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Monday, March 01, 2021

Risk of duopoly in telecom, ‘survival’ in interest of competition: CCI study

The CCI said high costs of spectrum acquisition, and the demands of network upgradation had increased the industry debt burden.

By: ENS Economic Bureau | New Delhi |
January 26, 2021 12:49:03 am
Antitrust body to interact with industry, govt officials on Feb 5.

Underscoring that the moniker of being the “lowest priced telecom market in the world” for India is not without a tradeoff, the Competition Commission of India (CCI) said any exit from the country’s telecom sector would mean a virtual duopoly and that “survival” was in the long-term interest of competition.

In a report on key findings and observations of a market study on India’s telecom sector, the antitrust body has alluded to the fact that at least two key moves by the Telecom Regulatory Authority of India (Trai) — the 2018 decision on defining a significant market power (SMP) and the 2017 downward revision of mobile termination charges — shaped the competitive landscape of the industry after the launch of Jio in 2016.

Firstly, the CCI has pointed out that Reliance Jio’s pricing strategy did not merit regulatory attention, given that the ex-ante competition analysis — the one based on forecasts rather than actual results — by Trai is based on the definition of a significant market power, and that only an entity with SMP can engage in conduct that is anti-competitive. “A new entrant with no presence in the relevant market is thus at once precluded from such conduct. Reliance’s entry into telecom through Jio did not merit regulatory attention despite its discounted pricing strategy. Based on Trai’s definition of SMP, Jio did not qualify as an entity with SMP and by definition ‘predatory’,” it noted.

Reliance Jio launched services in September 2016 offering free voice services and rock-bottom data tariffs. This led to the incumbent operators at the time responding to the tariff decline by matching the new tariffs, wherein voice, which accounted for 70 per cent of their revenues becoming free, and data prices falling by approximately 85 per cent. “The sharp decline in prices led to several exits, and industry revenue in 2018-19 amounted to nearly the same as the revenue from almost a decade ago,” the CCI report said.
The CCI said while overall welfare implications of such “price shocks” were hard to judge, it was certain that weakened competition will delay access to new technologies such as 5G. It has said creating a competitive market for 5G will be crucial to its success, and that a weak sector will dull the incentives to innovate and compete.

The observations made by CCI are based on a market study conducted by the Indian Council for Research on International Economic Relations (ICRIER), which is learnt to have submitted its report in May 2020. The CCI will interact with telecom industry and government officials on competition issues in the telecom sector based on the ICRIER report on February 5.

Secondly, the 2017 decision by the telecom sector watchdog to slash the mobile termination charges from 14 paise per minute to 6 paise per minute also “adversely impacted the competitive position of incumbent operators”. For every call that is made, the calling company used to pay the recipient network a mobile termination charge, or an interconnect usage charge (IUC). In September 2017, when the decision was announced, a roadmap was also laid down of completely doing away with the charge by January 1, 2020. The scrapping of the charge was then delayed and has been implemented effective January 1, 2021. Given that traffic had skewed as a result of Jio’s free offerings with the incumbents getting high volumes of incoming calls, the cut in IUC severely affected a potential revenue stream of the established players.

On the consolidation in the telecom sector post the 2016 start of tariff declines, the competition regulator has said that to lower costs and improve survival, smaller players were acquired, while big operators like Vodafone India and Idea Cellular merged. “The prevailing market structure validates the empirical finding expressed as the rule of three, which predicts that mature markets normally support three main competitors, others who survive, are limited to the fringes or a niche. The three major private sector operators, namely Jio, Airtel and Vodafone-Idea own almost 88.4 per cent of the market,” it said.

The CCI also said high costs of spectrum acquisition, and the demands of network upgradation had increased the industry debt burden. Technological disruption and tariff competition “triggered by the entry of Reliance Jio jointly aggravated the financial distress reflected in the unprecedented decline in revenue of the industry through the years 2017 and 2019”.

In an earlier interview, CCI Chairman Ashok Kumar Gupta told this newspaper that telecom is a sector that requires large investments, with the players being there for the long haul, and that “exit by certain players is as much an indicator of competition as entry”. Going ahead, CCI predicts in the market study report that in addition to price-based competition, non-tariff based differentiators like quality of services, bundled offerings will be the focus areas for service providers to improve customer retention. However, it also said bundling in form of strategic partnerships between telecom operators and content providers, e-commerce platforms, digital payment platforms, etc is designed to create “dependency”. The report cited the examples of Jio’s investments in various media companies and the investments into it from tech giants like Google and Facebook, apart from Airtel’s potential to vertically integrate illustrated by its presence across all communications technologies.

“The stakeholders in India do not yet perceive vertical integration as a threat to competition. However, cross-country examples do suggest a need for deeper scrutiny,” the CCI noted.

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