VSNL's relationship with international bandwidth suppliers and a large customer base, which was a result of it being under the government of India earlier, is a cause of worry to Chennai-based Internet service provider Sify.

This competitive issue may even prevent Sify from attracting and retaining subscribers and generating advertising revenue, which could in turn result in loss of market share, price reductions, reduced margins or negative cash flow.

Sify also feels that factors like these may call for further modification of prices in response to new pricing models introduced by new and existing competition in the Internet services market.

In a recent filing to the US Securities and Exchange Commission, Sify said, "While VSNL was controlled by the government of India, it had a number of significant competitive advantages over our company, including direct access to network infrastructure and greater financial resources."

"VSNL leveraged these competitive advantages and its longer service history to develop relationships with international bandwidth suppliers to develop a large subscriber base."

In February 2002, the government of India sold a 25 per cent stake in VSNL to the Tata Group, reducing the government's ownership of VSNL to 26 per cent.

However, Sify feels this has not altered the relationship between VSNL and the Centre.

"The government of India maintains a substantial equity interest in VSNL and this relationship, combined with VSNL's relationships with international bandwidth suppliers and large customer base, continues to provide it with competitive advantages over our company. As a result of VSNL's competitive position, we believe that we will continue to face difficult market conditions in the Internet access services business," the company said.

With a significant number of competitors having entered the country's liberalised Internet service provider market, Sify also expects additional competitors to emerge in the near future.

As of February 28, 2003, approximately 395 companies had obtained Internet service provider licenses in India, including 65 companies which have obtained licenses to offer Internet service provider services throughout India.

"We expect the market for Internet access to remain extremely price competitive," the company stated.

On online portal, Sify has said that it is facing significant competition from well-established Indian content providers, including rediff.com, which completed its initial public offering in the United States in June 2000.

Sify feels that dominant Internet portals continue to be the online services and search engine companies based in the United States, such as America Online, Yahoo!, Microsoft Network and Lycos.

"These companies have been developing specially branded or co-branded products designed for audiences in specific markets. We expect that these companies will deploy services that are targeted at the Indian market," the company has said.

As of March 31, 2003, Sify owned and operated 55 points of presence serving more than 250 cities across India, representing an estimated 90 per cent of the installed personal computer base in India.

Points of presence are telecommunications facilities located in a particular market which allow our customers to connect to the Internet through a local telephone call.