These two launches transformed e-commerce in India. Over the next six years, smartphones became the single-largest category for Flipkart and its arch-rival Amazon India. As shoppers lapped up low-cost powerful phones, offered at discounts and with EMI (equated monthly instalment) options, sales of smartphones comprised roughly half of all e-commerce transactions in most years.
Now, that very success in the smartphone business is being used against Flipkart and Amazon. On 13 January, the Competition Commission of India (CCI) announced that it would investigate the two largest e-commerce firms following allegations by a traders group that both were engaged in anticompetitive practices in the smartphone category.
A few weeks later, Amazon and Flipkart separately obtained a stay from the Karnataka high court on the investigation by CCI. A final court order is expected in the coming months.
Whatever the decision of the court, CCI will monitor the e-commerce space very closely over the coming years as part of its wider efforts to rein in internet companies that are challenging the abilities of regulators to govern them effectively. Apart from Amazon India and Flipkart, CCI is also investigating Google and the Oyo-MakeMyTrip pair.
At stake in the Amazon India-Flipkart investigation is the legal power of the antitrust regulator to determine the level of competition in the e-commerce space where the gap between Amazon and Flipkart, and the rest of the field has been increasing every year since 2017. The firms have established a virtual duopoly in the e-commerce arena after rivals Snapdeal, ShopClues and Paytm have failed to keep pace with them in recent years.
Though Mukesh Ambani’s Reliance Industries has announced grand plans to expand its fledgling e-commerce business, there is no evidence yet that it can become a serious rival to Amazon and Flipkart. Clearly, the two e-commerce firms are, to a large extent, shaping the future of retail, the single-largest part of India’s $3 trillion economy.
Retail is also a political battleground, as Amazon and Flipkart have found to their disadvantage in the recent past. A new e-commerce policy introduced in December 2018 temporarily disrupted the supply operations of online retailers and resulted in higher compliance costs. Commerce minister Piyush Goyal has inveighed against Amazon and Flipkart, and indicated that he thinks they’re violating FDI (foreign direct investment) laws.
CCI’s actions are being seen as the latest salvo in this regulatory onslaught against the e-commerce companies.
Still, the antitrust regulator’s order in January has raised eyebrows—for both the hurried manner in which the investigation was announced and the contents of the order. Technology and antitrust law experts that Mint spoke to said that while there are grounds to conduct an antitrust investigation against Amazon and Flipkart, CCI’s order has several inconsistencies. In some aspects, the regulator has broken with its own precedents without giving a reasonable explanation, they said.
CCI, Amazon India and Flipkart did not respond to requests for comment.
A long-time target
For at least 18 months before it finally announced the investigation in January, CCI had been eyeing the e-commerce companies.
In August 2018, CCI had cleared Walmart’s $16 billion acquisition of Flipkart. But in its order, CCI issued a clarion call to the Enforcement Directorate, which looks at FDI violations, to investigate Flipkart. CCI said that “a small number of sellers" on Flipkart “contributed to substantial sales" and availed “significant discounts" from the firm. In effect, the regulator was saying that Flipkart was breaking India’s FDI laws that prohibit marketplaces from discounting.
A year later, CCI announced that it would undertake a study of the e-commerce market. On 8 January 2020, the regulator released the findings of the wide-ranging study that included sectors like online travel and online food delivery, apart from online retail. The study all but said that the practices of Flipkart and Amazon veered into anticompetitive territory.
The CCI study pointed to deep discounts on online marketplaces and said that “the study could not identify sources of cost savings that may fully explain the deep discounts". It noted the “bargaining power imbalance and information asymmetry between e-commerce marketplace platforms and their business users". While the study recommended self-regulation by e-commerce companies, it warned that the “insights gained from the study will inform antitrust enforcement in these markets".
Just five days after the study was released, CCI announced its investigation of Amazon and Flipkart. CCI was responding to a complaint filed by Delhi Vyapar Mahasangh (DVM), a group representing small traders. DVM is a part of Confederation of All India Traders, a powerful trader lobby that has links with the Bharatiya Janata Party government.
DVM had alleged that Amazon and Flipkart gave preferential treatment to a few large sellers affiliated with them by offering deep discounts and prominent listing, apart from selling private labels through these sellers. It also alleged that both firms have exclusive arrangements with brands that hurt competition on the marketplaces. All these practices were alleged to be prevalent in the smartphone business.
A flawed order
CCI’s response to DVM’s complaint has several flaws, say experts. To start with, the process leading up to the regulator’s order in January seemed hurried.
“The order came just a few days after the market study, which recommended self-regulation—the timing is strange," said a partner at a Delhi-based law firm, speaking on condition of anonymity. “It is hard to understand why the CCI didn’t give the e-commerce firms time to implement some of the suggestions before launching an investigation."
According to norms, CCI typically calls the informant for a “preliminary conference" before launching a formal investigation, said Nisha Kaur Uberoi, partner and national competition head at Trilegal, a law firm. “However, in the present case, the CCI asked for an affidavit from DVM and immediately thereafter directed an investigation, without calling either DVM or the opposite parties for a preliminary conference, which is unusual because though the CCI is not required to hold the pre-conference by law, it is a norm to call the informant."
Experts say that CCI was wrong to have ordered a probe when the complaint was focused on one sector—smartphones and related accessories. DVM has alleged that exclusive deals between smartphone makers—Xiaomi and OnePlus—and Flipkart and Amazon constitute anticompetitive behaviour.
“To say that an exclusive arrangement between an e-commerce company and a smartphone brand on one or some products is having an adverse impact on competition in the entire sector is a stretch," said Anupam Manur, assistant professor at think tank Takshashila Institution and an antitrust regulation researcher. “There is no reason given as to why competition is being hurt. There are other smartphone models sold on other sites and in offline stores."
CCI’s own orders in the past have avoided considering specific product categories as “relevant markets", said Manur. Relevant market, a key concept in antitrust regulation, refers to a defined sector that allows CCI to gauge whether a company has the dominance and market power to harm competition in that space.
In April 2015, CCI had dismissed a complaint against Amazon, Flipkart and Snapdeal similar to DVM’s. An individual had accused the e-commerce firms of predatory pricing and exclusive arrangements. The regulator had said then that the exclusive arrangements in the books and smartphone categories did not have an “appreciable adverse effect on competition". Further, it added that it was “convinced" that “every product cannot be taken as a relevant market in itself". CCI indicated that it did not consider books or specific smartphone brands to be “relevant markets" by themselves.
“When you’re going against the principles that you’ve expressed in previous orders, you need compelling evidence. That isn’t there over here," said Manur.
One potential error in the DVM complaint and the CCI order was the issue of tags given by Amazon and Flipkart to certain sellers. DVM alleged that Flipkart put the tag of “Assured Seller" on products sold by a few of its “preferred" sellers, while Amazon gave the tag of “Fulfilled" to the products sold by such “preferred" sellers. These preferred sellers allegedly received discounts from Amazon and Flipkart as well as prominent placement on search results on the sites, it alleged.
However, the terms “Assured Seller" at Flipkart and “Fulfilled" at Amazon actually refer to products that are stored in company-owned warehouses. Both firms stock these products owned by third-party sellers in their own warehouses in order to deliver them faster whenever customers place orders. Thousands of sellers on Flipkart and Amazon avail of this service.
Case against duo
Although it is unstated, the default goal of internet platforms is to build monopolies.
In his 2017 book The Four, Scott Galloway, an entrepreneur and marketing professor, came up with a memorable metaphor for Amazon’s approach of sinking billions of dollars into the task of wowing customers without worrying about profits. He wrote that Amazon was “going under water with the world’s largest oxygen tank, forcing other retailers to follow it, match its prices and deal with changed customer delivery expectations". But against Amazon’s water tank, or limitless capital, retailers only had “the air in their lungs and are drowning". After the others are dead, Amazon will surface and have the “ocean of retail largely to itself", warned Galloway.
To prevent such a scenario, Western governments are scrutinizing internet giants like never before, after sleeping at the wheel for years. US and European antitrust regulators have focused their attention on “The Four"—Amazon, Apple, Google and Facebook—whose astonishing market power has seen their collective valuations rise to nearly $4 trillion.
Many believe that in India, too, Amazon and Flipkart are on course to dominate the retail business over the coming decades. Though e-commerce still comprises less than 5% of retail in India, online retail has grown to nearly $30 billion at the end of 2019 from less than $5 billion in 2014, according to analyst reports.
Going by CCI’s study, the purpose of antitrust action is to put curbs on the powers of Amazon and Flipkart and allow small sellers to thrive on the marketplaces, rather than allowing the two firms and a few sellers to establish complete control of the entire e-commerce ecosystem.
The Supreme Court has potentially handed a boost to antitrust action in the internet space. Last September, it mandated CCI to probe Uber India after Meru Cabs filed a complaint accusing the US taxi-hailing app of predatory pricing.
The ruling indicates that a company could be investigated for predatory pricing even though its market dominance may not be established, said a partner at a law firm, requesting anonymity. “Usually, it is necessary to prove market dominance before predatory pricing can be judged to have happened. So, if the Amazon-Flipkart case goes to the Supreme Court they could face a similar ruling," he said.
One area in e-commerce where there is a clear-cut potential for antitrust abuse is the private label businesses of Amazon and Flipkart. Both companies have access to data on shopping patterns and preferences of customers, and can use this to offer their labels that are priced lower than other brands. Private label products have higher margins.
“This business can have detrimental effects on other sellers in the market. If, in the search listings, private labels are being promoted ahead of others, that’s a problem. It’s a violation of platform neutrality that needs to be investigated," said Manur of Takshashila Institution.