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Broadband: The railroad of the 21st century? - Views on News from Equitymaster
 
 
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  • Aug 2, 2000

    Broadband: The railroad of the 21st century?

    Imagine. A viewer while watching a fashion show on television is able to click on the screen and be transported to the designer’s website from where she can buy the product or be shown other related products. Meanwhile the TV show she was watching gets downloaded onto a hard disk and can be recalled whenever she wishes. (That will mark the end of prime time as we know it of course). Television would drive the Internet and the Internet would drive television.

    The situation portends the ultimate ‘Nirvana’ for one breed of business: the content providers. ‘Content is king’ will no longer remain a mere cliché. What is driving this vision? The answer: Broadband.

    Broadband is a term generally used to refer to the communication lines or services which have a speed in excess of telephone lines (which in general is around 28 kilobit per second and maximum 64 kbps). In other words any medium that enables data/voice/pictures to be transferred at a speed faster than 64 kbps that a telephone line allows can fall under broadband. It includes ISDN, microwave, cable modem, Direct Subscriber Links and Very Small Aperture Terminals (VSATs).

    Earlier there were three distinct services viz. telephone, television and data management. While voice was transferred over telephone lines, computers with their processing abilities stored data. Television was primarily a mode of providing entertainment. As networking took off, computers began to interact. The modem saw data transfer over telephones. And what started of as the US defence department’s experiment using ‘packets’ for transfer of data developed into Internet Protocol (IP).

    Cable TV, which started around the early eighties in India (UTV pioneered cable television in India in 1981) as a one way communication with the cable operator being able to send signals. The cable modem (it is a device that allows high speed data access to the Internet through cable networks) has however made two way flow on the cable network possible.

    According to Forrester Research, 25% (i.e. 16 m) of all online households in the USA will have high speed Internet connectivity by 2002. Of these cable data service subscriptions are estimated to grow to almost 13.6 m (i.e. 80% of the market).

    In India, the cable television industry has inadvertently turned out to be one of the most liberalised in recent times. A part of the reason is that businesses did not wait for government regulations to be put in place. Thus the cable lines have no right of way i.e. they are not legal unlike the telephone line or the electricity wires coming into our homes.

    For the final customer this has hardly mattered. Cable TV has taken of in a big way in the country with India emerging as the third largest market (after the USA and China) with almost 25 million households out of a total television owning population of almost 70 million households. The industry has been growing at almost 25% per annum and with almost six million television sets being sold annually (including three million black and white television sets) this growth rate is expected to sustain in the foreseeable future. (A Nasscom survey has projected double the growth rate for television sets which would touch a level of 225 m by 2008 from the current level of 75 m.)

    Today, cable subscribers on an average pay Rs 100–125 per month and get to watch almost 70–80 channels including a host of pay channels such as ESPN, Star News and CNBC. This is one of the lowest rates the world over. The industry has been extremely fragmented and its only the last two year’s that have seen some sort of consolidation with Multi System Operators (MSOs) such as INCablenet and Siticable emerging. These have entered into franchisee agreements with the local cable operators. With total revenues in the range of over Rs 30 bn currently the industry seems to be sitting pretty. However, the situation is ripe for change.

    The emerging convergence of television, the personal computer and the telephone have forced far more organised players in the cable business. Zee’s entry into the cable business is an indication of that. Again international trends are an eye opener. AT & T the long distance telecom operator in the USA took over TCI, the top player in the cable industry (Microsoft with its stake in AT & T is also an indirect beneficiary). Similarly, in the UK the take over of Cable & Wireless by NTL, the US based communications company has led to the consolidation between the telecom and the cable industry. While such consolidation could take some time to happen in India, the cable operators could themselves offer Internet service on cable.

    A 2 Mbps line from VSNL along with upgrading of the cables reaching the customers home would costs around Rs 5 m to Rs 6 m and give around 2,000 connections. Add the other infrastructural costs and the total cost for providing the internet facility could work out to Rs 10 m. Even if a third of the connections are activated and the operator charges them around Rs 1,500 per month, he could theoretically break even.

    Whether it would work, is not yet clear. However, quite a few players have already bet on its success. Notable among them are the Hindujas who have upgraded their INCable Net grid and have started offering Internet over cable. Zee’s plans are even more ambitious. It is laying down fibring the headend cable operator via Siticable across 26 cities at a cost of Rs 24 bn. Similarly the Rajan Raheja promoted Cine Cable Channel is also upgrading its grid to provide the net over cable.

    As compared to satellite the other push for broadband is emerging from undersea fibre–optic cables. Flag Telecom (a Bermuda based carrier) has laid the longest under sea fibre–optic network connecting Japan to the UK at a cost of $ 1.5 bn. It has landed a submarine cable (at Prabhadevi) in Mumbai which offers 10 GBPS (10,000 MBPS) of bandwidth capacity. (VSNL the exclusive buyer buys 1.5% of this.) With the recent announcement of the Prime Minister ending VSNL’s monopoly on bandwidth access, Flag is free to provide a gateway to all other Internet Service Providers (ISPs). It offers a 2 MBPS lease line at a cost of Rs 4.4 m per annum as against VSNL’s cost of Rs 20 m per annum. There is another global fibre–optic network Sea–Me–We which lands at Kochi in South India and offers the same facilities. The third network that is planning an undersea link from Tamil Nadu to Singapore is DSL Dishnet.

    The third push for broadband services is from existing utilities such as BSES, Indian Railways, Gas Authority of India and Powergrid who already have existing terrestrial networks and are laying fibre–optic cables along their existing networks. While BSES plans to lay 1,200 kilometre fibre–optic cables, Indian Railways and Powergrid have made plans to lay cables over their entire networks albeit in phases.

    Cellular phone companies such as Airtel (promoted by Mr. Sunil Mittal) Fascel (promoted by the Hindujas), Hughes Telecom and BPL also have plans to set up their own networks. Not to forget industry houses such as Reliance (which is investing over Rs 135 bn for a terrestrial backbone), Tatas (who already have a 4,000 kilometre) pipeline, Enron and Punj Lloyd (which runs a national ISP Spectranet).

    While companies are setting up broadband backbones alright, one is not sure of the stand–alone bandwidth suppliers. Eventually, this would also become a commodity and like any other commodity those broadband manufacturers who offer their services the cheapest and keep their costs the lowest will survive and thrive.

    A look at the early twentieth century equivalent viz. railroads would be illustrative. Railroads carried freight plus passengers. The land was granted by the government in various parts of the country. The railroads sold some of the land to the farmers and used some of the land as a collateral for the huge loans they took to pay the workers, lay the tracks, railroad cars and other equipment. Peter Lynch in one his books “Learn to Earn” mentions the craze for railroad stocks “Railroad stocks, how could they miss! was the rallying cry of every investor from coast to coast. People saw the rail lines farming out to the far corners of the nation and the locomotives puffing along and they were convinced that railroads were a cannot lose proposition.” However, over the longer term it was the oil companies, the metal companies and the branded goods companies for whom rail transport enabled better distribution of goods and helped them establish their brands.

    Similar is likely to be the case of the companies offering broadband services. They would have to enter into revenue sharing agreements with content providers who would use their services. Such as the fashion designer in the example mentioned above. Or companies such as Apollo Hospitals who want to use the Internet to provide the services of their specialists through telemedicine (where network capable x–ray printers, scanners transmit the results of the patients examination to specialists who give their advice online). Or content providers such as UTV and TV 18 who have already set up general portals or plan to set up general portals offering streaming video online (UTV has already set up a portal called sharkstream.com). After all “Content is king” no longer remains a cliché.

     

     

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