How would the NITI Aayog’s CEO, Amitabh Kant harmonise policies relating to differing business platforms?
The recent move by the government to provide a single policy framework for a level-playing field to stakeholders of retail, fast-moving consumer goods (FMCG) and e-commerce is one step forward. However, from a regulatory perspective, online and offline markets have different characteristics resulting in varying consumer experience. The new economy of online startups have attracted customers due to their efficient tech solutions and unique business models. A major criterion of investment in the digital economy is due to its potential to disrupt the value chain in several ways like connecting, organizing, interaction between the customers and service providers, at reduced costs and more importantly bringing transparency in the transaction.
The online platform has brought up issues which regulators like Competition Commission of India (CCI), Department of Industrial Policy and Promotion (DIPP) need to address urgently due to the huge investments involved. This article focuses on the range of opportunities that competition regulation opens up along with the regulatory risks that it poses against the stakeholders.
Competition policy encourages innovation and easy entry of new players. Thus, a disruptive business model, even if it gains dominance suddenly, does not get questioned by the regulator (CCI), unless it abuses it’s dominance to create entry barriers.
However, how can the competitors in the traditional market who need to undergo legal and regulatory compliances let new disruptive businesses grow without questioning their legitimacy. Therefore, soon after the valuation of online markets started rising, since 2014 there have been constant legal battles before the CCI, DIPP and High Courts all over India.
The entry of Flipkart and other e-retailers, ostensibly called marketplaces, proved disruptive to the brick and mortar businesses. The brick and mortar businesses felt threatened by Flipkart and other e-retailers’ pricing strategies. The Confederation of All India Traders (CAIT) and other retailers informed the CCI about traditional shops being driven out of the market due to ‘predatory pricing’ by Flipkart and other similar online portals.
The CCI has been taking the view that online and brick and mortar stores are broadly one market and are only separate channels belonging to the same relevant market, even though it noted that both offline and online markets differ in terms of discounts and shopping experience and that buyers weigh the options available in both markets before making a decision.
In contradistinction to this view, in a similar allegation against Ola by its competitor ( Fast Track ) for ‘predatory pricing’, the CCI narrowly defined the market as ‘radio taxi services’, a market definition that did not include traditional taxies and held that Ola was predatory pricing and directed the Director General (DG) to investigate in April 2015.
Usually, disruptive technology solutions offer cost benefits and efficiency, which is encouraged by competition law. CCI considered different parameters to assess the respective markets of Ola’s cab aggregator’s service and other e-tailers. Any harm to competition is in relation to a particular product/area. Thus, a sophisticated market analysis involves accurate economic parameters for deciding abuse of dominance in a defined ‘relevant market’. The idea of creating a competition regulator is to make competitive markets work and not stifle competition at the behest of inefficient competitors.
The CCI’s decisions leaves some pertinent issues open, especially on economic considerations, regarding analyzing the impact of online versus offline businesses in the market. As an expert market regulator, the CCI has not given clarity on how market power is assessed or how are markets affected adversely. Increasingly, the challenges would grow due to different interpretations.
These antitrust cases against online market players like Flipkart /Snapdeal and Ola/ Uber provide two lessons for scaling technology companies:
First, when disruptors enter the market and gain scale, incumbents would fight back and collude to find ways to prevent competition. The classic examples are Microsoft’s OS dominance case, Apple’s ebook’s case and Google’s AdWords case.
Second, the decisions of India’s competition regulator - CCI , shows how critical it is to correctly define the market for assessing market power and how easy it is to confuse the notions of ‘protecting competitors’ with those of ‘protecting competition’.
Besides CCI, retailers had initiated parallel litigation before the Delhi High Court alleging violation of Foreign Direct Investment (FDI) policy norms by the e-commerce portals. The FDI policy announcements in Press Note No.3 ( March, 2016) does not completely validate the online business model used by major e-commerce entities in India. It imposes restrictions, particularly on sales through a single seller ( or group companies), discounts / other types of pricing. Thus, the devil is in the detail.
Without clarity in FDI policy, there would be regulatory challenges having important consequences to the way e-commerce entities operate in India. Short-term regulatory changes are damaging as such they cannot cover long-term investments by piecemeal measures. More importantly, the regulator’s huge discretionary powers to pass adverse orders can erode brand value.
In the absence of reasoned and consistent findings by CCI on legitimacy of these online players, they will be at risk of facing legal battles before CCI and Courts. For instance, the Karnataka High Court, recently upheld the state’s right to frame rules for ride-hailing apps. Maharashtra has set similar guidelines for taxi aggregators. Delhi and West Bengal are in the process of framing rules, as is the Union government. Although the cab aggregator’s pricing is more transparent and beneficial to the customer, Ola/ Uber would be forced to roll back the benefits.
The competitive environment has made the online players mould their strategies to gain scale in terms of customer loyalty, sales etc. They are spending millions on marketing and brand valuation. Regardless of the valuation strategies, there is apparent tension between regulation and market competition. The regulatory authorities are not equipped to deal with disruptive entry of new business models, making it difficult to overcome regulatory challenges. If the legitimacy of their business models were not clear then the investments would be risky. A complex question for instance is, whether online market players should be subject to the same regulatory regime as offline players or two separate regimes need to be adapted to their unique characteristics. Another question is, how can online markets co-exist with the traditional markets so that competition is not adversely affected.
While these "e-commerce businesses" confront a variety of the similar legal issues faced by traditional brick-and-mortar companies, they resist regulations. However, they need to manage their challenges with awareness of divergent regulatory approaches. The range of legal issues to consider and manage continues to grow, and ignoring this reality could lead to financial liability, regulatory penalties or unauthorized exploitation of a company’s intellectual property.
It is not possible to be a sustainable business in an unsustainable policy environment. All business models rely on certain external conditions. Most important among these are a country’s economic policy and regulatory framework.
The e-commerce companies have two options. The first option is to face many years of litigation and regulatory risks, until they are able to operate legally. The second, preferable, option is to proactively plan how to deal with the regulatory risk areas – starting by making this an important agenda in boardroom discussions as well as an important point of diligence when scouting for investment opportunities in India.
The environment today today, calls for sustainable plans that foresee market changes in the future and can work with minimal regulatory risks.
(The author is a specialist in competition, commercial and regulatory practice)
Published Date: Nov 25, 2016 11:06 AM | Updated Date: Jan 15, 2017 22:26 PM