Jio - Free is complex
On 8 April 2017 Jio, a mobile telecom operator in India, ended its offer to new and potential mobile subscribers for free telecom services for a fixed period of time. Jio did so following intervention by the Telecom Regulatory Authority of India (TRAI). TRAI indicated that Jio’s offer was not in accordance with the regulatory rules. The intervention occurred following complaints from competitors. It was not the first time that Jio has made such an offer. This aggressive pricing action and its already very low charge rate compared to the incumbent operators has made Jio a major force in the Indian mobile telecoms market; it entered the market just over 15 months ago but already has over 170 million subscribers.
The Jio story and arguably TRAI’s response prompts the question about companies offering low priced or free products/services; when is such conduct not lawful?
To begin, I remove from the discussion low prices offered by companies that hold a dominant position or at least hold a very significant market share. Discussion about such action, referred to as predation, is well framed and, it is generally accepted, such action can have an exclusionary effect. That is, it can lead to competitors being enfeebled and ultimately leaving the market, so opening the way for the dominant company to charge prices above the level prior to its predatory action.
The debate about free or at least below cost prices seemed to have reached a general consensus in 2005 when the OECD published a paper on what it referred to as Resale Below Cost (RBC). In brief, the consensus was there seemed little if any evidence supporting the sanctioning of RBC. Over a period of several years prior to the publication of the report an increasing number of countries that did have RBC sanctions had deleted them from their laws. Prohibition of RBC was justified because it was seen as unfair and contrary to normal business practices. It was also justified on the basis that it protects small retailers from the aggressive actions of large retailers. In general, the OECD paper identified that RBC laws were not working, produced negative societal effects and even, in some cases, produced anti-competitive outcomes! For example, a review of Belgian cases noted that, “A striking feature of these cases is that, as often as not, the plaintiff is the manufacturer using [the RBC law] as a means of curbing discounting and maintaining resale prices”. Another common characteristic noted was that the RBC provisions have been used by trade associations of retailers against discounters. In both groups of cases the outcome is to raise the price floor for the goods concerned. That a few countries even today still have an RBC provisions in their laws probably speaks mostly to the lobbying power of small retailers in those countries.
One of the biggest challenges to sanctioning RBC is the large number of ways a seller can sell at a low price, and the difficulty in knowing whether that price is RBC. For example, being offered three products for two might be thought of as a classic example of RBC, but because such offers are for a limited period of time they are not considered to be RBC. But what is a limited period of time, noting that Jio’s offer was for a few months only? A far less obvious example is current account banking services. A bank customer that stays in credit doesn’t pay for banking services. Instead, a customer will pay if it goes into the red, effectively pays a higher interest rate if it takes a loan from the bank and receives a lower interest rate on its saving account. Does this mean banks are offering current account services on an RBC basis and so should be stopped from offering free current account banking services?
The discussion about RBC has become more complex with the digital economy. Nobody pays Google to use its web search services. Instead, Google generates revenue for its web search services through advertising and monetization of aggregated user data. Does this mean Google is offering a free service? The same question could be posed in relation to terrestrial commercial television. The service is free, the ‘price’ is having to watch adverts.
Jio’s business plans and ultimate strategy are not in the public domain. However, to speculate, if its plan is to obtain a very large mobile telecom customer base and then oblige them to listen to adverts as the 'price' for the service, what is the fundamental difference between such a business model and either commercial terrestrial television or Google’s web searching services? If Jio’s strategy is to offer mobile telecom services, free or below cost, and mobile banking services where the customer is charged for transactions conducted using the mobile banking service, is this RBC in relation to its mobile telecom services?
The first line of challenge to Jio’s free offer is its competitors. If a competitor is only in the mobile telecoms space, it will lose customers to Jio. However, it would not lose all its customers. There will be those who prefer to have free banking services and pay for their mobile telecom services. The fact that banking services and mobile telecom services are in different markets might be an old economy way of considering the situation. The digital economy is a disrupter of traditional ways of doing business. In future, the mobile telecom sector might be joined at the hip with the banking sector. The latter might in future only exist on-line, given the emergence of digital currencies such as bitcoin and robust money tracking technologies such as block-chain. The emergence around the world of joint ventures between banks and mobile telecom providers would seem to attest to this sector dynamic.
Whilst the sanctioning of below cost selling by non-dominant companies exists in only a small number of countries, the increasing use of below cost pricing, at least by companies active in the digital economy, might result in a resurgence of interest by competition authorities and regulators. Such resurgence might be stimulated not by small retailers but by large incumbents fearful of disrupters. Today, RBC rules are cast as unfair competition rules rather than as rules aimed at anticompetitive practices and thus do not require any type of market structure or market power analysis concerning the likelihood of anticompetitive effects of a predatory campaign. Indeed, RBC laws simply prevent firms from offering low prices without requiring any evidence of a negative impact on competition or consumers. In most cases RBC laws are drafted as per se restrictions and as such are rather blunt and unsophisticated instruments. (Jio’s case may be an example of such a blunt instrument being applied). If there is a resurgence of interest by competition authorities and regulators in RBC, the challenge for competition authorities and regulators is what should be the framework for consideration of RBC conduct? Current ways of thinking about RBC and predation suggest that finding a framework that is robust in terms of legal and economic thinking for free offers, at least in the digital economy, will be complicated and likely complex.