While Internet rates are slated to drop further in the coming months, telephone tariff is on the rise going by the recent recommendations of the Telecom Regulatory Authority of India (TRAI). In four months, the average Internet rate (for the 500-hour dial-up account) has decreased from Rs 9,950 to Rs 8,050 or from around Rs 20 per hour to Rs 16 per hour.

On the other hand, telephone rates work out to Rs 18 per hour even under the existing tariff framework (for calls above the 2000 mark -- Rs 1.40 per call plus five per cent service charge). "Most net users fall in this category," says Prakash Arya of Dishnet Limited. Based on this data, Arya says the company is willing to provide Internet for free if DoTshares 50 per cent of its revenue obtained from Dishnet subscribers. "This is a little lower than what we are charging our subscribers. Instead of Rs 11.50, we will be getting Rs 9 per hour," he points out.

Internet rates have traditionally been much higher than telephony rates in India. So users rarely factor telephony charges while opting for an Internet account, agrees a senior official at Global Electronic Commerce Services, a nationwide ISP licensee. However, this may no longer hold good as local call costs become a major component in the cost of Internet.

The Mahanagar Telephone Nigam Limited (MTNL) realised the importance of low telephony rates for Internet early on. MTNL CMD S Rajagopalan had announced that its subscribers would not be billed for the phone units used up for surfing. However, under pressure from other players the public-sector undertaking had to retract and launch Internet services without this concession.

"In Hong Kong, local dial-up is free. Users pay only for Internet," says aVSNL official. The ISP buys capacity in bulk at discounted rates from carriers and gives it free to subscribers. In fact, feels the official, this (bulk-buying) could have been one of areas which the TRAI or the new telecom policy could have addressed.

The gap between telephony and Internet rates will only widen in the coming months. Videsh Sanchar Nigam Limited chief Amitabh Kumar has stated that by the year end the market would offer free Internet access. Another industry observer feels a more realistic estimate would be to peg it 10 per cent to 15 per cent below existing rates. Either way, market dynamics in the volume-sensitive ISP business dictates rates will only slide.

This has been the pattern in the US and other advanced countries where most net users are concentrated. Companies like British Telecom are offering net access for free. Because, in the Internet game, a company is judged not by profits alone but by the number of subscribers it boasts of. The success of Amazon.com and Drugstore.com onthe bourses are evidence of this.