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Last year, when the government opened the Internet access business to participation from private companies there was hope that competition would make online time cheaper.

But that has not happened.

To find out what's keeping the ISP price war from breaking out, Rediff called private Internet service providers.

Most private ISPs are not willing to leverage the Indian market's legendary price sensitivity. Shockingly, they seem to believe that better service for a slightly higher rate would be more attractive in the marketplace.

Here, of course, there is room for suspicion. As we said, the Indian market's price sensitivity is simply amazing.

The private ISPs' reluctance to undercut each other's prices might just lie in the fact that a gun is being held to their head by a subtle anti-competitive industry structure.

The trouble is that before the private ISPs were allowed in, the government owned overseas telecommunications monopoly, the Videsh Sanchar Nigam Limited, also had the monopoly over the Internet access business.

Being the only ISP between 1995 and 1998, it caught the first wave of early adopters and the second wave of elite users. When the private ISPs came in, all that the VSNL had to do was ensure that its subscribers found migration to any of the competition very expensive.

For the private ISPs to succeed, the only route was to sign up as many newbies as they could. The mass market, however, is the price sensitive middle class. To bag it, the private ISPs would have to keep prices in a margin higher than their cost price but lower than the VSNL's street price.

A Rediff investigation suggests that it is exactly this margin that has been squeezed to the narrowest possible.

The Mahanagar Telephone Nigam Limited is one ISP that has managed to match VSNL's low price. But it is another government owned corporation. It is cash rich and until recently was the monopoly basic telephony operator in the high teledensity cities of New Delhi and Bombay.

From the private sector the only ISPs that appear to sell connectivity above their cost prices but slightly below the VSNL-MTNL prices are Weikfield Mnemonix Infonetworks and Dishnet Limited.

But you will miss the picture completely if we don't tell you that both WMI and Dishnet are essentially local players from Pune.

The point we are making is that none of the high-profile national ISPs like Satyam Infoway's SatyamOnline and Bharti-BT's MantraOnline can beat the VSNL-MTNL 'price barrier' because of their high costs of operation.

Therefore, better services and prices as a result of a price war can only come from the actions of local ISPs.

Already Dishnet is threatening to upset the apple cart by opening shop in the big market of Bombay with the lowest access price ever. But they have missed two launch deadlines already and there is speculation that a lot of their announcements are more posturing than substance.

But we are getting ahead of the story...

To put the business of information technology on the fastest growth path possible, the government set up the National Taskforce on IT and Software Development.

On July 25, 1998, its first set of recommendations was notified in the Gazette of India (Extraordinary).

As a consequence, after a delay of over six months, licences to private Internet service providers was granted. And a government monopoly over the Internet access business was broken.

Across the country, from boardrooms to drawing rooms, people discussed the great ISP boom that was about to happen.

And there were lengthier arguments about how much damage would the private ISPs inflict on VSNL, the erstwhile monopoly.

On November 21, 1998, exactly 10 days after the government threw the switch to activate the private Internet access business WMI launched the first private Internet service in Pune.

And the great ISP war was set to begin... Or so we thought.

Nine months later the average subscriber is left wondering where have all the cowboys gone?

A disillusioned Net addict describes the feeling: "Where is the choice yaar? If I want the best prices I will go to MTNL. If I am looking at someone with the best infrastructure it's got to be VSNL. So what choice are we talking about?"

That pretty much sums up the situation today.

True; prices have fallen a bit since the private ISPs came in. But obviously, not enough to make the Net as popular as it is aching to be.

Again the downward movement of the prices had nothing to do with the private ISPs. It was more a result of skirmishes between government owned MTNL and VSNL.

The private ISPs were only forced to react to the government owned companies because they had to turn to VSNL for the international gateways that it still had the monopoly over.

The private ISPs had to go to MTNL for dial-up telephone lines in the lucrative markets of Bombay and New Delhi.

The obvious anti-competitive spirit of the arrangement was not lost on many.

Recently, the government broke VSNL's monopoly over the international gateways too. But it will still take a few precious moons before the private ISPs can fix their own bandwidth providers from overseas. On Internet time, that could spell the difference between life and death.

When private ISPs first started out, subscribers hoped that a tariff war would follow. Satyam Infoway, the country's first national private ISP, was expected to lead the way.

Instead, Satyam started out with rates that were equal to or marginally higher than that of VSNL.

Satyam chose to market itself on the service platform.

'Off-the-shelf, ready-to-use Internet. No more form filling. No more waiting in queues', rather than cheaper package, is their promise.

Pradeep Lakshmanan, vice-president, Internet Services, told Rediff, "When we launched our services you had only VSNL. The subscriber had to stand for a few hours in a queue, get a draft and then wait for a few days to get the connection. The situation has improved since then. We were the first to offer Net connections off the shelf. It has become so easy to get a connection now."

The bottom line is that most ISPs have chosen to position themselves on the service platform rather than have price as their USP.

Again, why are ISPs shying away from triggering a price war?

The answer depends on an understanding of how packages and prices are decided upon.

Lakshmanan explains "The cost of bandwidth, the infrastructure like routers, switches and also value added services like the CDs that have licensed software on it are counted before we decide on the tariff."

Arun Prabhu Desai, manager, Internet sales and support, WMI, elaborates: "The pricing also depends on the usage of per person per telephone line per hour. We consider our monthly expenses including hardware, cost of telephone lines, office rentals and staff salaries. If this works out to an X amount and say I have a profit margin of 20 per cent then X+20 per cent is divided by my estimated amount of subscribers. Then depending on the different packages that I plan to offer I will work out the tariff rates."

However, an Internet technology expert reveals that most ISPs use VSNL's tariff rates as the default benchmark. "Most ISPs make sure that they offer the same packages as VSNL with almost identical pricing. In addition to this they try to come up with a few new packages and try to throw in a few extra hours as compared to VSNL. But they ensure that their tariff is nearly the same as that of VSNL," the expert explains.

Surprisingly, it took the government owned MTNL to break the status quo and begin nudging prices downwards... slowly.

Playing the spoilsport, much to the joy of subscribers, MTNL started with prices that were lower than VSNL or any of the other operational private ISPs then.

With an aggressive price that was 15 per cent lower than the then existing market rate, MTNL went for the jugular.

Satyam, however, steadfastly refused to drop prices. Instead it laid heavy bets on its instant signup facility as opposed to VSNL's cumbersome procedures for first-time subscribers. Satyam was also banking on carrots like the bundling of a CD with software like a dialler and an anti-virus package.

Satyam made Internet connections available across supermarkets and departmental stores. It ran massive campaigns across national dailies to publicise its services.

But the blitz took its toll when the expense put its weight on the cost of operation. Publicity doesn't come cheap.

Admits Lakshmanan: "The initial investment in publicising our services, promoting it in schools and colleges did cost us money. We are also offering our subscriber free CDs with legal software on them which is otherwise expensive. We had to cover people who were selling connections off the shelf. Those costs had to be taken care of."

Point noted.

But how can MTNL, another large ISP, afford its pricing?

Here the story turns sordid. Allegations of cross-subsidy and unfair business practices abound.

The Internet Service Providers Association of India has actually lodged a complaint with the Telecom Regulatory Authority of India about the 15 per cent cut in tariffs recently announced by MTNL.

Amitabh Singhal, secretary, ISPAI, told Rediff "MTNL gets away by dropping prices. In Delhi they are giving free phone registration with Internet connections. We don't have these kinds of resources because we are not resource providers. If the resource provider wants to give discounts then those cuts should be extended to us as well, so that there is a level playing field."

ISPAI has told TRAI that it is not against MTNL's tariff cuts but wants the government owned ISP to announce a price cut on the resources it sells private ISPs. These resources are mostly dial-up and leased lines.

The complaint was based on a newspaper advertisement released by MTNL on July 17, 1999.

Singhal lashes out: "MTNL is charging Rs 35.5 lakh (Rs 3.55 million) as the annual charges for 2 MBPS ports and 50 per cent discount is offered to government institutions. But VSNL is offering us the same ports for Rs 41.8 lakh (Rs 4.18 million). If MTNL is subsidising its Internet service by its other services it cannot be done that way. Who will come to private ISPs then?"

The ISPAI is furious over MTNL's price cuts. Here is an extract from the complaint it has lodged with the TRAI nearly a month ago, a copy of which is in Rediff's possession:

'If MTNL can afford to price their 2 MBPS at Rs 17.75 lacs p.a to certain establishments (e.g. government organisations) and Rs 28.4 lacs p.a to certain other segments and still making a profit, is VSNL giving them preferential prices? Or, does MTNL have its own international gateway, when even norms for this has not been finalised? Or, are they cross-subsidising the Internet services from other revenue streams? Whichever way one looks, it represents absolute unfair competition and gross misuse of certain monopoly positions.'

MTNL officials deny there is any cross-subsidy of its Internet services from income generated by its basic telephony services operation.

MTNL Chairman and Managing Director S Rajagopalan was, however, unavailable for comments even after repeated attempts.

But if there is a question mark on how MTNL prices match those of VSNL, there is a bigger question mark on how private operator Dishnet can hope to go even lower than VSNL's price barrier.

Dishnet hopes to make it big by riding on revenue generated by volumes rather than margin.

Baffled competitors shrug and tell Rediff that Dishnet is probably operating on prices that just cover costs in their blind rush to gain as much market share as possible. Later they are bound to raise prices.

Dishnet vehemently denies that their pricing is running below the cost of their operation. They bet that they are going to break even in three years.

WMI is the other private ISP that has managed rates that are below the VSNL-MTNL price barrier.

They assign this right away to their amazingly low cost of operation because they are so small. WMI has a sizeable presence only in Pune and is doing well for itself. Within Pune, it is able to gain 25 to 30 subscribers a day.

Desai explains: "Smaller guys with lower cost of operation are the ones that are going to survive. If a person has to invest Rs 400 crore (Rs 4 billion) on a national level and also break even within a fixed period then it obviously drives up the cost. So, ultimately, low-cost operations like WMI are the ones that are going to succeed."

Not everyone agrees. Bharti-BT, the joint venture between Bharti Telenet and British Telecom is the most recent of the large national ISPs.

It started off with prices that were a little higher than VSNL's. But it pinned its hope on innovation...

Bharti-BT's MantraOnline ISP service was the first to offer surf-by-nite concession and monthly usage schemes. They offered account packages that did not coincide with the 100, 250, 500 types of hour-slabs that the rest of the industry had settled for. This made price comparison a little difficult to calculate for prospective subscribers.

Bharti-BT Marketing Manager Vikas Verma told Rediff "My USP is that I offer the widest choice to the consumer. I have prepaid plans like MTNL and VSNL and innovation like surf-by-nite plans that launched a trend. I offered two things to the consumer: innovation and choice."

But whatever MantraOnline did was easily replicable and almost all the competition swiftly announced matching schemes. Verma's innovation advantage was lost.

"But I was the first to do it. I forced the others to react," he justifies. Yet, none of Verma's innovations were designed to leverage the first-mover advantage.

All said and done, the final question is:

1. Is a price war not breaking out because the ISPs cannot afford it?
2. Or are none of the ISPs willing to risk it in favour of a win or lose all battle?

If the entrepreneur is the guy who is rewarded with profits for the risks he takes, there aren't many cowboys around!

When Rediff asked the questions, it got a simple, in-the-face, aghast, unblinking: 'NO! We don't want to take risks. Why should we be the first to lower prices?'

Here they are:

Arun Prabhu Desai, marketing manager, WMI:
"I can drop prices. But we are getting enough subscribers even otherwise. I don't want to be the person to start the price war. It may be a loss for the customer but it also means that my profit margin is going down. Why should I do it then?"

Pradeep Lakshmanan, vice-president, Internet services, Satyam Infoway:
"I am not looking at a price war. There is hardly any margin in this business. I cannot give it up and still expect to break even. Anyway, we are not targeting customers who might migrate from other ISPs if our prices were slow enough. We are promising them good service at reasonable prices."

Amitabh Singhal, secretary, ISPAI:
"We are not against the consumer benefiting. But ISPs can't afford to reduce prices. Predatory pricing is not the way to do business. Private ISPs need to survive first."

Mr Deep Throat, VSNL:
"We are not dropping prices because what do we gain from it? The volumes that we might gain after we drop our prices will not be large enough to compensate for the margins that we have lost. We would rather have the profit margin we have right now than give it up in the hope of volumes that we might gain."

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