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Dominance in the telecom sector can sometimes mean accommodating opponents, cushioning their fall

If the SC judgment sticks, competition will remain debilitated. Moreover, the demands that governments make of the telecom sector could be an enormous burden for Jio alone. Sometimes, to win the war one has to lose the battle. This is a battle well worth losing for Jio.

Written by Rajat Kathuria | Updated: January 18, 2020 12:24:29 pm
The fact that the identity of powerful incumbents has changed in telecom markets across the world, including in India (Representational image)

Introduction or maintenance of competition, especially in the presence of a powerful incumbent, places extra responsibility in the hands of an independent regulator. It’s a hard examination from which few regulators come out publicly unscathed, even if they are sincere in their decision making. Allegations fly thick and fast and it is difficult to unpick the truth under such circumstances. The boundary between fake and real becomes increasingly blurred. Ask Justice R S Sodhi, the first chairperson of the Telecom Regulatory Authority of India (TRAI) or Pradip Baijal, the third. Finding persons who will not toe the political line or succumb to private interests is a bit like a lottery. Incumbents, on the other hand, are much more predictable in their conduct no matter what their identity.

Old habits die hard. Firms exist for themselves first, and then for their shareholders — consumers are collateral benefit at best. Any opportunity to profit will be exploited unless there are restraints in place that limit the maximisation of self-interest. Having said that, we recognise that the private sector is not a charitable enterprise, just like it ought not to be a profiteering one. The challenge for regulators is to align all three interests — those of the principal (owner/shareholder), the agent (managers) and the consumers. It’s a hard, if not impossible, act to achieve all three simultaneously. To those familiar with a celebrated macroeconomics postulate — the impossible trinity — in which it is not possible to attain independent monetary policy, openness to capital flows and fixed exchange rate simultaneously, it could very well be a counterpart for regulatory discipline.

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The difficulty to achieve a balance doesn’t mean that we should allow incumbents to get away with overt and, more importantly, stealthy dominance. Joseph Schumpeter’s abiding insight is that capitalism’s spirit of creative destruction will ensure that innovation by start-ups or by smaller firms will keep the incumbents honest. Indeed, uneasy is the head that wears the incumbent’s crown, especially in markets that are technology-inspired such as telecom. The fact that the identity of powerful incumbents has changed in telecom markets across the world, including in India, gives weight to Schumpeter’s insight that markets have an inherent and unpredictable tendency to correct themselves.

I doubt if anyone disagrees with this premise, but the question crucially relevant for policy-makers is the speed of that adjustment. How soon will markets adjust? Joseph Stiglitz has argued that contrary to the Chicago view, market failures are so pervasive that these could be the norm and may take really long to correct themselves. Even in markets that are technology intensive. Moreover, and crucially from the point of view of regulation, powerful incumbents always impede the process of resolution. Who can forget IBM, Microsoft, Intel and Alphabet simply nipping competition in the bud through the outright purchase of upstarts. Besides, incumbents use all manner of strategies to thwart competition because, after all, as somebody with a great sense of foreboding said “nobody likes competition”, especially from close quarters.

Circa mid-1980s, telecom had ceased to be viewed as a natural monopoly — a situation where the market can be efficiently served by just one firm. In the late 1990s, India too embraced telecom reform and invited the private sector to provide fillip to a failing market. BSNL and its predecessor, the department of telecommunications (DoT), and their counterpart in Mumbai and Delhi, Mahanagar Telephone Nigam Limited (MTNL), did not like the new competition. They subverted competition and squeezed new entrants. Privately they felt new entry was meant only as a complement to public sector enterprise and not to compete with it. Publicly, they forced private players to carry inter-operator traffic through their network rather than among themselves. Therefore, traffic from one private network to another private network had to be routed through DoT and MTNL at exorbitant rates. Further, fixedline to mobile tariffs were made 24 times more expensive than fixed to fixed calls because 99 per cent of the latter network was owned by DoT and MTNL.

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Having experienced discrimination at the hands of the public sector, private sector entrants that survived were not destined to remain small. They came with better managerial and technical expertise. Although some perished along the way, the ones who survived grew in size and stature to rule the telecom roost for several years, until they were unseated by a combination of fresh entry, technological disruption and regulatory forbearance. But while they ruled, Airtel, Vodafone and Idea did what incumbents do — they influenced the regulator, cartelised tariffs, acted as “gatekeepers” for subscribers for start-ups, and in general kept prices above what they would have been with effective competition.

Indeed, in September 2016, when Jio disrupted the telecom market with aggressive pricing, data prices plummeted by 85 per cent and set off a war. In the three years since Jio has been around, its market share by value has gone from zero to 41 per cent in value terms. No one can question the fact that Jio is the new incumbent. One might be tempted to add that even in 2016, it was far from being the hapless new entrant deserving accommodation in a market beset by regulatory and technology disruption. Overall, telecom access revenues are down 33 per cent from roughly Rs 1.5 lakh crore in 2015-16 to about Rs 1 lakh crore in 2018-19 and debt has swelled. Roughly 88 per cent of the total debt of the telecom sector, which stands at above Rs 8 lakh crore, is due to Vodafone & Idea and Airtel, while Jio’s debt is less than 8 per cent.

Given this background, Jio’s strategy to accommodate the recent tariff hike by Airtel and Vodafone, to raise its own tariffs might come as a surprise to some. By not following the price hike, Jio could have dealt a killer blow and triggered a further exit of firms struggling under the burden of debt. But it chose to raise and give a lease of life to the battling industry. It is another matter that exits might still happen due to the Supreme Court’s refusal to give relief to telecom companies on their licence fee liabilities to the government. Vodafone’s obligation is upwards of Rs 50,000 crore while Airtel owes over Rs 35,000 crore. Jio’s dues are Rs 60 crore.

Why did Jio, alleged to have engaged in predatory pricing not so long ago, agree to raise tariffs? It might partly be related to its own sustainability since the low tariffs had become impossible to sustain and in part, it might have anticipated the result of the telcos’ appeal in the highest court. We also feel Jio is better off with enfeebled competition than with no competition at all for it helps dodge the regulatory glare that monopoly attracts. If the SC judgment sticks, competition will remain debilitated. Moreover, the demands that governments make of the telecom sector could be an enormous burden for Jio alone. Sometimes, to win the war one has to lose the battle. This is a battle well worth losing for Jio.

This article first appeared in the print edition on January 18, 2020 under the title ‘A battle worth losing’. Kathuria is director & chief executive, ICRIER. Views are personal

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