Ideas for PPP Business ModelsFor

RailTel Corporation of India Ltd.

K Manohar Raja

GM/SBC

Contents

FOREWORD.................................................................................................................................................3

1. Broadband through PPP is important for RailTel.....................................................................................3

Why is broadband through PPP important to RailTel?............................................................................3

Which Model will strengthen RailTel?.....................................................................................................3

2. Railtel strengths.......................................................................................................................................3

3. PPP Models..............................................................................................................................................3

3.1. RailWire............................................................................................................................................3

3.2. Content Delivery Networks...............................................................................................................3

3.2.1 Concept.......................................................................................................................................3

3.2.2 Statements and Evidence...........................................................................................................3

3.3.3 Beneficiaries of a Pan-India CDN.................................................................................................3

4. Business Summary...................................................................................................................................3

FOREWORD

In an interesting article forwarded by a RailTel colleague, it was surprising to note that Nokia

sells the highest number of cameras and not Sony, Canon or Nikon. Bharti is the biggest player

in the music business in India and not HMV or Sarigama. Apple, a computer firm suddenly

became a force in audio (I-pod) and mobile (I-phone) industry. In any industry vertical exposed

to market forces, organizations have to strive to maintain their core competence, evolve and

adapt to newer environments as others encroach into their core areas; more so in technology

companies. RailTel’s business domain of Telecom, being one of the most competitive business

verticals in the industry where market forces and technology advancements change equations

in very short time, RailTel has to secure its core competence and constantly evolve to take on

the market.

1. Broadband through PPP is important for RailTel

Why is broadband through PPP important to RailTel?India ranks 129th as per the ICT Development Index (IDI) for Internet access in the ITU (International Telecommunication Union) list of 154 Countries. Although India currently has about 8 million broadband homes, the broadband penetration is far less when compared to other developing economies. Studies conducted by World Bank indicate that 10% improvement in broadband penetration would increase the GDP by 1.38% - and this impact is likely to be higher in developing economies like India.

The Department of Telecommunication (DoT) hopes to move from a modest 8 million to optimistic 250 million broadband connections by the end of 2012. Although difficult, the figure could be hopefully attained by early 2015. Assuming an ARPU of Rs320, The market size is an annual business of Rs96000 Crores. However, experts peg the ARPU at a much higher level with anticipation of revenues from value added services. With its wide reach, if RailTel targets a 10% market share, the annual business would be Rs 9600crores or better.

Understanding the impact of broadband on economic growth, most countries have spent / planned substantial spending to improve their penetration and quality of broadband services. Being a PSU, we could stake a claim to the USO funds if we have viable plans.

Retail service is a huge challenge in terms of technology, investment and brand building. Given the enormous scale of the challenge, the PPP model for broadband penetration offers an opportunity for RailTel to leverage its strength and overcome its weaknesses by choosing partnerships that reinforce RailTel’s commitment to achieve better broadband penetration and the value we can bring to public investment.

Which Model will strengthen RailTel?Opportunities for a public-private partnership lie on a continuum where the public sector can play a micro role, a minor role or a major role. The degree of control and public good required is essentially a political choice. However, if this was a debate in 2000, it might have been appropriate for Railways to give away dark fiber for a percentage on the gross revenue. Networks could have been built faster, fiber utilization would have been good and return on public investment would have been decent.

Today, all major Telco’s have considerable fiber plant in place already, connecting all the lucrative markets. Since a commercial entity like RailTel has been incorporated and is performing creditably in the last 10 years, we should consider models which will strengthen RailTel and also achieve the national goal of better broadband penetration.

Optical Fiber

IP MPLS

NGN Broad band Services

VAS Cloud Computing

SDH

Current Business position

Max ProfitMax Value

en

While the PPP models can help RailTel scale the formidable challenges of investment, organizational flexibility and complexity of technology, it will be in RailTel’s interest to look at models which accentuate RailTel’s strengths and help RailTel move up the value chain so that we remain a profitable company along with meeting our public goals.

2. RailTel Strengths To determine which model is appropriate we need to have consensus on our strengths:

RailTel can create and maintain abundant inter city band width

In the last decade RailTel has done well for shelf and solved the challenges in transmission technologies of SDH and DWDM which has helped us to create abundant bandwidth in our network.

While this was our USP a few years ago, it is not anymore. More networks are getting lit and increased sharing of infrastructure among Telco’s are a major reason. We need to note the fact that nearly 90% of our business is only intra-circle.

4,000 PoPs across the length and breadth of the country

While other telcos have built networks of comparable size they do not have PoPs spread out geographically like RailTel and this is one area where RailTel will retain its strength for sometime and Telcos will be keen to participate in the PPP model currently envisaged by CO for this reach.

Being a PSU, RailTel can lay stake to USO funds and other Govt initiated broad band projects if we have a credible plan.

USA, Australia, Korea and several modern economies have seen enormous government spends to increase broadband penetration as they have realized the positive effect it has on the GDP and e-governance. Currently, only BSNL is positioned to receive these funds.

Highly recognizable brand name known for reliable service with consumers as well as partners in India.

RailTel has not taken advantage of this attribute at all. The RailWire model attempts to do this.

3. PPP Models With the twin goals of increasing broad band penetration and improving the business potential of RailTel, the following two PPP models are proposed which seek to leverage RailTel’s strengths and move us up the value chain:

1. RailWire Retail Broadband

2. Content Delivery Networks

3.1. RailWire

The trials of retail broadband service has been on in Whitefield, Bangalore for nearly 2 years now and presently we have about 2500 customers in a competitive environment. The proposal has been discussed with RailTel Top Management several times and hence only the gist is mentioned here.

RailWire seeks to leverage the world-class managed services expertise available in Indian software companies and also leverage the 85 million cable homes which have the capacity to turn into high performance broadband access networks by tweaking the Coax cable or using Cat 5 or OFC cable. Even if 10% of the cable homes are wired, then broad band penetration in India will double. By taking away the technology complexity and giving a recognizable Govt brand name, local cable operators will be able to retain their cable customers by increasing the bouquet of services to the customer. This simple yet highly scalable PPP model will dramatically increase RailTel’s top and bottom line and also help broadband penetration in a rapid manner. Subject of RailWire has been discussed several times in RailTel and analyzed and vetted by Finance. The latest proposal vetted by Finance is embedded hereunder--

C:\Documents and Settings\AGMRCIL\My Documents\Final railwire\ppp\RailWire_Report__(Whole, IBW).xls

3.2. Content Delivery Networks

3.2.1 Concept Content Delivery Networks are a network of caching servers designed to optimally deliver content by running sophisticated algorithms. For instance, when there is a 10 Gbps network backbone and 100Gbps central server capacity only 10Gbps can be delivered, but when 10 servers are moved to 10 edge locations total capacity can be 10*10 (100 Gbps).

The idea of CDN as a multiplier for broadband penetration and the business case for RailTel is presented in the rest of this paper.

Basic CDN Architecture

3.2.2 Why CDN makes a good business case for RailTel…The idea is not straight forward and has been missed even in the Broadband Consultation Paper released by TRAI in June this year. To convey the concept, the following set of statements are made and evidence provided to validate the statements and in the process the role of an India facing CDN as a multiplier for broadband will become evident.

1. Content made for Indian audience is mostly hosted outside India. This ‘has led to high international bandwidth cost for Indian ISPs which in turn has led to high Internet prices for Indian customers. High Internet prices have caused low penetration levels and thus low profitability of Indian portals.

In a survey, of the top 500 web sites served in India, only 150 are India-focused and the remaining 350 are international. Greater than 90% of the 150 India-focused web sites are hosted abroad. Portals have chosen to host abroad where prices are cheap at the cost of significant performance disadvantage which leads to lower revenue prospects. The three main issues which lead to this vicious circle in India are—

(i) High hosting prices

Indian Data Centers charge Rs.5.50 per GB per month while their U.s. counterparts charge Rs.0.14 per GB per month..

(ii) Less Local Delivery

As most of the content is hosted overseas, this overburdens Indian ISPs that have to pay for high international bandwidth plus NLD cost.

(iii) High broad band prices

This has led to low Internet penetration and less demand for high bandwidth content and application.

If the current eco system continues, increase in Internet utilization of consumers will lead to higher international bandwidth usage leading to continued high broad band prices. These factors will in turn lead to continued low Internet penetration levels and increasing Forex outflow. Forex outflow in terms of hosting and IBW costs is estimated to be greater than $1.055 billion

Saving Forex for India

By delivering ‘Indian origin’ content locally a CDN can significantly saves Forex outflows.

By delivering international content for Indian audience locally, a CDN can lead to Forex inflow.

The net changes in FOREX flows (Indian origin + international content) can be up to $ 5 Billion.

2 TRAI has over simplified the Internet performance issues by stipulating the contention ratio of 1: 50. The Internet experience in India is seriously affected by “ middle mile issues”

Sometime ago, the biggest hurdle in Internet was the last mile. But today research has indicated that the biggest bottleneck in achieving performance, reliability and scalability for commercial grade web application is the ‘middle mile’. In Internet parlance ‘first mile’ is the origin server infrastructure and fair amount of development in achieving good first mile performance has been achieved as it is within the application architect’s control. Last mile refers to the Access Network and with a slew of technologies developed in the last decade; this problem is considered solved at least in the western countries and even in India where the number of dial-up users is quite insignificant and improved performance of newer DSL connections.

The middle mile refers to the nebulous and heterogeneous networks between the origin server and access network of the end user. The middle mile injects latency bottlenecks, throughput constraints, reliability problems to the web application performance.

Like everything else, the Internet also is shaped by market economics. Money flows into the Internet from the first and last miles as companies pay for hosting and end users pay for access. Both these sections have grown tremendously in the last decade, while on the other hand there is very little economic incentive in the middle mile which is made up of peering and transit points where the networks trade traffic. As we have observed, in the case of NIXI, Telco’s want to minimize traffic coming into their networks that do not get paid for. As a result, peering points are often overburdened causing packet loss and service degradation.

Other issues which plague the middle mile include trans-oceanic cable cuts, power outages and DDOS attacks and challenges in managing vulnerability issues of BGP routing and most importantly, the inherent throughput limitation in TCP Protocol. It was noticed in some of our Railwire experiments where customers where ready to pay for 8 Mbps bandwidth; the actual Internet performance did not match the expectation even though we could establish a clear 8 Mbps connection up to the gateway. The reason is most of the content lies outside India mostly in the U.S. and TCP over 10,000 mile optic fiber cannot deliver more than about 270 Kbps throughput(in ideal conditions) . In this scenario the media rich applications which are popular globally will result in continued poor performance in our country

While the general problems in the middle mile is affecting Internet experience as a whole throughout the world, India is particularly badly affected as content hosting is mostly in the U.S. unlike that of China and compounded by the peculiar nature of Internet gateway business in India.

A statistical comparison between India and Chain’s broadband penetration is below

India significantly lags China in Penetration.

While e-commerce contributes to more than 1.5% of China’s GDP, India experiences Net FOREX outflow caused by overseas content hosting.

© 2010 Confidential

The Indian Internet ecosystem model is unsustainable in the long run and needs significant overhauling

3 Current market scenario is encouraging major players to benefit from this situation and hence there is tendency to maintain status quo.

All the major private Telecom players like Bharti, Tata and Reliance own gateways and undersea cable with only a fraction of their capacity utilized. Since they provide overseas Internet traffic going through the gateway, no initiatives have been taken for local peering and content delivery even though it presents an opportunity. Having invested considerably in creating International Gateways and shared ownership in submarine cable systems their business interest lies in consumption of international bandwidth in India.

4 With initiatives by the govt like NKN, Sakshat Portal, NPTEL, SWAN etc India requires an India facing CDN to enhance user experience.

NKN and other MHRD initiatives aiming to use technology to enhance learning is resulting in a lot of local content getting created. While NKN has is creating the network it has missed out on the CDN which presents an opportunity for RailTel. Even the flagship NPTEL content is ironically hosted on Youtube as there is no other content dissemination service in India.

Another reason that CDN is very important to India is the proven fact that lower the development level or education level of a country then the higher BW applications like video tend to be more popular.

5 Internet is going to be increasingly media rich with Video growing exponentially on the Internet and “middle mile” issues will hamper the Internet experience in India.

The fig below indicates the projected popularity and usage of applications on the Internet from a developed nation perspective. Since India is generally two years

For Government Significant Foreign Exchange saving, leading to improved GDPIncrease in Internet penetration across IndiaImproving sustainability of Internet ecosystem

behind in adoption of technology and services on the Internet we should anticipate an explosion of media rich applications in the next few years where CDN can play a big role in enhancing the user experience.

6 Cloud computing is poised to take off in the next few years bringing with it considerable economies of scale but a CDN based application acceleration is a must for low latency applications.

Cloud computing applications are latency dependent and require high throughput. According to Industry watchers cloud will proliferate in the next few years and touted as the next biggest thing in IT bringing with it economies of scale and cost efficiencies of 70 to 80%. However this market will need web acceleration platforms for achieving the penetration levels required for monetizing the market. These services can only be delivered through a pan-India CDN.

3.3.3 Beneficiaries of a Pan-India CDN

There are five key stakeholders in the Internet value network: Consumer, Government, ISP, IDCs and Content providers/Portals.

A Pan-Indian CDN will benefit all of these key stakeholders in the following manner:

For India Internet Consumer Cheaper Internet pricesExcellent web experienceAccess to high bandwidth applications

For Internet Service Provider Reduced international bandwidth costIncrease in profitabilityGrowth in Indian market size

For Internet Data Center Increase in proximity to customersGrowth in Indian market sizeIncrease in high bandwidth applications

For Content Provider / Portal Increase in consumer satisfactionIncrease in revenue generation opportunityIncrease in competitiveness to international portals

For RailTel, CDN is a natural value-add as CDN requires mini-datacenters for which the Railways have land with Power supply and huge bandwidth. RailTel has the required bandwidth for the CDN which could start at 1 GB minimum and would need upwards of multiple10 GB’s as the growth increases. If we can take the proposal of CDN to the ministry we could raise funding from USO fund as the CDN will be a multiplier for broad band penetration as illustrated above.

Though the CDN revenue streams and use cases are many, business model focusing only on the two main use-cases is worked out in the embedded Excel sheet of the business model and the summary of the business projection is depicted below.

4. Business Summary

2011 - 2012 2012 - 2013 2013 - 2014 2014 - 2015 2015 - 2016Cumulative Cost (Rs. Cr.) 279 878 2,155 3,898 6,023

RailTel CumulativeRevenue (Rs. Cr.) 359 1,183 3,146 5,982 9,552

CDN Financial Model

-

2,000

4,000

6,000

8,000

10,000

12,000

2011 -2012

2012 -2013

2013 -2014

2014 -2015

2015 -2016

Cumulative Cost (Rs. Cr.)

RailTel CumulativeRevenue (Rs. Cr.)

C:\Documents and Settings\AGMRCIL\My Documents\Final railwire\ppp\Oct11th CDN Financial model (2).xls

Conclusion:

Earlier in an interview to NDTV, Mr Sam Pitroda has said that content should be brought closer to the users for a richer internet experience. CDN is the best way to do it and support future media rich applications as well. Since the technology for CDN is complex not a commodity, it is an ideal case for PPP. If RailTel is first off the block then we can garner all the govt business and prevent other CDN’s being built on Govt expense. For RailTel, it is presents a clear and present business opportunity as our traditional business is shrinking.

Even though it was not planned as such, RailWire delivering CDN services will have a huge advantage over other broadband services and together RailTel will be able to transform the broadband scenario in India.