Reliance jio entry achieved what years of policymaking could not…

Reliance jio entry achieved what years of policymaking could not…

What years of policy-design and enabling adjustments to it could not do, a disruptive new entrant, Reliance Jio, has achieved in a matter of just months for India’s dynamic telecom sector. Consolidation activity, dormant (निष्क्रिय/प्रसुप्त) for years except for the odd murmur to save an ill-advised entry that sought lucrative spectrum at discount rather than hard-nosed enterprise, has suddenly picked up from virtually nowhere. Vodafone is merging with Idea Cellular, Airtel is acquiring Telenor, Reliance Communication has merged with Aircel and MTS and is in talks with Tata Teleservices. The much-anticipated consolidation is occurring at an astonishing (आश्चर्यजनक/चौंका देने वाला) pace, completely belying (मिथ्या साबित करना) the recent history of such activity (or the lack thereof) and setting the stage for restructuring the regulatory and licensing boundaries that now appear a much bigger limitation to growth than ever before.
An enduring lament (शोक) in the sector has been the proliferation of service-providers in the market that is divided geographically into 22 circles more or less contiguous (निकटवर्ती/निकटस्थ) with the state boundaries. Upto 10 active players operate in a circle; what makes the situation in India even more dramatic and different from other telecom markets is the fact that competition between players is overwhelmingly facilities-based. This means that every player builds out infrastructure—at times, duplicating investments—especially in congested urban areas.
Resellers in Indian telecom have been conspicuous (प्रत्यक्ष) by their absence and, often, policies to attract them have faltered at the hands of detailed guidelines that inhibited rather the encouraged reselling.
Similarly, guidelines for M&As have had a mortifying (लज्जाजनक) record. The focus has been on specifying limits to market-share and spectrum-holdings for the merged entity as well as the acceptable number of players remaining in the circle after the merger. The intent, of course, is honourable since mergers could potentially lessen competition and affect prices. For example, in 2004, the guidelines specified at least three remaining operators post-merger with no one single entity holding more than 67% market-share. In the modified guidelines of 2014, the corresponding number for market-share was reduced to 50% with conditions on spectrum holdings made less restrictive. But since there was no revealed merger activity, one can assume that the cost of the transaction outweighed the potential benefits.
The theoretical motivations for horizontal mergers are quite well-known and revolve around the following several—and perhaps, overlapping—reasons: to increase market power and share, to reduce costs, to strategically deter rivals among others. These and other obvious advantages to service-providers from merging need to be juxtaposed against the potential disadvantages to competition and consumers. The latter is at the core of the antitrust concern around mergers—whether newly acquired market power will be exploited to the detriment of long-term consumer welfare.
The search for market power is an obvious inducement for horizontal mergers and its abuse is what antitrust authorities aim to predict and preclude (रोकना/होने न देना) . The extent to which firms can exercise market power depends on several factors, including demand elasticity, presence of other firms and the degree of inter-firm rivalry. It was the envisaged negative impact on competition, prices and innovation that led the Antitrust Division of the US Department of Justice to block the takeover of T-Mobile by AT&T for a mammoth (बहुत बड़ा/विशालकाय) sum of $39 billion from Deutsche Telekom. The deal would have made AT&T the largest mobile phone company in the United States by a significant margin. On the other hand, in India, the fragmentation of the market and spectrum have often been held up as a reason for the inability to improve quality of services. Following merger activity, the persistent fragmentation could become a thing of the past, allowing new entities to exploit economies of scale and scope, foster innovation without arguably any adverse impact on prices.
The basis for our judgement is twofold. The structural estimates of competition using the Herfindahl-Hirschman Index (HHI) do not show a significant increase even when all currently proposed mergers are accounted for. HHI is determined by adding the squares of the market-shares of all firms and can range from close to 0 to 10,000. The closer a market is to being a monopoly, the higher the market’s concentration (and the lower its competition). If, for example, there were only one firm in an industry, that firm would have 100% market share, and the HHI would equal 10,000 in which price rises will be easier to sustain.
The calculation shows that for most telecom circles, the HHI value obtained after all mergers are done will be lower than the hypothetical three-firm HHI calculated by assigning equal market-shares to each of the three service-providers. In addition, and more significantly, the market will still be host to strong brands post-consolidation such as Airtel, Vodafone-Idea, the Anil-Ambani-led Reliance Communication–Tata Teleservices combine and the staid public sector operator, BSNL. Antitrust concerns should further recede (पीछे हटना/कम होना) into the distant background with the reasonable conjecture (अनुमान/अटकलबाज़ी) that Jio, the disruptive new entrant will seek to chip away at incumbent market-share and establish itself firmly in the new telecom paradigm.
The new paradigm took a while in coming and, to that extent, Jio must be credited with doing what months of policy and regulatory intervention could not achieve. In one fell swoop, its entry and associated pricing manoeuvres have triggered a wave of mergers, liberated consumers from domestic roaming charges and helped draw a commitment from India’s biggest operator to reduce international roaming prices by 90%. If ever we needed confirmation that international roaming prices have been vastly inflated and impervious (अप्रभावित/प्रबल) to regulatory intervention, Airtel’s announcement provides that validation.
True, incumbents have been jolted by the new ‘Schumpeter’, but as the cliche (something that is overused and betrays a lack of original thought.) counsels, every challenge presents an opportunity. For service-providers, the opportunity is to consolidate business and spectrum while recognising that voice will have a steadily declining share of revenue and profits. Jio’s entry has also offered a window for pending regulatory amendments. We know that since the mid-1990s, the telecom sector was transformed by new laws and institutions that profoundly altered the regulatory and institutional edifice and, consequently, sector performance. It is a ripe moment for the next generation of telecom reform.
A fundamental vision of the imminent GST regime is to help create ‘One India’ by breaking down artificial tax barriers between states. There is recognised merit in doing this. Similarly, there is acknowledged advantage in embedding within the licensing regime a reality of telecom that has been upon us for several years now and given expression by Jio—that distance is irrelevant in telecom markets today and convergence is occurring at a frightening pace. Legacy issues will prove daunting and revenue considerations might deter government from embracing a one converged licensing regime. But there are blueprints available in India and elsewhere to quickly begin the discourse. As the bard said, “On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.”