TMI Blog2013 (5) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... network operators, possibly the best partners for selling mobile handsets. This arrangement also helped Apple in gauging the public perception for iPhone before actually selling iPhone through its own retail stores. The mobile network companies who spent money on creating distribution channel and incurring advertisement expenditure wanted the iPhone to be locked-in for some period so that they would be able to recoup their investment over a period of time. To assess the alleged anti-competitive effect of the tie-in arrangement between Apple and Airtel/Vodafone in line with Section 19(3), the Commission relying on the market share statistics of smartphones in India provided by the DG observed that Apple had a share of less than 6% in the market of smart phones during the period 2008-11. Furthermore, share of GSM subscribers using Apple iPhone to total GSM subscribers in India is miniscule (less than 0.1%). Similarly,data provided on mobile service provider, no operator has more than 35% market share in an otherwise competitive mobile network service market. As none of the impugned operators (OP3 / OP4) have market-share exceeding 30%, that smartphone market in India is less than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e). No appreciable adverse effect on competition in the market of smart-phones and/or mobile service has been established, there is no contravention of Section 3 (4) of the Act. Accordingly, the case is ordered to be closed. - Case No. 24 of 2011 - - - Dated:- 19-3-2013 - Ashok Chawla,H.C. Gupta, GEETA GOURI, ANURAG GOEL,M.L. TAYAL AND S.N. DHINGRA, JJ. ORDER:- The instant information filed on 30.05.2011 under section 19(1)(a) of the Competition Act 2007 (Act), having been taken on record by the Commission relates to allegations of anti-competitive agreements entered into by the OPs as also abuse of dominant position by them, in violation of various provisions of the Act. Information 1. As submitted by the Informant, OP1 is an American multinational corporation that designs and markets consumer electronics, computer software and personal computers, best known for hardware products like Macintosh line of computers, iPod, iPhone and iPad. OP2 is the Indian subsidiary of OP1 through which it markets its products in India. OP3 and OP4 are leading mobile service providers in India, jointly having more than 30 crore Indian subscribers that account for almost 52% market sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ications, the purchaser loses all warranties on the handset. Further, no other third party applications can be run on iPhone unless the same has been approved by Apple. If, however, operating system of jailbroken iPhone is upgraded, the iPhone gets re-locked and all third party applications are deleted by the servers of OP1 and OP2 permanently. Informant has further alleged that OP 3 4 refuse to accept any iPhone for repairs at their authorized service centers if the same is not purchased from them. Allegation 6. For the purposes of allegation pertaining to abuse of dominance (AoD), the Informant has claimed that OP1 enjoys a dominant position in the relevant market for the smartphones both in India as well as internationally, iPhone being largest selling smartphone in the world. The Informant has also averred that OP3 and OP4 jointly enjoy dominant position in the relevant market for GSM mobile telephony services in India, as they have almost 52% market share therein. 7. The Informant has submitted that OP3 and OP4 have abused their dominant position by imposing unfair conditions on the purchasers of Apple iPhones by offering expensive subscription services and compulsoril ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y forward the investigation: Did Apple enter into an exclusive arrangement with any cellular service provider for sale of its iPhone? If yes, did the practice have any adverse effect on business of other cellular service providers or limit the supply of iPhones? Were iPhones sold during 2008-2010 locked to the network of cellular service provider through which they were sold? Did the practice amount to tie-in arrangement between Apple and cellular service providers? Were iPhone users required to use only specific data plans? If yes, how these plans compared with other plans at that point of time? Did the practice amount to tying users of apple iPhone to the cellular service provider? Did it result in Appreciable Adverse effect on competition in the cellular service market in India? Were there conditions stipulated by Apple for development and downloading of applications on iPhones? If yes, did the practice lead to any appreciable adverse effect on competition? Was Apple India, Apple US dominant in the defined relevant market? If yes, did their conduct / practice amount to abuse of dominance in the relevant market? Were Airtel and Vodafone dominant in the def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup entity (incorporated under the provisions of the Companies Act, 1956) which is licensed to establish, install, operate and maintain unified access services and other value added services in that specified service area (i.e., circle) is Vodafone Essar Digilink Limited (VEDL). In accordance with the terms of the license issued by Government of India, VEDL is licensed to operate only in Rajasthan, Haryana and Uttar Pradesh (East). Recently, VEDL has changed its name to Vodafone Digilink Limited pursuant to the fresh certificate of incorporation. iii. The information primarily related to alleged conduct of VDEL. (being the relevant entity in whose service area the Informant resides and the alleged conducts is sought to have taken place), however the Notice as issued is a clear mis-joinder of the parties. iv. The Contract of Adherence (COA) was effective for a period of two years with effect from 16.4.2008 and the same is no longer in existence. v. Any review of the COA or the iPhone Agreement is purely and an academic exercise, especially considering the fact that the agreement, when it was in existence related to miniscule portion of the smart phone market which under no cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service providers do not leave any room for restricting customers from moving (to other service providers ). Any issues in relations to restriction on movement of customers between telecom service providers would also clearly fall within the purview of the TRAI and or TDSAT. xi. As stated earlier, since there is a special regulation which governs the operations of telecom service providers including Vodafone, any allegations of "over-charging" by Vodafone would purely fall within the ambit of examination by the TRAI or TDSAT. Based on the above, in so far as the allegations in relation to tariff plans are concerned these clearly fall within the ambit of the TRAI and the special legislation in this regard, as applicable. Therefore, any investigation in relation to issue of tariffs clearly falls within the scope of the TRAI and TDSAT only and not any other authority, and if considered by any other authority including the hon'ble commission, would in effect amount to transgressing into the TRAI's and TDSAT's jurisdiction. xii. The information and the prima facie order which forms the basis of notice, proceeds on the presumption that Vodafone along with Airtel has more than 52% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annels (or its affiliated company) after the expiry of the agreement was purely a commercial decision to clear the existing unsold inventory. Further, even during the continuance of the iPhone agreement and even as of today, as will be demonstrated hereafter, both Vodafone and Apple had and have small shares of the potential relevant markets for provision of cellular telecom network services and smartphone, respectively, that it could not possibly have an adverse effect on competition, much less, an appreciable adverse effect in India in terms of the competition Act. xix. In any case, the informant has failed to define the precise nature and scope of the relevant market(s) before proceeding to make allegations of an infringement of sections 3(3)(b) and 4 of the Competition Act. xx. Vodafone is a service provider of voice and data services, including internet connectivity to its customers and hence they do not control or restrict its customers from downloading applications which may or may not be authorized by Apple. xxi. After the expiration of the iPhone agreement, there can not even be any continuing conduct by Vodafone pursuant to any infringing agreement as sought to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause for examining his allegation, DG has submitted that the Informant did use the iPhone in India and availed the cellular services of the providers in India. Further, DG has submitted that there is no mandatory requirement for the informant to be a directly affected party. Having dealt with the preliminary issues, the DG, then, proceeded to investigate the allegations of anti-competitive conduct of the opposite parties. Investigation of Section 3 violation 17. As submitted by DG, Apple iPhone 3G and 3GS were launched in India in August 2008 and March 2010, respectively. Further, since Apple India did not own or operate retail stores in India, its marketing activities for iPhones were done by Mobile Network Operators (MNOs) or through Authorized Premium Resellers (APRs) through non-exclusive distribution agreements with tenure of two to three years. On the basis of data submitted by Apple India, DG has quoted volume-wise sales of iPhones 3G/3GS made by MNOs and authorized re-sellers during FY 2008-09, FY 2009-10 and FY 2010-11 as 41590, 23080 and 16180, respectively. Against this background, DG investigated section 3 violations by the OPs. Exclusive agreement of undisclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtunities to other cellular service providers. Quoting from the IDC report on the market share for smartphone in India, DG has submitted that Apple had a market share of 1.5% in the year 2008; less than 1% in 2009 and 2010 and 2.4% in 2011. Additionally, DG has submitted that at the time of launch of iPhone in India, there were about 250 million GSM mobile subscribers which subsequently rose to about 600 million in the year 2011. Using this data, DG has concluded that the sale of 3G and 3GS iPhones of Apple in India since its launch in 2008 till 2011 was small in absolute terms as well as in terms of percentage of the overall sale of smartphones of various brands and that the corresponding number of subscribers using iPhone to the total number of GSM subscribers is miniscule. Thus, DG has concluded that the tie-in arrangement would not have materially and adversely impacted the competition by creating any entry barrier for new entrants; driving existing competitors out of the market; foreclosure of competition by hindering entry into the market. Accordingly, DG has held that there is no appreciable adverse effect of the tie-in arrangement of Apple with Airtel and Vodafone on compet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cknowledging that iPhone is a unique product, DG has pointed out that there are certain smart phones offered by other brands such as Nokia, Blackberry, Samsung that have advanced features and which could be considered as substitutes for the iPhone. Further, in case of technologically driven products and industries characterized by rapid innovation, the DG holds the view that availability of substitutable products has to be assessed over a period of time rather than at a given point of time. 26. In line of above arguments, DG has identified two distinct relevant markets in terms of the provisions of the Act namely; (i) relevant market for smart phones in India and (ii) relevant market for GSM cellular services in India. Referring to the IDC Smartphone Report, according to which iPhone had a market share of less than 3% during 2008-11 in terms of volume and less than 6% in terms of value during the same period, DG is of the view that market share of Apple iPhones was low both in terms of value and volume. Further, DG has submitted that there are several other brands of smartphones having market share greater than Apple iPhone. On this ground, DG has submitted that Apple could not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this case as it pertains to the jurisdiction of TRAI; (b) the applicability of the Act as the case pertains to pre-May 2009. Both these issues were addressed by the DG. The Commission takes note of the juridical issues raised by some of the opposite parties and is in agreement with the view taken by the DG in this regard, as brought out earlier in this Order and therefore settles the issues raised by them. Competition Issues 31. The allegations in the present case relate to Section 3 on the anti-competitive agreements and to Section 4 on abuse of dominant position of the opposite parties. The specific competition issues that arise from these allegations are: i. Appreciable adverse affect arising from such agreements; ii. Abuse of dominance by the opposite parties by: (a) Imposing unfair conditions in the purchase of Apple iPhones (b) Imposing discriminatory conditions on users who had purchased their Apple iPhones from a source other than OP 3 and OP 4 (c) Indulging in such concerted practices under the agreements/understandings between them, which results in denial of access, to the other GSM network providers (d) Concluding contracts for the sale of iPhones subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k operators and handset manufacturers create the communication channel wherein the former provides the service and latter sells the hardware to harness the benefits of the service provider. A mobile handset is a complementary product to mobile network service, thereby meaning that unless a mobile handset user has the access to a mobile network services, he would not be in a position to exploit the full utility of the handset. It is observed that, generally, as a part of complementary marketing strategy, handset makers and mobile service providers, although, distinct entities often offer bundled products/services. It has been observed that with the approval of the sector regulator, there have been instances of offering bundled services, wherein mobile service providers offer handsets to their customers that may be locked to their network for a certain time period. 37. As per the data provided by the DG, the Commission has noted the GSM subscriber base in India has shown a phenomenal growth - it stood at 25,82,35,642 in 2008 and has grown to 63,96,37,109 in 2011, a growth of nearly 150%. Taking the GSM subscriber base to be the proxy for the handset market (as every subscriber requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... msung, Nokia, LG, HTC, Micromax, Sony etc. It is notable that each manufacturer has several variants of smartphones, available in different price-bands. In this dynamic scenario, we now proceed to examine the case from the lens of competition. Relevant Market 40. Section 2 (r), (s) and (t) of the Act define the relevant market. Further, Section 19(5), (6) and (7) of the Act gives the guidelines for determining relevant market. 41. The Informant has averred that features offered on iPhone are exclusive only to it, because of which an iPhone cannot be substituted by any other smartphone available in the market. While saying so, we infer that the Informant is referring to the relevant market as consisting of Apple iPhones. On the other hand, while defining relevant market, DG has held that "in case of technologically driven products and industries characterized by rapid innovation the availability of substitutable products has to be assessed over a period of time (few months or year/s) rather than at a given point of time". 42. As stated earlier, DG has made a distinction between a smartphone and a normal phone in as much as the former is capable of running larger menu of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lephony Market 46. From the public documents available on the internet as also from the Information and the DG Report, it is apparent that products of Apple have been defying the conventional norms - they come with innovative features that offer qualitative leap over their rivals. No doubt, some people might have a preference for Apple products like iPhone but to qualify it as a niche segment, it is required that no other competing products offer similar products and that the target customers perceive it as being the 'only' product in the market. If it were so then, the relevant market would have been that of iPhones. The Commission finds it difficult to define the relevant market as just consisting of iPhones. Such single-brand markets are rarely tenable. Relevant markets generally cannot be limited to a single manufacturer's products. The Commission views reasonable interchangability between iPhones and other smartphones. iPhone is a part of bigger segment of mobile handset i.e. the smartphone market. Comparisons of features and prices of different smartphones are done and referred to that includes iPhone along with other smartphones. Apparently, Apple views Samsung, Nokia, Bla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eby meaning that, as an example, iPhone purchased from Airtel could be made functional by inserting Airtel SIM in any service area in which Airtel was licensed to offer mobile services. 51. In view of the above discussion and in consonance with the definition of relevant market in respect of cellular telecom services market as proposed by the DG, the Commission opines that the relevant market is the market for GSM mobile services in India. 52. To sum, the two relevant markets identified for the purpose of present case are: Market for smartphones in India; and Market for mobile services in India. Dominance 53. Dominant position has been defined under Explanation to Sec 4 as " position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to (i) operate independently of competitive forces prevailing in the relevant market; or (ii) affect its competitors or consumers or the relevant market in its favour. Section 19(4) of the Act lists guiding conditions under which an enterprise may be viewed as having a dominant position. 54. The Informant has submitted that Apple is the largest selling smartphone worldwide. It has also s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orts that Apple's share in smartphone market in India was around 3% during 2008-11. On this screening criterion, the argument of Apple's dominance falls flat. However, the DG has analyzed dominance of other factors as envisaged under 19(4) conditions and has concluded that even then, Apple cannot be said to be in a dominant position. The Commission endorses the view of the DG. 59. As regards the dominance of OP3 and OP4 in the second relevant market, the DG has held on the basis of section 19(4) conditions that neither Airtel nor Vodafone has adequate market power so as to be deemed dominant. Also, the argument made by the Informant that OP3 and OP4 hold nearly 52% of market share in the GSM services in India cannot be accepted for the fact that they are horizontal competitors who fight for greater market share. Moreover, there is no allegation qua these OPs that they have indulged into anti-competitive conduct among themselves for a common cause. 60. According to the data available on the website of Cellular Operators Association of India (COAI), Group Company wise percentage market share in terms of GSM subscribers for the month of December 2012 is as follows: Sl. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, distribution, storage, sale or price of, or trade in goods or provision of services, including (a) tie-in arrangement; (b) exclusive supply agreement; (c) exclusive distribution agreement; (d) refusal to deal; (e) resale price maintenance, shall be an agreement in contravention of sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India". Further, what constitutes appreciable adverse effect on competition has been provided for in Section 19(3) of the Act. 65. The allegation is focused on what is referred to as a lock-in arrangement between the handset manufacturer and service-provider by the Informant. At this stage, it is worthwhile to distinguish between tie-in and bundling as these two terms tend to be used interchangeably in common parlance especially in marketing strategies. Anti-competitive concerns, however, require a distinction in the two terms that an agreement sets out. Furthermore, an agreement, as in the present case, the Commission has carefully reviewed the tie-arrangement in the context of the dual roles of the service provider. On one hand the service providers are independent mobile te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ractive to buyers. Bundling is used as a strategic pricing tool by the producers to price discriminate among groups of buyers with different preference schedule in order to capture larger pie of social surplus thus generated. 68. Having discussed tying and bundling, it is important to underscore the fact that there is a subtle difference between the two concepts. The term "tying" is most often used when the proportion in which the customer purchases the two products is not fixed or specified at the time of purchase, as in a "requirements tie-in" sale. A bundled sale typically refers to a sale in which the products are sold only in fixed proportions (e.g., one pair of shoes and one pair of shoe laces or a newspaper, which can be viewed as a bundle of sections, some of which may not be read at all by the customers). Bundling may also be referred to as a "package tie-in." It is also true that various foreign courts have occasionally used the two terms interchangeably. 69. On the other hand, anti-trust concerns are raised in the case of tie-in as held in section 3(4) (a), although per se it is not anti-competitive. Therefore, the Commission has been at pains to distinguish between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But as pointed out that for a vertical agreement to be anti competitive requires the monopolization claim to hold, and given the minuscule market share of the tying party the monopolization claim will be contrived. Nevertheless, we assess this agreement in the framework of 19(3)(a) (b) and (c) by posing the following questions: Does this agreement prevent Airtel and Vodafone customers to use other smart phones? Does the agreement prevent unlocked iPhone users to use services of other mobile service provider? Consequently, is there a foreclosure effect of the agreement on any of the two markets - smartphone and mobile services? 71. Given the fact that none of the opposite parties (Apple/Airtel/Vodafone) have dominant position in their respective market, as discussed earlier and that there has been no intention and evidence to show that market has been foreclosed to competitors or that entry-barriers have been erected for new entrants in any of the markets by any of the opposite parties, the anti-competitive analysis of the tie-in arrangement shall be made while addressing the above questions. 72. In this case, it is found that a consumer interested in buying an iPhon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ached several service providers to sell its handset without exclusivity as regards the service provider. Apart from service providers, these handsets were also sold through the Apple Premium Resellers (APRs). The exclusivity argument put forward by the Informant flies in the evidence of multiple choices for both purchase of iPhone as well as network service provider for consumers. 76. The Commission also notes that a consumer having a mobile handset (smartphone or otherwise) is free to exercise his choice for availing network services without any restrictions. Furthermore, the network operators do not require any particular handset to be purchased by the customer in order to avail its network services. Moreover, the lock-in arrangement of iPhone to a particular network was for only for a specific period and not perpetual, a fact known to prospective customer. It is difficult to construe consumer harm from the 'tie-in' arrangement between the opposite parties. The Commission observes that there is no restriction on consumers to use the network services of OP3 and OP4 to the extent that the network services can be availed on any mobile handset, even an unlocked iPhone purchased fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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