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Cut in Bandwidth Rates - Concerns and implications

April 15, 2005
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The Telecom Regulatory Authority of India (TRAI) has recently fixed ceiling tariffs for three most commonly used capacities/speed –­ E1 (speed of 2 mbps), DS-3 (speed of 45 mbps) and STM-1 (speed of 155 mbps). The tariffs are significantly lower than the prevalent rates and have been brought down to facilitate broadband penetration. Touted as a major initiative to reduce bandwidth costs, the matter has proven to be contentious with VSNL moving the TDSAT on the issue. Here are views from the industry on the implications and possible effects of this change...

Will the reduction in IPLC leased rentals give a boost to the broadband industry?

Rustom Irani: The reduction in IPLC leased rentals that TRAI is trying to mandate is a step in the right direction, although many years late.

Rather than making a significant difference to international bandwidth prices, it only reflects more closely the volume-discounted rates already available. To that extent, it is not going to make a difference to the broadband access industry, which already offers services at some of the lowest prices in the world. Presently, the growth of internet in the country is retarded due to a combination of high international and domestic bandwidth tariffs as well as not allowing service providers to access resources built by earlier incumbents. The focus of the regulator should now be on domestic bandwidth tariffs and other resource sharing (such as copper unbundling) to make these more available for internet growth.

Deepak Maheshwari: According to Telegeography, more than 88 per cent of international bandwidth is used for internet traffic. The CII's "India's Broadband Economy: Vision 2010", TRAI's broadband recommendations of April 2004 and even the broadband policy of October 2004 recognise that international bandwidth rates from India are very high and that bandwidth accounts for the single largest cost item for providing broadband access. This is also substantiated by independent expert research and studies undertaken by consulting organisations like Gartner.

Broadband users can definitely look forward to lower prices and/or better quality. However, one would have to wait for the notification on revised ceilings for domestic leased lines in the pipeline as well to assess the full impact from a larger perspective.

Rajat Sharma: Currently, there are two types of offerings from the broadband industry –­ plans with a data cap and plans without a data cap. The reduction in IPLC rentals should definitely give a boost to the broadband industry, but in different ways. The growing awareness of hidden costs in plans with data caps is deterring customers to get onto the broadband bandwagon. For users to find broadband connections more practical, the hidden costs have to be lowered. Thus, the reduction in IPLC rentals will lower the hidden costs by increasing the data cap, increasing connection speed and improving the quality of service. To make customers realise the true benefits of broadband and build up their confidence, entry costs in such plans should not see a reduction, unless the players decide to stick to the existing not-so-popular data cap offers. The IPLC rental reduction should lower entry costs for the second service offering, unlimited usage for a certain amount, thus directly increasing the number of users.

Mahesh Uppal: Yes, to a degree. Broadband demand is a function of price but also of other things such as availability of quality content and services that the user wishes to access.

In actual terms, how much does the reduction in rental translate into? Is it a substantial reduction or is more required?

Rustom Irani: As outlined above, this does not translate into any real reduction for high-volume consumers of bandwidth as the present discounted market rates offered are close to the prices being mandated by TRAI. It is also not at a level at which international bandwidth is available even in the region. Certainly more is required. However, even the existing recommendation has been challenged with the TDSAT and its implementation delayed to May 2005. This is a classic case of monopolies trying to maintain the status quo and creaming the market for profits, when opening it up would stimulate very high consumption levels and revenue growth.

Deepak Maheshwari: Tariffs for a 64 kbps leased line between Delhi and Mumbai came down from Rs 1.4 million plus to just Rs 96,000 with effect from April 1, 1999, resulting in a drop of more than 93 per cent, literally overnight, thanks to the Telecommunications Tariff Order, 1999 (TTO) notified by TRAI on March 9, 1999. However, vide the same TTO, TRAI had forborne with IPLC tariffs, though the explanatory memoranda did not record any underlying reason for it. In any case, TRAI had committed that the tariffs for leased lines –­ both domestic and international –­ would be reviewed one year thereafter, implying that a review was due in early 2000.

Though tariffs did sporadically come down, the ISPAI has been bringing to the notice of the authority numerous instances of vertical price squeezes ever since 1999, and requesting regulatory intervention against anti-competitive and predatory pricing and practices.

The new tariffs are coming into force almost one year after the release of the consultation paper by TRAI. Though the 70 per cent reduction sounds steep, in reality, it is not really so steep since various discounts already prevailed on the list prices.

Internationally, prices have been tumbling down even in the past one year but here, TRAI has been generous in fixing the ceiling at Rs 1.3 million for E1 –­ higher than its own indicative figure of Rs 1.2 million mentioned in the consultation paper. Leave aside the fact that TRAI chose not to use forward-looking longrange incremental cost, rather than using the weighted average cost of all operators, TRAI has by and large relied on the historical costs of the incumbent operator and even after being very generous, notified 8 and 23 as the multipliers for DS-3 and STM-1 whereas internationally, these are around 4 and 10 respectively, compared to E1 rates. After all, certain costs like legal and administration remain the same irrespective of the capacity.

Though the proposed reduction is too little, too late, the important thing is that the regulator took cognisance of the market failure and decided to intervene, when in general it is slowly but surely withdrawing from rate-fixation exercises.

Rajat Sharma: Bandwidth cost constitutes a whopping 50 per cent of the monthly opex for broadband service providers. Although this is a big first step, more steps can definitely be taken to reduce the remaining 50 per cent of operating costs as well, for example, reduction in telecom equipment tax, reduction in local carriage costs and service taxes. More important is to enhance last mile access, which can be easily addressed by unbundling the incumbent's last mile. This will increase competition which, when coupled with aggressive marketing by private players, can fuel growth of broadband services.

Mahesh Uppal: TRAI has ordered that ceiling tariffs for E1, DS-3 and STM-1 be reduced by 35 per cent, 71 per cent and 70 per cent. This is a significant decrease. TRAI has argued rightly that this would not have been necessary if the market had been sufficiently competitive. Since it is not, the decrease is welcome. A further decrease will be inevitable with the capacity likely to expand in the coming months. I would argue that more effort needs to be focused on applications and services that can drive broadband. This is obviously not the regulator's responsibility but it does require a carefully considered strategy.

Will this move lead to higher capacity utilisation and lower prices?

Rustom Irani: This is the intention but it does not appear so as of now. With a further drop in prices (to include domestic bandwidth as well) higher capacity offtake is expected. With the present reduction, only normal growth is anticipated. To simulate the broadband market, much lower prices are required as well as mandatory sharing of other resources (copper unbundling).

Deepak Maheshwari: The majority of the cost in a submarine cable is towards the laying; enhancing the lit capacity entails minor incremental investment while increasing the capacity manifold, thanks to technological advances like DWDM and its variants. Besides, the cost of cable itself has come down by more than 80 per cent in the last three years.

In a market with surplus supply, suppliers should start reducing prices to spur demand rather than cry hoarse that prices are to be kept high since there is little demand. When the new prices come into force, many users would find it more attractive to upgrade to the next level, for example, from E1 to DS-3 and DS-3 to STM-1 rather than taking multiples of E1 links. Capacity utilisation would definitely receive a boost.

As the country becomes a significant user entity of international bandwidth, carriers providing the far-end of IPLC would also reduce prices. However, that will not be in the same proportion since their rate on a per mu-kilometre basis is already significantly lower than that of Indian operators.

Rajat Sharma: This move should lead to higher capacity utilisation. The current capacity utilised is very nominal. Also, with the ceiling tariffs fixed, further competition can fuel prices to be lower than the ceiling prices, in effect lowering the prices further as suggested by TRAI.

Mahesh Uppal: Yes, to a degree. But, as mentioned above, content is the key issue, not bandwidth per se.

What measures are necessary to remove the bottlenecks in cable landing facilities and spur competition in the IPLC market?

Rustom Irani: The market should spur additional investments in building cable landing facilities and this can only happen with growing internet usage. Incentivisation of such projects through discounted taxation would be one way to attract investments in this sector. Global communication using video and voice would be a key driver for this sector and would spur the economy as well.

Deepak Maheshwari: Having trouble in getting bandwidth even after paying outrageously high prices, we realised early in 1999 itself that though satellite gateways may be a stopgap arrangement, submarine cable was a better way to augment bandwidth. Accordingly, ISPAI spearheaded the cause of bringing in competition by suggesting to the Group on Telecom and Information Technology in early 2000 that any ISP should be able to establish a cable landing facility as an international gateway. This resulted in the guidelines for submarine cable landing in August 2000 and many entrepreneurs showed interest.

However, even though three Indian companies are controlling a significant amount of submarine cables worldwide, access to cable landing facilities remains a bottleneck. If every eligible service provider has access to the landing facility on non-discriminatory and regulated commercial terms, the uptake of bandwidth would go up, resulting in price reductions.

Another way to spur competition in any market is to allow resellers. They can buy bulk capacity from facility-based operators, thus freeing the big telcos from the mundane minutiae of a large number of low capacity users. At the same time, they can offer focused customer care and customised services to such users.

Rajat Sharma: In many countries, intense competition is attributed to a large number of players, of which many are non-facility-based operators. Submarine cable landing stations are critical and expensive telecom structures. The incumbent having control of landing stations should be made less potent. Currently, the incumbent can impose constraints on underlying cable operators and on operators who have acquired capacity in cable systems utilising the incumbent's facilities. These constraints are non-price related and affect competition negatively. Further, India has a dearth of landing stations. Building a landing station is capital intensive and time consuming, requiring many clearances, for example, security and regulatory clearances which are major inhibitors for new players to enter the marketplace. Measures should be taken to expedite the process to encourage companies to invest in landing stations.

Mahesh Uppal: There needs to be a genuine free market here. TRAI needs to ensure that any kind of exclusive arrangement between large suppliers and users is discouraged.

What impact will this move have on the viability of international bandwidth suppliers?

Rustom Irani: With newer technologies like UDWDM, more capacity can be squeezed out of the same fibre and the existing cables can provide higher and higher capacities. Additional cable landing stations and the newer capacities they can provide will only bring about more competition in the market. However, the view that additional cable landing stations will stimulate internet growth would be incorrect. Internet growth needs to be stimulated through various initiatives and by involving all constituencies in this exercise. Benefits accruing out of additional cable landing stations and capacities would provide redundancy to existing facilities and make India a more compelling option for global players to look at for providing their services. The viability of international bandwidth suppliers can only be guaranteed with the continuing growth of the internet revolution –­ or else they will anyway be in trouble.

Deepak Maheshwari: First and foremost, the ILDO licence is essentially for ISD service though the same licence also permits provisioning of IPLC. Even today, most of the revenue comes from voice traffic, though data in general and, more specifically, internet traffic account for the lion's share of capacity volumes.

Once you lay a submarine cable, significant cost is already sunk –­ quite literally. Hence, the best way to recoup the investment is to quickly ramp up the lit capacity, offer a range of viable options like leasing dark fibres and wavelengths. Indian operators have been aggressively augmenting not only the capacity in new short-haul low-cost cables connecting major hubs but have also made forays into acquiring or controlling significant capacity of major cable companies worldwide, aided by low valuations post the recent crisis they had. This brings the cost base significantly lower than what TRAI has used for its computations. Admittedly, according to TRAI, most regulators rely on the FL-LRIC (forward looking long range incremental cost) model and the cost figures so arrived at would have been significantly lower than the ones notified. Our own estimates show that even if STM-1 IPLC half-circuit is priced at Rs 4.5 million per annum rather than Rs 29.9 million as notified by TRAI, the business would continue to be viable.

Rajat Sharma: International bandwidth suppliers can now look at India as a potential bandwidth hub. With roaring bandwidth demands, many international players will look to connect future submarine cables via India. The surge in bandwidth utilisation by various sectors in India –­ IT, ITES, telecom, BFSI, etc. –­ as well as a potential broadband base build-up can see many international players coming into India and setting up the desired infrastructure to get a share of the pie.

Mahesh Uppal: Given the low usage currently, the lower tariffs for use of installed –­ but often unused –­ capacity should not impact viability per se.

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