Trai gets it wrong: Bundling beneficial for both consumers, producers

Internet and technology companies develop products and services that can be sold attractively to consumers as a suite.

Trai gets it wrong: Bundling beneficial for both consumers, producers
While the allegation might have some traces of truth, the reality is much more complex.

Bundling is back in the news, and possibly for the wrong reasons. The Telecom Regulatory Authority of India (TRAI) has, once again, taken a rather dim view of bundling in the broadcasting industry, presumably in consumer interest. They say bundling is non-transparent, costly, and subscribers end up paying for channels they do not watch. While the allegation might have some traces of truth, the reality is much more complex. Besides, the alternative that is sought to be put in place doesn’t really deal with the initial problem, in some cases, making the situation worse.

Let’s start from the beginning. What is bundling, and why does it raise the hackles of regulators? Bundling is selling two or more goods, or services, at a single price. The constituents of the bundle may be related, unrelated or tied (inseparable). Bundling attracted the antitrust glare in the late 1990s, when Microsoft ‘bundled’ its browser, Internet Explorer (IE), with its Windows operating system (WOS). It was alleged that Microsoft wanted to preserve, or even extend, a monopoly position in operating systems. Half a century before that, America’s Supreme Court had pronounced that “tying agreements serve hardly any purpose beyond the suppression of competition.”

But, tying arrangements, or ‘pure bundles’, by definition, do not allow products to be sold separately, thereby restricting consumer choice. Many will recall an emotional Bill Gates arguing in court that IE and the WOS were, in fact, a pure bundle, and that the two could not be technically separated. It would damage the system capability if they were. In retrospect, we now know that it was a manoeuvre to retain monopoly status.

Not all bundles, however, are anticompetitive. Since the Supreme Court verdict in the US, the ecosystem has vastly changed. Today’s technology renders the past unrecognisable, and bundling itself has seen much innovation. Internet and technology companies develop products and services that can be sold attractively to consumers as a suite. For example, subscription to Amazon Prime allows e-commerce consumers price and delivery privileges, as well as access to their music, and on-demand video services. Telecom companies in the US, and Europe offer the ‘quad play package’, bundling together wired broadband connection, landline, mobile phone, and content. Closer to home, telecom operators are offering their OTT products alongside conventional services.

The fact that these are ubiquitous, and have found favour with consumers, means there is some public good in them. Other examples from daily life include assembled cars, desktops and mobile devices (with preloaded software), package deals for vacation tours, restaurants offering value meals, and metro offering season tickets—the list is endless. They also come with a statutory warning—products are available without the offer—albeit sometimes in fine print. The overpowering conclusion is that bundles are not always bad. For consumers, they reduce search costs while for producers, they reduce distribution costs. The overall lowering of transaction costs could improve market efficiency. The challenge for regulators, therefore, is to identify bundles that cause harm to consumers, and result in suppression of competition. No doubt, the task is hard—but, prescription ought to be a last resort, rather than the first option.

Especially, if the retail market is competitive, and technology is evolving in a manner to ensure that it will always remain so for the foreseeable future. In the US, broadcasting, as we know it, is already a declining industry due to the Netflix invasion.

TRAI, however, disagrees with the general proposition that “bundles provide more to watch, at low incremental cost” (Bharat Anand, The Content Trap, 2016). Its “Telecommunication (Broadcasting and Cable) Services (Eighth) (Addressable Systems) Tariff Order, 2017” mandated an à la carte regime that would bring transparency across the wholesale, and retail segments of the industry value chain, and empower consumers to exercise their choice in selection of channels. The order also prescribed a floor price for a bouquet, and limited it to 85% of the sum of MRPs of the à la carte pay channels included in the bouquet. In other words, a broadcaster could offer a maximum discount of 15% for the bouquet. The order also capped the price of a channel to Rs 19, for those channels included in any bouquet. The order was expected to lower costs for consumers, and improve transparency.

The implementation of the order met with resistance from the industry. The provision capping discount of bouquets at 85% was struck down by the Madras High Court, and a review raised in the Supreme Court was also dismissed. However, the courts recognised TRAI’s right to regulate prices. TRAI’s intention to secure consumer interest is honourable, but the choice of instruments, doubtful. For example, a CRISIL study that followed implementation of the order found varying impacts on monthly TV bills for consumers. It reported that the new pricing could increase monthly TV bills by up to 25% for viewers who opt for the top 10 channels, but is likely to reduce it for those who opt for the top five channels. Browsing over 800 channels is overwhelming for any consumer, and could lead to ‘post choice dissatisfaction’.

At ICRIER, we also studied “Competition and Regulatory Intervention in India’s Television Distribution and Broadcasting Services” (April 2019) in general, and examined the implications of TRAI’s new Tariff Order in particular. The research showed that structural measures revealed adequate competition in the market, even without accounting for the incipient competition from newer technologies. The fact that the Competition Commission of India (CCI) allowed the merger between Dish TV and Videocon, and that the acquisition of Den Cable and Hathaway by Reliance also received a green signal indicates that, in the opinion of CCI, the market will remain adequately competitive even after such combinations.

After the TRAI order, industry responded by raising the price for channels with inelastic demand, such as those providing general entertainment, movies and sports. In some cases, prices increased by over 100%. Several channels were placed at the ceiling price of Rs 19. The sum of prices for the entire set of channels, for every broadcaster, when aggregated individually, was higher than what it was before the order. The average price for Standard Definition (SD) channels increased from Rs 5.56 per channel to Rs 5.93, while the price for High Definition (HD) channels declined from an average of Rs 48.2 to Rs 30.6. Lowering prices was, presumably, a response strategy for premium broadcasters, such as Discovery and National Geographic, to survive. Moreover, the order raised several compliance challenges for the technologically underprepared cable operators. TRAI, by its own admission, was disappointed with the outcome.

In an attempt to course-correct, TRAI floated another consultation paper on tariff-related issues for broadcasting and cable on August 16, 2019. The consultation paper attempts to further restrict the price flexibility available to broadcasters and distributors. It questions the need for channel bouquets, and revisits its previous recommendation on price floors for bouquets. Such prescriptive regulations are unlikely to serve the consumer interest, and may be harmful to long-run viability. In the telecom sector, TRAI has followed the practice of regulatory forbearance whenever it has deemed competition to be adequate. More often than not, this has proven to be optimal. The same rule could be extended to broadcasting, especially since it is an industry witnessing competition from OTT. Being prescriptive runs the risk of implicitly choosing one technology over another. In any case, abuse by broadcasters can be addressed ex post by the competition regulator. That might just be the better approach!

(The author is Director & CEO, ICRIER. Co-authored by Mansi Kedia, Fellow, ICRIER & Richa Sekhani, Research Assistant, ICRIER. Views are personal)

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.