A little over 18 months ago, in a bizarre move rarely seen before in any part of the world, a Greenfield 4G operator viz. Reliance Jio [RJ] entered the Indian telecomm market with ‘free’ and ‘unlimited’ voice calls and low-cost data. After launching an introductory offer in September, 2016 for free – both data and voice for 6 months, from April, 2017, it charged data at throwaway price Rs 50 per GB, even as voice calls continue to be free ad infinitum.
For a conglomerate [read: RJ] investing hundreds of thousands crores in laying infrastructure and paying heavily for purchase of spectrum, an attempt to sell services virtually for free was a brazen case of ‘predatory’ pricing with the sole intent to snatch customers from incumbent players. The latter were forced to reduce their tariff drastically to match the former. Post-revision, the tariff in India at less than US$ 1 per GB is a fraction of what customers in other countries pay.
At such rock bottom tariff, almost all companies are bleeding. All telecomm companies put together have a debt of over Rs 450,000 crore on their books. They are not in a position to meet their loan repayment obligations and capital expenditure needed to deliver reliable and quality services is a casualty. Smaller players are forced to exit and mergers/amalgamations is the order of the day.
Meanwhile, based on recommendations of an inter-ministerial committee, the government has offered some relief to the industry via extending the duration for spectrum payment from 10 years to 16 years and lowering the interest burden on unpaid dues [towards license fee and spectrum usage charges] [companies pay roughly 8% of AGR (adjusted gross revenue) as license fee and an additional 3% as spectrum usage charges] by 2 percentage points.
Yet, the companies continue to be in dire financial straits as the root cause of the problem i.e. predatory pricing remains unaddressed. Normally, when such a thing happens, it is for the sector regulator viz. Telecom Regulatory Authority of India [TRAI] to intervene and force the recalcitrant operator to make mend.
TRAI should have nipped the problem in the bud. But, it saw nothing wrong in this practice. Adding salt to the injury, in February 2018, it came out with fresh amendments to the Telecom Tariff Order [TTO] to define predatory pricing whose sole purpose is not only to let RJ continue with its actions but also shield it against any counteractive action by competitors/incumbent operators.
As per the amended order, a tariff will be considered predatory if in a relevant market [circle], an operator who is a significant market player [SMP] offers services at a price that is below its average variable cost [AVC] with a view to reduce competition or eliminate competitors in that relevant market. An operator will be considered SMP if it controls 30% market share or above, which will be calculated on the basis of gross revenue and subscriber market share. Further, AVC is defined as the cost that is calculated by identifying those expenses, which change with output, adding them and then dividing the result with total number of units produced.
The very act of selling a product or service below the variable cost of producing it would lead to loss on every unit produced and sold. This will add up to huge loss by the company [add to this, the cost of servicing the investment, the loss would be much more]. Yet, if an operator is selling at below AVC, it is clear that he is doing predatory pricing with the sole aim of eliminating competitors. To that extent, the regulator is right.
But, the problem arises when it draws an arbitrary line arguing that by selling at less than AVC, an operator with less than 30% market share will not be scuttling competition whereas a similar action by an operator with market share higher than 30% will tantamount to predatory pricing. This is outright one-sided and discriminatory aimed at favoring RJ which has market share less than 30% and unfairly targeting incumbent players whose share is higher than 30%.
The clarification given by TRAI chairman, RS Sharma that “even an incumbent operator can give offers which are below its AVC, provided the intention is not to kill competition” is untenable. Who will determine whether the intention was good or bad?
An operator who comes up with such a tariff plan will never say that his intent was to scuttle competition. On the other hand, leaving this to the regulator will create room for ‘discretion’ and ‘subjectivity’. This will not go away even if it comes up with an exhaustive checklist ‘to determine the intent of tariffs’. Furthermore, this is the surest invitation to nepotism and corruption which is completely out of sync with Modi’s philosophy of zero tolerance for corruption.
In this backdrop, the TRAI order was challenged – rightly so by the incumbent operators before the Telecomm Dispute Settlement Appellate Tribunal [TDSAT]. In its order on February 1, 2018, the TDSAT has directed TRAI ‘to issue suitable direction/order/regulation regarding benchmark/guideline that can be applied for ascertaining consistency with the principle of non-predation’.
The Tribunal’s order does nothing to remedy the situation which will become more warped. This is bound to be challenged in the higher courts and we will see unending litigation.
Meanwhile, the regulator needs to make operators [especially RJ] realize that their actions are nothing short of self-massacre and unconscionable. It should treat any company selling below variable cost as indulging in predatory pricing – without distinction. Heavy penalty should be imposed on violators and proceeds thereof may be used for lowering the burden of various levies on the industry.
While, this may mean some increase in tariff, the customers will be assured of ‘quality’ services and on a ‘sustainable’ basis. The companies will improve their cash flow and be able to service their loans. The NPAs of banks will go down implying less erosion in their capital and enhancing their capacity to lend.
In short, stern action by TRAI against recalcitrant operator [instead of the present approach of handling with kid gloves] will benefit all stakeholders and impact the macro-economy positively. But, the million dollar question remains.
Will the regulator change course midstream?