Internet penetration in India by all standards is a low 8 million currently. The government's target by the end of 2007 is 18 million. However, the recommendations in last week's "Review of Internet Services" by the Telecom Regulatory of India would hurt more than help.
Hands-on regulation or fees for Internet service provision were abandoned over a decade ago in almost all countries, as cited in TRAI's report. Yet, it recommends that every new Internet Service Provider pay a minimum of Rs 10 lakh (Rs 1 million), as opposed to nothing at present; foreign direct investments be lowered to 74 per cent from the current 100 per cent; bank guarantees be retained; provision of Internet Protocol Television services by ISPs be disallowed; the 6 per cent revenue shared currently charged to Internet telephony operators be extended to all ISPs; and that non-functional ISPs be "physically investigated to verify their presence, nature of activities and the financial viability". TRAI advocates an unorthodox course over one that works spectacularly elsewhere.
The Department of Telecom's reference to TRAI calls upon the latter to address the threat posed by the alleged grey market operations of ISPs and the threat ISPs pose to the businesses of fixed and mobile operators.
There is no data on the size of the problem. Few can recall an instance of an ISP being successfully prosecuted for grey market calls although ironically, telecom operators were known widely to be rerouting international calls to escape paying access deficit charge. One operator was found guilty and charged a hefty fine.
Despite the free licence, less than half of India's 338 ISPs have survived. Other ISPs have moved to niche markets. And some, according to TRAI and DoT, are untraceable. Government companies BSNL and MTNL control over 64 per cent of the market.
None of the over hundred competitors control even 10 per cent. Players like VSNL and Sify, despite significant early successes, lost their marketshares within months of BSNL and MTNL entering the fray - since the latter own almost all of India's copper-based telephone cable that users and ISPs need for dial-up or broadband access to Internet.
Unbundling the local loop and open and free entry for anyone to serve any size of area or population are considered sufficient conditions by regulators worldwide to seed booming Internet markets.
In the US, Europe, Australia and southeast Asia, anybody can become an ISP in a few hours - almost as much time as it takes to acquire and instal equipment. Not all succeed in this, but few regulators or governments care since the price of their services is so nominal that unsatisfied customers can take their business to a competitor.
Big ISPs and infrastructure providers know that the hundreds of small ISPs are potential customers and rarely pose any threats. ISPs provide all manner of services, multimedia, TV and much else. Cheap Internet telephony is widely available.
Barring some early efforts, TRAI has been a helpless witness to the growing dominance of the Internet market by state incumbents. Access to network elements on cost-based charges is mandated in most successful Internet markets.
The government - the owner of BSNL - has refused any request to opt for local loop unbundling, a regulatory best practice, and has lost revenue that competitors could have contributed to BSNL for use of its publicly funded infrastructure.
ISPs have fought endless battles to access BSNL infrastructure such as leased lines, the phone numbers - that begin with 172 - which cut the cost of access. Telephone companies can cross-subsidise their Internet service by bundling it with telephony which standalone ISPs clearly cannot do.
Standalone ISPs the world over gain some competitive advantage over larger telecom companies ("telcos") by offering services such as portals, TV and other content, which may sometimes not offer the scale or profits that larger telecom companies might covet. TRAI sees that IPTV is a perk best restricted to existing telcos.
Virtual private network services which were included in the earlier ISP licence have been removed from it and an additional fee imposed. Internet telephony provided by ISPs globally attracts a substantial fee, even in its restricted form, where calls from PCs to phone network are still forbidden.
Internet telephony can be a boon for rural areas where most calls - with family members away to make a living in the city - are long-distance. TRAI wants all ISPs to be allowed to provide Internet telephony but in a restricted form - in which PCs may not call landline or mobile phones. This makes ISPs uncompetitive with the big telecom players. TRAI, however, proposes that telcos and ISPs pay the same annual fees to the government.
Two-way Internet telephony, which inexplicably, only fixed and mobile telephone operators are permitted to provide, is not being marketed or provided on any scale by any of these operators.
No regulator or government could have missed that Internet telephony services hurt the higher priced long-distance services of those who have the exclusive right to provide Internet telephony. Instead of addressing this patent conflict of interest, TRAI has offered to further secure the margins of those who refuse to provide Internet telephony.
To suggest, as DoT/TRAI imply, that existing rules favour ISPs over telcos, is a travesty especially since the dominant BSNL and MTNL have free licences.
The size of the ISPs market is being further diminished. While conditions for local and long-distance telecom operators have become progressively more attractive, every small success of an ISP looks like a trigger for greater control.
Rather than correct the failure of markets, the intention seems to be to shrink them so that bureaucrats have less work monitoring them.
Poor access to Internet and broadband is a sufficiently strong justification to amend the licence for cellular and unified access services to remove features, if any that cripple Internet and broadband growth.
The law empowers TRAI to recommend changes on grounds of public interest and advances in technology. The government and TRAI must wait no longer.
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