India: Has The Competition Commission Dealt Biggest Legal Blow Yet To India's Start-Up Story?

Last Updated: 13 October 2015
Article by Anand & Anand

Growth, adoption and market share; these three words form the basis of the business strategies of millions of start-ups around the world including thousands in India. Profitability is almost a profanity in the start-up world; investors often advise start-ups to have a single-minded dedication to growth and to not worry about profits. Consequently, start-ups in India have been able to enter with a big bang offering goods and services at a price range that was unthinkable only a few years ago. Their strategies have included bumper discounts, large-scale marketing and possibly even pricing below cost. Some of these pricing strategies have been in play in the automotive aggregator space where players such as Ola and Uber have adopted very aggressive pricing and marketing strategies that have even driven out competitors like Taxi For Sure out of the market. Thus far, the sustainability of these pricing practices and the valuations of these companies has only been debated amongst industry experts ad nauseam even as more and more companies obtain millions of dollars of VC funding on the basis of the same model.

In a recently delivered decision, the Competition Commission dealt the first legal blow to these practices by ordering an investigation into Ola's practices on the basis of information given by Fast Track, an incumbent in the radio taxi space. The decision not only impacts Ola; While the Uber rape case was a black swan event, this development is probably the most important legal decision affecting India's start-up industry yet considering that such practices have been adopted by thousands of start-ups.

The case set up against Ola

Ola is a dominant player in the radio taxi service market in Bengaluru having a market share of 69% with 43.2% of the active fleet in the city. It has been heavily funded by VCs, because of which it is indulging in abusive pricing practices including pricing below cost i.e. the 'direct costs' of providing the services to consumers are higher than the revenue earned. It is also offering unrealistic discounts to consumers and unviable incentives to drivers. These practices have resulted into exclusion of existing players and created entry barriers for the new entrants.

Apart from this, it is restricting its drivers from using platforms offered by competitors, which by itself is an anti-competitive practice.

Commission's findings

In a nutshell, the Commission's findings are as under:

  • The relevant market is that of radio taxi service since the services provided by radio cabs are not substitutable i.e. similar services are not offered by other means of transport. Interestingly, the Commission took into account distinctive features of the radio taxi services such as high availability, pre-booking facility, booking through apps, ability to track cabs, payment by cards, transparent pricing etc. to hold that radio taxi services form a separate market of their own.
  • The relevant geographic market is Bengaluru since radio cabs usually operate within the city limits and consumers cannot hail cabs from beyond the city limits.
  • Ola is a dominant player in the market since it has 69% market share in the relevant radio taxi service market. It appears that Ola has market power since it has gained this market share in a period of only 3 – 4 years of starting operations.
  • Ola has prima facie indulged in predatory pricing practices since it is spending more money on discounts and incentives (apart from the variable costs it may be incurring) on customers and drivers compared to the revenue it is earning. The Commission noticed that Ola was losing nearly Rs. 230 per trip and this was indicative of predatory pricing.

In view of these findings, the Commission ordered the Director General (DG) to conduct an investigation into the matter including an investigation into the conduct of Ola's officials so as to fix individual liability on those responsible for these practices.

What happens next?

While Ola can challenge this decision by way of a writ petition, past experience in such cases indicates that it is unlikely that the Court will stay the DG's investigation. Courts in the past have stayed the proceedings after the investigation but have refrained from staying the investigation itself.

An investigation usually involves a look into the Company's business practices, request for documents/ information and Ola may be required to fill out a questionnaire prepared by the Director General's office. Since it contains confidential business information, the questionnaire and any documents submitted can be kept confidential upon request. In rare cases, the investigation can also involve dawn raids which are highly intrusive.

What does the decision mean for the start-up industry?

As I mention above, this decision strikes at the heart of the business strategy of thousands of start-ups.

Importantly, a crucial pre-requisite for antitrust scrutiny into predatory pricing is "market dominance". Thus practices that may be under the radar for several years may suddenly become subject to scrutiny by the Competition Commission as the player starts grabbing more market share. What percentage of market share leads to "dominance"? Unfortunately (as is often the case in law) there is no clear answer to this question. 50% market share is usually a good indicator of market dominance, though in some cases in other jurisdictions, even 30% market share has been considered enough to show dominance. At the same time, a market share of over 50% may also not be considered dominant if the barriers to entry into the market are low since this would mean that the current players do not have "market power" and cannot abuse their market position.

Another critical aspect is the standard of "cost" used to determine predatory pricing. Lets say a widget seller acquires the goods from the manufacturer for Rs. 100, incurs Rs. 40 on marketing and other operational expenses and sells the goods further for Rs. 120. While the Company has technically incurred a loss, the price of the goods sold is more than the cost of goods sold. The part of the Commission's order looking at the amount of money Ola is losing per trip lacks analysis into the pricing structure and the standard of "cost" that the Commission took into account while reaching a prima facie conclusion of predatory pricing. It is noteworthy that even more advanced jurisdictions like US and EU are grappling with the standard of "cost".

While some may argue that the Commission has only ordered an investigation and this is far from a death knell into such pricing strategies, the nuisance value of an investigation may itself incentivize incumbents who have suffered owing to stiff competition from their e-commerce rivals to file more such complaints under the Competition Act. On their part, start-ups must start planning ahead for such issues as soon as they start gaining some level of market dominance in a particular geographical market. For the bigger players, especially in the e-tailing sector, it may be an ominous sign of things to come.

The decision of the Competition Commission can be accessed at http://cci.gov.in/May2011/OrderOfCommission/261/062015.pdf.

Originally published on The Legal 500

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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