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Monday, April 03, 2017

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.

1 comment:

  1. perhaps a reconsideration is required for point 4 on consumer switching. reliance will have access to consumer data exhaust, including transaction history, and would be in a better position to attract and retain consumers than its competitors. in other words, as is often said 'data is the new oil' the relevant market here is 'data exhaust' rather than 'telecom'. the dominant player in 'data' market can use its position to get gain market share in other markets. the problem with data is that it takes time to profile user based on its specific data - so once an entity has access to data and built a database, it will be very difficult for a potential competitor to get access to such amount of data in reasonable time and make competitive offers.

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