer Virtual Private Networks or Internet Protocol-TV?

Currently I would have to pay a licence fee anywhere between to Rs. 5 crore and 10 crore just to start offering these services,” said EVS Chakravarty, CEO, YOU broadband Ltd.

Back in the 1960’s in the U.S, Bell Telephones forced users to connect to their networks with only its devices.

When the courts forced Bell to give up this monopoly, it unleashed a wave of innovation that brought about the device that allowed most of the world to explore the Internet: the modem. Such innovations in the Indian broadband space require an open playing field, something the government should strive for.