Scatmag.com

February 2017

OBTAIN YOUR OWN ISP LICENSE



The Internet provides information to students, entertainment to the home and facilitates business and communication. As a result, most computers today want to be connected to the internet.

Today, internet services provide an excellent business opportunity, with large margins. While the cable TV business typically offers margins of 30 to 50%, internet services provide margins of 300% to 500%. We therefore urge all cable TV MSOs and LCOs to diversify their business to include providing internet services. Before you can commence providing internet services, you must obtain an internet service provider's licence from the Department of Telecom (DoT) in New Delhi.


Internet Services Today Provide Margins Of Over 300%


Lets us first understand a few basic concepts about the internet & broadband.


THE INTERNET

The internet is simply a large network of computers. Any computer can join the internet using basic hardware and software which are usually built into every computer sold today.


ISP

A company that provides an Internet connectivity, is an Internet Service Provider (ISP).


INTERNET SPEED

The speed at which your computer can send information to or receive information from the internet is the speed of your internet connection.


BROADBAND

If your computer is connected to the internet at all times at a particular minimum speed, it is called a broadband connection.



MINIMUM BROADBAND SPEED

In India, a broadband connection must have a minimum download speed of 512 KBPs. Most countries in the world today require a broadband speed of minimum of 2 MBps i.e. 2,000 KBps.

Hence every ISP in India must maintain a minimum speed of 512 KBps. Some ISPs offer unlimited usage of the Internet, even after the consumer depletes his monthly download + upload quota. Even in such cases, a Broadband service provider must maintain a speed of atleast 512 KBps.


DOWNLOAD & UPLOAD

The download speed refers to speed that the data connection delivers from the internet to your computer. The upload speed is the speed at which your computer is allowed to feed its data into the internet. A company that provides connectivity between the internet and your computer is referred to as an Internet Service Provider (ISP).


WIRED CONNECTION

Computers can connect to the internet using a wired connection. These are referred to as 'Wireline Subscribers.'


Wired Internet Must Be Atleast 50 MBps To Be Competitive



WIRELESS CONNECTION

Wireless Internet Subscribers connect to the internet either through their mobile phones or other wireless technologies such as WIFI inside their homes. Out of a total of 368 million Indian internet subscribers, 346 million are wireless. Only 21 million (5.7% of total) subscribers are wireline subscribers.


WIRED & WIRELESS SPEEDS

Wireless subscribers such as mobile phone users have internet access even when they are on the go. However, Wireless Internet is usually delivered at a much lower speed than wired or wireline internet. New wireless technologies such as mobile 4G provide fast internet access of upto 50 MBps. Hence wireline internet services must provide internet connectivity at atleast 50 MBps or more to remain competitive with new technologies like 4G wireless. A wired connection can provide speeds of 1000 MBps (1GBPs) and higher.

Mobile Wireless services can be offered only by telecom licence holders, which is extremely expensive.


ISP LICENSE

Wired Internet can be provided by anyone holding an Internet Service Provider's (ISP) license.


There Are 3 Categories Of ISP Licenses



ISP LICENSE CATEGORIES

The Internet Service Provider's (ISP) license is issued by the Department of Telecom (DoT) in New Delhi. There are 3 levels of ISP licences viz:

♦ The ISP-A license permits the company to provide internet services anywhere within the country.

♦ The ISP-B license allows a company to provide internet services in any one of the 4 Metro cities: New Delhi, Mumbai, Kolkata and Chennai or any of the 16 telecom circles. Typically, each state is defined as a Telecom circle. Table-1 provides a listing of all 16 Telecom circles + 4 Metro Circles.



♦ ISP-C - This effectively covers ISP services in all areas not listed in the ISP-B category.

A company can also apply for an ISP License to cover more than 1 area. If it selects 4 areas under the ISP-C category, it will have to apply for an ISP-B category license.


ISP LICENSE CONDITIONS

An ISP license is granted for a period of 20 years.

The license holder must commence commercial operations with 18 months of receiving the license.

The application form is to be bought from DoT for Rs. 1,000 and the processing fee is Rs. 5,000.


ISP Licenses Are issued only To Registered Companies, Not Individuals



LICENSE APPLICATION

Table-2 summarises the Entry Fee and the Bank Guarantees that an ISP applicant must submit along with his license application.

The cost of an ISP C category license is well within the means of LCOs and MSOs, enabling them to venture into this business diversification into the lucrative area of distribution Broadband services in their territory. It is important to note the following:



1. ISP Licenses are issued Only to Registered Companies, Not individuals.

2. There is No minimum equity or minimum net worth requirement For ISP companies.

3. An ISP license is supposed to be issued within 60 days.


LICENCE FEE

Just as an MSO or LCO is required to pay a license fee, there is also a fee payable for the ISP license. While the MSO/LCO is required to pay a one-time license fee, the Government has imposed an annual license fee for ISPs, in addition to a one-time Entry Fee. This is similar to what is levied on DTH platforms.


ISP ANNUAL LICENCE FEE

The ISP license fee is 8% of the Adjusted Gross Revenue (AGR) of the ISP license holder.

Hence if the ISP has an annual business/ revenue of Rs. 50,00,000 + Service Tax, he is required to pay a license fee of 8% of Rs. 50 Lakhs, i.e. Rs. 4,00,000 as his annual license fee. No license fee is payable on the Service Tax amount.


ISPs Must Pay 8% Of Revenues As A License Fee


The AGR is calculated on the total revenue, so it would include even equipment that the ISP may sell to the consumer, or repair charges.

There are no deductions, even for the cost of Bandwidth purchased by the ISP.


AGR & FRANCHISEES

It is very relevant to discuss the role of an ISP franchisee, and the tax payable in such cases. Several cable networks show themselves as franchisees of an ISP, making the issue particularly important for our industry.

A franchisee takes internet bandwidth from an ISP. The cable network provides broadband connections to individual users as a franchisee of a licensed ISP. As an example, a cable network may take its broadband connection from RailTel and distribute these signals to end consumers without the cable network itself obtaining an ISP license. (Note: RailTel is only taken as an illustrative example. it applies to any other licensed ISP, with a Category A or Category B or Category C license.) The cable network says it is a franchisee of RailTel and RailTel has an ISP license.


The End Consumer Must Be Invoiced By The ISP, Not The Franchisee


In such a case, the cable network as a franchisee must strictly adhere to the following:

1. The service must be provided to the end consumer as a RailTel service under the RailTel branding.

2. The invoice must be raised on the end consumer as a RailTel invoice.

3. The revenues from each subscriber must be accounted for by RailTel.

4. RailTel must pay 8% AGR on the amount collected from each retail subscriber even of the broadbbroadband network operated by the Cable operator.


HUGE FINANCIAL IMPACT

The above imply a huge financial impact which is often, knowingly or unknowingly ignored by the retailing broadband network. Let us assume that the cable operator purchases band width from RailTel and pays RailTel Rs. 50,000 per month for the bandwidth.

This bandwidth is then retailed by the cable operator's broadband network to end consumers, for a total of Rs. 3,00,000 per month. RailTel's license terms require RailTel to pay a licence fee of 8% of the Rs. 3,00,000 collected from subscribers and not on the Rs. 50,000 that RailTel has charged the broadband network/retailer for its bulk bandwidth.

Since broadband retailing is a high profit margin business, the tax which is to be paid on the retail price rather than on any intermediate wholesale price of bandwidth, is quite different and a substantial amount of tax is payable.

The cable operator operating as a RailTel (or any other ISP) franchisee can be booked for tax evasion if they do not pay the 8% AGR on the retail price collected.


CATV & ISP Should Be Operated By Separate Companies



ISP + CABLE TV NETWORK

Another very important issue arises when a cable network also operates as an ISP. The same company may hold both a cable TV license + an ISP license.

Unfortunately, the ISP license rules state that the entire company's revenues/turnover will be used to compute the 8% AGR due on the ISP license.

Hence if an MSO (or LCO) operates both cable TV and broadband networks under the same company name, the MSO will not only have to pay cable TV entertainment tax + cable TV service tax but also an additional 8% of the entire cable TV revenues, as the ISP license fee!

As a result of this, MSOs now operate separate companies for their cable TV and broadband activities. For example, Hathway Cable and Datacom Ltd. has decided to spin off its Cable TV business into a wholly owned subsidiary: 'Hathway Datacom Central Pvt Ltd.'. It will retain its broadband business in the parent company.

Similarly, DEN Networks Limited provides Cable TV while Skynet - a separate company, fully owned by DEN operates the broadband business.


LEASING FIBRE

There are various other business synergies that can be shared between a cable TV network and an ISP.

Cable TV networks lay multicore optical fibre throughout their area of operation. Typically, there are several dark fibres within the fibre bundle. These could be very profitably leased out or sold for data or internet connectivity for example, between two office locations of a company within the same town.

The cable TV network will have to transfer the dark fibre to the broadband company (which also could be owned by the cable TV company). The ISP license holder can lease out this fibre to a data customer.

Using its skills in laying optical fibre gained through cable TV operations, the ISP company could also undertake, on a contract basis, laying a fresh fibre to provide point-to-point data connectivity to commercial establishments/companies within the town. According to current law, only an ISP license holder is permitted to lay and/or lease data cables/fibres.

Clearly, an ISP license opens up multiple commercial opportunities.


Laying / Leasing Data Cables / Fibre requires An ISP License



FACILITATING BROADBAND VIA CABLE

MSOs have highlighted the ISP AGR issue with the Government pointing out that it is a major impediment for delivering broadband via existing cable operators and networks.

For the past several years, the TRAI has been promising to resolve this matter with the DoT. In fact, the current TRAI Chairman has said that it is a priority for TRAI to facilitate broadband delivery to almost 100 million existing cable TV homes.

Let us hope for some positive response from the government that will facilitate and encourage Cable TV networks to offer broadband also to the 100 million Indian homes that they already service.