Context

The near-death of competition signalled by the incipient exit of Vi late last year pushed the Department of Telecommunications (DoT) to announce steps to prevent the premature exit of a sagging operator.

About 5G

• 5G is the 5th generation mobile network.
• It is a new global wireless standard after 1G, 2G, 3G, and 4G networks.
• 5G can be significantly faster than 4G, delivering up to 20 Gigabits-per-second (Gbps) peak data rates and 100+ Megabits-per-second (Mbps) average data rates.
• 5G enables a new kind of network that is designed to connect virtually everyone and everything together including machines, objects, and devices.
• 5G wireless technology is meant to deliver higher multi-Gbps peak data speeds, ultra low latency, more reliability, massive network capacity, increased availability, and a more uniform user experience to more users.
• Higher performance and improved efficiency empower new user experiences and connects new industries.
• With high speeds, superior reliability and negligible latency, 5G will expand the mobile ecosystem into new realms.
• 5G will impact every industry, making safer transportation, remote healthcare, precision agriculture, digitized logistics — and more — a reality.

India’s telecom sector: From monopoly to hyper-competition to duopoly

• India’s telecom market has seen monopoly as well as hyper-competition.
• Twenty-five years ago, the government alone could provide services.
• Technology and deregulation: In the following years, the combined forces of technology and deregulation helped break the shackles of public sector dominance despite the latter’s stiff resistance
• In the following years, there were nearly a dozen competing operators. Most service areas now have four players.
• However, the possible exit of the financially-stressed Vodafone Idea would leave only two dominant players-Airtel and Jio in the telecom sector.
• A looming duopoly, or the exit of a global telecommunications major, are both worrying.
• They deserve a careful and creative response.

Government package for telecom sector to prevent duopoly

• The near-death of competition signalled by the incipient exit of Vi late last year pushed the Department of Telecommunications (DoT) to announce steps to prevent the premature exit of a sagging operator.
• As a part of its support package for the telecom sector, in October 2021, it dispensed with the requirement of performance bank guarantees required earlier as security.
• It increased the tenure of spectrum holding from 20 to 30 years.
• It allowed for the surrender of the unutilised or underutilised spectrum after 10 years.
• Most importantly removed the levy of spectrum usage charges. 

Why competitive telecom market is important?

• Key to achieving digital ambitions: A competitive telecom sector is fundamental to realising India’s digital ambitions.
• Innovation: Monopolies have no incentive to innovate.
• Investment: The competition will guarantee that operators find it attractive to invest in network infrastructure upgradation and offer consumers a wide range of innovative service options.
• Source of revenue: A competitive telecom sector would be an indirect source of tax revenue as well.
• How to make market competitive? Competition cannot be willed into the sector.
• It needs careful nurturing, assiduous fostering and regulatory neutrality. 

Way forward on 5G

• Structural changes: While the package may have prevented the exit of Vi from the market, to embed competition within the sector, structural changes are necessary.
• The imminent 5G networks demand massive investment and sophistication of operations.
• 1] Level playing field: This will not be achieved unless the playing field is level across the relevant operators and honest incentives are provided to operators to embrace new technology.
•  2] Change the spectrum allocation method: There is no doubt that spectrum auctions have served India well in the past due to the acrimonious political economy associated with administrative spectrum assignment, including First Come First Serve (FCFS) method.
• The auction regime worked well when demand exceeded supply, but if there is an adequate quantity of spectrum for everyone, that constraint would not exist.
• Administrative assignments can thus be considered once again.
• 3] Administrative assignments:  An administrative assignment will include the possibility that all spectrum can be assigned at reasonable prices and in the process, a grand bargain can be struck with telecom operators.
• 4] Assigning 5G spectrum for private enterprise business: TRAI and the Digital Communications Commission (DCC) are considering whether 5G spectrum should be assigned to companies like TCS, Amazon and Google, among others, for their private enterprise business.
• 5G spectrum assignment for enterprises would adversely affect the business model of telcos.
• But there will be enterprises that telcos could serve that are not large enough to purchase 5G spectrum.
• A grand bargain that allows enterprises to buy 5G spectrum while assigning spectrum to the existing telcos through the administrative route will also serve the revenue needs of the government.
• 5] Privatise public sector operator: This is an opportunity to also signal to the public sector operator that 5G business is outside the range of its capability set.
• Hence like Air India it needs to be privatised in the fullness of time.
• These are difficult decisions and will need much more political will than in 1994.

Consider the question “Why a competitive telecom market is a prerequisite for achieving India’s digital dream and why an eminent duopoly in the sector stands to threaten that dream? Suggest way forward.”

Conclusion

It would be tragic if India’s telecom-access market was to be reduced to only two competing operators, as we have a long way to go. What we need is structural changes in the sectors as well as the way the sector is regulated.

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Back2Basics: Spectrum usage charges

• Companies had to pay 3-5 per cent of their adjusted gross revenue (AGR) as spectrum usage charge to the department of telecom.
• If they share spectrum with another operator, operators must pay an additional 0.5 per cent of AGR for that band as SUC.
• However, in September 2021, the Department of Telecommunications (DoT) decided to remove the floor rate of 3% of the adjusted gross revenue (AGR) for operators to pay their spectrum usage charge (SUC).
• The removal of the clause fixing a floor rate of 3% was done to give effect to the recently announced telecom relief package.
• Though the telecom package talks of scrapping SUC only on spectrum acquired in future auctions like that of 5G, if the 3% floor is abolished, as and when operators acquire more spectrum in future auctions, their SUC will become zero on the entire holding.
• This is because of a complex weighted average formula to calculate the SUC of operators who have a mix of administratively allocated spectrum and acquired through auctions.

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Context

Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise.

Duopolies and scrutiny by the CCI

• Duopolies in the most segment: The online marketplace or the platform/intermediation service market is now largely characterised by duopolies in most segments:
  • Amazon and Flipkart in e-commerce, Uber and Ola in transport, Zomato and Swiggy in food service, MakeMyTrip and Yatra in travel bookings.
  • Some niche players do exist in these segments, but by and large, the market has been carved up by large players.
• Why CCI is scrutinising these companies? Several of these companies have come under the scrutiny of the Competition Commission of India (CCI).
  • What are the issues involved? The issues involved here have far-reaching ramifications for both online and offline market places. Some of the more contentious issues are:
  • Do such market structures restrict online competition?
  • Are the players engaging in predatory pricing?
  • If so, is it driving out both online and offline competition and does this adversely impact consumer welfare?
  • Is there a need for policy intervention, and, if so, what should be the underlying framework?

Lower barrier to entry not translating into greater competition

• Market not working as per theory: In theory, the online market structure should facilitate greater competition given the lower barriers to entry. But this may not be the case.
  • Take-over: Most other firms in the segments mentioned above have either been taken over or have folded up.
• What is the reason for the emergence of such marker structures
• Positive feedback loop: One explanation for the emergence of these market structures is that as companies grow, with more users coming on board these platforms, they benefit from what CCI calls positive feedback loop.
  • This leads to market concentration.
  • Difficulties for new players: Given the network effects, which are common in digital spaces, it becomes difficult for new players to enter these spaces, and gain market share as there isn’t much space for many such networks.
• Capital intensive market: Another possible explanation is that, contrary to perception, the online space is highly capital intensive.
  • Deep pockets are required to fund the discounts to get customers on board initially.
  • Such market structures are more likely in capital deficit countries like India.
• Incumbents restricting new entrant: Incumbents, as in other sectors, may also engage in various strategies to restrict entry and thus competition.
  • Even small actions by these platforms coupled with the network effects can adversely impact competition.

Predatory pricing-issues involved in it

• Allegations of predatory pricing driving out the competition: Many allege that these two-sided online platforms engage in predatory pricing or below-cost pricing either by funding it themselves (deep pockets) or by squeezing producers.
  • This drives out the competition — both online as well as offline.
  • Predatory pricing is anti-competition, to begin with.
  • How it is harmful to the customers? While consumers do benefit in the short run, once the competition is driven out, the platform starts raising prices to recoup previous losses.
  • But is it that straightforward?
• What are the issues involved in predatory pricing?
• First- Assessing whether a platform is engaged in predatory pricing.
  • In India, it is defined as price falling below average variable cost — may not be a straightforward exercise.
  • Why it is not a straight forward exercise? The dynamics of online pricing (prices change over time), their unique cost structures — in such two-sided platforms, prices/costs on both sides should be seen in conjunction — as well as the impact of economies of scale and organisational efficiency in lowering costs, all need to be factored in.
  • Discount for clearing inventories: Besides, one would also have to take into account that even offline firms engage in deep discounting to clear inventories.
  • As do both online and offline firms to acquire customers in the early stages of their business.
• Second-The impact of such pricing strategies on competition and on consumer welfare must be carefully assessed.
  • Driving out competitors is not equal to driving out the competition: It is quite likely that once the competition is eliminated and the platform starts to raise prices, new players will enter the market, attracted by higher prices.
  • Driving out competitors may not be the same as driving out the competition — though the extent to which new firms are able to enter the market will depend on the degree to which barriers to entry exist.
  • Concerns of recovering the losses: Platforms will be mindful that losses will be hard to recover, and may not engage in below-cost pricing to drive out competitors for extended periods.
  • Consumers are unlikely to lose out as prices are likely to remain low.
• Third- Possibility of collusion
  • There is also an argument for closer examination of such market structures because of the possibility of collusion.
  • Customers moving towards cheaper options: In most such markets, as the consumer has little to differentiate between the two platforms, it is the price that sets them apart.
  • Consumers tend to gravitate towards the cheaper option. This ensures continuous competition between the major players to offer low prices.
  • Possibility of customer left with no option: It is possible that at some point, the players will find it in their interest to venture into some sort of agreement that allows both of them to survive, rather than be engaged in a race to the bottom — as has seemingly happened in the telecom sector.
• Fourth- Linking predatory pricing with abuse of dominant market position must be reexamined.
  • The dominant position is not always linked with predatory pricing: As the experience of the telecom sector shows, a dominant position may not be a prerequisite for predatory pricing.
  • Accepting this argument would imply that if regulatory intervention is required to check predatory pricing, it could kick in before market power or dominance is established.
  • Taking into account deep pockets: Alternatively, the definition of market dominance could be expanded to take into account deep pockets.

Conclusion

• Set of guidelines instead of the fixed framework: Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise. Having a fixed predetermined framework is unlikely to be helpful. Instead, it would be more useful to have a set of guiding principles based on which regulatory intervention, if required, can be undertaken.
• Safeguarding competition not competitors: Competition policy should be driven by safeguarding competition, not competitors. It should seek to bring about greater transparency in pricing and reduce information asymmetry.

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