Network effects in India s online businesses: A competition September law analysis 29, / 15

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1 Network effects in India s online businesses: A competition law analysis September 29, 2016 Network effects in India s online businesses: A competition September law analysis 29, / 15

2 The Basics Market economy works best when firms in competitive markets continuously innovate to produce better quality products at cheaper costs What happens when a monopoly is set up or achieved? What is the role of competition law? Network effects in India s online businesses: A competition September law analysis 29, / 15

3 Part I Characteristics of new economy firms Network effects in India s online businesses: A competition September law analysis 29, / 15

4 Key features Demand side economies of scale - network effects Network effects in India s online businesses: A competition September law analysis 29, / 15

5 Key features Demand side economies of scale - network effects High innovation and technological changes Network effects in India s online businesses: A competition September law analysis 29, / 15

6 Key features Demand side economies of scale - network effects High innovation and technological changes Average unit cost reduces with scale Network effects in India s online businesses: A competition September law analysis 29, / 15

7 Key features Demand side economies of scale - network effects High innovation and technological changes Average unit cost reduces with scale Availability of capital Network effects in India s online businesses: A competition September law analysis 29, / 15

8 Key features Demand side economies of scale - network effects High innovation and technological changes Average unit cost reduces with scale Availability of capital User data as an input Network effects in India s online businesses: A competition September law analysis 29, / 15

9 Understanding network effects First mover advantage Winner-takes-all markets Self-reinforcing nature of network effects Tipping point Money as the new raw material? Network effects in India s online businesses: A competition September law analysis 29, / 15

10 The case of India s radio taxi market Ola s net losses: INR 228 million INR 342 million INR 7.9 billion Network effects in India s online businesses: A competition September law analysis 29, / 15

11 The case of India s radio taxi market Ola s net losses: INR 228 million INR 342 million INR 7.9 billion Snapshot of FY 2015: Revenue from operations - INR 3.8 billion Total expenses - INR 11.2 billion Network effects in India s online businesses: A competition September law analysis 29, / 15

12 The case of India s radio taxi market Ola s net losses: INR 228 million INR 342 million INR 7.9 billion Snapshot of FY 2015: Revenue from operations - INR 3.8 billion Total expenses - INR 11.2 billion What caused the losses? Network effects in India s online businesses: A competition September law analysis 29, / 15

13 The case of India s radio taxi market Ola s net losses: INR 228 million INR 342 million INR 7.9 billion Snapshot of FY 2015: Revenue from operations - INR 3.8 billion Total expenses - INR 11.2 billion What caused the losses? Fleet operator costs - INR 9.2 billion (82% of expenses) Advertising and sales promotion - INR 998 million Network effects in India s online businesses: A competition September law analysis 29, / 15

14 Global Taxi Aggregation Business Top five ride hailing companies Network effects in India s online businesses: A competition September law analysis 29, / 15

15 The Uber-Ola-Didi Nexus Network effects in India s online businesses: A competition September law analysis 29, / 15

16 e-commerce startups and their investors Common ownership of competing firms Network effects in India s online businesses: A competition September law analysis 29, / 15

17 e-commerce startups and their investors Common ownership of competing firms Tiger Global - Flipkart, Shopclues Nexus Venture Partners - Snapdeal and Shopclues Northwest Venture Partners - Quikr and Sulekha Sequoia - Zaakpay and Citrus; Grofers and Peppertap Network effects in India s online businesses: A competition September law analysis 29, / 15

18 e-commerce startups and their investors Common ownership of competing firms Tiger Global - Flipkart, Shopclues Nexus Venture Partners - Snapdeal and Shopclues Northwest Venture Partners - Quikr and Sulekha Sequoia - Zaakpay and Citrus; Grofers and Peppertap Investor-facilated buyouts Network effects in India s online businesses: A competition September law analysis 29, / 15

19 e-commerce startups and their investors Common ownership of competing firms Tiger Global - Flipkart, Shopclues Nexus Venture Partners - Snapdeal and Shopclues Northwest Venture Partners - Quikr and Sulekha Sequoia - Zaakpay and Citrus; Grofers and Peppertap Investor-facilated buyouts Tiger and Accel - Flipkart/Myntra Tiger and Accel - Flipkart/Letsbuy Strategic investors Network effects in India s online businesses: A competition September law analysis 29, / 15

20 Part II Ambit of the Competition Act Network effects in India s online businesses: A competition September law analysis 29, / 15

21 Abuse of dominance Three step process: 1 Relevant market 2 Dominant position 3 Abuse Network effects in India s online businesses: A competition September law analysis 29, / 15

22 Abuse of dominance Three step process: 1 Relevant market 2 Dominant position 3 Abuse Relevant market: Offline/online markets Geolocation tools Unique products/service could be a relevant market Predatory price v Unfair price Network effects in India s online businesses: A competition September law analysis 29, / 15

23 Determination of dominance Sequential analysis of abuse of dominant position Lets question the current approach: Can we deal with imminent dominance? Reliability of data? Double dominance? Network effects in India s online businesses: A competition September law analysis 29, / 15

24 Part III The way forward Network effects in India s online businesses: A competition September law analysis 29, / 15

25 Suggestions on the way forward Proposed changes to the law Position of imminent dominance Recoupment of losses Voluntary commitments Network effects in India s online businesses: A competition September law analysis 29, / 15

26 Suggestions on the way forward Proposed changes to the law Position of imminent dominance Recoupment of losses Voluntary commitments Rethinking CCI s approach Swifter enforcement procedures Economic features of network industries Closer look at role of investors Dealing with double dominance Network effects in India s online businesses: A competition September law analysis 29, / 15

27 Thank you Network effects in India s online businesses: A competition September law analysis 29, / 15

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