Wrong connection: Trai's position on predatory pricing defies logic

The latest tariff order issued by the telecom regulator to curb predatory pricing has set off another me-versus-you battle in the industry. Tariffs have been under forbearance for more than 15 years, thereby letting market forces determine how much a telecom company will charge its customers. Although the forbearance regime continues, the regulator has ceased to be hands-off on tariffs with this order. However, the order, which comes into effect immediately, looks faulty for its full dependence on the definition of “significant market player”, or SMP, to pin down predatory pricing in the sector. Any service provider with more than 30 per cent market share by subscribers or revenue is an SMP, the regulator has maintained. Therefore, such a player will be seen as offering predatory pricing if it offers tariffs that are below its average variable cost in any circle, according to the Telecom Regulatory Authority of India (Trai). A penalty of Rs 5 million per player per circle has been fixed for operators violating this tariff diktat. The way it works out on the ground, all incumbents appear to lose out, except for one new entrant.

The problem lies in Trai’s interpretation and description of predatory pricing. The most basic discrepancy is that if the government has already eased the mergers and acquisition norms by allowing up to 50 per cent combined market share for the merged entity, why has Trai set the threshold for an SMP at 30 per cent? Moreover, what happens when an SMP offers so-called predatory pricing in response to rock-bottom tariffs provided by a player that is yet to be defined as an SMP? With the latest order, does the regulator want the incumbents to either voluntarily shed a sizeable chunk of their subscribers to qualify as non-SMPs or watch their users walk away to a new entrant who has the freedom to offer unsustainably low tariffs? Moreover, if Trai must calculate predatory pricing by looking at market share, it should also take into account the share of the data market as well. It is well known that the real telecom game is being played out in the data segment, not in voice.

Another concern is about Trai’s focus on the details of the tariff plans offered to customers. Trai wants telecom companies to disclose all their tariff plans before going to market. Incumbents often have multiple plans to prevent customers from porting, especially to a new player that offers a single tariff plan. While incumbents are likely to seek legal intervention to be free to fix tariffs according to market conditions and requirements, the regulator would have done well to avoid another source of uncertainty in a sector already weighed down by losses. In any case, it is odd to see a sectoral regulator trying to muscle in on what should clearly be territory of the Competition Commission of India (CCI), which has been empowered by the Competition Act to look at dominance issues, including predatory pricing. The rules are clear: While Trai must deal ex ante with tariffs, the CCI must deal with issues arising ex post, out of market behaviour. Trai’s action, which has set off a high-decibel regulatory turf war already, defies logic.