TRAI's views on Predatory Pricing

TRAI in its recent Telecom Tariff Order (TTO) dated 16.2.2018 has sought to lay the grounds for ex ante determination of dominance and predatory pricing and in the process, linked it to the concept of Significant Market Power (SMP).

I had  in my earlier blog post titled 'CCI, TRAI and Regulation of Predatory Pricing'  written that,

the concepts of Significant Market Power in telecom regulation mostly apply to ex ante regulation of bottleneck facilities such as EU's erstwhile regulation of leased lines. This concept based on percentage of ownership of resources is simplistic and too crude to handle a complex issue such as predatory conduct / abuse of dominance.

It is generally understood that given the existence of a Competition Regulator namely, Competition Commission of India whose jurisdiction includes telecommunications, TRAI's role is ex ante facilitation of competition; CCI's role is ex ante as far as merger control/review is concerned but ex post as  regards anti-trust matters such as abuse of dominance including predatory pricing.

However, though in its consultation paper TRAI had quoted from EU law to state significantly that, market definitions for the ex ante regulation of the electronics communication sector would differ from markets defined in individual competition law cases as the purpose of the former is an overall assessment of the structure and functioning of the market under examination to determine whether or not to impose ex ante regulation, the Telecom Regulator has not perhaps appreciated the EU stance/international norm properly. 

In fact an EU working paper states that,

Under the Framework, the definition of relevant markets and the assessment of significant market power should be based on the same methodologies as under EU competition law. This ensures that it reflects the applicable jurisprudence of the Court of Justice of the European Union and the Commission Notice on the definition of relevant markets for the purposes of Community competition law ....When NRAs consistently apply established methodologies to define markets and assess significant market power, they contribute to ensuring regulatory predictability and limit regulatory intervention to cases of market failures identified by analytical tools......

........Similarly, the designation of an undertaking as having significant market power in a market identified for the purpose of ex ante regulation does not automatically imply that this undertaking is also dominant for the purpose of Article 102 of the Treaty or for the purpose of application of Council Regulation 139/2004 or similar national provisions. Moreover, a significant market power (SMP) designation has no direct bearing on whether that undertaking has also abused a dominant position under Article 102 of the Treaty. It merely implies that, within the scope of Article 14 of the Directive 2002/21/EC, from a structural perspective, and in the short to medium term, in the relevant market identified the operator has and will have, sufficient market power to behave to an appreciable extent independently of its competitors, customers, and ultimately consumers.....................................................In this respect, ex ante obligations imposed by NRAs on undertakings designated as having significant market power aim to remedy market failures identified and fulfil the specific objectives set out in the Framework. On the other hand EU competition law instruments serve to address and remove concerns in relation to illegal agreements, concerted practices or unilateral abusive behaviour which restrict or distort competition in the relevant market.

This paper also states that,

...The SMP Guidelines do not in any way restrict the rights conferred by EU law on individuals or undertakings. They are without prejudice to the application of EU law in general, and of competition rules more specifically, and to their interpretation by the Court of Justice of the European Union. The SMP Guidelines do not prejudice any action the Commission may take or any guidance the Commission may issue in the future with regard to the application of EU competition law.

This key aspect is ignored by TRAI when equating a primarily structural analysis in terms of ex ante definition of Significant Market Power ( to decide whether to impose tariff restrictions or open access requirements etc.) with a different concept of abuse of dominance (which is essentially an anti-competitive  'conduct') as a precondition to determine predatory behaviour which is internationally the subject matter of competition law and involves mostly ex post analysis by the competition regulator. There was really no need for TRAI to foray into the domain of  Competition Commission of India which is well equipped to deal with cases of predatory pricing. Certainly TRAI would not be in a better position than CCI to determine intent which is a complicated exercise.

Another  interesting aspect of this TTO is that of TRAI  dismissing without adequate explanation the other criteria of arriving at determination of SMP in a market,  namely, switching capacity and traffic volume. Thus if a Service Provider has the lion's share of switching capacity/infrastructure  and then proceeds to use predatory pricing to drive out its competitors and acquire their customers, this would not amount to predatory behaviour based on  ex ante measurement of dominance in terms of market share by subscribers/turnover.

Finally, it is again reiterated that determination of relevant market to establish dominance is far more nuanced than methodology laid down by TRAI based on market share and the present licensing regime. It would have been better if TRAI had consulted CCI on the matter and ultimately left predatory pricing to the latter.

CCI, TRAI and Regulation of Predatory Pricing

Recently there was a news item about a letter written by CCI to TRAI highlighting the role and expertise of CCI in post facto assessment of occurrence predatory pricing in any sector. This was in response to TRAI's consultation paper on Regulatory Principles of Tariff Assessment. 

This paper  seeks to address inter alia the issue of regulation of promotional offers and prevention of anti-competitive conduct in this regard.

TRAI's jurisdiction as regards telecom tariff is outlined in 

 Section 11(2) of the Chapter III of the Telecom Regulatory Authority of India Act, 1997 [that] lays down that: “(2) Notwithstanding anything contained in the Indian Telegraph Act, 1885 (13 of 1885), the Authority may, from time to time, by order, notify in the Official Gazette the rates at which the telecommunication services within India and outside India shall be provided under this Act including the rates at which messages shall be transmitted to any country outside India: Provided that the Authority may notify different rates for different persons or class of persons for similar telecommunication services and where different rates are fixed as aforesaid the Authority shall record the reason therefor.”

As brought out in the consultation paper,

 Currently, except for the tariffs for national roaming, fixed rural telephony and leased lines, tariffs for other telecommunication service are under forbearance

TRAI's recommendation (not binding on government) powers include inter alia measures to facilitate competition. 

The concepts of Significant Market Power in telecom regulation mostly apply to ex ante regulation of bottleneck facilities such as EU's erstwhile regulation of leased lines. This concept based on percentage of ownership of resources is simplistic and too crude to handle a complex issue such as predation / abuse of dominance.

It is generally understood that given the existence of a Competition Regulator namely, Competition Commission of India whose jurisdiction includes telecommunications, TRAI's role is ex ante facilitation of competition; CCI's role is ex ante as far as merger control/review is concerned but ex post as  regards anti-trust matters such as abuse of dominance including predatory pricing.

Yet the Consultation paper after quoting liberally from various sections of the Competition Act  including those relating to delineation of relevant markets and abuse of dominance, (inexplicably)  still seeks views of stakeholders on inter alia:

 What should be the different relevant markets – relevant product market & relevant geographic market – in telecom services? 

 How to define dominance in these relevant markets? Please suggest the criteria for determination of dominance.  

As someone who has several years of telecom policy experience and some degree of expertise in Competition law, I would agree with CCI's viewpoint that  definitions of product and geographic markets and post  facto analysis of abuse of dominance including predatory pricing are best left to CCI. The Competition regulator has sophisticated tools and relevant expertise at its disposal, as also ample experience in these matters. It would conduct analysis on a case by case basis. This would include an appropriately nuanced approach to delineation of markets rather than being tied down by rigid  definitions based on percentages and technologies which are not only too simplistic, crude and blunt, but easily rendered irrelevant and obsolete. 

A multiplicity of definitions and approaches could also create a real danger of forum shopping by service providers to avoid effective regulation of competition. In any case, the already beleaguered telecom sector in India could do with less ambiguity and more clarity and certainty on regulatory matters. 

Cheap Smartphones & the Broadband Ecosystem

The Economic Times today carries an article about Government panning sub $100 smartphones to boost broadband penetration. As per TRAI, India has about 15 million broadband subscribers and about 143 million access internet through wireless.Clearly with  negligible wire lines in access, last mile connectivity in India will be wireless and mobile devices are therefore critical to broadband access.

It is reported that a telecom official stated that, 

"A fully-functional smartphone is no longer an object of desire but an instrument of empowerment ," the official said. He added that since smartphone affordability remains the biggest hurdle to broadband penetration in India, the world's second largest mobile phone market, the government is exploring ways to encourage the biggest handset makers to produce sub- $100 advanced smartphones on a large scale that will come pre-loaded with the latest entertainment applications and also support mobile banking, telemedicine, education to even farming applications like e-krishi."

One viewpoint is that affordability of smart phones is a key driver of broadband penetration.

 "This, mainly since the average global price of such devices continued to hover around $130 (Rs 7,800), the main reason why barely 5% of the Indian population has till date upgraded to genuine smartphones despite the country's 70 %-plus telecom penetration levels.."

 In my view affordability of devices is a necessary but not sufficient condition for universalizing broadband access especially for rural India which has negligible broadband penetration. On the supply side, we also need good quality and affordable  connectivity (absent even in urban areas at present) and on the demand side we need locally relevant content in vernacular languages as well universal accessibility to cater to needs of disabled, illiterate and aged populations. As readers may recall, I has commented earlier on news about a probability of USOF India subsidizing mobile devices for rural poor. My views on this subject may also be seen in previous posts on Broadband Ecosystem

Need for Innovative Regulation-Indian Telecom Sector

On the occasion of the Confederation of Indian Industries National Telecom Summit 2013, The Hon'ble Minister of Communications & IT, the Chief of the Telecom Regulatory Authority of India and the Telecom Secretary have all highlighted important elements of the way forward to achieve the goals of universal digital inclusion and to boost the health of the flagging telecom sector in India. 

I am focusing more on the issues affecting the Market efficiency Gap in this blog post.

The need to concentrate of local R&D and design capabilities in manufacturing, the need to improve regulatory certainty including issues like M&A and spectrum and unified licensing were highlighted.  

The TRAI chief  stressed  "on  the critical need to use telecom infrastructure for public service in the fields of disaster management, financial inclusion and digital transactions, in the long term." (source: http://www.ciol.com/ciol/news/192836/government-committed-boost-telecom-sector)

Most importantly the telecom secretary stated that, "[i]nnovation in regulation is also important though legacy issues are there,..... there were complex legacy issues involved in order to fix unpredictability and ambiguity in the regulatory regime." (source: http://www.ciol.com/ciol/news/192860/innovation-regulation-farooqui)

In my view, taking stock of past mistakes, resolving legacy issues and creating a simple but  clearly refined regulatory framework for telecommunications can go a long way to rectify past problems and create a conducive environment for growth of Indian Telecommunications. Please see my earlier posts on Telecom Regulation.

Of course the legal framework of the  telecommunications sector is a part of the overall legal/regulatory framework of the economy which too needs looking at. One of these areas lies in the realm of competition policy. An overarching competition policy framework would prevent many a poor policy /programme from being accepted and would strengthen the ability of regulators and policy makers to make economically wiser decisions. I have written about this is an article titled "Airwaves, Incumbents and Good Governance - The Urgent Need for a Robust Competition Policy Framework" Also, please see my previous posts on Competition.

Continuously Declining Wire Lines in India

Telecom Regulatory Authority of India's latest Performance Indicators Report (January-March 2013) indicates that the wire line teledensity of the country has further declined from 2.52% to 2.47%. In Urban areas, wire line teledensity is 6.29% while in rural areas it is 0.79%. The market share of PSUs in wir line market is about 80%. Though not a part of this report, in rural areas the market share of the incumbent, PSU BSNL in wire lines is 99.9%.

The state of wire line penetration is closely related to negligible rural broadband penetration. While as I had written earlier, there are many regulatory issues contributing to this scenario, it is noteworthy that this situation is in spite of considerable USF support to BSNL for rural wire lines and broadband. My post titled "Regulation and USFs-Support for Rural Wire lines in India" had drawn attention to the fact that,about 98.6% of USOF funding has gone to support rural wire lines for voice and broadband connectivity. However BSNL which is the recipient of more than 86%  of USOF’s  total subsidy pay out  continues to steadily lose  rural wire line connections. These could have been maintained, improved and expanded by BSNL to provide broadband to rural areas. Much of this infrastructure was  put in place before BSNL was carved out of the Department of Telecommunications. It thus  represents a large amount of government investment besides presenting a huge competitive advantage for BSNL, considering  that it owns 99.9% of rural wire lines and rural India has negligible broadband penetration. This advantage has not been leveraged by BSNL. Nor has unbundling of this infrastructure been carried out in spite of regulatory recommendations. Further, against a Rs 1500 crore scheme initiated in January 2009 to support rural wire line basedbroadband with a scope to add about  18,00,000  connections (with subsidy being linked to the number of connections) BSNL had added less 400000 connections over a period of 3 years.

I had commented earlier that laxity in maintaining competitive neutrality of USF interventions tends to have long term negative implications on  the affected markets and defeats the very purpose of Universal Service.