Intervention: response to adverse trends - DG, TRC

The Telecommunication Regulatory Commission (TRC) said that the introduction of a floor rate to telephone operators has survived the telcom industry that was on the verge of collapse as a result of the price war between operators.

The controversial intervention of TRC raised many issues and critics questioned the role of the regulator. However, Director General, TRC Anusha Palpita said that price competition in the industry had come to a level that affects the whole industry as some operators would tend to cut rates below the cost.

Anusha Palpita

Bharati Airtel Lanka Limited challenged the TRC floor rate and said that TRC has violated fundamental rights by arbitrary treatment and is violating its investment conditions. TRC backed by other operators said that Airtel is attempting to create a monopoly using its huge customer base worldwide.

With 100 million subscribers, Airtel is the third largest single country mobile services operator in the world and sixth largest integrated telecom company globally. The Supreme Court last Thursday rejected the Airtel rights plea accepting that monopoly is detrimental to the interest of the consumers.

Palpita said that the floor rate was introduced by the end of 2009 and only an amendment was done on July 17. “Our intervention was a response to the adverse trend created in the industry.

In 2009 the industry had lost Rs.23 billion and in the fourth quarter of 2009, all operators earned losses, he said.

TRC said that there are only around 2 million post paid subscribers while the other over ten million are pre-paid customers and the introduction of floor rate has given benefits to them as the operators have reduced pre-paid rates.

For instance Dialog has reduced its Rs.5 off net rate to Rs.2.50 and on net rate to Rs.1.50. Etisalat on net from Rs.2 to Re.1, off net from Rs.3 to Rs.2, SLT CDMA off net from Rs.3.96 to Rs.2 and on net from Rs.3.66 to Rs.2. Hutch off net from Rs.2.50 to Rs.2 and on net from Rs.2.50 to Re.1, he said.

This is a healthy trend and it has boosted the confidence in the industry.

This will reduce the cost of operators by 50 percent and since there are 60 billion calls a month a small price change will make a huge impact on the revenue of the sector.

The TRC will revise the floor rate every six months and reduce it by 25 cents.

This is a temporary measure and the regulator’s role is to ensure an unfair competition in the industry, Palpita said.

GW

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[ Price war ]

Price war is a term used in economics to indicate a state of intense competitive rivalry of price reduction. One competitor will lower its price to grab a market share and then others will lower their prices to match.

If one of them reduces its price again, a new round of reductions start.

In the short-term, price wars are good for consumers, who can take advantage of lower prices.

Often they are not good for the companies involved.

Lower prices reduce profit margins and can threaten their survival.

In the medium to long term, they can be good for the dominant firms in the industry.

Typically, the smaller, more marginal, firms cannot compete and must close.

The remaining firms absorb the market share of those that have closed.

The real losers then, are the marginal firms and their investors.

In the long term, the consumer may lose too. With fewer firms in the industry, prices tend to increase, sometimes higher than before the price war started.

This is happening in Oligopoly markets, a market dominated by a few firms.

A main characteristic of oligopoly is the interdependence of firms with high intense advertising.

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