Telecom Regulatory Authority of India’s (TRAI’S) new tariff order is likely to adversely hit incumbents, turning the competitive dynamics to their disadvantage. It has changed the definition of a significant market player (SMP) and the method of calculating predatory pricing, which bring the incumbents under the ambit of the rules, while leaving out the disruptive new entrant and smaller players out of its purview.
Of the four parameters earlier considered to identify an SMP, TRAI retained‘ subscriber base’ and ‘gross revenue’, but removed ‘network capacity’ and ‘traffic share’. It is set to benchmark 30 percent share of revenues or subscriber base in a given circle, to categorise a telco as an SMP. By removing ‘network capacity’ and ‘traffic volume’, despite having the highest data market share and a strong network capacity, the new entrant is kept out of the rule’s purview. However, TRAI chairman R S Sharma later said that top telcos are free to match the lower or even free offers of a rival so long as it doesn’t hurt the competition.
TRAI presumes that only an incumbent operator enjoying SMP can distort the market. It fails to take into account that the new entrant is a large corporation that has already altered the contours of the industry. Its priced-based competition strategy led to tariff wars, and subsequently to market consolidation.
Asian peers consider additional factors to categorise a telco as an SMP. Japan factors in ‘control of essential facilities’; Malaysia looks at economies of scale/scope and potential competition; and South Korea gives weightage to metrics such as level of innovation and investment. Malaysia places market shares of 25-40 percent in the ‘probable SMP’ category, and over 50 percent market share in the SMP one. For EU countries, regulators consider potential for competition, barriers to entry and control of an essential facility.
TRAI’S 30 percent benchmark for market share dominance is divergent from global norms. As per International Telecommunication Union (ITU) guidelines, only market share of more than 50 percent defines an SMP.
The regulator now considers any tariff charged below the cost as predatory. The relevant cost considered here is the average variable costs (AVC). But AVC is a weak metric for determining predatory pricing, especially in a sector that has significant fixed-cost components arising from spectrum, networks, employee base and marketing.
any countries have moved away from imposing retail price controls (RPC), and favour market forces-determined tariff and pricing models. British telecom regulator, Ofcom, withdrew RPC in 2006 as it observed that retail price regulation can have a negative impact on the wider market (e.g., restricting tariff innovation).
As per the new guidance, if the tariff is adjudged predatory, the service provider shall have to pay a penalty of Rs 5 million per tariff plan for each service area. This will further raise financial woes of an industry already burdened by a Rs 4.6 trillion debt.
TRAI should consider a light-touch approach to pricing with market forces determining the tariffs. – Newsfeed