Abstract
Anti-competitive behaviour, despite helping its practitioners reap rich benefits, is generally believed to have adverse effects on the consumers and the economy as a whole. This paper studies anti-competitive behaviour with specific focus on the Indian Telecom Industry. With an extensive coverage of tacit collusion, predatory pricing and competition structures, this paper attempts to provide a strong economic explanation for why big telecom operators are inclined to involve in anti-competitive behaviour. Using concentration ratios, Herfindahl–Hirschman Index (HHI) and a unique measure of excess profits of individual firms, the paper tries to identify which firms have the potential to exhibit anti-competitive behaviour. Real cases of anti-competitive behaviour by firms are also documented. It is hoped that telecom regulatory and competition authorities will be more vigilant and use concrete information to act decisively and impartially.
Introduction
India has the world’s second-largest telecom network, which is growing at a rate unmatched by any other country in the world. The pace of growth and the achievements in terms of statistics have been quite spectacular. Growth of mobile telephony has been the most visible indicator and catalyst to economic growth. Coverage in terms of number of subscribers has reached to 951.34 million in March 2012 from 206 million in March 2007.
However, all is not rosy. Abuse of dominant position, mergers and acquisitions and anti-competitive agreements are standard causes of concern for most competition authorities. Organisation for Economic Co-operation and Development (OECD, 2005) recommends four types of regulations for efficient and best conduct of market activities—namely, (i) competition regulation to protect the competitive environment by monitoring and investigating anti-competitive conduct and assessing mergers, (ii) economic regulation for tariff regulation and pricing, (iii) access regulation for monitoring access to essential facilities in a non-discriminatory and fair manner and (iv) technical regulation to assure compliance with quality, safety, privacy and environmental standards.
Regulation of telecommunications in India is carried out by the Telecom Regulatory Authority of India (TRAI), established in 1997. In accordance with the provisions of the Competition (Amendment) Act, 2007, the Competition Commission of India (CCI) and the Competition Appellate Tribunal (CAT) have been established. CCI is India’s supreme anti-trust body.
To define a few important concepts, we define unfair competition as adoption of practices, such as, collusive price fixing, deliberate reduction in output in order to increase prices, creation of barriers to entry, allocation of markets, predatory pricing, etc. Competition Policy refers to a set of policies, such as liberalised trade policy and relaxed foreign direct investment (FDI) policy that enhances competition in the markets. Competition Law aims to prevent anti-competitive practices with minimal intervention.
Although the paper focuses heavily on the mobile telephony sector, the Indian telecom industry also offers other services such as national and international long-distance services. The role of incumbent operator becomes important in this sector. Unfortunately, the competition in fixed services is rather pointless as the incumbent operator BSNL/MTNL controls some 75 per cent of the market. In both the national long-distance service (NLD) and international long-distance service (ILD) sectors, there has been significant rise in competition. However, the dominant position of the incumbent operators BSNL and VSNL has not been sufficiently eroded. Internet Service Provision (ISP) sector has been very willingly pursued by private players, but in the first decade of liberalisation, no private operator could claim to control even 10 per cent of the market.
This paper mainly concentrates on the competition scene in mobile telephony sector which has a large number of private players. Figure 1 shows the major telecom operators and their market shares (refer to the Appendix for the data table).
Tariff reduction and decline in handset costs has helped this segment of the industry growth extensively. The cellular segment is playing an important role in the industry by expanding in the rural and semi-urban areas. Intense competition for nearly a decade has resulted in prompt service and, given the low tariff environment and relatively low rural and urban penetration level, the demand for this service will continue to remain high across all the segments. Of course, high capital investments, well-established players who have a nationwide network, licence fee, continuously evolving technology and lowest tariffs in the world make the barriers to entry very high in this sector. Also, telecom industry is a capital intensive industry with high sunk and fixed cost due to specialised equipment, spectrum cost, etc. Thus, the exit barrier for an existing player is very high.
We can also look into the nature of the telecom industry. The services in the telecom sector are relatively undifferentiated, and technology innovations are easily copied by the rivals. The customers are price sensitive to some extent to different firms but quite insensitive at an industrial level. This price sensitivity of the buyers increases the threat of price war in the industry.
It is a very fast-paced industry with competitors investing heavily in technical innovation and marketing strategies as any advantage is quite short lived. Interconnection charges lead the incumbents to enjoy their position with almost 80 per cent coverage as a result of the disproportionate cost structure under Interconnection Usage Charges (IUC) regime. Interconnection is the lifeline of telecommunications. It is one of the foundations of viable competition and, when implemented correctly, can become a driver of growth.
The sections in this paper are arranged in a lucid manner: Following this introductory part, the second section deals with a literature review of existing literature on this subject in the Indian context. This is followed by an in-depth coverage of tacit collusions, predatory pricing and factors causing firms to exhibit such behaviour. Next, competition structures in an oligopoly such as Cournot model, Bertrand model and Stackleberg model are examined to explain the structure of telecom industry. A section on mergers and acquisitions in the industry follows. The data and methodology used to identify anti-competitive behaviour is described and an empirical analysis is done for the Indian industry. The role of innovation and a few cases of Indian operators exhibiting anti-competitive behaviour are described. Finally, important conclusions are drawn from this analysis.
Literature Review
There is broad agreement that competition is likely to be the most effective method of promoting improvements in the telecom sector. A monopoly provider, whether state owned or private, faces fewer incentives to improve service and lower prices than do firms operating in a competitive environment. Most agree that while privatisation can bring about great improvements, it must be combined with effective regulation.
Jain (2010) discusses anti-competitive behaviour extensively in her paper ‘Competition Issues in Telecommunication in India & European Union’ and finds numerous challenges faced by the competition authority in the telecom sector. Gupta (2011) highlights the sorry state of rural teledensity and the lack of broadband penetration. Furthermore, the telecommunications sector seems to get embroiled in political problems often. His paper ‘Cellular Mobile in India: Competition and Policy’ concludes on an optimistic note that the competition in cellular mobile is likely to be healthy and the numbers of subscribers will continue to grow. However, issues of governance and misconduct by firms may continue to trouble this sector.
Kumar and Jain (2010) find that the various reasons supporting the need for regulation include addressing market imperfections, foster development of competition and protect competition. It is important to achieve some social objectives like universal service and managing scarce resources efficiently. Regulation also ensures compatibility and interoperability between telecommunications systems and maintains fair interconnection services. Malik (2008) in her paper ‘Telecom Regulatory and Policy Environment in India’ has assessed the role of the Indian regulator on seven broad parameters: (a) market entry; (b) access to scarce resources, mainly spectrum; (c) interconnection; (d) tariff regulation; (e) regulation of anti-competitive practices; (f) universal service obligations (USO); and (g) quality of Service (QoS). The Indian telecom sector’s growth and its ability to serve the poor is a good example of the success of liberal policies. Market failures on account of monopolistic power of the incumbent firm or due to the market entry deterrence practices followed by big firms are an issue of concern. The paper recommends use of proper regulatory instruments like encouraging more entry and infrastructure sharing to address this issue. In fact, the industry scores very low on market entry and regulation of anti-competitive practices as pointed out by the survey results. The current institutional limitations to address these issues and forcing the regulator to work with a predefined market structure, is limiting the ability to foster competition ex-ante. Moreover, in the absence of an effective competition authority, an ex-post check on anti-competitive behaviour is also weak, so much so there is an increasing concern that the incumbent wireless service providers are creating barriers to entry. The paper identifies many barriers to entry are erected due to policy and hence suggests that the licensing policy should be as liberal as possible.
In their paper ‘Price Parallelism and Tacit Collusion with Respect to Practices under Indian Competition Law’, Tripathi and Malhotra (2012) touch upon tacit collusion, price parallelism, cartels and how different countries deal with these issues legally through competition laws and regulations. Anti-trust cases are discussed to show how no single mechanism can identify anti-competitive behaviour, leave alone presence of the collusion, just by studying the price fluctuations in the market of the particular product. Pointing at the ineffectiveness of Indian competition authorities, it is recommended that Indian authorities should avail the advantage of learning from their counterparts in US and EU and other Jurisdictions. An analysis can be made of certain plus factors which are commonly recognisable and whose presence indicates collusive behaviour.
Thus, this paper helps to identify certain patterns in the telecom industry and attempts to explain why large operators have great incentive to collude and engage in anti-competitive behaviour. The gaps highlighted by the papers in regulatory authorities and techniques used by them to identify anti-competitive behaviour are to be addressed.
Tacit Collusions and Predatory Pricing
A key threat to competition is when a number of firms engage in what economists refer to as tacit collusion
Many characteristics can affect the sustainability of these collusions. First, there are some basic structural variables, such as the number of competitors and entry barriers. Second, there are characteristics about the demand side: Is the market growing, stagnant, or declining? Third, there are characteristics of the supply side: Is the market driven by technology and innovation, or is it a mature industry with stable technologies? Are there significant differences across firms in terms of costs and production capacities? Do firms offer similar products?
Firstly, coordination is quite difficult when the number of parties involved is high. Secondly, market share asymmetry may tend to make collusion more difficult to sustain. It should be clear that collusion is difficult to sustain if there are low barriers to entry. Firms are more tempted to undercut collusive prices and the ability to collude, hence, declines when the likelihood of entry increases.
Further, firms will find it easier to sustain collusion when they interact more frequently. The reason comes from the fact that firms can then react more quickly to any deviation from the collusion by the member firms. Another related factor is the frequency of price adjustments in the industry. The more frequent price adjustments are, the easier it is to sustain collusion. However, collusion can be difficult to sustain when individual prices, despite frequently changing, are not readily observable to all the market players.
Coming to the demand side, collusion is easier to sustain in growing markets which promise high future profits. Market growth may be associated with market characteristics detrimental to collusion also. In markets with low entry barriers, market growth is indeed likely to generate entry, and the overall impact may well be detrimental to collusion. However, in those markets where entry barriers are high the intrinsic impact of market growth may prevail and facilitate collusion. It is known that demand fluctuations hinder collusion. For oligopolistic industries facing seasonal cycles instead of random changes in demand, the probability of firms showing collusive behaviour is higher.
In sectors like telecommunication, the innovation is not just technological in nature but also consists of organisational innovations and innovation in product offerings, bundling of services and marketing. When the innovation activity in an industry is low or not very volatile, the firms in an industry benefit from a secure, stable situation. Cheating on a collusive conduct could result in unnecessary price wars. Suppose now that one firm makes a drastic innovation which can drive its rival out of the market. If the probability of such technological change is substantial, the incumbents then anticipate that their market position is short-lived (at least in expected terms). A technologically fast-paced industry would rarely see firms engaging in collusive behaviour.
Next, we look at cost asymmetry in the industry. The most effective collusive conducts will involve asymmetric market shares, reflecting firms’ costs. It is easier to collude among equals, that is, among firms that have similar cost structures, similar production capacities, or offer similar ranges of products. This is a factor that is typically affected by a merger. Mergers that tend to restore symmetry can facilitate collusion, whereas those who create or increase pre-existing asymmetry are more likely to hinder collusion. Also, firms can sustain collusion more easily when the same firms are present in several markets.
Ross (1992) points out that collusion may become easier or more difficult, depending on the exact nature of the competitive situation (e.g., competition in prices versus competition in quantity). The competition structure is dealt with in more detail later on in the paper.
Other than these crucial factors, competition authorities often look at elasticity of the demand, the buying power of the customers, etc. More than the demand itself, the slope of the demand curve has a significant impact collusive prices, as well as on the profitability of collusion. When the firms pick a collusive price, the demand elasticity becomes an important deciding factor. In fact, the profitability of collusion can greatly influence the willingness of firms to design and implement practices that facilitate collusive action.
Snyder (1996) noted that large buyers can successfully break collusion by concentrating their orders or ordering in bulk. This arrangement makes firms’ interact less frequently and increases the short-term gains that firms can gain from undercutting rivals.
Keeping all these factors in mind, let us evaluate the Indian Telecom Industry. Firstly, Telecom industry is oligopolistic in nature with 5–6 dominant firms and has high barriers to entry. The service is fairly homogenous and almost all firms deal with the same service. If calling rates and data rates are taken as the service prices, then the frequency of change is quite high (although the magnitude of change is not) and the prices of all firms usually move in the same direction. The India telecom industry is poised to grow at a compound annual growth rate (CAGR) of 15.8 per cent between 2010 and 2014 (Rai, 2011). Such attractive growth rates and high barriers to entry make the incentive to collude quite high. Although telecom is sometimes termed as a cyclical industry, the demand for telecom services is quite stable and growing rapidly. Additionally, telecom industry is a high-tech industry with rapid technological changes every few years. Only innovative firms that are fast to adapt to new technologies are able to survive profitably in the industry in the long term. Operators offer similar range of services but varied cost structures. However, licence fees, tower rents and network maintenance costs are more or less the same. Other than large corporate customers, telecom industries cater to a large mass of individual customers who frequently transact with them, thus ruling out bulk order of products. The elasticity of demand essentially defines a product or service’s substitutability with respect to others. As the demand curve becomes less elastic, consumers are less willing to do without the good. For telecom services as a whole, elasticity of demand is very low and the service can be considered as a necessity these days. As many cases, like collusive bidding for spectrums, have shown, the profitability of having a tacit collusion is immense and outweighs any benefits of breaking away or undercutting.
Together all these factors clearly indicate that firms in the telecom industry will likely to be a part of tacit collusion or at least engage in collusive behaviour in certain situations.
Changes in the Competition Structure
If we look at the history of competition in the industry and see how the market shares of different companies have evolved over time, especially after liberalisation and entry of multiple private players, we can discern changes in the overall competition structure in the industry.
Initially, Indian Telecom Industry was dominated by state-owned operators BSNL and MTNL. Slowly, with liberalisation and entry of private players like Bharti Airtel, Reliance Communications, Hutch and Tata, the competition scene in the industry improved greatly. Table 1 offers a quick look at the current market positions of these telecom companies. It is interesting to note that Bharti Airtel, Vodafone India and Idea Cellular lead the revenue market share charts and have jointly crossed 70 per cent in revenue market share in 2013. Also, only these private firms report an increase in subscribers during 2012. There are lot of reasons behind this robust performance. The three GSM incumbents share a lot of resources—their physical infrastructure such as towers are held by a three-way JV, Indus—and their 3G roaming pacts enable them to service high-end data customers across the country, even in areas where they do not have the bandwidth to offer these facilities (Philip, 2013).
Top Wireless (GSM and CDMA) Service Providers in India
Bertrand Competition model has at least two firms producing a homogeneous (undifferentiated) product. The firms compete by setting prices simultaneously and consumers want to buy everything from a firm with a lower price. With Bertrand, capacity is sufficiently flexible to meet any demand and, the rivals expect to be able to steal business from other firms. Another assumption is that consumers want to buy from the lowest priced firm. The market is such that by lowering prices just slightly, a firm could gain the whole market, so both firms (in the case of a duopoly) are tempted to lower prices as much as they can.
In early 2000s, the cut-throat competition between firms on the price front and expanding capacity resembles Bertrand competition model to quite an extent. The market shares of companies fluctuated quite a lot in this period owing to extensive competition and entry of smaller firms.
Since 2009 and 2010, the market shares of most firms have stabilised and have not fluctuated a lot (year-on-year basis). It is also observed that the service has become more of a necessity and subscribers are continuously added to the overall subscriber base. Increased brand loyalty due to extensive marketing and transaction cost (including the opportunity cost) of shifting from one operator to another makes the consumers stick with their operators even with small changes in price or quality of service. The firms, now, are following an aggressive strategy of adding new customers by trying to expand in rural areas and other potential areas of growth.
These points indicate that a Cournot competition model can explain the industry better now than the Bertrand model. With Cournot, rivals set prices less aggressively than in Bertrand price competition, since they expect that any price cut will be immediately matched. Also, with Cournot quantity competition, prices adjust more quickly than do quantities (Marks, 1997).
A key point to note is that in a Cournot model of competition, the firms have an incentive to form a cartel, effectively turning the Cournot model into a monopoly. As cartels are usually termed illegal, firms instead try to enter tacit collusions. They may resort to self-imposing strategies to reduce output. A partial cartel model, based on Cournot competition with competitive fringe model, can explain the present situation in the industry to some extent. A powerful group of firms, which form the partial cartel, assume the role of a natural leader and other firms are just followers.
This is especially true, with Bharti Airtel, Vodafone and Idea forming a tacit collusion based on situations and take the first decisions regarding pricing in the market. They are followed by other smaller players in the industry.
Mergers and Acquisitions
M&A by firms are motivated by desire to grow inorganically at a fast pace, quickly grab market share and achieve economies of scale. With the support of government policy and regulations in the past decade, the mobile sector has achieved a teledensity of 14 per cent by July 2006, which has been aided by multiple factors like generous foreign investment, regulatory support, lower tariffs and falling network cost and handset prices. Banka (2012) talks extensively about the regulatory framework, TRAI recommendations and DoT Guidelines that govern M&As in the telecom industry.
The various factors governing the M&A activity in the Telecom Sector are described in Figure 2. Department of Telecommunications (DoT), Government of India, has many responsibilities and one of the most important ones is granting licences for various telecom services. The Securities and Exchange Board of India (SEBI) is a statutory body and the main regulator for the securities market in India. Foreign Exchange Management Act (FEMA), 1999 governs all foreign exchange management and related activities, such as deals in foreign currency, in India. The Competition Act, 2002, contains all rules and law related to anti-competitive agreements, abuse of dominant position, and regulates merger and acquisition activities. The Competition Commission of India (CCI) is responsible for enforcing the Competition Act and monitors all activities which cause adverse effects on competition within India.
Some of the predominant objectives of takeovers and mergers in telecom industry are the acquisition of licences or geographical territory, acquisition of spectrum, acquisition of telecom infrastructure and network. Acquisition of customer base and brand value is also an important motivation along with opportunities to enhance higher profit margins (Table 2).
Major M&A Deals in Telecom Industry
Some other important mergers include Idea Cellular taking over Spice Telecom, in 2011, by buying 40.8 per cent stake at a cost of `2,720 crores. It offered Idea an entry in the contiguous wireless markets of Punjab and Karnataka, which account for 11 per cent of India’s total wireless subscribers. Its all-India subscriber market share increased from 9.5 per cent to 11.1 per cent. Additionally, in 2008, NTT DoCoMo paid 2.7 billion USD for a 26 per cent stake in Tata Teleservices and the deal valued Tata Teleservices at $10 billion.
Analysts at Fitch Ratings, in 2013, have deemed the Indian market to be less profitable and more fragmented than before, and found the top three telcos to have relatively weaker balance sheets. It is believed that, in the long run, India can support only six profitable mobile companies. Indian mobile phone companies are waiting for the relaxation of M&A guidelines, expected by the end of 2013 (Economic Times Bureau, 22 November, 2013). Also, many operators expect the phone call and other mobile services rates to go up every year, indicating that low tariff regime may not be sustainable any longer for the industry. In fact, according to Sunil Mittal, chairman and managing director of Bharti Airtel Ltd., consolidation in India’s telecommunications industry is imminent even as competition eases and call tariffs stabilise. Consolidation will improve small companies’ declining profitability and voice tariffs will benefit from lower competition in the industry (Machado, 2011).
Data and Methodology
For examining the Indian Telecom sector, data for the total subscriber base, company-wise subscribers and overall market share of all the companies are taken for the period December 2003 to December 2012.
All the data are collected, compiled and organised by Association of Unified Telecom Service Providers of India (AUSPI), Cellular Operators Association of India (COAI) and Economic Times Intelligence Group (ETIG). The data published by Telecom Regulatory Authority of India (TRAI) was also used in certain parts of the paper.
Sarkar and Dash (2013) calculated the weighted average cost of capital (WACC) of the Nifty 50 Stock Index for the period 2001–2012. Money Control (
To analyse market competition, we begin by analysing the market power of the firms. For identifying and defining market power we begin with market shares. The market share is the firm’s percentage share of the market’s total sales revenue. Firms with higher market shares are thought to have greater degrees of control over price and quantity, and have correspondingly higher profits.
However, market share data does not give all the relevant information and there are additional indicators of market power, usually based on market structure. The most closely related use of firms’ market share is in defining how competitive an industry is. The combined market shares of the dominant firms within a market are important in determining such competition. Concentration represents the combined market shares of firms. While knowing the concentration within a market does not provide conclusive evidence as to the competitiveness within that market, but it provides a general idea of the industry.
There are two primary methods of calculating market concentration. One method is the four-firm concentration ratio, or C4. The C4 ratio adds the market shares of the top four firms in the industry.
A more widely used measure of market concentration is the Hirschman–Herfindahl Index (HHI). The HHI is calculated for the entire industry using the market shares of all firms rather than only the largest four. The HHI is calculated as the sum of the squared market shares of all firms in the market. The HHI for a pure monopoly would be 10,000. The threshold value indicating a tight oligopoly is generally held to be 1,800. Values below 1,000 indicate that there is no significant market power with individual firms. In general, HHI just serves as a useful guideline, than a definitive criterion for gauging whether effective competition is too high or too low.
The C4 and HHI are methods for determining the degree to which a market is concentrated, but they do not tell us whether firms possess or are exercising market power. Profits, on the other hand, are a clear indicator of the exercise of market power. We take a well-accepted approach to identifying supernatural profits being earned by any firm in the industry.
To be useful as an indicator, firm profit should be calculated as the rate of return on capital employed. Capital Employed is defined as total assets less current liabilities. Return on Capital Employed is a ratio that shows the efficiency and profitability of a company’s capital investments. It is expected that firms in competitive markets would receive a return on capital that is equal to their WACC. The WACC estimates the cost for the firm to raise capital from debt holders and equity holders. The weight refers to a weight on the source of financing; each source has a different price, so the weight allows each source’s price to be taken into account in the overall financial figure. As finding the cost of capital for the entire industry is not very feasible, a reasonable proxy might be to compare the rate of returns of the telecommunications firms of interest to those of other firms in the economy that face business risks similar to the telecommunications firms.
The near overlap of the (cost of capital) CoC calculated for CNX Nifty Index with the CoC of cyclical companies can be explained by the fact that most of the companies forming the Nifty Index are cyclical in nature. In fact, telecom industry falls under the cyclical category. Thus, Cost of Capital of companies (cyclical) index is used as a proxy for WACC for telecom industry. The rate of return of capital employed for large publicly listed companies is taken for the period 2003–2012. Bharti Airtel, Idea Cellular and Reliance Communications are listed on the BSE. Vodafone being an important competitor also needs to be examined. Hutchison-Essar used to operate as Hutch until 2007, before Vodafone group bought the company and converted the network to Vodafone. As an international company, the rate of return on capital employed for the entire Vodafone Group PLC is taken and same applies for Hutch (prior to 2007). These are poor approximations for the rate of return that these companies would have recorded for the Indian operations, and no concrete conclusions can be made using this particular data.
Empirical Analysis
Concentration Ratios
Using the data of market shares, the concentration ratios for different years are calculated first and then plotted (see Table 3 and Figure 3).
Concentration Ratios
A CR4 exceeding 80 per cent is a clear case of very high concentration. With such a high concentration of firms in an industry, probability of cartel formation or other anti-competitive behaviours will rise. Up to 2007, the CR4 value is quite high barring 2004. From 2007, the CR4 decreased quite drastically to a level showing medium concentration in the industry. This indicates a clear oligopolistic industry.
The graph in Figure 4 shows the revenue footprint of different operators in different circles in 2013. After the hyper-competition phase, Bharti, Vodafone and Idea (incumbents) in 2013 have emerged relatively stronger. Incumbents control 62 per cent of active subscribers/wireless traffic. This graph shows that Bharti Airtel continues to dominate the industry and has dominant market share in 65 per cent of all the circles.
Hirschman–Herfindahl Index (HHI)
Hirschman–Herfindahl Index (HHI) is a more widely used measure of market concentration. This is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman (1964). It is an economic concept widely applied in competition law, antitrust and also technology management and is defined as the sum of the squares of the market shares. Thus, the formula for calculating this HHI is as follows:
where si is the market share of firm i in the market, and N is the number of firms. Thus, in a market with two firms that each have 50 per cent market share, the Herfindahl index equals 0.502 + 0.502 = 1/2.
The HHI ranges from 1/N to one, where N is the number of firms in the market. Equivalently, if per cents are used as whole numbers, as in 75 instead of 0.75, the index can range up to 100, or 10,000.
It is generally considered that markets in which the HHI is between 1,500 and 2,500 points are moderately concentrated and markets in which the HHI is in excess of 2,500 points are considered to be highly concentrated. Transactions that increase the HHI by more than 200 points deserve to be investigated into further. The Department of Justice (DoJ) of the USA holds a threshold indicating a tight oligopoly generally at 1,800. Values below 1,000 indicate no significant market power.
A small index indicates a competitive industry with no dominant players. If all firms have an equal share the reciprocal of the index shows the number of firms in the industry. When firms have unequal shares, the reciprocal of the index indicates the ‘equivalent’ number of firms in the industry.
Table 4 and Figure 5 show a drastic increase in the HHI during the period 2004 to 2007. A steady decrease is observed in the recent years owing to the increasing competition and entry of new players in the industry.
In 2005, the total M&A value was nearly $5 billion. This included the deal made by Hutch with Max India, Aditya Birla Group’s deal with the Tatas, Bharti Group’s deal with Vodafone among many others. 2006 again was a stellar year for Indian Telecom M&As with deals worth over $1.5 billion. It marked the entry of Maxis, Malaysia through Aircel, Telekom, Malaysia through Spice Telecom. It also was the year of big purchases by Hutchison-Essar.
Such large M&As in an industry can greatly affect the competition levels. It is evident from the concentration ratios and HHI values that there was an adverse effect on the competition scenario.
Excess Profits
Using the methodology outlined previously, Table 5 is constructed for Bharti, Idea, Reliance and Vodafone.
Hirschman-Herfindahl Index (HHI)
Cost of Capital and Rate of Return on Capital for Selected Years
If the telcos consistently receive rates of return that are comparable to the WACC of the industry, the telecom markets are equally competitive. If the telecom operator’s profits tend to be high compared to the WACC of the industry, the situation is further analysed to see if the higher profits were the result of superior performance or the exercise of market power (Figure 6).
There is no doubt that Bharti Airtel is the best performing company and is widely regarded as one of the best run companies. However, to earn a rate of return on capital employed higher than the industry’s average cost of capital for seven consecutive years may not be a result of operational efficiencies.
Viewing this in the light of Airtel being the highest market share holder for the period 2006–2012 and the HHI becoming very high during the time period 2004–2007, we can discern some pattern. In a post-recession economy, a firm like Airtel could have outperformed its peers based on its sheer efficiency in running the entire network and minimising costs in all the right places. Good strategy and implementation could be behind the success of the company during the post-2008 time period. However, during the period 2004–2007, Airtel could have exercised the power of being the dominant player in the industry to earn super normal profits. The industry had a very tight oligopoly and experienced a spate of M&As during that period with Airtel holding the largest market share and being a dominant, stable player in the industry. It is possible that Airtel used these years to gain a strong foothold in the industry by abusing the power of its dominance or just try to earn super-normal profits. An in-depth analysis of the prices and cost of the firm along with the industry cost curves would be required to give a verdict on the exact behaviour shown during that time period.
Role of Innovation
Two types of innovation, namely innovation in new services and innovation in network infrastructures underlie competition in the telecom industry. We believe that innovation is an inevitable part of these kinds of industries. Thus, firms need to continuously innovate and adapt to changing technologies to survive in hyper-competitive markets such as India. The innovation in network infrastructures is not a major disruptive force for the players under consideration. For example, introduction of 3G was adapted by all major players and was governed by government regulations. The innovation in new services is the major source of competition in the telecom industry.
Observe in Figure 7 the rapidly increasing R&D expenditure by private players in the telecommunication industry, which must be appreciated not just in isolation but keeping in mind that telecom is consistently one of the top 10 industry groups in India by R&D expenditure.
Consider the case for Bharti Airtel. Compared to other competitors, Bharti Airtel has been able to successfully develop and focus on the core competence mainly by partnering with strong global partners. It has managed to completely outsource five big operations—telecom equipment network, IT, customer service, distribution and passive infrastructure. This unique business model, widely lauded for its efficiency, has allowed Airtel to offer lowest costs possible. A fast-changing technological landscape and rapid innovation in services, marketing and pricing models is the real force driving competition in Indian Telecom Industry.
The extent to which technological changes alter the organisation of the industry and speed of innovation—particularly in the new markets—should be reflected in any regulatory intervention. If regulatory authorities cannot respond fast enough to follow the rapid change of the market, many regulatory measures then become either inefficient or obsolete. Fortunately, Mani (2011) credits technological changes and reasonably well implemented regulatory policies for the success of the telecom industry in India. Both these have reduced the height of entry barriers to the industry and made it extremely competitive.
Policy implications of technology and innovation are especially important. Bourreau and Doğan (2001) discuss which types of regulatory schemes are likely to promote innovation in a fast-growing telecommunications industry. Cost-based regulatory methods are expected to fail and do not provide incentives for firms to invest in innovations that would lead to lower production costs in the future. However, ex post control by competition policies are expected to provide better incentives for innovations, at least to the incumbent firm. Regulatory bodies such as CCI must be prudent, and avoid penalising firm dominance that is a result of innovative efforts rather than anticompetitive practices.
Cases of Anti-competitive Behaviour
In this section, we take a few real cases of major telecom companies showing anti-competitive behaviour. Most of these are based on news reports and allegations by competitors. But they serve to show how major operators, such as, Airtel and Reliance Communications, are constantly trying to abuse their dominant position in the market and maximise their gains through tacit collusions.
3G Licence Allocation
After 34 days and 183 rounds of bidding, India’s 3G spectrum auction, conducted by Department of Telecommunications, was concluded in mid-2010. 3G licences were offered for auction in 2010, using a multi-stage bidding process. Out of 22 service areas, Vodafone secured licence for 9, Airtel for 13 and Idea for 9.
It was quite clear that some of the country’s largest operators (Vodafone, Bharti Airtel and Idea) had entered into a mutual understanding, or a tacit collusion. All three operators decided that they would not bid for all the service areas but bid in a way that at least 1 of the 3 parties secured licence for each of the states. This strategic bidding becomes obvious if we see the successful bids. None of the service areas have the presence of all three parties, and yet virtually no service area has been missed out, one or other party has secured licence for every service area except the lone state of Orissa.
It is estimated that together they could save over ` 20,000 crores by following this bidding process instead of attempting to secure a pan Indian licence. Two issues are clearly discernable from this violation. One is the massive loss to the exchequer that has taken place for violating the conditions of bidding and entering what is quite obviously a tacit collusion. The second is the damage to other parties like state-owned BSNL and MTNL who secured pan India licence and operate in confirmation with the licence conditions.
Bharat Sanchar Nigam Ltd. (BSNL), the state-owned operator, has even filed an affidavit in the Supreme Court stating that Bharti Airtel entered into illegal arrangements for roaming violating the terms of the licence held by the private giant. It has openly alleged that Bharti Airtel, Vodafone India Ltd. and Idea Cellular were in collusion in bidding for 3G spectrum auction in 2010. The operator has declared that the whole strategy was aimed at bidding selectively and avoiding competition with each other (Ghosh, 2013).
Without such collusive bidding, the final 3G licence prices would have been higher. There would have been more bids, more excess demand and hence more number of rounds. By artificially reducing the numbers by such collusive bidding, the three parties have kept the final prices lower by at least 25 per cent. Additionally, all the successful parties have paid lower prices causing the loss to the exchequer between ` 15,000 and 20,000 crores.
In 2011, another 3G problem was observed. The various parties were violating their licence terms and conditions by offering services in service areas where they do not have licences. Wherever they were offering services where they do not have a licence, they pretended that they are using roaming arrangements. It is to be noted that collusive bidding was only one part of this problem and the other part was offering all India coverage without the necessary licences. The operators have saved humungous amounts of money if we include the cost of the final licences for those service areas they did not bid but are offering services in.
Another violation by these private telecom giants is not following the roll-out obligation which is part of the 3G licence. By not having any roll-out of infrastructure prior to acquiring the licence—like towers, cells, switches, other equipment—the parties saved not only licence fees but also the capital expenditure required for building this crucial infrastructure. By sharing spectrum and infrastructure among themselves, they are spending much less to provide the same services.
The DoT continues to wink at such violations by private operators. This is despite various organisations including BSNL’s unions having brought the issue to the attention of the DoT officials. Despite the recent 2G scam and other irregularities, DoT and the regulatory authority, TRAI, have failed to be vigilant enough.
Airtel’s Abuse of Dominant Position
In 2012, two operators—Aircel and Reliance Communications—alleged that Airtel was resorting to pressure tactics just days before the festival of Diwali to compel them to pay more towards SMS termination fees. Bharti Airtel closed its network to incoming text messages from subscribers of the two other operators.
Termination charge is a fee paid by the operator on whose network the SMS originates to the operator on whose network the message is delivered (ENS Economic Bureau, 28 May 2013). The country’s largest telecom operator, Airtel, had set a charge of 10 paise per SMS as the termination charge. This was contested by other operators (Ghai, 2012).
Reliance Communications, offering services on both GSM and CDMA platforms, had slammed Airtel for intentionally choosing to go ahead with this move on the eve of Diwali. The blatant disregard for the interests of millions of customers made the company allege that this was another instance of abuse of market position by Bharti. However, Airtel defended its move saying how allowing any misuse of Airtel’s network would compromise the quality of service for its own customers during the festival season.
When Aircel dragged Airtel to TDSAT (Telecom Disputes Settlement Appellate Tribunal) alleging that its decision was arbitrary, illegal, wrong, the tribunal favoured Airtel and the Supreme Court also declined to stay TDSAT’s order previous month.
In March 2009, the concerns about the regulatory authority showing leniency in the setting of interconnection fees, which in turn allowed dominant players to exploit their position, caused the TRAI to order that termination charges be transparent, reciprocal and non-discriminatory. In 2011, TRAI officially began the consultation process for the introduction of SMS interconnection fees. However, over the next few years, the discriminatory interconnection charges resurfaced with certain major operators abusing their dominant market positions to coerce rivals into paying higher fees.
In 2013, good news for smaller telecom players came when the Telecom Regulatory Authority of India (TRAI) announced to lower termination charge to 2 paise per SMS for retail consumers and 5 paise for commercial messages. This decision is the first by the regulator on SMS termination charges as it had left the determination of termination charges to the market.
The Association of Unified Service Providers of India have called the TRAI move a positive one because until now large operators were using their clout to impose an SMS termination charge as high as 10 paise on small operators interconnecting with them. It is expected that the new termination charge will set right the prevalent market distortion, in the rightful interest of the Indian consumers.
Conclusion
Anti-competitive behaviour can be categorised into categories for analysing situations better, namely anti-competitive agreements, abuse of dominance and mergers and acquisitions. In our analysis of the Indian Telecom Industry, all the three behaviours were observed in the industry. As the dominant operator in most circles of the country, Bharti Airtel was seen to be indulging in anti-competitive behaviour multiple times. The economic explanations for why firms in telecom industry are inclined to collude, especially in the recent years, have been touched upon in this paper.
The role of innovation in both services and network infrastructure was examined, and we found rapid innovation and large investment in R&D driving heavy competition among incumbents. An important policy implication is that anti-trust policies have the power to not only enhance competition but incentivise innovative activity.
The line between true lowering of prices and predatory pricing and the line between intentional collusive bidding and a mere coordination of bids are so very fine that regulatory authorities would need to be highly vigilant and thorough in detecting any kind of anti-competitive behaviour. It is also observed that multiple regulatory authorities may have a clash of opinions leading to confusion in the legal domain. Hence, unified policy from the government ought to make CCI more powerful and independent so that it can take strong decisions against any firms in question.
Footnotes
Appendix
Data Tables Overall Market Share of Companies
| Overall Market Share of Companies in Mobile Business |
Yearly Share |
||||||
| Company | Dec 2003 | Dec 2004 | Dec 2005 | Dec 2009* | Dec 2010 | Dec 2011 | Dec 2012 |
| Aircel Cellular | 3.58 | 6.41 | 4.64 | 5.75 | 6.67 | 6.90 | 7.33 |
| Bharti | 22.75 | 21.31 | 24.70 | 22.01 | 20.27 | 19.65 | 21.04 |
| BSNL | 19.71 | 22.42 | 13.28 | 11.47 | 11.53 | 10.83 | 11.56 |
| Idea Mobile | 9.27 | 10.63 | 9.87 | 10.67 | 10.87 | 11.90 | 13.18 |
| Reliance | 25.83 | 22.97 | 17.69 | 20.29 | 16.70 | 16.79 | 13.71 |
| Tata | 2.33 | 1.82 | 9.16 | 10.62 | 11.20 | 9.34 | 8.04 |
| Vadafone | 12.21 | 10.96 | 17.58 | 16.93 | 16.52 | 16.53 | 17.05 |
| Others | 4.31 | 3.48 | 3.08 | 2.27 | 6.23 | 8.06 | 8.10 |
| Total Wireless | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 | 100.00 |
