Submission by the Commissioner of Competition before the Canadian Radio-television and Telecommunications Commission—Telecom Notice of Consultation CRTC 2013-685 — Wholesale mobile wireless roaming in Canada—Unjust discrimination/undue preference

January 29, 2014

On this page

  1. Introduction
  2. The economics of roaming
  3. Market power in mobile wireless
  4. Unfair discrimination and undue preference
  5. Remedy
  6. Conclusion
  7. Procedural matters

I. Introduction

  1. On August 30, 2013, the Canadian Radio‑television and Telecommunications Commission (the "CRTC") requested certain information from Canadian mobile wireless service providers in response to "concerns with respect to the rates, terms, and conditions associated with wireless roaming".Footnote 1 Following this "fact‑finding exercise", the CRTC made a call for comments in a letter dated December 12, 2013 (the "Call for Comments").Footnote 2 Pursuant to section 125 of the Competition Act,Footnote 3 the Commissioner of Competition (the "Commissioner") wishes to intervene in this proceeding, and is pleased to provide this submission by the Competition Bureau (the "Bureau") in response to the Call for Comments.
  2. The Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace. Headed by the Commissioner, the Bureau is responsible for administering and enforcing legislation, including the Competition Act and related statutes, throughout the Canadian economy. The purpose of the Competition Act is to maintain and encourage competition in Canada to, among other things, provide consumers with competitive prices and product choices.Footnote 4
  3. The purpose of the Call for Comments is to assist the CRTC in determining whether "there is a situation of unjust discrimination or undue preference with respect to wholesale mobile wireless roaming arrangements in Canada".Footnote 5 In the Bureau’s view, based on the information contained within the Call for Comments, there is differential treatment occurring in the contractual terms of roaming agreements that constitutes discriminatory or preferential behaviour. Roaming agreements are an essential component of any mobile wireless service provider’s business, and strategic behaviour that negatively affects the terms of these agreements has the potential to adversely affect competition, economic welfare, the Canadian economy, and the sustainability of competition in Canadian mobile wireless markets. In the Bureau’s opinion, the differential treatment observed by the CRTC is unfair discrimination or undue preference, and it is both necessary and appropriate for the CRTC to intervene and stop this behaviour.

II. The economics of roaming

  1. To compete effectively in Canadian mobile wireless markets, entrant service providers are faced with a daunting challenge. Not only are entrants at a significant disadvantage to incumbent service providers in terms of spectrum holdings,Footnote 6 but entrants are also faced with the challenges associated with deploying a sufficiently wide‑scale mobile wireless network — from scratch — to provide the robust network coverage demanded by consumers.
  2. One way for an entrant to overcome the difficulties associated with wide‑scale network deployment is to enter into a roaming agreement with an established incumbent service provider. Such an agreement allows an entrant’s customers to obtain service from the incumbent’s network in areas where the entrant’s network is not fully developed.
  3. However, the terms of such roaming agreements are a strategic tool that incumbents can use to protect their market power.Footnote 7,Footnote 8 The Bureau believes that incumbent service providers have retail market power, and therefore have an incentive to enact strategies to protect their market power by ensuring that entrants are not, and do not become, fully effective competitors. Because these strategies do not require incumbents to sacrifice profits in the short run, but allow incumbents to either preserve or increase their profits immediately, these strategies have clear advantages for incumbent firms.Footnote 9
  4. It is reasonable to assume that effective entry at the retail level lowers the profits incumbent service providers earn in those markets.Footnote 10 Therefore, incumbent service providers are incented to implement strategies that eliminate (either partially or fully) the extent of this competitive pressure.Footnote 11 In practical terms, strategic actions by incumbent service providers have likely resulted in, or will likely result in, entrant service providers charging higher prices at the retail level, or providing less attractive non‑price elements of their services in those markets, than they would if their roaming agreements were not affected by the strategic actions of the incumbent service providers.
  5. Ultimately, if entrant service providers are not able to effectively compete, there is a significant risk that they will become "niche" players with little competitive effect on incumbent service providers or, in the worst case, that entrants may simply exit Canadian mobile wireless markets. Either result harms the sustainability of competition for mobile wireless services in Canada, and deprives consumers of the benefits associated with effective competition, including lower prices, higher quality service, and greater innovation.

III. Market power in mobile wireless

  1. In the Bureau’s view, mobile wireless markets in Canada are characterized by high concentration and very high barriers to entry and expansion.Footnote 12 Furthermore, Canadian mobile wireless markets are characterized by other factors that, when combined with high concentration and very high barriers to entry and expansion, create a risk of coordinated interaction in these markets.Footnote 13 Given these factors, the Bureau’s view is that incumbent service providers have market power in Canadian retail mobile wireless markets.Footnote 14
  2. However, in this proceeding, Bell Canada ("Bell"), on behalf of a number of related entities, claims that the "wireless market in Canada remains robustly competitive".Footnote 15 In support of its claim, Bell’s submission cites a recent report prepared by Jeffrey Church and Andrew Wilkins entitled "Wireless Competition in Canada: An Assessment" (the "C‑W Report").Footnote 16
  3. The analysis contained in the C‑W Report has two significant limitations that should be noted. First, the profitability analysis that forms the centerpiece of the report:
    • (1) examines only one service provider,
    • (2) does not actually measure that service provider’s cost of capital, and
    • (3) when properly interpreted, does not support the conclusions contained in the report.
    Second, the C‑W Report appears to suggest that, because of the presence of significant scale and network economies in the provision of mobile wireless services, entry by an additional competitor in the market would lead to significant cost inefficiencies. Such a conclusion is premature; an in‑depth analysis of the relationship between the limits on spectrum availability and the costs of network build‑out is necessary to properly address any such effect.
  4. Bell’s submission also claims that its position is supported by assertions in the C‑W Report that the level of concentration is comparable to foreign mobile wireless markets, and particularly the United States. However, Bell’s submission does not take into account that the U.S. Federal Communications Commission has repeatedly failed to conclude that U.S. markets for mobile wireless services are competitive.Footnote 17
  5. In the Bureau’s view, the C‑W Report does not provide adequate support for Bell’s claims that mobile wireless markets in Canada are competitive. Instead, based on the factors described above, the Bureau believes that incumbent service providers do have market power in the provision of retail mobile wireless services, and the CRTC should take this fact into account when considering this matter.

IV. Unfair discrimination and undue preference

  1. In the Call for Comments, the CRTC notes that "some Canadian wireless service providers are charging or proposing to charge significantly higher rates in their wholesale roaming arrangements with other Canadian carriers than in their arrangements with U.S.‑based carriers".Footnote 18 The fact that some roaming partners are able to access more attractive contractual terms is "differential treatment" in the provision of roaming services.Footnote 19
  2. The CRTC should regard this discriminatory or preferential behaviour as unfair or undue. As described above, a practice of imposing supra‑competitive roaming rates on direct competitors can result in the elimination of those competitors as an effective constraint on incumbents, either by excluding those entrants from the market entirely, or by raising those entrants’ costs such that the full effect of their competitive entry cannot be manifested.Footnote 20 By impairing the function of competitive entry, thereby depriving consumers of the benefits of competition, the imposition of restrictive contract terms and high roaming rates is not consistent with the public interest, and the differential treatment should meet the standard for unfairness or undueness.Footnote 21

V. Remedy

  1. The CRTC, through the Call for Comments, also seeks input on appropriate remedies if it finds that Canadian service providers are subject to unfair discrimination or undue preference. In the Bureau’s opinion, an effective remedy is one that would allow entrant service providers to obtain roaming access on terms that do not reflect the strategic interaction present in the current situation, such that any discrimination or preference can no longer be considered unfair or undue. If, in deciding upon an appropriate remedy, the CRTC is faced with a choice between a remedy that goes farther than is strictly necessary to eliminate the unfair discrimination or undue preference and a remedy that does not go far enough, the Bureau would prefer the former remedy.Footnote 22

VI. Conclusion

  1. The Bureau is pleased to respond to the Call for Comments. Discouraging the strategic behaviour that has resulted in unfair discrimination or undue preference, and effectively encouraging the competitive provision of roaming access to entrant providers, will enable Canadians to enjoy the beneficial effects of greater competitive forces in mobile wireless markets, including lower prices, higher quality service, and greater innovation.

VII. Procedural matters

  1. The Commissioner, or his authorized representative, is prepared to attend any oral hearing in person if the CRTC so requests.
  2. For the purposes of this proceeding, the designated representative of the Commissioner is:
    Martine Dagenais
    Deputy Commissioner, Economic Policy & Enforcement Branch
    Competition Bureau
    15th Floor, 50 Rue Victoria
    Gatineau, Quebec K1A 0C9
    Martine.Dagenais@canada.ca
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