Non-predatory rules: Slightly negative for incumbents but Jio to gain

The non-predatory tariff rules announced by sectoral regulator Trai could adversely impact incumbent operators like Bharti Airtel, Vodafone and Idea Cellular as the new norms restrict their pricing flexibility, whereas new entrant Reliance Jio will be left untouched at least till the time it achieves a market share of 30 per cent.

According to the order by Telecom Regulatory Authority of India (Trai), a tariff can be considered predatory if a significant market player (SMP) offers services at a price, which is below the average variable cost in a "relevant market" with a view to reduce competition or eliminate competitors.

"The tariff order restricts predatory pricing by players with more than 30 per cent subscriber/revenue market share and puts no restrictions on promotions from Jio which is the dominant player in data with 4 times more volumes than Bharti Airtel or Idea+Vodafone," BNP Paribas said in a report.

Further, the regulator has said whenever differential tariffs are offered, it shall be the responsibility of the operators to define in a transparent and unambiguous manner the eligibility criteria for availing such differential tariff. Analysts said this change can potentially reduce the flexibility in pricing for the incumbents.

Analysts also feel that average variable cost is a weak metric to be used as the floor price for identifying predatory pricing in a sector like a telecom which has a very high component of fixed costs such as spectrum, network, employee, advertisement, etc with minimum linkage to volumes.

Ignoring the fixed costs leaves significant scope for below-cost pricing by all operators including SMP. As per Credit Suisse, the cost definitions used to mean that the current tariff levels even by aggressive players will comfortably pass the test.

The analysts further said even if Jio becomes SMP in certain circles, its low priced offers can continue as its variable cost per minute or per GB is likely to be very low, thus making this proposal redundant and not provide any long-term solution to the sector's problems.

Estimates show Airtel is a significant market player in 15 circles, Vodafone in four and Idea in three. However, after the merger, Idea-Vodafone will be a significant market player in about 16 to 18 circles. Jio also has gained around 18 per cent share in circles like Punjab and in the coming years may become a significant player at least in a few circles.

As per BNP Paribas, incumbents were demanding floor pricing for services as well as restrictions on promotions. However, the regulator does not see any need for these as promotions benefit consumers and promotions by one operator compels counter promotions by other operators.