The ruling from the Competition Commission of India (CCI), on a complaint filed regarding alleged anti-competitive practices by Ola, provides great insight into how the CCI looks at issues, and the ruling can help set precedence for similar cases in the future. The allegations, filed by Meru and Fast Track Call Cab, both radio taxi services, were essentially that Ola is providing radio taxi services, and it has abused its dominant position in the Bangalore market by offering heavy discounts to passengers and incentives to cab drivers, which “amounts to predatory pricing” and has “affected other competitors in the market who cannot offer similar discounts/incentives to commuters/drivers.”

What the CCI & its Director General’s said

1. Aggregator platforms are a substitute for radio taxi services: Despite the argument made by Ola that it is only a technology software provider for taxi hiring, and different from radio taxi services, “thus different from radio taxi companies operating under asset-owned model”, the CCI Director General held that taxis operating under these different business models are “functionally substitutable“. The DG also said that Ola’s argument that all other commercial modes of transport should also be included in the relevant market was rejected, given that “the key features of radio taxi, viz. point-to-point pick and drop facility, ease of booking, pre-booking facility, round the clock availability even at obscure places, predictability in terms of expected waiting and journey time,” among other things.

Aside of the DG’s report, the CCI also agreed the services offered by Ola are of a radio taxi provider, and the services consumed by users are of radio taxis.

“Ola enters into contracts with taxi owners/drivers and uses its brand image, platform to offer these services to the customers. The tariff payable by the consumers for the taxi services rendered is determined by [Ola], which has control over all aspects of taxi services. Moreover, the gross billing amount received from customers is shown as revenue in [Ola]’s books of accounts, instead of ‘commission’. Also, the amount paid/payable to the drivers is a share of revenue from the amount so received from the passengers/customers and is shown as the fleet operators cost. It is evident that [Ola] is providing the same functional product which the players operating under the asset-owned model are providing.”

The fact that Ola has functionally substitutable services “is also clear from the fact that [Ola]’s Article of Association, inter alia, also refer to ‘Uber’, ‘Meru Cabs’, and ‘TaxiForSure’ (subsequently acquired by it) as its competitors.”

In addition to this, regulation treats aggregators as Radio Taxi service providers: “The regulatory framework along with the advisory issued by the Ministry of Road Transport and Highways, Govt. of India in October 2015 and subsequent amendments made by various state transport authorities which indicate that the aggregators are included within the scope of radio taxi schemes.” Following “an amendment in the Delhi’s City Taxi Scheme 2015, aggregators are included in the same category as that of radio taxi service providers.”

What’s also important here is that the CCI noted that “By merely adopting a new business model of operation for providing the same goods/services, the incumbent cannot qualify for a distinct relevant product market.”

It thus found no merit “in the argument of [Ola] that it is only a technology software service provider and not a radio taxi service provider.”

2. Identify of the supplier is inconsequential for the end consumer: The CCI noted that “For the end consumer, who is booking a taxi ride through OP’s platform, identity of the driver who owns the taxi is inconsequential. The consumer perceives [Ola] as a service provider of radio taxi service whose service is substitutable with the services provided by other radio taxi service operators, irrespective of the business model followed by them. Thus, substitutability, in the radio taxi industry, is between the operators and not between the drivers.”

3. Fleet size is not an indicator of market share in case of aggregators: The DG also said that the total fleet size and active fleet size for different players” were not appropriate indicators for assessment of market shares “because there are chances of one radio taxi getting registered on multiple platforms, giving rise to the problem of multiple counting.” Thus they chose to assess market shares on the basis of number of trips.

4. Dominant position depends on how long the marketshare was held, and Uber’s entry helped Ola: The DG said that for a player to have a dominant position in the relevant market, it should be able to hold its market share for a reasonable period of time. Ola’s marketshare started declining “as Uber entered the relevant market almost three years after Ola’s entry.” The DG said that “Uber was able to successfully counter the pricing strategy of [Ola], and being able to sustain losses, which restrained [Ola] from exercising market power in the relevant market. This was evident from the fact that similar strategy was followed by Uber and as a result, the gap in market share between [Ola] and Uber narrowed down from 69% in January 2015 to 22% by September 2015.” “Despite [Ola] having the largest network, the network effect was not strong enough to deter entry and rapid expansion of Uber.”

Thus, it can’t be said whether Ola “would be in a position to hold on to its market share for a sustainable period for assessment of dominance in the relevant market.”

5. Platforms help grow the market: “Further, the entry of these enterprises does not necessarily have to split existing demand. Instead, innovative pricing and other business strategies allow them to increase demand and supply in an existing market.”

Trips and market share

  • In terms of number of point to point trips, the market shares of Meru, Mega Cabs, Easy Cabs and Karnataka State Tourism Development Corporation (KSTDC) declined from 2012-13 to 2015-16. Meru led the market till August 2014.
  • Ola entered the market in early 2011, and had a market share of only 5-6% in the year 2012-13. It increased to 61-62% in the year 2015-16 (till September 2015), taking the lead in September 2014. Ola’s growth in January 2015 was 75-76%, as compared to 0-1% in June 2012
  • For FY15 and FY16, Ola’s marketshare was “more than the aggregate of all the competitors put together”. The number of trips by Ola increased from 46,571 in September 2013 to 2,318,175 in September 2015.
  • Uber, starting operations in Bangalore in August 2013, had a market share of less than 1-2% in 2013-14, which increased to 9-10% in the year 2014-15. Uber maintained the second position from March 2015 onwards.
  • For the six month period up to September 2015, Ola’s market share increased marginally by 2% to 3%, while Uber’s share increased by about 20%-22%. From January to September 2015, Uber’s trip size registered growth of nearly 1200%, while Ola’s growth was about 63% during the same period. Ola’s market share started to decline after Uber’s entry, to 58-59% by September 2015. Uber’s market share grew from 0-1% in August 2013, 6-7% in January 2015 to 36-37% in September 2015.

The numbers bear this out, it seems: “the market has seen a growth of nearly 1900% in terms of number of trips between June 2012 and September 2015. In a span of one year between September 2014 and September 2015, in terms of number of trips, the market in Bengaluru witnessed a growth of about 555%.” In addition, apart from Easy Cabs, all the other incumbents saw an increase “in terms of absolute number of trips from 2012-13 to 2014-15. In the new market dynamics, the incumbents were left catching up with a new entrant armed with a new technology which allowed it to arrogate to itself a large unmet demand, resulting in the growth of [Ola]’s market share during the same period. The emerging pattern indicates that the new
additions to the market, i.e. the new taxis and the new riders chiefly opted for [Ola] instead of the incumbents.”

“Thus, the erosion in their market shares is more attributable to the expansion of consumer base in the market than them being deprived of the demand which they were serving
before.”

 

4. Ola priced below cost, but not predatory: The DG said that Uber’s pricing was more aggressive, in terms of below cost pricing, than Ola. Both Ola and Uber adopted a “below-cost pricing strategy” he said, but “the scheme of the Act only attracts the provisions of Section 4 when an incumbent is found to be dominant”. Ola wasn’t found to be dominant, so this isn’t an issue.

Ola, however, argued that it wasn’t pricing below cost, saying that “customer discounts, bonus and driver incentive are budgeted fixed costs [and not variable costs] and that it’s low Effective Net Take Rate (‘ENTR’) was not due to below cost pricing.” It pointed out that revenue share varies depending on “city and car category, with [Ola] earning positive (5% to 20% of the Gross Merchandise Value (“GMV”)) revenue per ride. “Since the variable cost for [Ola] (i.e. payment to the drivers, 80% to 95%) is lower than the pricing by 20% to 5%, therefore the pricing at all times, is more than the AVC (Average variable cost).

5. Ola didn’t start the price war: Note that the CCI report suggests points out that Ola’s “Average monthly indexed margin” was positive from September 2013 to May 2014, but with Uber’s entry, they dipped. Uber’s monthly indexed margins have “been negative from September 2013 till September 2015.” The CCI deemed that Ola didn’t initiate the aggressive pricing, and it’s negative indexed margin since June 2014 seemed to be more of a reactive strategy to Uber’s pricing.

The CCI also notes that Ola’s response to Uber’s pricing is “indicative of the competitive constraint put by Uber to [Ola] in the relevant market”, and that the existence of two strong players in the market indicates competition, unless they have agreed not to compete, which can “only be looked into under Section 3 of the Act, not Section 4.”

6. Low barrier to entry and switching costs: Meru and/or Fast Track had raised an objection to the DG’s report, saying that he did not investigate the “allegation of exclusivity condition imposed upon the drivers by [Ola] under Section 3(4) of the Act.” The CCI said that the DG found that the drivers are allowed to opt for another platform and they were not restricted because of their association with [Ola].  Because of this, “it is difficult for an incumbent to exercise market power,” since “neither the customers nor the drivers are locked up in any manner,” the DG said, adding that “competitive constraints can also be exerted by the customers/commuters in the form of countervailing buyer power, as they have an option of booking taxis from other platforms like Uber.”

“The possibility and ease of multi-homing constrains the power of the platforms to act independently of the market forces. ”

In addition to this, since the companies don’t have to invest capital on purchasing cabs, “…capital investment as an entry barrier is not high enough to deter new entrants.”

6. Access to funding: The CCI said that access to finance plays an important role, where there is a level playing field. “This is evidenced by the experience of technology start-ups across sectors in the country which could access funding from various sources such as venture capital, angel networks, private equity funds etc.”…”The key to success in this fiercely competitive environment is fast adaptation to changes and constant innovation in business models, technology, pricing models to shake the markets out of equilibrium, and render old ways of doing business uncompetitive, dislodging the existing market leaders.”

Ola raised a total of Rs 5504.81 crores by end of September 2015 (Rs. 2,059.01 crore by the end of 30th September 2015, and Rs. 3445.50 crore by the end of 2014-15. Meru and Mega cabs “were found to be lagging much behind [Ola] in this respect.” Uber had been able to raise its funding to Rs. 161.78 crore by the end of 2014-15, and “Uber Inc had a total capital investment of about 15 to 20 times of [Ola]’s financial resources.”

While the CCI did not fully disagree with Meru and Fast Track Call Cab that Ola’s low prices are not because of cost efficiency, and largely because it got funding from private equity firms, but “there is no evidence that the access to such funding was inequitable and that the market for financing was not competitive and had aberrations.” It also added that their “penetrative pricing strategy that facilitated them to garner high market shares in short span of time as well as develop the networks to a size that could provide sufficient positive externalities to the participants of the network.”

7. To soon to tell: The CCI said that it’s difficult to determine the long term impact of this pricing strategy since the market is yet to mature. “the Commission is hesitant to interfere in a market, which is yet to fully evolve. Any interference at this stage will not only disturb the market dynamics, but also pose a risk of prescribing sub-optimal solution to a nascent market situation.”

8. The changing nature of markets: The CCI said that “The narrow interpretation of the concept of dominance offered by the [Meru and/or Fast Track] would mean that an entrant armed with a new idea, a superior product or technological solution that challenges the status quo in a market and shifts a large consumer base in its favour would have to be erroneously
held dominant. To preclude possibilities of such anomalies in approach in assessing dominance, the Act lays down a holistic framework for assessing dominance and lists out the relevant factors including relative strength of competitors, entry conditions and countervailing power.” It also said that “Aggressive competition in the early stages of network creation takes place, until the market settles in favour of a few enterprises. In such markets, market leadership position can be fragile or transient during the initial stage of evolution of the market.”