JCMC 3 (1) June 1997
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On-line Services in India : A Market Analysis

Kaushik Banerjee 
Evolvers Group

Table of Contents

Abstract

Unlike the on-line service providers in the USA or Western Europe, the growth of the on-line service providers in India has started tapering off. Major factors affecting the growth of Internet access in India have been partial deregulation of the telecom sector as opposed to complete liberalization, poor telecom infrastructure, a narrower home PC base, a high level of price sensitivity among the target audience, and a lack of effective exploitation of the on-line services for delivering content. For these reasons private sector service providers are slowly becoming marginalized in India. Any emerging country which wants to exploit this medium successfully needs to keep these constraints in mind while planning for the future. 

Introduction

While in a country like the USA, private on-line services or Internet access providers have a substantial subscriber base which is growing, in India the subscriber growth rate for most service providers has slowly been tapering off. I hypothesize that most of the factors that seem to have contributed to the decline of private service providers in India are common to most emerging economies. As such, while a broader study taking more than one such country is required to draw conclusions which may have statistical validity, I have analysed the Indian market here to draw conclusions that may be of relevance to other such countries operating under similar constraints. While reading this article, please keep the following factors in mind: there has been no statistically valid industrywide on-line services market study in India. Conclusions made here have been drawn from secondary sources, qualitative inputs derived from Delphi interviews [1], and first hand experience. 

The private sector is not allowed to offer direct Internet access. Among other e-mail service providers, the difference between an on-line service provider and an Internet access provider is not as broad as it is in the USA. Most successful commercial e-mail service providers also provide other on-line services. Therefore, whenever the term on-line services has been used in the context of India it includes both e-mail service providers and on-line service providers, and vice versa .

A Brief History of E-mail Services in India

As elsewhere in the world, in India too e-mail services were initially introduced for academic institutions through ERNET -a UN funded project. ERNET was a project initially funded by United Nations Development Projects and later on subsidized by the Government of India. It offered subsidized access to educational and research institutions in India. ERNET worked and still works reasonably well, allowing Indian researchers and students access to Internet [Chitnus, 1995]. 

However, non-academic users are not allowed to access ERNET, and before the commercial on-line services came into the picture, the home PC users in the metropolitan areas like Delhi and Bangalore had to depend on either Compuserve (which in the Indian context was prohibitively expensive) or on the BBSs. Before the introduction of commercial on-line services Fidonet fulfilled the dual role of a discussion forum and electronic mail service provider. 

Following telecom liberalization, the Government of India (GOI) allowed private sector organizations to provide e-mail services to end users. However, it restricted their scope of operation through  In spite of that, quite a few entrepreneurs and companies chose to enter this market. The following service providers have at some point played a major role in the on-line services market in India : 

Computer Maintenance Corporation (CMC) : It is a large government owned public sector organization that offered dialup connections through an X.400 based network. In the initial days, its e-mail service, Indonet, picked up subscribers largely due its brand equity as a good Annual Maintenance Contractor.

ICNET : One of the earliest service providers, it offered Closed User Group (CUG) solutions targeted at large corporate houses. Through powerful advertising campaigns and sustained direct sales effort, it captured a big chunk of the institutional market in Southern India. Later on, when Sprint entered the market with a superior product and better marketing skills, and targeted the same audience, most of its clients migrated to Sprint. 

UUNET : Another early entrant, UUNET offered UUPC/UUCP based e-mail service that required a certain degree of UNIX literacy on the part of the user. However, this feature helped it to get corporate users who use UNIX as the backbone of their network.

BIIT : Business India Information Technology Ltd. (BIIT), a wholly owned venture by Business India, a Bombay based media conglomerate, was one of the earliest e-mail service providers. aXcess on-line services, the service provided by BIIT, managed to acquire a large chunk of the North and Western Indian market through a combination of aggressive marketing and good service. The aXcess subscriber base grew rapidly until recent months, when most potential subscribers defected to VSNL. 

BIIT priced its service the lowest and were the first to target the home PC users and SOHOs. They also launched a service called Business Dataserve, a stockmarket quote delivery service. They also set up a nationwide distribution network consisting of franchisees who administered the aXcess local node in collaboration with BIIT on a profit sharing basis and dealers who remarketed aXcess e-mail. It allowed them to penetrate the previously untapped non-metro market. 

DART : DART, a Dalal Street Journal (a financial publication) undertaking, started its on-line service, India On-line, largely to provide stock market information. Its offer for unlimited e-mail access bundled with that service for a flat fee generated a lot of interest. The service also offered other features like bulletin boards, real time chats, shareware downloads, etc.

VSNL : Videsh Sanchar Nigam Limited, the Government-owned long distance carrier, had a skeletal, low profile e-mail service available. In 1995, it started offering direct access to the World Wide Web at a reasonable price and the entire Internet-literate market slowly started migrating to VSNL. In June 1996, they halved the tariff for dialup access [Ghosh, 1996, September 6-8], spruced up their service network and added more telephone lines. Because they are the only WWW access provider in the country, they are experiencing a high growth rate (the current user base is estimated at around 30,000). 

In the recent past, VSNL faced criticism due to their unilateral pricing decisions and inability to cope with increasing demands for Web access. It has recently brought down the tariff for lease line access ["New VSNL Tariff Structure for Net access modified," 1997, February 18]. 

SRIL : Sprint-RPG, a collaboration between Sprint in the USA and the RPG Group, one of the largest Indian corporations, offers Sprintmail, which is basically the e-mail service offered by Sprint in the USA. They have a state-of-the-art infrastructure and a good service level ["RPG Sprint," 1994, November]. They priced their services higher than other providers and targeted the corporate sector. Later on, they set up a dealer channel to cater to individual users/SOHOs. Sprint has also started providing news summaries every morning and plans to introduce other related news services to cater to its clients. In its niche, Sprint has been doing moderately well. 

Wipro BT : The last major organization to enter the e-mail service arena was the Wipro-British Telecom collaboration, which launched their service in Bangalore and has only recently started expanding into Northern India. While it has not made any major impact so far, one can not entirely write them off since Wipro as the second largest hardware vendor in India has a lot of staying power. 

Global Telesystems : Another latecomer in the e-mail services business, it is slowly building up its infrastructure in anticipation of deregulation on the ISP front. 

The few others who have entered later, like Datapro's Xeemail, have not been able to make a dent in the market. (For a detailed treatment of the comparison of service levels of different on-line service providers see ["E-mail -- what's the menu," 1994, September; "Selecting your e-mail provider," 1995, January; Chitnus, 1994] 

Current Scenario

Currently, almost all the e-mail service providers are taking heavy losses. The major private sector service providers like BIIT and Sprint have stopped expanding the scope of their e-mail services business and VSNL is expanding largely because it's the only one providing WWW access. 

Below I attempt to analyze the possible causes for the downturn in the growth of the on-line services in India. 

In 1993, the e-mail market in India was an emerging sector in a rapidly deregulating telecom environment with a lot of excitement built up about it, but very little knowledge on the part of the potential users about its utility. The choice of stance that various service providers took were to a large extent dictated by the current telecom environment. [Bleeke, 1990], in his article on opening markets, described how businesses in rapidly deregulating industries in the USA operated. There is an amazing degree of similarity between the market entry strategies employed by companies in USA in the past and the pioneer ISPs in India. However, the similarity ends there. 

Bleeke identifies 4 major categories :  Of the 3 companies which are identifiably doing better than the other service providers in India, BIIT was unquestionably a low-cost new entrant as it kept its overhead very low to bring down the prices, targeted the price sensitive market and put into place a strong sales and customer support team and a distribution network which helped build a sense of personal relationship with its clients. Faced with a situation where all potential subscribers are opting for Web access thru VSNL, it is trying to compete through putting up an intranet on which India-related content available on the Web will be mirrored with the permission of the content provider 

Sprint, which entered the market late and tried to leverage its superior product, state-of-the-art infrastructure and brand equity to target the most profitable segments of the market, had successfully exploited the rapid deregulation in the USA and its superior service quality to move up the service price ladder. Its India market entry strategy was similar. It also started expanding into related categories like Sprintfax, etc. Faced with a slump in the e-mail services market, it is now in the process of leveraging its expertise to provide Intranet consultancy to the Indian corporate sector. 

VSNL, CMC : Both of them had the potential to become a broadband distribution company. However, CMC because of a lack of marketing orientation and poor service level got marginalized in the e-mail services market very early. In the initial months VSNL's product did not have an edge over the others, but the sheer breadth of resources at its disposal allowed it to commit resources to create a differentiated service in the long term. 

However, during the first two years of commercial Internet access in India, the government-owned companies were not in high demand. The leading computing or telecommunication magazines were advising potential users to use one of the private service providers. 

Although there is a great deal of similarity between the entry strategies adopted by ISPs in India and the strategies observed in the USA, unfortunately none of the ISPs in India is displaying the high growth rate that organizations at such a stage are enjoying in the West. The ISPs from the private sector are either getting out of the e-mail business, or have stopped growing. 

Market Analysis

Below I have delineated the major factors that have led to the marginalization of private sector e-mail service providers in India : 

Lack of further telecom liberalization

The initiation of the deregulation process brought in private sector participation. The entrepreneurs who entered this market expected Governmental encouragement and further liberalization. However, due to changes in the sociopolitical environment, further liberalization has not materialized, which has made it difficult for ISPs to compete on an even footing. 

Example : While VSNL (the Government-owned carrier), the Software Technology Park of India, and ERNET are allowed to provide World Wide Web access, private commercial providers still can't. 

Lack of strong telecom infrastructure

The telecom infrastructure development in India has not kept pace with the rest of the world. While users in various forums on the World Wide Web debate topics like ISDN, cable modems, etc., in India basic telecommunication facilities are sometimes lacking. Due to lack of adequate customer education about the problems associated with the telecom media, in the users' mind, recurring connectivity problems due to poor infrastructure usually became a contributing cause to user dissatisfaction either with the medium or with the service provider 

Example: if it rains badly on one particular day in Delhi, the users will usually have difficulty getting connected to their dialup accounts and the helpdesks at the service providers' end will be flooded with irate phone calls from users. 

Narrow base of home PC owners

In the USA, as the on-line service providers never tire of reminding others, 37% of the population have computers in their homes. In India, while no empirical evidence exists on the total home PC population (part of the reason is that a large number of these PCs come from the unbranded/gray market), delphi interviews suggest that there are no more than 100,000 throughout India, out of a population of over 900 million spread out over a large geographical mass. This makes it extremely difficult to send targeted communication focused at this audience. Its only recently that a PC manufacturer has launched a Home PC targeted at the FTUs. 

These home PC owners, the potential e-mail users centered in the metropolitan areas of Delhi, Bombay, Madras, Bangalore, and Calcutta belong primarily to the following segments :  These segments use e-mail primarily as a communication tool and are not interested in on-line content in the format (ASCII) in which service providers are making it available. BIIT's aXcess, due to its cheaper price tag, was attractive to this target audience. However, this market got saturated very quickly and the incremental cost of converting individual subscribers started going up. 

The secondary market that the service providers then targeted consisted of :  These segments viewed e-mail as a cheaper alternative to faxes. However, in India, e-mail service could not compete with fax because of the time lag involved in sending e-mails from India to elsewhere. All private sector service providers have to go through the VSNL link through which they can connect to their respective service partners in USA. Due to various technological problems at the service providers' end, international e-mail was sometimes taking much longer than it ordinarily would. In any case, the service providers were not offering real time solutions (Sprint started out with the promise of fast e-mail delivery, but they also ran into a service level problem). Thus e-mail could not be used as a cheaper alternative to fax for sending out time-sensitive information. While e-mail as a new technology attracted a lot of attention, these segments slowly started getting disenchanted with e-mail service as a solution. 

The segment which has always been very aware of developments on the e-mail front is the corporate sector. The corporate sector as an e-mail market is maturing slowly in India. Most organizations have taken one or two e-mail accounts which a number of their personnel are sharing. The concept of a personal e-mail box is yet to take off in a major way in India. Also, most organizations are currently opting for VSNL connectivity now that it is giving direct Internet access. 

Lack of a proper revenue stream

E-mail service in the initial stages has a high entry barrier. Also, the cost of converting and retaining customers is quite high. It's only after a service provider attains the critical mass of subscribers that the payoff in terms of monetary returns begin. In AOL it seems to have been achieved. The Web as a commercial entity has yet to achieve that. In India, that critical mass is yet to be achieved. Till one reaches that stage, the on-line services can be sustained by:  In an emerging economy like India, the concept of venture capital has only now started taking off. There is no venture capitalist around who is willing to take a risk on an emerging industry. Because of the lack of a large customer base, the content providers in India were not as attracted to the market provided by on-line services as they were in the USA. 

Revenue generated through subscription : aXcess as part of its marketing strategy kept its overhead very low and brought the prices down. Since the market size had been limited and the competition fierce, the other ISPs were forced to follow the lead provided by aXcess. However, all of them had higher overhead, which made it impossible for them to maintain profitability. So eventually there were two serious players left in the Indian ISP market, aXcess and Sprint, with two different target audiences. However, both ran into similar problems. 

Subscriber discontent

E-mail service by its very nature requires a high degree of customer-orientation. Indian work culture, while highly professional, has never required the kind of 24-hour attention to clients that an e-mail service requires. What the industry needed was a highly skilled workforce. But because of low margin, overall salaries in the e-mail sector fell, bringing about a fall in the quality of manpower. This coupled with poor telecom infrastructure brought about a gradual lowering of service levels, which obviously led to a strong sense of post-purchase dissonance among the subscribers. The absence of an exit policy made matters doubly difficult for service providers. 

The collapse of the distribution networks

Because of the subscribers' discontent, a lot more legwork was required on the part of the support centers (which were manned by VARs/franchisees in most non-metro locations for most ISPs ). The eventual return on investment made after putting in so much effort was negligible when compared to returns on hardware/software sales in which most of these providers were also involved. So motivation too started dwindling, and the amount of time that a dealer or a franchisee devoted to this business vis a vis his/her other businesses declined, and the contribution of dealers from non-metro locations started to decrease. 

Lack of organizational support

Most Indian business houses that went into the provision of online services are family-owned companies, with a low level of e-mail literacy. They seemed unaware that the industry would be slow to bring profits and that they would need to pour resources into it for a long time before the market attained critical mass. In the recent past, all of them have shown a strong inclination to cut their losses and get back to their core businesses. 

The situation has been exacerbated by VSNL's launch of their WWW service. While the quality of VSNL's customer service is poor, they happen to be the only source offering Web access. They are also the only organization which by virtue of their being Government-owned can sustain a loss for years. Therefore, for the past few months, private on-line service growth rates have slowly been tapering off. Unless some major changes come about in the telecom environment in India, this trend is going to continue. 

Future Directions

Government-owned monopolies like VSNL are usually not equipped to cater to the consumer market. In India, the Government has for a long time been toying with the idea of allowing the private sector to provide direct Internet access. So far no explicit policy has been made available to the public, probably as much due to bureacratic distaste for any kind of change with respect to deregulation as it is to the fluidity of the political situation for the last couple of years. 

E-mail service providers expect the Department of Telecommunication (DOT) to allow the private sector to provide Web access later this year. VSNL is expected to remain the only gateway to India and act as a backbone to smaller Internet service providers. There is also a lot of lobbying going on to reduce the licensing fee requirement which supposedly DOT has pegged at Rs. 30 lakhs. If the Government of India actually lowers the licensing fee requirement and allows the private sector to provide direct Internet access, many more are expected to enter the market and the e-mail market scenario in India is probably going to undergo a sea change. Otherwise, most of the existing e-mail services will likely end up as money-losing propositions, and the popularity of the WWW in India will remain at its present low ebb. 

Conclusions

Complete deregulation is needed 

Governments will need to liberalize the telecom environment at one go rather than do it gradually : What happened in India in terms of gradual liberalization did more harm than good. 

Service providers need to be given higher priority

Certain facilities like quick provisioning of hunting lines etc., which may be taken for granted in a country like the USA or the UK, are a privilege in a developing country. Good telecom facilities are essential for a high level of service. Most developing countries have Government-owned telephony companies. The private sector telecom service providers under such circumstances tend to be at a disadvantage. E-mail service providers in India are obviously much bigger consumers of telephone company services than end users are, and they need to be offered a lower, bulk rate. Also, speedy approval of requests for additional telephone lines should become de rigeur. Since telephony is a monopoly and the private sector service providers have no alternative to using MTNL's (Mahanagar Telephone Nigam Ltd - the Government controlled Telephony companies in the metros), the government needs to be especially sensitive to the needs to service providers 

Availability of funds

Unlike the USA and Western Europe, entrepreneurs in most developing countries don't have access to venture capital. Most Governments in such countries usually have a kitty/incentives which they make available to industries in preferred categories. While that might sound like preferential treatment, in the absence of any better alternative, making that available to ISPs/on-line service providers is an alternative such countries can look at. 

Managing expectations 

One of the major reasons for the initial boost for e-mail services in India was the publicity generated by the press. In this instance, the press was acting as an ally of the service providers. However, the perspective that they provided was largely a Western perspective. In the Indian context, what was made available was much less. With expectations built up so high, when an individual/institution subscribed to an e-mail service, the post-purchase unhappiness was too high for the service providers to handle. The consumer dissatisfaction got translated initially into a high churn rate and down the line for some customers into a discontinuance of e-mail service subscription altogether. (There is no empirical evidence available in this area though). As such, it is important that what is possible is made known to consumers from the outset. 

Customer orientation

The concept of customer service is difficult to master under the best of circumstances. One only need look at the number of anti-AOL sites (23) and pro-AOL sites (1) listed under Yahoo to understand. Most employees, with training, will gradually get into the mindset (in India, the junior management of the hotel industry too is also ill-paid, and not everyone gets tips, but the service level in most 5-star hotels is excellent). So it makes sense to invest in retraining all employees who interact with customers. 

Building Virtual Communities

As recent events in the USA demonstrate, on-line services there too are going through a turbulent phase. However, successful service providers like AOL and even less successful ones like Genie had managed to retain a large customer base in part because of the virtual communities that they have built around chat rooms and on-line games. In a business marked by parity of service and a lower level of brand loyalty, it is important to encourage the development of user communities that will help retain clients despite any post-signup distress over the provider's level of service. 

Glossary  

Small Office Home Office Users ( SOHO ) : Small scale entrepreneurs who operate either out of the house or out of a small office with skeletal infrastructure are called SOHO users. Many of them are very IT savvy and are often early adopters of technology in India. 

First Time Users ( FTU ) : The home computer buyers who are buying computers for the first time are often referred to by the acronym FTU. For a long time, the FTU segment was ignored by Indian PC makers. 

Value Added Remarketer ( VAR ) : Value Added Remarketers remarket e-mail subscriptions to end-users. They are also expected to provide training and post-sales product support to the users. Value Added Remarketers of e-mail services tend to be modem or PC dealers who need to add value to their core offerings. 

Hunting lines : The facility which, on dialing a particular phone number, hunts through all phone numbers on that EPABX and connects the user to the first available phone number, thus called a hunting line. In a country like in India, where service providers have a limited number of lines available, it is crucial to have hunting lines. 

Footnotes

[1] Some of the characterizations of online services in India were the result of Delphi interviews conducted by the author with executives of leading Indian online service provider companies. Of those interviewees, the following have graciously consented to allowing publication of their email addresses and other contact information should readers have further questions about the state of the online provider industry in India today:

Delhi Interviewees who may be contacted by readers:

Mr. Indranil Ghosh
Regional Manager ( Delhi )
Rediff Communication P. Ltd.
Websites www.redifindia.com, www.rediff.co.in
e-mail : rediff@giasdl01.vsnl.net.in
Phone : 6147662, 6144883

Mr. Sandeep Kohli
General Manager
BIIT
e-mail address sandeep.biginfo@axcess.net.in
Phone- 022-4932779

Mr. Prasanto K. Roy
Editor PC Quest
website www.cmil.com
e-mail pcq@pobox.com
phone-011-6433999, 6435999



References

About the author

Kaushik Banerjee works for The Evolvers Group, an EAI consulting company headquartered in Dallas, Texas. He studied Electrical Engineering at University College of Engineering (Burla) in India. His previous experiences include marketing research and consultancy, planning and general management for the corporate sector in India. His current interests include use of Internet-Intranet as productivity enhancement/marketing tool, sociocultural impact of CMC, the emerging convergence of media and technology companies on the Web and its impact on industry. 
Address: Kaushik Banerjee, 33 Union Square, #1426, Union City, California 94587 .