Creating a monopoly or healthy competition?

Creating a monopoly or healthy competition?

 By V Sridhar, Professor, IIIT Bangalore

The recent announcement by Google to partner with Bharti Airtel for 1.28 percent stake in the company and the corresponding investment up to $1 billion is indeed a very interesting case for competition regulation in the country. This is a second major investment by Google in an Indian telco, after it purchased stake in RJio earlier. Much like Google, Facebook (now Meta) also has interest in the Indian telecom market with its investment in RJio. Google has indicated that the partnership will enable speedy and effective provisioning of 5G services in the country.

It is indeed good news for the telecom industry, which has been shunned by the investors – both domestic and foreign, for the past decade, due to cancellation of licenses, dispute over regulatory levies, and unviable operations.

The telcos and Internet firms were at loggerheads over asymmetric regulation of the two sectors. While telcos are heavily regulated all over the world, the Internet forms are not.  Some of this asymmetry stems from fundamental differences in the nature of business such as jurisdictional nature of operation, technology used, and substitutability of services.

However, the telephony, messaging, content and application services offered by the two sets of firms do also complement each other. World over, Net Neutrality advocates always looked at any partnership between a telco and an Internet firm with suspicion. In India, TRAI shot down the alliance between Facebook and one of the Indian telcos in December 2015, by issuing the regulation on prohibition of discriminatory tariff for data services. Are there such premonitions with these new alliances?

When net neutrality was conceptualized in the early 2000s, it was meant to stem the significant market power of telcos, an entity that provides an essential service. Obviously, a dominant telco can hinder competition in a downstream market by a vertical merger with content and application providers. For instance, a telco with its own marketplace for apps (such as iMode owned by DoCoMo), can increase barriers to entry for other application marketplaces who are not part of the ecosystem. Net neutrality regulation that prohibits discriminatory treatment of Internet companies– either with respect to pricing or traffic management – in a sense eliminates any incentive for vertical integration and alliances. Is this argument valid in today’s 5G world?  

Apart from the popular views about 5G providing high speed data transfers, 5G is more about bringing a paradigm shift in ways in which things and humans are interconnected. In a recent report, McKinsey Global Institute (MGI) has estimated an increase in global GDP by about $2 trillion through the use of 5G connectivity paradigm in key sectors such as healthcare, retail, mobility and manufacturing alone. Deployment of 5G involves the coordinated effort of not only the telcos, but also of the content & application providers. 5G is also about connectivity solutions for specific domains in areas such as healthcare, transport, agriculture, government and utilities. Hence this arrangement between telcos and Internet firms is a welcome step indeed to usher in next generation services, especially in Business-to-Business and Business-to-Government services. The synergies between connectivity providers such as Airtel & Rjio coupled with the strength of the Internet firms such as Google and Facebook in cloud provisioning, content and applications will have strong complementarities for 5G deployment to be successful.

However, such alliances often tend to create “Walled Gardens” (term coined by John Malone, the founder of Tele-Communications Inc., a company later acquired by AT&T) comprising of a bouquet of services provided by network operators, handset manufacturers, platform vendors, and content providers. A notable example is the one created by Apple with exclusive wholesale agreements with AT&T Wireless in early 2000s for its iPhones. By subsidizing the iPhone with long tenure contractual agreements, and creating a proprietary app store, Apple created a walled garden. Way back in 1999, NTT Docomo, the leading mobile operator in Japan as platform captain, created its own ecosystem of application and content providers for its iMode service. These alliances in general pave way for vertical integration of products and services and expand the scope of offerings, at the same time beneficial to consumers due to reduced transaction costs.

More often than not, these vertically integrated walled gardens have a “platform captain” (i.e. Apple, NTT DoCoMo, RJio, Google) who provides coordinating mechanisms, rules, key products, intellectual property and financial capital. Platform captains generally derive business benefit from their key position in the vale chain.

While there are clear guidelines and thresholds on horizontal alliances such as market share, revenue share, spectrum holding for assessing Significant Market Power, setting such benchmarks for vertical alliances are often tricky. The integration of different types of services also obfuscates the definition of market for the regulators to access the firm’s power in the defined market. In the U.S., the Department of Justice tried in vain to block AT&T’s (telco) acquisition of Time Warner (media and cable) for $45 billion in 2018.

In general, the garden can be walled; however with gates open for easy entry and exit of both the customers and the platform members. The regulator needs methods to detect these openings and see whether these are wide enough! The basic rule shall be that firms in vertical alliances shall not make huge profits at the expense of depriving consumers of alternative options.

(This article first appeared in Business Line on 11 February 2022)