Idea-Vodafone merger has created India’s largest telecom entity, leaving just 3-4 players in the fray. Will it lead to a duopolistic or oligopolistic market with the consumer being squeezed?
~By Sujit Bhar
At a recent event in Delhi, Reliance Industries chairman and the founder of Jio telecom network, Mukesh Ambani, boasted that his network would cover 99 percent of the country by the year-end and be upgraded to 5G as well. This may seem like an idle boast but statistics prove otherwise. While India’s largest telecom network Airtel took nearly 16 years to reach its current 307 million customer base, Jio has reportedly surged to 100 million in a matter of months.
But with British firm Vodafone and Aditya Birla Group’s Idea network announcing a merger recently, it becomes India’s largest telecom entity and the world’s second largest, with 400 million subscribers. Will this process of consolidation lead to a duopolistic or oligopolistic market? (see box)
Jio is still on a free mode, and will switch over to a paid one only on March 31. Analysts speculate an immediate slump of 50 percent in subscription then, but this could be premature considering that Ambani still has to reveal his payment plan.
CONSOLIDATION GAME
So far so good for the Indian consumer. However, if we look at the top three telecom companies, we see a consolidation of sorts. Assuming that Jio manages to retain its 100 million consumer base after recovering from the projected slump, the total number of people hooked on to the three networks—Jio, Airtel and Idea-Vodafone—will be 807 million. If we add Anil Ambani’s RCom-Aircel-MTS’s which has a 195 million base, the total number of subscribers would be over a billion.
In the voice section, there could be a large subscriber overlap—of up to 50 percent—but the real money is in data where the overlap is expected to be not more than 20 percent. Hence, the critical subscription base will be around 900 million, around 75 percent of the population. It is immaterial what percentage of revenue each company collects from the market because that will keep chan-ging with the plans they come up with from time to time.
An anti-trust case?
In the US, competition is guaranteed by anti-trust laws. In the telecom sphere, the 1970s saw a landmark case: United States vs AT&T Co.
The American Telephone & Telegraph (AT&T) company was a behemoth then, with an enviable and virtually unbeatable footprint. The US Federal Communications Commission suspected that AT&T was doing unfair business, using profits from its Western Electric subsidiary to subsidise the cost of its network. This meant that it could un-fairly provide cheaper service to beat competition.
A case was filed and eventually, AT&T lost. The mammoth company was broken up into seven regional Bell Operating Companies and in 1984, a smaller AT&T was formed. It is commonly called the Bell System divestiture.
The entire process of using a subsidiary company’s profits to subsidise the functioning and hence the pricing of another company owned by the same group becomes an anti-trust case in the US. Could this happen in India? Think Reliance Industries and Jio.
Technically, a freebie can be in place for a short period, to be renewed with a new one. This is what Jio has done, despite its competitors crying foul. The Telecom Regulatory Authority of India did not take any action.
However, freebie schemes could violate the Monopolistic and Restrictive Trade Practice Act, 1969 (replaced by the Competition Act of 2002) which says: “In many cases, depending on the structure of the transaction, territorial restrictions, exclusivity, non-compete, price control mechanisms, freebies, lotteries, discounts, the agreement or practice could mean a violation of the MRTP Act.”
Technically, a freebie can be in place for a short period, to be renewed with a new one. This is what Jio has done, despite its competitors crying foul. The Telecom Regulatory Authority of India did not take any action.
JIO’S DEEP POCKETS
While a stable of four companies may seem like a fair spread of competition, one should remember that Jio has deep pockets and could withstand any price war to stay afloat for a long time. The weakest among the four is the RCom-Aircel-MTS combine, which is not expected to stay on the leaderboard for long, losing subscribers.
Airtel has been bleeding for a while, having faced rough weather in its foreign acquisitions (especially in Africa) and chances are that it too could slip a bit, losing customers.
Defining terms
Duopoly (noun): A situation in which two suppliers dominate the market for a commodity or service. Legal systems in stable democracies abhor monopolistic or duopolistic trade practices. They kill competition, quality and accountability and create juggernauts that can tweak markets with ease, ultimately harming the consumer.
Oligopoly (noun): A state of limited competition, in which a market is shared by a small number of producers or sellers. On the face of it, this might not even seem like a monopolistic situation, till a detailed comparison is made of the prices consumers pay in various markets.
And this is where there could be a change. The race horses could be reduced to two, making the market highly skewed. As for BSNL, its performance is so abysmal that it is not even being considered in this debate.
The Competition Act of 2002, headed by the Competition Commission of India (CCI), however, talks about the “Effect Theory”. While it does “not categorically decry or condemn the existence of a monopoly in the relevant market”, it concentrates on the “use of the monopoly status such that it operates to the detriment of the potential and actual competitors….” So while this new act has been given legal teeth to take punitive action on errant entities, Section 4 of the Act says that “no enterprise shall abuse its dominant position”. This means that a dominant position is okay, but the “Effect Theory” will come into play when this position is perceived to have been misused. Rather vague.
By the same token, ITC is a dominant player in the cigarette market and it can arbitrarily change prices due to its position. Legal experts that India Legal spoke to said that there should be constant vigil on the part of CCI and it should take action even if there is no appeal.
Experts also point out that telecom is no longer a luxury, but a necessity and an essential service. This is more so due to the government’s insistence on digitising India. All payment portals are being forced to go that way. In such a scenario, data is set to become a money spinner for telecom companies.
ESSENTIAL SERVICE
Experts also point out that telecom is no longer a luxury, but a necessity and an essential service. This is more so due to the government’s insistence on digitising India. All payment portals are being forced to go that way. In such a scenario, data is set to become a money spinner for telecom companies.
Coming to the consumer now, there are two ways in which he can be squeezed. With telecom developing into an essential service, the consumer must have data connection. Secondly, if service providers are reduced to two, three or even four players, oligopolistic situations could easily arise. And it is doubtful whether the Competition Act of 2002 will rise to the occasion or be responsive enough. Sadly, though telecom will become an essential service soon, as per the Essential Services Maintenance Act, 1968, it is postal, telegraph and telephone services which come under it.
With time, the freebies from telecom companies will also stop and that is when the price hike will really take off, perhaps in collusion. And the consumer will no longer be the king.