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The Telecom Regulatory Authority of India (TRAI) has announced a cut in domestic bandwidth (domestic leased circuit) rates by up to 70 per cent, effective May 1, 2005. The new ceiling tariff has been revised for the first time since 1999.

The move comes even while TRAI's earlier order, reducing international bandwidth prices, has been set aside by the TDSAT following protests by Videsh Sanchar Nigam Limited (VSNL). VSNL had questioned TRAI's authority in fixing international bandwidth prices.

Nevertheless, it is good news for operators using domestic bandwidth. A conduit for voice and data services, this is a key input for ISPs, the IT and IT-enabled services industry, and enterprises. The reduction in domestic bandwidth prices is expected to reduce costs and perhaps translate into lower prices for end-users.

The reduction forms the 36th Amendment to the Telecommunication Tariff Order, and is the result of a consultative process initiated in 2004. Under this, TRAI has revised the ceiling tariffs for the most commonly used capacities/speed –­ 64 kbps, 128 kbps, 256 kbps, E1 (speed of 2 Mbps), DS-3 (speed of 45 Mbps) and STM-1 (speed of 155 Mbps).

In the case of 64 kbps, 128 kbps and 256 kbps, there has been a reduction of 54 per cent in the ceiling tariff. The tariff for 64 kbps has been brought down from Rs 96,000 to Rs 44,000, for 128 kbps it has come down from Rs 172,000 to Rs 79,000 and for 256 kbps it has come down from Rs 297,000 to Rs 136,000.

The highest reduction, of 70 per cent, has been for STM-1, for which the rate has been brought down from Rs 138.6 million to Rs 16.5 million. This is followed by a 67 per cent reduction in DS-3 leased lines, from Rs 46.2 million to Rs 6.2 million. The smallest reduction has taken place in E1 leased lines, from Rs 2.2 million to Rs 850,000. These are ceiling tariffs, and operators are free to offer rates that are lower than those fixed by TRAI.

According to TRAI, it was forced to lower the ceilings in order to ensure competition in the market. It felt that competition was not entirely effective in the provision of domestic leased circuits (DLCs) despite the increase in the number of players. In fact, the few reductions that have taken place have been restricted to selected routes and in selected capacities.

Also, despite the technological advances that have sharply reduced the unit cost of long haul bandwidth, TRAI believes there has not been a corresponding reduction in the cost of providing such services.

TRAI sees this move as an effort to help reduce costs for users of domestic bandwidth. It states: "Competitively priced DLC service is fundamental to achieve a higher rate of broadband penetration in the country." Broadband, it believes, is an important tool to bridge the digital divide.

In fact, TRAI hopes that with increased competition in domestic bandwidth prices, the segment will witness a growth similar to that in mobile telephony when tariffs fell. Lower prices will stimulate demand and increase capacity utilisation. This will lead to a win-win situation for consumers as well as service providers.

However, its sentiment is not entirely supported by suppliers of domestic bandwidth. Usually, basic and unified service providers, national long distance operators and Category-II infrastructure service providers offer such services. This lobby does not fully back the move. Bharat Sanchar Nigam Limited (BSNL), for one, which could have been adversely affected, had asked TRAI for a revision in the 54 per cent tariff reduction in 64 kbps bandwidth. BSNL is the sole provider of 64 kbps leased lines in the country and it reportedly feels this ceiling is below cost and may force it to discontinue service.

Although the company did not have any objections to tariff reductions for other speeds, it claimed that no other operator provides 64 kbps lines as they are not profitable. With the new tariffs, these would have become even less viable. BSNL was weighing its options of going to TDSAT on this issue. TRAI has since then agreed to look into the matter, and revise the ceiling.

Although TRAI has agreed to revise the 64 kbps bandwidth ceiling, it has not agreed to do so for other capacities. It believes that since the domestic leased line business of different operators varies from 0.5 to 2 per cent of their present turnover, any shortterm reduction in revenues will not impact their business. It believes that the reduced profit margins, if any, in the short term will be more than made up for in the medium term by increasing volumes.

At the end of the day, an increase in demand for broadband services will depend on the extent to which the reduction in costs is passed on to end-users. Only then will there be a real boost in demand.