Competition Laws and the Telecom war-fare

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1 Competition Laws and the Telecom war-fare Introduction A recent newspaper report 1 pointed out that for the very first time in the past six months, the Indian government s revenue from the telecom sector has dipped even though almost 80 million new subscribers have been added. The reason is the ongoing intense pricewar between the existing telecom operators in the country. Call rates have gone down tremendously, along with SMS and data transfer prices. Clearly, the necessary corollary to this is consumer satisfaction. However, price-war usually has an impact on competition amongst players and their long term growth. Sector specific regulators have to ensure consumer satisfaction as well as a level playing field for all operators. The present bulletin analyses the prevailing market conditions in the telecom industry, the role of the telecom regulator with respect to competition, relevant competition laws, and the impact of the existing regulations on the telecom sector. 1.0 Regulating the Competition Regulators Imagine going to a travel agent to book a holiday and finding all exotic places that you have always wanted to travel to at extremely low prices. When the choice is plenty, the consumer is satisfied. Imagine the same pool of options available in mobile call rates, SMS and data package plans and other value added services enjoyed by the consumer. The operators are working on outreach and numbers, and, hence, they need to lower their prices as much as possible at the risk of substantially dropping their revenue. The telecom sector is regulated by the Telecom Authority of India ( TRAI ), 2 which in turn is governed by the TRAI Act, 1997 as amended by the TRAI (Amendment) Act, 2000 ( TRAI Act ). One of the functions of TRAI is to facilitate competition and promote efficiency in the operation of telecommunication services so as to facilitate growth in such services. 3 With the coming into force of the Competition Act, 2002 as amended by the Competition (Amendment) Act, 2007 ( Act ), which has now completely replaced the Monopolies and Restrictive Trade Practices Act, 1969, and setting up of the Competition 1 Joji Thomas Philip, Economic Times Bureau: Price war shrinks government s telecom kitty. as viewed on December 07, It is a regulatory authority set up by the government of India to ensure that the interests of consumers are protected and at the same time to nurture conditions for growth of telecommunications, broadcasting and cable services 3 Section 11(1)(h) of the TRAI Act

2 Commission of India ( CCI ), 4 the dilemma about which authority will regulate competition has commenced. Since the substantive sections of the Act i.e. those pertaining to anticompetitive agreements 5 and abuse of dominant position 6 were notified on May 15, 2009, there are no precedents (at the time of writing) where the CCI has initiated an investigation or passed any order against a telecom operator. Nevertheless, disputes may arise when there is an overlap of duties and powers of the TRAI and CCI on issues pertaining to competition within the telecom industry. Needless to say, CCI has to operate cogently vis-à-vis regulators set up for specific sectors. However, in case there is a conflict of opinion between the CCI and TRAI, there is no clarity as to whose decision would prevail. 1.1 Choice of forum At the very outset, the prospective complainant has to identify the forum in which it wants to file a complaint. Presently, the forum can be TRAI (by virtue of section 11(1)(h) of the TRAI Act) or the CCI. Subject to filing an appeal, 7 the order passed by the TRAI or CCI, as the case may be, will be final. However, since two independent forums have the jurisdiction to hear matters on the same issue, one cannot rule out the possibility of the complainant filing the same complaint with say, the CCI, in case it is rejected by TRAI. It is crucial that the jurisdiction and scope of powers of both these regulators is clearly defined in order to avoid confusion and multiplicity of complaints. 1.2 Tariff Wars: two views On a review of the Act, TRAI Act and the latest developments in the telecom sector, certain other ambiguities may also come to the forefront. For example, TRAI is empowered to determine mandatory tariffs that a telecom operator is allowed to charge. With its consumer protection mandate, TRAI may fix tariffs so as to ensure maximum consumer satisfaction. The CCI may view this a little differently. It will assess whether the low tariff bars the market of new entrants who possibly cannot achieve the same economies of scale as existing operators. If such a bar exists, the CCI may declare the pricing as predatory 8 and pass an order under section 27 of the Act Dominant position and Mergers and Acquisitions TRAI also recommends that no merger or acquisition be allowed amongst telecom operators if it results in more than 40% market share of the merged entity or if the total 4 The CCI was established with effect from October 14, The main duty of the CCI is to eliminate practices having adverse effect on competition, promote and sustain competition, protect interest of consumers, and ensure freedom of trade carried on by other participants 5 Section 3 of the Act 6 Section 4 of the Act 7 An appeal from an order passed by the CCI will lie with the Competition Appellate Tribunal, and, thereafter, with the Supreme Court. Appeal from an order passed by TRAI will lie with the Telecom Dispute Settlement Appellate Tribunal, and then with the Supreme Court 8 Section 4(2)(a)(ii) of the Act 9 Under section 27, the CCI may either direct the parties to discontinue or modify the pricing and/or impose a penalty on the guilty party, subject to a maximum of 10% of the average turnover of the last three financial years

3 number of operators goes below 4 in a circle. CCI, on the other hand, provides for no such bar. The Act does not prohibit a dominant position 10 per se but only its abuse. Any abuse of dominant position will also be dealt by the CCI as per section 27 of the Act. However, once section 5 11 and 6 12 of the Act are notified, it will be interesting to see whether CCI will approve combinations that violate the thresholds set by TRAI. The foregoing briefly describes some circumstances when there is scope of a possible conflict between the two regulators. Nevertheless, it is important to understand the role and significance of the two regulators. CCI has a fixed mandate and it will not hopefully try and stretch it to encroach upon someone else s terrain. Policy decisions have to be taken by TRAI but whether these policies impact competition in the market, has to be assessed by the CCI. Therefore, the need of the hour should be to clearly demarcate the roles of CCI and TRAI to avoid any prospective disputes and ambiguities. TRAI should restrict itself to policy and regulatory work for the telecom sector and allow CCI to be the only body empowered to adjudicate upon competition matters. In case any policy dispute can potentially be anti-competitive and contrary to the Act, TRAI can always refer such issue to the CCI as per section 21 of the Act. Conversely, if the CCI is of the opinion that a competition matter directly or indirectly contravenes any legislation governing the telecom sector, it can refer the issue to TRAI, and, thereafter, pass an order accordingly Predatory Pricing in the Telecom sector Section 4(2)(a)(ii) of the Act introduces the phrase predatory pricing and states that there shall be deemed to be an abuse of dominant position if an enterprise or group directly or indirectly, imposes unfair or discriminatory prices in purchase or sale of goods or service. Explanation to section 4(2) of the Act defines predatory pricing as the price at which goods or provision of services are sold to consumers and at prices with a view to reduce competition or eliminate competitors. However, there is one exception to this provision, i.e. if such pricing is adopted to meet competition, there will be no abuse. Recently, large telecom operators have made allegations of predatory pricing against new entrants and TRAI has been asked to look into these allegations. 14 It is interesting to note that no formal complaint has been made with the CCI alleging predatory pricing, at least not publicly. In order to establish an allegation of predatory pricing, the complainant has to successfully demonstrate that the accused had priced goods or services with a view to reduce competition or eliminate the competitors. It seems that it is not necessary to establish or prove any actual reduction in competition or elimination of competitors. Once a case of 10 Dominant position means a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to- (i) operate independently of competitive forces prevailing in the relevant market; or (ii) affect its competitors or consumers or the relevant market in its favour 11 Section 5 of the Act describes what constitutes a combination but this section still has not been notified 12 Section 6 of the Act deals with regulation of combinations and has also not been notified 13 Section 21A of the Act 14 Mansi Taneja: Experts divided over predatory pricing. viewed on January 01, 2010

4 predatory pricing has been made out, the CCI may pass any order as per section 27 of the Act. One fundamental flaw exists regarding predatory pricing, especially with respect to the ongoing tariff war between mobile operators. For a mobile operator to be guilty of predatory pricing, it must be in a dominant position per section 4 of the Act. Since the Indian market is all about numbers 15 (which is probably why our government feels that it can sustain competition even with 14 telecom operators), no new entrant can be said to be in a dominant position and, therefore, may never be guilty of predatory pricing, even though it may have deep pockets to withstand lower tariffs as compared to other operators and successfully eliminate any future competition from other new entrants. This can also have a negative impact on the older and established operators, who may be in a dominant position, but may not have a suitable business model to sustain lower tariffs for a very long period of time. Therefore, competition can be negatively impacted even though the operator accused of predatory pricing is not dominant. Presently, telecom tariffs are governed by market forces and have steeply fallen due to intense competition amongst several players. Various newspaper articles state that with a per-second tariff, operators have faced a slow growth rate in the past months and stocks of mobile service provider companies have tumbled at stock exchanges. With Mobile Number Portability 16 set to launch by April 2010, the tariff war will only intensify in order to attract and retain customers. So what is the solution? TRAI must interfere and ensure that the interest of both the industry and consumers is protected. Till recently, mobile operators had to file their tariffs with TRAI within a week of implementing them. However, for the long-term health of the telecom sector and to ensure that it remains attractive to investors, TRAI has to facilitate survival of companies and keep the sector investor friendly, so that companies can raise money to fund additional expansion of networks. TRAI must seek specific information from telecom companies to understand their business plan and scrutinize their tariffs before they are launched in the market. If the tariffs appear unreasonable, 17 TRAI should direct the company to modify the tariffs as it deems appropriate. This will not only promote healthy competition amongst players but also benefit the sector while ensuring consumer satisfaction. Continuously lowering tariffs is not consumer-friendly in the long run unless these lower tariffs assist in the growth of the telecom industry. 15 In India, the business model of a telecom service provider is usually surrounded around having a large customer base and balancing out the lower tariffs by having a large volume of subscribers 16 It is a technology that allows subscribers to change their mobile service provider without changing their mobile number. For details, please see %20Issue%20II PM.pdf 17 A tariff can be held to be unreasonable if it is so low that it takes much more than average time for the mobile service provider company to break even

5 Conclusion Telecommunications is an integral part of our lifestyle. The interest of the consumer has to be kept at par with the growth of the industry. Keeping one happy at the cost of another will negatively impact the sector in years to come. Therefore, sustaining competition within the sector is crucial. As discussed above, there are certain loopholes and ambiguities in the Act, and in the powers of the CCI and TRAI. Both the regulatory bodies will have to formulate boundaries for themselves and ensure that they manage to create a pro-consumer business friendly model for the telecom sector. Authored by: Dhruv Suri