The Competition Commission of India (CCI) recently released a market study on the telecom sector in India discussing the evolution of the competitive structure in the market over time. Such a market study comes soon after the announcement of market studies and reviews to be undertaken in certain key sectors and markets important for the development of the economy as well as society, such as pharmaceuticals, key infrastructure sectors such as airports, railways, ports, and electricity, as well as private equity investments. While such market studies and reviews are underway, the CCI has previously released policy notes and market studies in important sectors such as healthcare and e-commerce, amongst others.

Considering such market studies are formulated pursuant to consultations with key stakeholders such as market participants, consumer groups, and research institutes, amongst others, a market study helps the CCI to understand the commercial practicalities of markets, weigh the same against the objectives and provisions of the Competition Act, 2002, and arrive at optimal positions that account for commercial interest, consumer interest as well as give fillip to competition in markets. Such initiatives by the CCI, a sector agnostic regulator, signals the regulator becoming a mature regulator which seeks to understand the markets it regulates as opposed to regulating markets it has no understanding of, where regulatory actions act as hindrance to commerce. Such efforts of the CCI to shift towards becoming a more business friendly regulator, intervening appropriately only in instances where intervention is actually merited, are laudable.

Market studies don’t just help the regulator understand the market better, they also help key stakeholders understand the thought process of the regulator and help such stakeholders to assist the CCI. In such light, the move of the CCI to undertake and release a market study on the telecom sector, which has seen substantial churn over the years, is of significant importance. The events following the declaration of lockdowns as part of governmental efforts to combat COVID19 highlighted more than ever that a well-functioning telecom sector, which offers quality of service, is of key importance to sustain commerce and economic activity while also ensuring that social interactions do not cease altogether when combating an anomaly of the nature of COVID19. Very importantly, advancements in technology in the telecom sector helped ensure that the administration of justice does not cease, as courts across India rapidly moved to an online functioning process. The aforesaid does not begin to account for the possibilities that 5G technology has to offer, and would not have been possible without the technological advancements till date.

Therefore, the question arises, how does the competition regulator assess such an important sector which has seen many competitors exit the market over-time? The CCI took note of several key metrics on the basis of which many of its observations are premised. It was noted that while the consumer base, Minutes of Use and data usage by consumers had increased vastly over time, the average revenue per user had decreased by a factor of almost 18, and net profit margins have been seen to have fallen to as low as 0.5%. The same is a very unique phenomenon since the number of telecom operators has reduced substantially over the years, however, profit margins have not gone up even in the face of increased usage of the offerings of such a reduced number of service providers. 

In light of such market dynamics, the CCI noted that the disruptive market entry of Reliance Jio had led to the incumbents approaching the Telecom Regulatory Authority of India (TRAI) to institute a floor price i.e. a minimum price below which no operator could provide its services. In such regard, the CCI had, at that juncture, advised TRAI to refrain from such a move as the same also runs the possible risk of complacence on the part of telecom operators who are not incentivized to compete in light of ensured profitability. Subsequently, by way of the present market study, the CCI is attempting to adopt a nuanced view of the circumstances. One very important aspect of the market study related to the aspect of price competition and non-price competition in the telecom sector, as it existed previously, and such competition in the present and near future.

It was noted that there is significant parity in prices across operators, therefore, non-price factors of competition assume significant importance. While it was acknowledged that the average consumer remains price sensitive, the CCI was of the view that other factors such as quality of service, data speeds and the phenomenon of bundling of services of different natures and offering premium services to consumers will significantly influence consumer choice in terms of choice of operator. Bundled offerings, specifically, were noted to be the factor that will drive differentiation in the market. Such bundled offerings can be seen in various forms across operators, such as tie-ups with Over-The-Top (OTT) media platforms, amongst others, in order to offer exclusive benefits and content which is offered at zero cost to users. Not only do such bundled offerings help consumers gain an expanded and better quality of service, it also provides an opportunity for telecom operators to devise unique monetization schemes to help increase profitability.

However, in the background of such evolution of services offered, the role of the CCI and prudence on its part becomes of utmost importance. During the evolution of services in such a manner, there are various parties that interact in respect of delivery to the end consumer. These include not just the telecom service provider but also OTT media platforms which telecom operators may tie up with, content delivery networks that provide geographically distributed servers in order to assist with efficient delivery of content, payment gateways that facilitate transactions undertaken by the consumer, and any other entity that may be involved in providing a service which is a part of the bundle offered to the consumers. It would be of utmost importance to ensure that no entity at any of the vertical levels operates in an abusive manner that prejudices competition in the market place and results in harm to other market players in an undue manner.

To appreciate such concerns of anti-competitive conduct, at the level of telecom operators, it needs to be noted that the Herfindahl-Hirschman Index – a tool used to measure market concentration and determine competitiveness in a market, has continued to increase over time and is now at a level that suggests a high degree of concentration, and resultantly, potential market power in the hands of the telecom operators. At downstream levels, vertical integration can be seen in the form of telecom operators investing in content creation companies (for instance, Reliance Jio’s acquisition of shareholding in Balaji Telefilms which, in turn, owns an OTT platform), launch of media platforms which integrate a wide variety of entertainment content, news content, music content, etc. (for instance, Airtel Xstream, JioTV, JioNews, amongst others).

However, such vertical integration and consolidation require appropriate structuring and approaches such that the CCI does not have apprehensions of anti-competitive conduct while also ensuring that the commercial objectives of the transacting parties are not unduly diminished or diluted. It needs to be noted that vertical integration and consolidation, by themselves, need not lead to appreciable adverse effects on competition, the threshold set out by the Competition Act, 2002 to determine the permissibility of any conduct. The CCI, as a mature regulator trying to ensure competition in markets while also not impeding ease of doing business, ought to keep the aforesaid in mind while assessing the competitive effects of such evolving market practices considering it observed in the present study that there is a possibility of anti-competitive conduct from such integration which requires deeper scrutiny. 

For instance, the CCI took note of reports claiming that certain broadband services providers routed data traffic in such a manner that faster speeds were provided to specific services. The employment of such practices by telecom service providers, if the same are alleged to be employed, would require scrutiny to assess whether the same have resulted in contraventions of the rules of competition such as the prohibition on abuse of dominance as contained in Section 4 of the Competition Act, 2002. However, the CCI would be well advised to take action only when egregious distortions of the competitive structure and violations of rules of competition are observed considering the rapidly changing market structure accompanied by the financial turmoil seen in the telecom markets owing to various factors. 

Further, considering the uncharted territories, the CCI and TRAI would have to work in harmony with each other as relevant regulators for the telecom sector, and in accordance with the provisions of the Competition Act, 2002 and TRAI Act, 1997 and the decision of the Supreme Court regarding the jurisdictional conflict which arose between the two regulators previously.

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Rudresh Singh is Partner, L&L Partners

Aaditya Ranbir Sahgal is Associate, L&L Partners

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