CCI Study on the Telecom Market – Key Observations

Posted on February 8, 2021

Authored by Rushil Anand*

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Image Source: BW Businessworld

On 22nd January 2021, Competition Commission of India (“CCI”) published the “Market Study On The Telecom Sector In India” (“Study”). The study, initiated in January 2020, analyses the telecom sector from an antitrust perspective in the wake of the significant development the sector has witnessed in the past 5 years. It highlights various contemporary competition issues, partly due to Jio’s disruptive entrance, as well as upcoming competition issues as the sector is set to see further transformation and innovations with 5G around the corner. This article discusses the various concerns highlighted in the Study in four parts, namely – (a) financial stability and competition; (b) vertical integration and competition; (c) data privacy and competition; and (d) infrastructure and competition.

A. Financially Stability and Competition

For the telecom sector incumbents, 2016 to 2019 was a very turbulent period. The entry of Jio in the market, with its predatory prices and unlimited data scheme, caused massive disruption to their businesses. Jio managed to avoid scrutiny over its prices as TRAI’s competition analysis relies on the Significant Market Power (“SMP”) concept. SMP, as per the 68th Amendment to the TRAI Tariff Order, means a service provider holding a share of at least 30% of total activity in a relevant market on the basis of either subscriber base or gross revenue, which would trigger competition concerns. Since Jio was a new entrant, it could not have been subjected to competition analysis. As the data rates tanked from Rs.180 per GB in 2016 to Rs.6.98 in 2019, meaning India had the cheapest data rates, it became unsustainable for telecom companies to operate.[1] Many players exited the market, some were acquired by larger firms, or merged with other players such as the Idea-Vodafone merger. The market has now settled on three main operators which are Vodafone, Airtel and Jio, collectively owning about 88.4% of the market share.[2] This is in line with multiple empirical studies that show mature markets tend to support 3 main operators with rest staying on fringes of the market or targeting a niche audience[3].

Various entities demanded a floor price regime due to Jio’s disruptive pricing scheme, however on CCI’s advice the TRAI did not grant it. While the floor prices would have ensured a certain amount of profit, it could have made the operators complacent, hampering competition and innovation in the sector, hence TRAI struck with the forbearance model. Since then, there has been upward revision in prices in December 2019 by all three operators, which is beneficial for consumers in the long term as companies were functioning at an unsustainable level. Though in a better situation, the market is still reeling under some financial stress Hence, it is essential that the upcoming 5G spectrum auction is done at reasonable prices. With companies already under financial stress and prices of the 5G spectrum in India expected to be comparatively expensive to other countries, the allocation of the spectrum will play a significant part in determining the competitive landscape of the telecom sector going forward. Presently, the average spectrum holding of Indian telecom operators stands at 31Mhz, which is significantly lower than the global average of 50Mhz.[4] Furthermore, in the interest of competition, it is essential to maintain three competitors in the market as any exit now leaves a virtual duopoly.

B. Vertical Integration and Competition

In parallel to the falling rates, the proliferation of smartphones also led to consumption of data skyrocketing due to data intense content such as video calls, streaming etc. While India can still be considered a price sensitive market, widespread adoption of data heavy apps has meant that the competition between the operators has moved beyond the price factor, focusing on Quality of Service (QoS), data speed etc. 4G has blurred the lines between voice and data services,  exemplifying the growing importance of non-price-based factors in competition between telecom companies which are increasingly influencing consumer choices.

This convergence is driving a vertical integration across the market. Companies are adapting by focusing on tariff packages bundled with OTT services. While the introduction of OTT services replaced revenue sources such as SMS and Voice Calls, they also substituted their functionality with data heavy apps, opening up new revenue sources. Telecom companies and OTT services are now in “symbiotic relationship” where OTT services provide more data consumption for telecom companies resulting in more customers for OTT services. An illustration of this symbiotic relationship would be the partnership of the OTT video streaming platform Zee5 with Vodafone-Idea by providing users with free subscription on purchase of certain data packs.

These inroads made by OTT services in the telecom sector have raised certain competition concerns regarding the vertical integration. While it can create consumer benefits by reducing search cost, this technological convergence can also create dependency and lock in the consumers. These strategic partnerships can hinder competition and create entry barriers for non-vertically integrated operators and OTT services. However, these effects are understudied, and due to both the anti-competitive and pro-competitive potential, they need to be scrutinized further as these integrations become more common.

‘Net Neutrality’ is a principle that can be negatively affected by vertical integration. Incumbents may try to direct traffic to its own or vertical integrated services, which may affect competition especially for operators and OTT services which lack such integration. While the TRAI regulations forbid such practices, there are various avenues where such practices can go unnoticed. For example, telecom operators utilize Content Delivery Networks (CDN) servers for faster delivery of their services. Since agreement between these companies are not disclosed, it is essential their traffic patterns are monitored to ensure they adhere to net neutrality and fair competition. Peering arrangements are another avenue, which allow two networks to exchange traffic directly, which has benefits such as lower transit costs. There have been instances reported in India where specific services under peering arrangement were being provided at faster speed.

C. Data Privacy and Competition

With vertical integration taking place across the market, seamless data aggregation is a very straight forward exercise. Given the rising importance of data in today’s business environment, it is important for any competition analysis to consider “combined data power” that these incumbents enjoy. Such data can be used to undermine potential competitors in a related service. Dominant platforms can strengthen their position by crosslinking data through their vertically linked digital products and can use the same to enter multiple markets. Access to data can also become a significant entry barrier for new entrants. While it can lead to efficiencies in the market, it can enhance network effects and switching cost, acting as a deterrent for any potential entrants. However, it has been cautioned that access to big data does not mean that there are entry barriers in the market. Data is of varied kind and their anti-competitive effects are contextual.

There are also privacy concerns that arise from such data aggregation. Privacy is a non-price competition, meaning a factor through which firms compete that is not monetary price. Lowering of privacy standards can be considered abuse of dominance by dominant platforms, as it will affect consumer welfare. Furthermore, cross-linking allows exchange of data between different vertically integrated services, which can lead to degradation of privacy to the determinant of the consumer. Hence, till what extent consumers can consent to a dominant player’s action shall be part of competition analysis. While the existing competition tools under the Competition Act 2002 are deemed sufficient for any competition concern arising out of privacy policies, however, multiple jurisdictions around the world are formulating ex-ante regulations for digital companies.

D. Infrastructure and Competition

The late entrant advantage Jio enjoyed significantly helped it in managing its costs. Jio only offers 4G network, meaning all of its technologies and infrastructure are geared towards it. Airtel and Vodafone, on the other hand, still provide 2G and 3G services along with 4G services, meaning they still operate older technologies, increasing cost of operations, impacting competition.

One of the suggestions under consideration to infuse more competition in the sector is unbundling the license. Currently, India follows a Unified License (UL) regime, where the licensee is responsible for building the infrastructure and providing the network and service to the consumers, with only very limited unbundling done at the infrastructure layer. Recently, TRAI has opened consultations on a new license regime proposed by TRAI for unbundling of the UL, i.e., different licenses will be introduced for the infrastructure layer as well as the network and service layer (and a proposed entry for the new ‘application’ layer as well). This proposal is currently under discussion with different stakeholders..

In the author’s opinion, the proposed unbundling will greatly expand the markets as firm can now compete in different layers, making the sector more competitive. Furthermore, with limited unbundling already in place and further unbundling proposed, passive and active infrastructure sharing between companies can reduce entry barriers in the market and reduce duplication of infrastructure, especially in time of economic ill-health of the sector.

*Rushil Anand is BBA L.L.B graduate from Jindal Global Law School. He is deeply interested Competition Law and Indirect Tax matters.

[1] Competition Commission of India, ‘Market Study On The Telecom Sector In India’ (22 January 2021), paragraph 9.

[2] Ibid.

[3] Sheth, J. and Sisodia, R. (2002). The Rule of Three: Surviving and Thriving in Competitive Markets. New York: Free Press.

[4] Competition Commission of India, ‘Market Study On The Telecom Sector In India’ (22 January 2021), paragraph 19.

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