India's Predatory Pricing Rules Trigger Telco Slugfest
India's recent order on predatory pricing in telecom has provoked the latest slugfest between longer-established operators and relative new entrant Reliance Jio, with regulatory authorities caught in the middle.
The old guard are now protesting against the new rules and have also filed a legal case in the High Court. Airtel Chairman Sunil Bharti Mittal, the chairman of Bharti Airtel Ltd. (Mumbai: BHARTIARTL), and Vittorio Colao, the CEO of Vodafone Group plc (NYSE: VOD), have voiced their particular concerns about the latest directives from the Telecom Regulatory Authority of India.
It all started when the Telecom Regulatory Authority of India (TRAI) last month introduced new rules on predatory pricing. That started with an overhaul of the way it calculates market share to determine whether a company has significant market power (SMP). Previously, such calculations were based on a company's subscriber base, turnover, network capacity and traffic volume. Following changes, only the subscriber base and turnover are considered.
The methodology is important because the TRAI considers any operator with a market share of more than 30% (in a particular circle, or service area) to have SMP. The TRAI's changes seem to favor Reliance Jio, which carries huge volumes of data traffic on its networks but serves fewer customers than Airtel, Idea Cellular Ltd. and Vodafone. Under the new definition, those longer-established operators all have SMP, while Reliance Jio does not.
Any operator with SMP will not be able to engage in predatory pricing, or pricing aimed at driving competitors out of the market. The TRAI says it will consider a tariff to be predatory if in a given circle it is priced below the "average variable cost" -- a measure used by economists that divides variable costs, such as labor and electricity expenses, by output -- and designed to hurt competition. However, there is some uncertainty over the TRAI's exact definition of average variable cost, including which cost elements it regards as variable. Nor is it clear how authorities will decide that pricing moves are designed to hurt competition.
Airtel, Idea and Vodafone are, not surprisingly, upset. While their pricing activities will be restricted, Reliance Jio, as a player without SMP, will be free to do what it likes. That is a troubling prospect for companies that have already lost customers and seen profits dwindle because of Reliance Jio's aggressive tactics. Alleging government favoritism, the incumbents are contesting the TRAI's order in India's High Court.
What further irritates the incumbents is that regulators have also stopped service providers from sending special offers to particular subscribers via mobile messaging. The likes of Airtel and Vodafone have relied on such promotional activities to reduce churn. Reliance Jio is perhaps the only telco with a single and fully transparent pricing system for the entire subscriber base.
But a legal battle between incumbents and regulatory authorities will probably be drawn out. The industry is already reeling under huge debts. The latest regulatory wrangling could create additional hurdles and further impede growth. Moreover, the telecom sector is reportedly suffering from a shortage of lawyers amid a surge in legal cases, triggered partly by the recent wave of consolidation. There is unlikely to be much respite for the industry in the near future.
— Gagandeep Kaur, consulting editor, special to Light Reading
