29 March 2007

Connecting Broadband
By Joe Leahy, Mumbai correspondent
Financial Times
(c) 2007 The Financial Times Limited. All rights reserved.

Engaging India is a weekly online column analysing the issues, trends and forces behind the business and politics shaping India and its impact on the world, which appears on FT.com India, a dedicated online section on India. Engaging India appears every Thursday morning exclusively on FT.com India and is written by Jo Johnson, the Financial Times’ South Asia bureau chief; Amy Yee, New Delhi correspondent; and Joe Leahy, Mumbai correspondent.

The foreign interface with India is so often linked to high-technology: western doctors send X-rays for analysis to India, New York investment banks email spread sheets to analysts in Bangalore to crunch the numbers.

But the domestic experience of India is often very different. The high-technology revolution that has made possible India's success in exporting services has in some areas passed by the country’s consumers.

One of the key areas in which India is lagging is broadband. Seven years after the broadband revolution began sweeping the rest of the world, Indian broadband penetration continues to seriously lag behind rivals, such as China.

As of last year, less than 2 per cent of Indian homes received broadband compared with 13 per cent in China, 8 per cent in Brazil and 3 per cent in Thailand. India had only 1.8m broadband users as of September last year, far short of an original target set by the government of 3m by 2005, according to Media Partners Asia.

On behalf of a group of cable companies and investors, Media Partners recently sent a position paper to the government urging it to consider capitalising on India’s $4.3bn cable industry to improve the country’s broadband penetration.

The paper, which was backed by Star Group, the Asian arm of Rupert Murdoch's News Corp, Macquarie Media Group, part of the Sydney-based investment bank, and Liberty Global, the US-based cable giant, was of course aimed at furthering the goals of foreign participants in the Indian market.

But the paper had a point: if more of India’s cable operators could be encouraged to offer broadband to their subscribers, the government could instantly boost the availability of internet access to the country’s middle classes.

On paper, the idea looks like a no-brainer. In total, 71m Indian homes receive cable, a figure that is growing annually by 14 per cent. At the end of last year, 60 per cent of Indian homes that had a television subscribed to cable. Last year, India overtook the US as the world's biggest cable market by subscriber numbers and now trails only China. India has 20m more cable than fixed line telephone home connections.

Media Partners and its supporters argue that to encourage the necessary investment to upgrade these networks to enable them to provide broadband, the industry watchdog, the Telecom Regulatory Authority of India (TRAI), needs to adopt a lighter touch.

In particular, they object to the regulator’s imposition starting this year of a flat rate of Rs5 per channel. They say this rate is an arbitrary number and want the regulator to lay down a more consistent, transparent policy framework anchored in the needs of the industry. A flat rate, for instance, does not allow broadcasters to charge more for premium channels.

In reality, the situation is more complex. Rather than being driven by large companies, the mainstay of India's cable industry is its plethora of small cable operators, numbering more than 30,000, each of which controls the “last-mile” networks into homes in their area.

They have typically charged subscribers rates as low as Rs200 per home compared with rates in the US or the UK of $30-$40 per connection. This has been made possible by cable operators under-reporting the number of users in their subscriber areas to broadcasters. They might tell a broadcaster they have only 2,000 subscribers in their area when they actually have 10 times as many. They then hand over fees for only 2,000 to the broadcaster and pocket the difference.

As part of efforts to begin regularising the business, India recently began introducing digital conditional access systems, or CAS, in major cities. CAS, a set-top box system for unscrambling digital signals, makes it difficult to misreport subscriber numbers because each user must have a unit.

To help encourage uptake of the new system, TRAI set the flat rate of Rs5 per channel. N Misra, chairman of TRAI, says the system has so far been successful. Following its introduction January 1, it has already garnered 500,000 subscribers, he says.

He rejects arguments that regulation is holding back the use of cable for developing broadband in India; of the country's official 71m subscribers, or 80m by his estimate, only those using the CAS system are subject to any sort of regulation.

He says the adoption of broadband will depend on a range of factors from computer penetration to the development of e-commerce and the consolidation of small cable operators into larger entities capable of investing in digital networks.

“With broadband, the story is linked with e-content, linked with how great is the computer population in the country,” says Mr Misra.

Still, efforts to regularise the industry are off to a slow start if the government is looking to encourage large-scale investment.

The low flat rate, for instance, looks like it is aimed at pacifying the concerns of small cable operators, which in combination remain a large employer and often a key source of patronage for local politicians, as well as their subscribers.

“In a way, what the government has done is regulate the broadcasters as to how much they can charge the cable operators and how much the cable operators can charge subscribers,” says Farokh Balsara, a partner at Ernst & Young specializing in media and entertainment.

The upshot is that the Indian subscriber does continue to get lower rates - amazingly low compared with his counterparts overseas.

But if this proves to be at the expense of something as important as broadband access, then he may be cutting off his nose to spite his face.