Star India and Sony in Troubled Waters over CCI Order

[Warning: Long post follows!]

The CCI, in a recent order dated 27th July, 2018, passed under Section 26(1) of the Competition Act, 2002 (“the Act”), instructed the Director General to investigate claims of price discrimination made by the Informant, Noida Software Technology Park Limited (“NSTPL”) against Star India Pvt. Ltd. (“Star India”), Sony Pictures Network India Pvt. Ltd. (“Sony”) and Indian Broadcasting Foundation (“IBF”).

Factual Overview

NSTPL is a distributor of TV content and it uses the new Head-end in the Sky (HITS) technology, a “potentially new disruptive” technology due to its numerous advantages over traditional distribution technologies.

In services provided by Multi-System Operators (MSO) and Local Cable Operators (LCO), the cable operator provides channels on a lump sum basis and the consumer is left with no choice when it comes to choosing these channels. Often, the picture quality is also low in these services. Since they are not addressable systems, the number of subscribers remain undisclosed. HITS and DTH (Direct to Home), both ,“addressable systems”, tackle this problem by employing the Conditional Access System (CAS) for encrypting TV signals and Subscriber Management System (SMS) for managing subscriber details and content and allowing users to exercise their choice of channels . The main point of difference between these two systems lies in the fact that in DTH, transmission can take place only via Ku band and in HITS, transmission can take place vie Ku band or C band. C band is said to be more effective and have a wider coverage than Ku band. HITS is said to be far superior to other technologies due to its wide reach, high quality transmission services and economical low-cost infrastructural set up. (For more information regarding the functioning of the technology, read this.)

Big media broadcasters, Star India and Sony, need no introduction. Both are members of the IBF, a representative umbrella body formed to protect the interests of its member broadcasters.

The Regulatory Framework

Regulation 3.2 of TRAI’s Interconnection Regulations, 2004 (“Regulations”) deals with the “must provide” and non-exclusion principle by mandating all broadcasters to provide access to channels to all distributors, including HITS operators who approach them, on non-discriminatory terms. The Regulations also require the framing of a Reference Interconnect Offer (RIO), which is to form the basis of all Interconnection Agreements. A RIO lays down the “technological and commercial terms” on which TV signals are offered by broadcasters to TV Distributors. The Regulations also allow for mutually negotiated agreements between broadcaster and distributor, apart from the RIO.

Past Litigation

Ever since the inception of the technology, HITS operators have faced various regulatory and legal hurdles. Way back in 2008, Dish TV approached the TDSAT, since an agent of broadcasters was withholding their channels from Dish TV on account of it being a HITS operator (Currently, Dish TV no longer holds a HITS license). Though the TDSAT noted the many benefits of the HITS technology, it ultimately decided the case against Dish TV on the sole basis of a regulatory oversight by the TRAI. Although Regulation 3.2 of the Regulations had been amended to include HITS operators, the existing policy regarding downlinking channels at the time (as per the 11th November 2005 notification) did not cover HITs operators.

In 2013, the TDSAT considered a matter where the content aggregator, Media Pro, refused to enter into an RIO with NSTPL alleging that the technical standards laid out in Schedule IV of the Fifth Amendment to the Regulations needed to be more stringent qua HITS operators, since there was a risk of piracy of TV channels. More specifically, it was alleged that due to the huge “footprint” of HITS operators, more than one country was covered by it and a transmodulator could be used to smuggle signals into another country. Observing that the same could be done by other operators too and that operators cannot be expected to adhere to higher norms than the ones specified in Schedule IV, the Tribunal decided in favour of NSTPL. Problems with Media Pro, however still continued.

In 2014, NSTPL again approached the TDSAT following Media Pro’s refusal to reveal rates at which TV channels were provided to other similarly placed distributors. Media Pro claimed that it was not bound to disclose such details in relation to other distributors and was only bound to give signals to NSTPL on the basis of its RIO, which it claimed was non-discriminatory. The RIO it offered to NSTPL only had a la carte channels but in its agreements with other distributors, it offered bouquet rates, thereby reducing the reach of NSTPL’s operations to viewers. Further, the ratio of a la carte and bouquet rates, as per Clause 13.2A.12, was not adhered to. It also refused to enter any mutual negotiation with NSTPL. The TDSAT delivered its judgment in 2015 and decided upon various important issues. The Tribunal held that any negotiations between parties (and mutually agreed upon contracts) would be subject to principles of non-exclusion, non-discrimination and reasonableness under the Regulations. Though the TDSAT ruled that HITS operators were different from others (DTH and MSO), due to the differing technology, they ought not to be excluded from being offered similar commercial terms as other distributors. The Tribunal also deemed that the disclosure of terms of agreements entered into with other broadcasters was necessary, considering that none of the other distributors were making RIOs as per Regulations. The Tribunal lastly deliberated on the RIO. The RIO in this case offered the highest permissible rate under TRAI tariff orders, hence compelling NSTPL to accept it at high and arbitrary rates. Noting that the RIO was perpetuating discrimination instead of preventing it, it termed it as a “faux RIO”. It held that that when parties are bound by such RIOs, violation of principles contained under the Regulations take place. It further gave several directions on what a “proper RIO” was to consist of: all formats of packaging channels, along with respective prices, (adhering to the prescribed ratio) on the basis of which negotiation can be entered into. (For the copyright issue in this case, refer to our post here.) Accordingly, it ordered all broadcasters to enter into fresh Agreements.

In the present case, the Informants alleged that the broadcasters were offering RIOs with highly onerous commercial terms and were simultaneously entering into agreements not based on the RIOs with certain distributors on favourable commercial terms. Specifically, NSTPL alleged that Star India had released a RIO with an inventive scheme containing several discounts in 2014 which excluded HITs operators. After NSTPL requested Star India to make the RIO available to them, Star India offered to do the same in 2015, provided that they clear Star India’s dues. However, instead of offering the RIO, they issued disconnection notices to NSTPL. Sony, on the other hand, was in a RIO based agreement with NSTPL till 2016, after which they stopped supplying channels to them, alleging that they had defaulted in payment.

The CCI Order: Allegations. Counter-Allegations and Final Decision

While there were numerous arguments and issues in this case, let me focus on the most important ones:

Jurisdiction: Who’s to Decide, TRAI or the CCI?

Star India, in its contentions, accused NSTPL of forum shopping since they had already approached the TDSAT on similar grounds. They further argued that pricing and manner of offering fell under TRAI’s jurisdiction and was hence, an ‘occupied field’.

The Commission held that the matter was well within its jurisdiction since its powers were “additional and not in derogation” to TRAI’s power to regulate broadcasting practices under Section 62 of the Act. Quoting a recent Bombay High Court judgment in Vodafone India v. CCI, where the Court held that the CCI can only opine in a matter if it has been suitably settled under relevant Telecommunication Laws and/or decided by Regulatory Authorities or High Courts, the Commission observed that that the same had taken place in the current case. The TDSAT and TRAI both had confirmed price discrimination practiced by the broadcasters, in their earlier orders. Citing a Madras High Court judgment, which had dealt with the validity of the  2017 TRAI Regulations for addressable systems and its related tariff order under the TRAI Act, 1997, the CCI went on to observe that the matter had already been decided by the High Court. It hence concluded that the matter was open to the CCI to decide.

Section 3(4) and Section 4: Price Discrimination

NSTPL complained of various discriminatory tactics undertaken by broadcasters. According to them, the broadcasters were entering into side agreements for ‘carriage fees’ (for carrying channels) and ‘placement fees’ (for placing channels prominently in distributors’ bouquets) with vertically integrated and preferred distributors. The broadcasters, on their part, did not deny this and merely stated that only the TRAI could regulate the quantum of such fees.

Another method of price discrimination alleged to be practiced by the broadcasters was of making ‘bouquets’ of channels, i.e., grouping unpopular channels with popular ones so that even the former can garner advertising revenue by getting switched ‘on’ in the subscriber’s Set Top box. It was alleged that the channels in these bouquets were offered at more attractive prices in non-RIO based agreements than the a la carte rates of these channels in RIO based agreements, thereby compelling subscribers to opt for the bouquets rather than the individual channels.

Star India also admitted that they gave lower discounts to NSTPL and claimed that the practice was not discriminatory since they claimed that small players have less reach and there is less scope for broadcasters to earn advertisement revenue through them.  (This allegation was not dealt with by the CCI but it is an accepted practice in light of the 2015 TDSAT order which had observed as such: “It, thus, follows that the broadcaster might agree to give its channels for distribution on comparatively lower licence fee if it ensured a greater reach of its channels to the viewers and thus a larger potential for advertisement revenue. Volume-based discount in the licence fee is recognised by the Regulations 10…”)

The NSTPL alleged that the above-mentioned practices amounted to ‘constructive’ refusal to deal under Section 3(4). They also contended that there was ‘outright’ refusal since the commercially viable RIO which Star India had released in 2014 excluded HITS operators. Star India and Sony mainly refuted such claims by stating that their RIO rates were regulated wholesale prices, approved by TRAI and hence, no claims of price discrimination could be brought against them.

Under Section 4, NSTPL strived to prove the collective dominance of the broadcasters and how they were abusing their dominant position to deny market access, whereas the broadcasters tried to refute the same.

Holding that Section 4 cannot apply to a case of collective dominance, the CCI focused on Section 3(4), which also required analysis of market power. On examining their channels, the Commission came to the conclusion that Sony and Star India enjoyed a dominant position in ‘Sports’ and ‘Entertainment’ genres. It then considered the TDSAT observations regarding how badly framed RIOs could be used as a “coercive tool”. It applied these observations to refute the broadcasters’ contentions that ‘refusal to deal’ cannot take place if channels are offered at RIO rates and instead observed that such coercive RIOs can be a mechanism for refusal to deal. Further, it held that broadcaster’s dealing with NSTPL solely on the basis on RIO was discriminatory according to the TDSAT ruling and hence, it amounts to contravention of Section 3(4) of the Act.

Accordingly, it passed the order for investigation.

Analysis of the CCI’s Take

Given that Star India and Sony admitted that they offered differential pricing to Informant vis-à-vis other distributors and that there has been a finding of contravention of Section 3(4) against them, the situation appears to tilt mostly in NSTPL’s favour. However, there are some tricky legal issues that this case throws up.

Jurisdictional tussles between the TRAI and the CCI are quite common. CCI’s ability to intervene in TRAI regulated matters stems from two provisions of the Act: Section 60 describes the overriding effect of the Act and states that it would have effect “notwithstanding anything inconsistent therewith contained in any other law” and Section 62  states that the provisions of the Act were “in addition to, and not in derogation ” of other laws.

With respect to broadcasting services, the CCI has taken a similar stance to the one taken in this order in its past decisions i.e., it has relied on Section 62 to decide on a TRAI regulated matter. It has even gone on to state in one order that though it acknowledged TRAI’s status as a sectoral regulator in the broadcasting market, competition in this market would fall within exclusive jurisdiction of the CCI. The Supreme Court, in a case where the matter had been settled by the TDSAT and the parties had approached the CCI thereafter (similar to the present case), held that the CCI had a “positive role” to play and could rule on such matters, observing as follows:

The Preamble of the Act, read with the aforesaid provisions, would show that the Commission set up by the Competition Act certainly has a positive role to play. A perusal of Sections18 and 19 would show that it is a positive duty of the Commission to eliminate all practices which have an adverse effect on competition…Section 60 then gives the Act overriding effect over other statutes in case of a clash between the Act and such statues to effectuate the policy of the Act, keeping in view the economic development of the country as a whole.”

Should such an approach, however, be allowed?

The CCI’s reliance on the Bombay HC decision is puzzling since the Bombay HC clearly stated that “interconnection agreements” (which is exactly what the CCI ruled upon) comes within the ambit of the Authority/TDSAT exclusively and not the CCI. The Commission’s reliance on the Madras High Court judgment is also equally puzzling. Since the High Court had examined the validity of certain provisions of the 2017 Regulations and the related tariff order which laid down certain restrictions related to mixing of channels in bouquets, caps on MRP rates and discount rates of these channels, it can be assumed that the Commission was trying to draw a connection to facts of the present case by stating that the Madras HC judgment dealt with “discriminatory pricing”. However, these provisions were mostly discussed from the point of view of content regulation and their validity was upheld under the TRAI Act, 1997. The present case, on the other hand, does not deal with the issue of content regulation and instead deals with various means of price discrimination against the Informant. Hence, it is unclear as to how the issues in the present case can be said to have been decided by the Madras High Court. In a nutshell, the question of jurisdiction remains undecided and a conclusive interpretation by the Apex Court on the same is required.

Irrespective of whether the CCI should have ruled on this matter or not, its approach towards ending discrimination towards HITs operators is commendable. By keeping the HITs technology out of the market, broadcasters have effectively prevented consumers from accessing a superior technology resulting in consumer’s choice taking a backseat. In all these matters, consumer interest should be the prime focus of the deciding authority. Hopefully, this latest order will compel other broadcasters to revise their RIOs  to ensure that HITs operators are offered non-discriminatory terms and are placed on the same level field as other operators.

Image from here.


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