Building blocks of Jio's predatory pricing analysis

by Smriti Parsheera.

In a recent post on predatory pricing and the telecom sector Ajay Shah questions whether the subsidised user base of Reliance Jio can set off a network effect. The post makes two claims. The explicit claim is that the combined effect of interconnection regulation; mobile number portability and open standards of TCP/IP ensures that there are no real network effects in the telecom sector. The underlying implicit claim is that the existence of network effects is central to a predatory pricing analysis in this context. This piece takes a closer look at both these claims and the other factors that should inform the Competition Commission of India (CCI)'s analysis in the complaint filed by Airtel against Jio's pricing practices.

Network effects in telecom

Modern day tariff plans, including that of Jio, comprise of three main components - voice, data and access to content - all bundled into one product. A competition law analysis of Jio's pricing strategy must focus on each of these segments individually, and then their collective effect.

Voice services: Telecommunication services are known to generate strong network effects - the value of having a phone number is linked to the number of people who can be called using it. This creates a classic case for concentration of market power in the hands of the incumbent. Telecom regulators have overcome this issue by mandating operators to link their networks with the networks of other operators, allowing users to communicate across networks. Research on telecom networks, however, finds that despite interoperability, users tend to display a preference for being on a larger network, particularly when operators offer lower tariffs for calls made within their networks (on-net/off-net price differentiation). Others suggest that the network effects in telecom are more 'local' in nature - the preference to be on the same network as one's family and friends leads to the formation of calling clubs. This is not necessarily dependent on the overall size of the network.

In summary, even with mandated interconnection norms, traditional telecom services display a certain level of network effects. Arguably, the relevance of being "on the same network" would have gone down with the convergence of voice and data services and availability of various over-the-top calling apps. This requires a deeper study of consumer behaviour and preferences in the post-data world.

Internet services: Network effects on the Internet are not about the provision of Internet access services (i.e. the data services offered by ISPs) but rather about the direct and indirect network effects that define the business models of many Internet-based platforms and businesses.

Telecom service providers are increasingly stepping into the role of Internet platforms by bundling access to online music, TV, movies and news along with their communication services. In Jio's case, every new SIM comes bundled with a bouquet of Jio-branded apps, making it one of the fastest growing content aggregators in the country. Its free offer period from September to March has helped Jio build a massive user base, which in turn helps in attracting other complementary users to its platform. For instance, Uber's recent decision to partner with Jio Money reflects the value that it sees in being able to access Jio's users. The same holds true for other merchants and suppliers, like providers of music, video and news content, who are attracted to platforms with a large number of users.

Integration of data services and content

The vertical integration of data services and content offers Jio many advantages. One, convenient access to free content along with free/discounted data services has helped Jio in promoting higher consumption patterns. The aggressive data usage on Jio's network, particularly of video content, will gradually translate into higher revenues. The company claims that its users "consume nearly as much mobile data as the entire United States of America...and nearly 50% more mobile data than all of China." It would be interesting to see what percentage of this data is being consumed within the Jio ecosystem and the change in consumption patterns after Jio starting charging for its data services.

Two, it promotes faster adoption of in-house services. To take an example, the AT&T/FaceTime case study in the United States found that less than 10 percent of iPhone users downloaded Skype while all of them had automatic access to Apple's FaceTime. Adoption of Jio Money versus rival payment apps (among Jio subscribers) is likely to show similar results. Reports about the launch of Jio's 4G feature phone with built-in Jio apps suggest the possibility of further entrenchment of new users in the Jio universe.

Can Jio's pricing strategy in telecom enable it to indulge in monopolistic behaviour in related markets like mobile payments? Unlike telecom services, the payments sector continues to suffer from the lack of interoperability among providers, leading to significant network effects. Safaricom's M-Pesa service in Kenya offers an example of how the company was able to leverage massive network effects in the mobile-money space to establish its dominance in calls and text messages. The situation in India is certainly different - we have higher levels of competition, both in telecom as well as online payments. Yet, the Kenyan example is a helpful reminder of the extent to which cross-linkages between bundled products can influence their adoption and usage, to the exclusion of other competitors.

Jio's dual role as a telecom provider and platform offering access to online content makes it difficult to outright dismiss the role of any network effects. Moreover, any subsequent recoupment of the losses suffered by Jio in its early days need not necessarily be through a significant markup in data tariffs. Increase in volume of data consumption, future monetisation of Jio apps and opportunities for utilisation of data collected from users, are all factors that must be considered.

The tests of predatory pricing

The law and jurisprudence on predatory pricing defines it as below cost pricing by a dominant firm, with a view to exclude competitors. Sustained discounting practices in a market with strong network effects certainly raises a red flag due to the tendency of a single network to dominate the market. In such a scenario, there is a strong likelihood of recoupment after other competitors have left the market and structural barriers deter the entry of new players. The determination of predatory pricing, however, does not hinge on the existence of these network effects.

When Jio first launched its services in September, 2016 it was a fresh entrant in a market with several established players. Its price point of zero was certainly below cost but there was no question of it being a "dominant player". Any regulatory intervention to stop the pricing plans at that stage, whether by the sectoral regulator TRAI or the CCI, would have been premature.

This position has come to change over the last few months. Jio has managed to acquire a sizable presence in the market for high-speed data services - it holds about one-third of the country's broadband subscriber base and about 85 percent of the market in terms of mobile data traffic. Its share in the overall market for telecom services (voice plus data) still remains small since telecom subscribers continue to outnumber Internet users by a wide margin. The manner in which CCI delienates the "relevant market" will therefore form the crux of its analysis in this case.

Accordingly, the first step for CCI would be to determine whether there is a market for data services that is distinct from the broader cellular services market? This will hinge on a factual analysis of whether users regard voice, data and high-speed data services as being interchangeable in terms of their end-use and characteristics, based on a number of factors. One, voice calls can be made using the Internet but the reverse is not true - this indicates a one-way substitutability between the services. Two, there are some differences in the utility of 2G and 4G networks based on the applications that they are able to support. Three, CCI will need to collect data on Jio's usage patterns, that of its competitors and the switching behaviour of consumers. Four, supply-side constraints (like spectrum holdings) that can make it difficult for providers to switch from one type of service to another will also need to be considered.

In the second stage, CCI will need to examine whether Jio can be regarded as being dominant player in the identified market. Besides looking at its market share, in terms of subscriber base and usage volumes, this analysis must also consider the various other factors that have been given under the Competition Act, 2002. These include:

1. Size and resources of Jio and its competitors - Telecom being a capital-intensive industry has many big players. Each of them has access to significant capital resources, although there may be differences in the extent to which these firms have been leveraged.
   
2. Vertical integration of the enterprise - As discussed above, the bundling of voice, data and content offers Jio certain clear advantages. Other players are also offering similar bundles but not necessarily at the same scale. In many cases, the prices and bundles offered by other players have come about as a response to Jio's entry strategy.
   
3. Entry barriers - Telecom is a heavily regulated sector and there are entry barriers, both in terms of licensing requirements and the availability and price of spectrum.
   
4. Relative advantage through contribution to economic development - The arrival of Jio's 4G LTE network, with its aggressive pricing strategy, could also have some pro-competitive effects. Arguably, it has nudged the telecom market towards greater price competition, resulting in lower tariffs. Over time, this could also push other operators towards faster upgradation of technology.

Assuming that CCI's analysis leads it to delineate a separate broadband market (and Jio is found to be dominant in it), the third challenge would be to assess whether its current prices are in fact "below cost". This again will require data on the costs incurred by Jio for delivering its voice and data services and the free apps that are on offer. Finally, CCI will have to determine whether Jio's current pricing continues to be in the nature of a genuine "promotional strategy" by a new entrant or is it a deliberate attempt to reduce competition in the market.

Many have linked the consolidation that we are seeing in the market today with Jio's entry strategy. One one hand, consolidation reduces the number of players, hence reducing competition. On the other, it might be a sign of the sector's movement towards a more mature market with fewer players who are able to focus better on infrastructure expansion and quality of services. CCI will need to weigh in all these factors while examining the impact of Jio's prices on consumer interests, competition in the market and overall economic development.

These are all complex questions, with no obvious answers. The solution lies in a multi-stage, data-driven analysis of predation that should be rooted in an understanding of competition policy and telecom economics. Co-operation and knowledge-sharing between CCI and TRAI is key to finding these solutions.

 

Smriti Parsheera is a researcher at the National Institute of Public Finance & Policy. The author would like to thank Amba Kak, Kaushik Krishnan and Faiza Rahman for useful discussions.

Predatory pricing and the telecom sector

by Ajay Shah.

1. When there are network effects, we should be cautious about the business strategy of discounting. What looks like a gift to consumers today is often a plan to achieve market power and recoup those gains by extracting consumer surplus in the future.
2. The burn rate at Reliance Jio is likely to be pretty large. However, the question that we should be asking: Can this subsidised user base set off a network effect?
3. In telecom, interoperability regulation is in place. Even if Reliance Jio was able to establish a commanding market position through discounting, there is no way to close off its user base for rival firms. Interconnection regulation by TRAI imply that a phone call from a rival telecom company, to a Reliance Jio customer, will always go through. The open standards of TCP/IP mean that a data packet from a customer of any data communications company in the world will successfully reach a Reliance Jio customer. Even if all my friends and family are on Reliance Jio, it makes no difference to my decision to be on Reliance Jio. There is no network effect.
4. Recoupment test: If in the future, Reliance Jio tries to increase prices, nothing prevents customers from switching to rival firms. There is no reason for a consumer to stay with Reliance Jio at future dates if it turns out that Reliance Jio is expensive.
5. Market power in this industry has been checked by the three key building blocks -- interconnectivity regulation + mobile number portability + the open standards of TCP/IP.
6. In fact, there is a negative network effect, as follows. Suppose a lot of customers switch from rival telephone companies to Reliance Jio. This will clog the airwaves of Reliance Jio's base stations, so the performance of Reliance Jio will go down while the performance of rival companies will go up. Through this channel, if Reliance Jio succeeds a lot in gaining customers, it will fail in delivering the best mobile data services.

Second order issues:

1. Interconnectivity regulation imposes costs upon all regulated persons and these costs should be placed in a fair manner.
2. There is an opportunity to obtain market power in JioMoney as payment regulation lacks all three components: interconnectivity regulation + number portability + open standards.

TRAI's consultation towards a net neutrality framework in India

by Amba Kak, Mayank Mishra and Smriti Parsheera.

The context

The Telecom Regulatory Authority of India (TRAI) has issued a Consultation Paper (CP) on Net Neutrality seeking inputs for the formulation of final views on the subject. This comes almost a year after TRAI's regulation prohibiting discriminatory tariffs for data services based on content, framed using its power to determine the rates at which telecommunication services are to be provided. The present exercise covers a broader canvas of trying to identify the acceptable limits of interference in the provision of Internet access services. This includes practices like blocking, degradation or prioritisation of specific traffic, which often form the focus of the net neutrality debate. In TRAI's words, it is an attempt to "rethink the first principles of traffic management by telecom service providers (TSPs)".

While issuing the discriminatory tariff regulation, TRAI had highlighted the importance of "keeping the Internet open and non-discriminatory". This idea also flows through the CP and the pre-consultation paper that preceded it in May, 2016. In fact, TRAI acknowledges in the CP that the term "net neutrality" is being used in its commonly understood sense of equal or nondiscriminatory treatment of content while providing access to the Internet. The word "equal", however, does not appear in the ultimate question posed by TRAI on what should be the "principles for ensuring nondiscriminatory access to content". The CP does not clearly spell out the reason for this. It could be due to the difficulties of monitoring equality in a best efforts delivery system; or perhaps because the term non-discriminatory already captures the concept of equality.

Key issues raised by TRAI

The CP is reasonably comprehensive in its coverage of all major aspects that countries have considered while formulating their positions on net neutrality. Several of these, like reasonable traffic management, scope of prohibited activities and need for transparency were also discussed by TRAI at the pre-consultation stage. The difference, however, is that this CP takes a deeper dive into those issues, identifying the different approaches that could be considered and, in some cases, also weighing their pros and cons. On some issues, TRAI explores new areas, not covered in its earlier papers on the subject. The following are some key points discussed in the CP.

• First, TRAI notes that each country's approach on net neutrality is defined by its local context. Accordingly, it refers to some India-specific factors that may influence its approach. These include, the predominantly wireless character of access services -- 97 percent of Internet subscribers are on wireless networks. The CP later explains that traffic management on wireless networks may pose certain unique challenges due to spectrum constraints and variable usage patterns. It also refers to India's circle-wise licensing regime which often results in the usage of third party networks outside one's home service area. TRAI queries, who will be responsible for any neutrality violations in such situations?
  
• Second, the CP raises pertinent questions about the appropriate footprint of regulation, in terms of the services that are covered and the persons rendering them. In particular, it refers to the potential exclusion of "specialised services", which could be defined in several different ways. The manner in which India eventually chooses to answer this question will have far reaching effects on the adoption of future technologies in the country, particularly in the context of the Internet of Things revolution.
  
• Third, beyond trying to identify the reasonable limits of traffic management, this CP gets into more practical aspects of detection and monitoring of violations. It also suggests a collaborative approach for implementing the operational aspects of net neutrality, which, if adopted, would be a novel approach for the Indian telecom sector.
  
• Fourth, TRAI discusses the role of disclosures and transparency in guarding against discriminatory traffic management practices, an issue that was also raised in earlier consultation papers. However, in this case, it goes on to suggest two approaches on how this can be achieved -- a "direct approach" that would require a TSP to make specific disclosures only its own users; and an "indirect" one would also involve transparency towards third parties like content providers, consumers groups, research organisations and users of other TSPs.
  

Scope of acceptable traffic management

The chapter on "Traffic Management" in the CP sets out the crux of the net neutrality policy debate. First, it explains why traffic management is an integral function of access providers -- to address congestion, security and the integrity of the network. Next, it notes that while such motivations for traffic management practices (TMPs) could be considered "reasonable", others might be "non-reasonable" due to their potentially discriminatory and anti-competitive effects. As such, it explains why regulating traffic management is being considered as a policy option and then mulls over the varied regulatory approaches that could be adopted.

Congestion management, which is explained in terms of the variability of demand or "peak-load", particularly on wireless networks, is explained to be one of the reasons for which access providers might legitimately engage in TMPs. TRAI recognises that the real solution to such issues lies in enhancing the overall network capacity but goes on to note that "even in a situation of enhanced capacity, some degree of scarcity might persist", hence creating a role for traffic management. The key takeaway from this discussion is that "differences in network architecture and technology" will play a role in assessing the reasonableness of any TMPs.

Next, the CP highlights that the same commercial considerations that prompt the use of traffic management tools to improve network performance could also become the cause of exclusionary or discriminatory practices. It notes that there have been global examples of TSP interference in networks for patently anti-competitive purposes, namely "service blocking, prioritising affiliated content provider services or throttling competing ones". While this explains the calls for regulation, traffic interference driven by commercial arrangements is not the whole scope of TRAI's enquiry. Instead, the CP provides two conceptual frames that might be used for such regulation -- the "broad approach" and the "narrow approach".

The "broad approach" appears to be a principles-based approach to identifying which practices would be considered reasonable. Drawing from the European Union's regulations, it refers to guiding principles like proportionality, non-discrimination, transparency and absence of commercial considerations that can be used to define the bounds of reasonableness. Practices like application-specific discrimination, throttling encrypted content, deep packet inspections, etc. can then be tested against these standards.

In contrast, the "narrow approach" will confine itself to formulating a "negative list" of practices that will not be permitted, without going into the contours of reasonableness. TRAI leaves the content of the negative list open for discussion, but gives the specific example of practices motivated by commercial/strategic partnerships with content companies as a potentially proscribed activity.

The distinction between the two approaches does not appear to be one of mere semantics. The paper acknowledges that a negative list is, by nature, likely to be restricted to situations that we are aware of today -- "This may motivate providers to develop other types of business practices that are not explicitly covered in the narrow restrictions although they may have similar harmful effects". It also notes that there could be difficulties in establishing a commercial motive. One way to address this could be to treat the lack of any objective/ technical reasoning for a traffic shaping practice as being indicative of "commercial motive", even where this may not be explicit.

By weighing these different approaches, TRAI seems to acknowledge that regulating TMPs is a tricky exercise, with high likelihood of false positives and negatives. Narrowly defined ex-ante rules may therefore be an uneasy fit with the complex and technical nature of traffic management. The controversy over AT&T restricting Apple's FaceTime application, its high-quality video-calling service, on its cellular network, presents an interesting example. In 2012, when Apple first launched FaceTime for use on mobile networks, AT&T declared that the service would be available only on select pricing plans. On the face of it, this constitutes an application-specific discrimination that violates net neutrality principles, as pointed out by many neutrality advocates. The case, however, also throws up several complex issues, which were discussed in the case study prepared by a Working Group of FCC's Open Internet Advisory Committee.

First, pre-loaded applications, like Facetime, are likely to enjoy more large-scale adoption, thus more likelihood of creating pressure on the network -- only about 10 percent iPhone users voluntarily downloaded Skype, while all had Facetime preloaded on their phones. Second, high-bandwidth video calling applications put a particular strain on mobile data networks, in both the upstream and downstream direction. FaceTime, in particular, was found to consume "on average 2-4 times more bandwidth than a similar Skype video call" at that point of time. Third, limited trial deployment of a new application, for instance, by limiting it to particular pricing plans, could be useful for gathering measurement data to assist in developing better TMPs. Fourth, application management can take place on the device, as was happening in this case, or on the network -- "whether it matters where an application-management decision is enforced, and which organization decides on it". TRAI has also touched upon some of these aspects in the CP by raising questions on "application-specific discrimination", "duty-bearers" in a net neutrality regime and impact of traffic management at the level of the device or operating system being used by a person.

Conclusion

The public discourse that preceded the discriminatory tariff regulation took place in the shadow of Facebook's Free Basics offering. It led to heated debates and sharply polarised views, many of which were focused on the specifics of Free Basics. In contrast, this current consultation is taking place in a relatively less charged environment, with no poster child violation. This presents an opportunity for the regulator and stakeholders to proactively engage with one another for developing a suitable framework for India that can be tested against a range of potential practices. The real test will be to ensure that whatever principles India chooses to adopt at this stage convey a strong regulatory message on non-discrimination, but also have the flexibility to adapt to the dynamic environment of this industry.

The authors are researchers at the National Institute of Public Finance and Policy.