Passage to Cheap Internet: A Case Study on Competition Commission’s decision in Airtel v. Reliance

Passage to Cheap Internet: A Case Study on Competition Commission’s decision in Airtel v. Reliance.

[Anmol Gupta]

The author is a second-year student of National University of Juridical Sciences, Kolkata.

On September 1, 2016, the Reliance Industries under the aegis of Mukesh Ambani launched a new subsidiary Reliance Jio (‘Jio’) in the telecom sector. Jio, unlike its competitors- Airtel, Idea and Vodafone- offered Volte services to its customers, and the media soon termed Mukesh Ambani as a game changer. However, its competitors described Jio and Reliance Industries’ actions as predatory in nature. Following its claims, Airtel filed a complaint against Jio before the Competition Commission of India (“Commission”). In its decision,[1] the Commission rejected Airtel’s complains and held Jio’s activities to be a legitimate exercise of competitive pricing. The following note offers an insight into the decision.

Competitive or Predatory Pricing?

For a policy to be predatory in nature, the following conditions must exist: the company must be a dominant market player in the relevant market, the prices offered must be lower than the cost of production of such goods, and such lower prices must be coupled with an intention of driving out competitors and recovering the losses in the long term.[2]

It is submitted that at the time of decision, Jio was the only company to provide free calling and SMS services to its customers. Ignoring the cost which Jio had to incur on Jio-to-Jio services, Jio still would have been required to pay a 14- paise per minute cost to other networks.[3] This shows that Jio charged for services at a rate lower than its cost of production. Further, Jio had intention to drive out competitors and recover market losses gradually. It is submitted that the Commission has wrongly interpreted the free calling and internet services offered by Jio to be part of fair competition. The Commission, ignoring Jio’s high share in the market and its presence since September 2016, held Jio to be new entrant in the market.[4] Further, the Commission failed to consider merger of Jio with Reliance Communications- another player of the relevant market.[5] Reliance Communications, prior to its merger with Jio, had already made plans for merger with Aircel and Sistema in the year 2017;[6] such move, if considered, would have been enough to establish Jio’s intention to reduce competition.

As per section 4 of the Competition Act, 2002, for a pricing policy to be classified as predatory, the company must have a dominant position in the relevant market. Further, as per section 19(4), dominant position can be determined by seeing the size and resources, the economic power, the source of such position along with the consumer dependence on the company. Hence, the Commission should have focused only on the market share of Jio while determining its position in the market. Airtel presented two key submissions before the Commission. First, Reliance Industry, being a parent company of Jio, had given Jio full access to its funds for its development purposes, and second, Jio’s offers such as Jio Welcome Offer were predatory in nature aimed at taking away Airtel’s customers. However, both of these contentions were rejected by the Commission on the certain grounds.

For the first contention, the Commission noted that the relevant market of the concerned parties was characterized by presence of ‘entrenched players’ like Tata in a well-developed telecom market. However, the Commission’s reply did not answer the possibility of the parent company’s money injection into its subsidiary; further, as per the Commission, a company can only be liable for predatory pricing when it enjoys a dominant position in an under developed market. For the second contention, the Commission observed that Jio’s Welcome offer was a legitimate strategy to attract new customers in order to strengthen its position in the market. It is submitted that the issue was not the legality or illegality of the offer but the effect of the offer on the market. Although the telecom giants such as Airtel and Idea were able to ward off the effects of the strategies, the same had not been possible for the middle and lower-class businessmen who had only two options- to switch or to resign.

In the decision, the Commission denied the possibility of Jio being a dominant player on grounds of it being a new entrant in the market. However, it can be argued that Jio as of the date of decision did have a dominant position. Interpreting section 4 of Competition Act, 2002 and the Commission’s decisions, for a company to be charged for predatory pricing, such company must have a dominant market position. This being the established Indian position, a new entrant irrespective of being loaded can never be held to be holding a dominant position. The same was showcased in this case; however, Jio was not a new entrant. It is submitted that Jio entered the market in September 2016, which gave it a substantial incubation period. As of August 2017, the time when the case was heard, Jio had one-third of India’s consumer base and 85% of Indian mobile data network market.[7] Despite such facts, the Commission held Jio to be a new entrant in the market.

Not Pricing but Predatory Behaviour and Intention

The Commission had ruled in favour of Jio on grounds of it being a new entrant in a well- developed competitive telecom sector and its pricing having no ‘tainted anti-competitive objective.’ The following part analyses predatory intention and predatory behavior of Jio.

  1. Predatory Intention

For predatory pricing, the company through its actions and policy must signify a predatory intention. Jio’s predatory intention could be inferred from the facts given below.

Reliance Industries being the financial muscle

Reliance Jio is a subsidiary of Reliance Industries, the latter being a dominant player in other markets. The unlimited investments made by the latter were a clear breach of section 4(2)(e) Competition Act, however, Commission while linking predatory pricing with the dominant position in the same relevant market stated otherwise. By way of its decision, the Commission implicitly allowed subsidiaries with strong financial backing to invest in new markets and exploit them to their own interests. As per section 4(2)(e), a dominant firm’s investments in a subsidiary in a different relevant market amounts to predatory pricing. However, the contention was rejected on grounds of market being characterized by well-established players such as Tata and Airtel.

The story behind free calls- incurring expenses and losses to competitors

For ensuring free and fair competition in the telecom market, it is essential that interconnected usage charges (IUC) are equitable and reasonably distributed. At present, the IUC have been fixed at 14 paise per call.[8] As per the regime, Airtel would have to pay IUC to Idea, if Airtel’s users call Idea users. Since the Jio users did not have to pay for voice calling services, there would be an increase in the calls made from Jio networks to other networks. This means that Jio would have to incur large expenditure as IUC which, in turn, would supplement other telecom regulators revenue. As per estimates, the first year IUC of Jio would have amounted to Rs. 2400 and if such IUC is brought down to zero it could lead to a Rs. 5000-decline in revenue of other regulators, bringing about a strategic advantage to Jio.[9] Further, since Jio users would be calling through a different VoIP platform, the regulator would have to invest in an easy and cheap conversion of these calls to CS platform, thereby adding to their expense.[10]

  1. Predatory Behaviour- The Illusion of Free Calls

As one may be aware, the Volte services offered by Jio can only be used by a LTE-enabled mobile phone. Jio essentially provided voice over data transmission unlike its competitors which provided voice and data services separately. The former services take place through data packets (VoIP calls), while the latter take place over the CS platform.[11] Hence, a consumer must switch to a new LTE-enabled phone to use the Jio services. This is in contrast to Modi’s Digital India initiative which Mukesh Ambani seemed to support while launching Jio. The claims were of reaching every Indian through the internet; however, given the specification and intricacies of the offer such claims seem mere far-fetched ideas. Further, as per various authors, the fact that a free service is contingent on the fulfilment of certain basic conditions itself amounts to a predatory behaviour.[12]

Conclusion

Based on above discussion, it can safely be concluded that Jio’s pricing policy was in fact predatory in nature and showed predatory intention and behaviour. The scope of predatory pricing in Indian law is very limited given its exclusive nature. However, considering the entry of new companies in the Indian markets, it is high time that this scope is widened; otherwise, it would be too late for the Commission to revive the Indian market from the throngs of corruption of monopolistic markets.

[1] Bharti Airtel Limited v. Reliance Industries Limited and Ors., MANU/CO/0038/2017.

[2] Arshiya Rail Infrastructure Limited (ARIL) v. Ministry of Railways (MOR) through the Chairman, Railway Board (KB) and Container Corporation of India Limited (CONCOR), MANU/CO/0076/2012.

[3] Jai Bhatia, Reliance Jio: Predatory Pricing or Predatory Behaviour?, Economic & Political Weekly, http://www.epw.in/journal/2016/39/web-exclusives/reliance-jio-predatory-pricing-or-predatory-behaviour.html (Oct. 25, 2017, 3:28 pm).

[4] Bharti Airtel Limited v. Reliance Industries Limited and Ors., MANU/CO/0038/2017, ¶ 15.

[5] ET Bureau, Anil Ambani says RCom and Jio have practically merged, The Economic Times, https://economictimes.indiatimes.com/news/company/corporate-trends/anilambanisays-rcom-jio-have-virtually-merged/articleshow/54553574.cms (Oct. 25, 2017, 3:15 pm).

[6] Gulveen Aulekh, RCom, Aircel merger on sticky grounds, The Economic Times, https://economictimes.indiatimes.com/news/company/corporate-trends/rcom-aircel-merger-deal-on-sticky-ground/articleshow/59837568.cms (Oct. 25, 2017, 6:18 pm).

[7] Smriti Parsheera, Building Blocks of Jio’s Predatory Pricing Analysis, Indrastra, http://www.indrastra.com/2017/05/BE-Building-Blocks-of-Jio-s-Predatory-Pricing-003-5-2017-0014.html (Oct. 25, 2017, 3:18 pm).

[8] Bhatia, supra note 3.

[9] Id.

[10] Parsheera, supra note 7.

[11] Id.

[12] Bhatia, supra note 4.