In floor price debate for telecom firms, India has Pakistan, Nigeria, Zimbabwe for company

Incumbents in the telecom sector have asked the Telecom Regulatory Authority of India (Trai) to fix a minimum floor price for voice and data services. This isn’t surprising; they have been knocking on every possible door seeking an end to Reliance Jio Infocomm Ltd’s onslaught, which offered its services free for seven months, and is now offering three months’ services for the price of one.

Also, with the Competition Commission of India (CCI) having shot down a petition to rule against Jio’s alleged predatory pricing, the lobbying with the sector regulator has understandably intensified.

“It is quite jarring for the telecom industry, a child of the country’s reforms in the 1990s, to ask the regulator to intervene in pricing decisions”, says an analyst with a domestic institutional brokerage.

As this paper’s editorial argued last Thursday, Trai must avoid the temptation of overregulating the sector (http://bit.ly/2sPFSVw).

It has always practiced the policy of forbearance as far as pricing decisions are concerned, and any intervention on pricing will be a major shift in policy, and will drag the regulator into extremely tricky territory.

In Nigeria, a decision to impose a floor price for data services caused a furore among consumers in November 2016, leading the Nigerian Communications Commission (NCC) to withdraw the proposal (http://bit.ly/2sa33ro).

In India, a far larger market, it will be reasonable to expect a revolt from consumers as well, especially after the drastic fall in tariffs they have enjoyed in recent months.

One of the arguments made by incumbents before Trai was that this has been implemented in some other countries. But a moot point is that two countries where the telecom regulator has mandated a floor price, Sri Lanka and Zimbabwe, have a population of less than 40 million put together.

Bangladesh is a rare market with a relatively large size where a floor price is applicable for voice services.

None of the other ~190 countries have implemented a floor price for the telecom sector, and from the looks of it, no developed market has even broached the subject.

As such, there isn’t a compelling narrative as far as precedence goes.

The Sri Lankan example is often touted in the debate. Its telecom industry was running high losses when the floor price was introduced by the Telecommunications Regulatory Commission of Sri Lanka (TRCSL), but turned around within two years of the move, and also resulted in higher investments into the sector.

But what is often missed in the argument is that the policy has helped Dialog Axiata Plc remain entrenched as the clear market leader—Murtaza Jafferjee, chief executive officer at Colombo-based JB Securities (Pvt.) Ltd, estimates the company has a revenue market share of well over 55%.

Meanwhile, the subsidiaries of Bharti Airtel Ltd and Hutchison Whampoa Ltd have remained bit players, with single-digit market share, thanks to the restrictions on price-based competition.

As such, a floor on prices affects competition dynamics and favours some companies over the others.

It can also breed inefficiency in some companies and result in huge profit in some others.

Jafferjee points out that the cost of providing services for some telcos is way lower than the floor price set by the regulator. As a result, large incumbents are enjoying high operating profit margins, he adds.

Apart from being appallingly anti-consumer, the concept of a floor price can also keep some telecom companies from investing in advanced technologies to lower costs, and result in them becoming inefficient.

Last year, the Pakistan Telecommunication Authority, issued a consultation paper, arguing for a floor price for voice and data services. See http://bit.ly/2s5ak0C.

While there’s no news on its decision yet, the paper articulates the typical case for a floor price fairly well. The regulators who have considered a floor tend to argue that intense price competition affects the financial health of telcos and that a floor will strengthen the industry.

A TRCSL official also pointed out in a presentation that companies shift their focus from price competition to other areas such as competing on quality.

Some have suggested that unfettered competition can lead to a race to the bottom and affect sustainability of services to customers.

In the rare case, such as when Turkey imposed a floor only for market leader Turkcell, the reasoning was more nuanced.

Turkey’s telecoms regulator, the Information Technology and Communications Authority, imposed a floor price for only Turkcell’s on-net calls, because the operator was charging vastly different prices for on-net and off-net calls, purportedly to take advantage of its high market share. The floor was lifted last August.

The Bangladesh Telecommunication Regulatory Commission (BTRC) is currently doing a cost-model analysis for data prices, because it believes companies aren’t reducing prices fast enough, despite lower regulatory costs.

So, in sum, the concept of a blanket floor price is clearly out of the ordinary, especially when it’s being considered for the reasons India’s incumbent operators are talking about.