Archived — Acquisition of Microcell Telecommunications Inc. by Rogers Wireless Communications Inc.
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The purpose of this document is to summarize the main findings of the Competition Bureau's review of the acquisition of Microcell Telecommunications Inc. ("Microcell") by Rogers Wireless Communications Inc. ("RWCI").
As in all of its investigations, the Bureau's evaluation has been highly fact-specific, and many of the relevant underlying facts are not public. The legal requirements of section 29 of the Competition Act and the Bureau's policies and practices regarding the treatment of confidential information limit its ability to disclose specific information obtained during the course of a merger review.
Readers should not draw overly broad conclusions regarding how the Bureau is likely in the future to analyse other activities or transactions involving particular firms. This statement does not bind the Bureau in any future enforcement action.
On September 20, 2004, RWCI, Rogers Communications Inc. ("RCI") and Microcell jointly announced that RWCI and Microcell had entered into an agreement under which RWCI would make an all cash bid for Microcell securities totalling approximately C$1.4 billion in value.
The Competition Bureau conducted a comprehensive merger review to determine the competitive effects of the proposed transaction. The Bureau classified the transaction as "very complex" under its service standards.1 The Bureau retained independent economic and accounting experts, contacted market participants and gathered information from a wide range of sources, including competitors and customers of the parties.
The transaction raised competition issues with respect to the potential removal of Microcell as a vigorous and effective competitor in the provision of mobile wireless services in Canada. In addition to the potential exercise of unilateral market power, the Bureau was concerned with the impact of the transaction on coordinated behaviour and whether Microcell could be considered a "maverick"2 in the mobile wireless market, as described in the Bureau's Merger Enforcement Guidelines ("MEGs").
After carefully examining the impact of the proposed merger on competition in the mobile wireless industry, the Bureau concluded that it would not substantially lessen or prevent competition in this market. As a result, an application to the Competition Tribunal challenging this transaction was not warranted.
The Bureau concluded that the relevant product market was mobile wireless (voice and data) telecommunications services. The merger review considered whether wireline was in the same market as wireless. It was determined that wireline is not a sufficiently close substitute to wireless to constrain the market power of a wireless "hypothetical monopolist."3 The available empirical evidence indicates that there has been little substitution to date between wireless and other telecommunications services such as wireline.4 In the two cities where Microcell had launched CityFido, the number of customers who transferred their home numbers to Microcell from their wireline carrier was relatively small.5, 6
Consideration was also given to whether different product markets could be defined based on the underlying technological platform (Bell and Telus use the CDMA platform while Rogers and Microcell use the GSM platform). The Bureau considered a number of factors when examining this, including the end use of the product, the ability of customers to move from one provider to another as measured by the churn rate7 and the similar physical and technical characteristics which exist between the two platforms. Recent aggressive marketing promotions to attract current Microcell subscribers to a CDMA-based competitor supports the view that the product market includes both technological platforms.
Prior analysis of the cellular industry in both Canada and the United States found the geographic market to be something less than national in scope8 and the Bureau's analysis in the current merger led to a similar conclusion. Although limited, it was found that some differences in the number of competitors, product offerings and prices exist across provinces. As well, using the hypothetical monopolist test, there is no persuasive explanation that explains why a provincial hypothetical monopolist could not raise price profitably. It does not appear that demand-side substitution would render this unprofitable. Therefore, for the purposes of this assessment, it was determined that defining geographic markets around provincial boundaries was appropriate.9
Barriers to Entry
The barriers to entry for facilities-based mobile wireless operators are very high (high capital costs to construct and run networks as well as regulatory barriers relating to the availability of the necessary spectrum and cell site development). New entry at the facilities-based level was considered highly unlikely.
Foreign ownership restrictions are another significant barrier to entry. Under current requirements regarding foreign ownership, a foreign-based company is limited to a minority position in any facilities-based telecommunications company. In addition to limiting the opportunities for new foreign based entry, these ownership restrictions also limit the options for Canadian based companies seeking new sources of investment capital or alternative purchasers.
The barriers to entry for resale, however, are lower with several resellers already in the market and with Virgin Mobile, an established player in several other countries, recently launching a mobile wireless service offering. According to the Bureau's analysis, resale will have a positive, but limited impact on competition. Resellers' pricing plans are, and will continue to be, dependent on the underlying network fees which are set by their suppliers/competitors.
However, new product and service offerings, as well as aggressive marketing by resellers have increased competitive pressures in other jurisdictions.
There were a number of factors behind the Bureau's finding that there would continue to be vigorous and effective competition remaining following the merger, some of which included the introduction of a variety of new plans that combine minutes of use, handsets, service features and prices; the ability of competitors to add new customers, and; the willingness of Bell Mobility, Rogers and Telus Mobility to respond to price changes by others and to go after each others' territories. This finding is consistent with several decisions involving forbearance from regulation in the mobile wireless market in Canada by the CRTC where it determined that these markets are competitive.10 For example, in Telecom Decision CRTC 98-4, it found that:
"the wireless services market has grown considerably during the past ten years, that it is dynamic and competitive (and becoming more competitive as new competing services such as PCS and ESMR are being rolled out), that there is significant rivalry among competitors as demonstrated by the media advertising blitzes and price rivalry, and that consumers are aware of alternate wireless service providers."
The Bureau found that the competitive history of Bell, Telus and Rogers in the mobile telecommunications market also supported this conclusion. This was reinforced by the nature of competition in other telecommunication and broadcast distribution markets where these firms also compete.
Change and Innovation
The role of change and innovation had an important impact on the Bureau's conclusions in this matter. The rate of growth in the mobile telecommunications market in the next six to seven years is expected to be significant. Currently, it is estimated that the wireless industry has penetrated 44% of the population base but that is expected to grow to a 70% penetration level.
Advances in mobile handset technology are rapidly bringing newer and more advanced services to market and placing an increasing load on existing infrastructure. This, in turn, requires additional capital investment in existing and new technologies in order to strengthen the underlying networks and support the continued rollout of these services.
At the same time, advances in broadcast distribution and telecommunications are now providing new delivery mechanisms, allowing for greater convergence between these traditionally separate market segments.11 This has led incumbents in both markets to increasingly rely on bundled service offerings to attract and/or retain their customer base. Bundling provides a competitive advantage to integrated firms who can more readily combine their wireless services with other telecommunications services, broadcasting services or Internet access.
Change and innovation will, in the Bureau's view, continue to play an important, positive role in the future evolution of competition in this market.
Post-merger, RWCI, the third largest firm, would combine with Microcell, the fourth largest (albeit much smaller) firm, creating Canada's largest firm measured nationally by subscriber base. However, as noted, the Bureau viewed the geographic market to be less than national and used provincial data as the appropriate measure. Rogers will be above the 35% market share threshold as outlined in the Bureau's MEGs in Ontario and British Columbia. Rogers/Microcell will be the largest provider in Ontario and will be the second largest in the remaining provinces.
There will be two other facilities-based competitors remaining in each provincial market following the merger. As noted above, other resale-based competitors are currently present or have announced their intention to enter these markets in the near future.
In terms of regional market share, as noted, Rogers will be above the 35% market share threshold described in the MEGs in Ontario and British Columbia.
However, an important challenge facing the newly formed company is subscriber retention. The actual market share gain resulting from the merger will likely be affected by both higher-than-industry average churn rates for these companies and anticipated customer migration following the merger. It is anticipated that Telus and Bell will compete aggressively for the former Microcell subscribers.12 Both have the capacity to add customers. Given the amount of subscriber growth that is expected in this industry, as well as the prospects for technological change, current market shares are not viewed at this time to be an adequate indicator of how much market power individual companies will have in the future.13
As a result, post-merger, there will be three mobile wireless operators who are vigorous and effective competitors. Rogers does not possess sufficient market power to impose and sustain a significant and non-transitory price increase above levels that would otherwise exist in absence of the merger because rivals would likely respond in an effort to enhance their customer bases. The Bureau concluded that innovative product and service offerings will continue to be available to consumers at competitive prices. As already noted, both Bell and Telus have recently engaged in aggressive marketing promotions targeted at current Microcell and Rogers subscribers. Indeed, the Bureau viewed RWCI's absence from the wireline market as providing an incentive for it to continue to offer some of the more aggressive marketing features from Microcell in an effort to move customers away from the traditional services offered by incumbent local exchange competitors.
Coordinated Behavior and Maverick Theory
Coordinated behaviour (also referred to as interdependent behaviour) is, in simple terms, the ability of a group of competitors in a relevant market to profitably hold back from price competition (or restrict other dimensions of competition such as quality, product choice, service, innovation or advertising), due to the accommodating responses of rivals. This could occur either by way of an explicit agreement or a tacit understanding.14
One of the ways a merger can increase the risk of coordinated effects is through the removal of a maverick firm from the market. A maverick is a firm with a strong incentive to deviate from coordinated behaviour and to thereby provide a strong stimulus to competition in the market. For example, such a firm may have less to gain from coordination or be less threatened by punishments from rivals because of the kinds of products it sells or its cost structure. In a market that is otherwise predisposed toward coordinated behaviour, the removal of a maverick could lead to a significant lessening of competition.
The Bureau's MEGs state that "[t]he analysis of coordinated effects includes an examination of how the merger changes the competitive dynamic. To do so, the Bureau identifies the constraints on coordinated behavior that existed pre-merger to determine if the merger reduces or eliminates those constraints." In other words, does the merger reduce or eliminate those conditions that previously constrained firms in the market from coordinating?
Some important and necessary conditions for coordinated behavior were found to exist in the mobile wireless market. Market concentration is high and, as noted above, there are high barriers for new facility-based entry.
However, the Bureau's analysis determined that there were other important conditions present that diminish the likelihood of effective coordination from developing. As noted, the mobile wireless services market is in a period of rapid growth which is likely to continue for a number of years as Canada's penetration rate for mobile telecommunications rises. There is a greater impetus for wireless providers to capture as much market share when the market is growing in an effort to secure long term customer loyalty. As a result, there is a significant disincentive for industry participants to act in a coordinated fashion.
Markets with rapid and frequent product or service innovations are less conducive to coordinated behaviour. It is much harder to act in a coordinated fashion when competitors worry that their rivals might be ready to launch the next new "killer application". This is further compounded in this market because of the differences in the underlying technological platforms. It was the Bureau's view that this is a dynamic industry which is still evolving rapidly. There is a high degree of technological change and innovation, as reflected by the number of new product and service launches over the past number of years.
A further factor that was considered important in the Bureau's review was the history and nature of competition between the remaining competitors in this market and in other markets. Evidence suggested that the majority of competitive price reactions by a competitor in the mobile telecommunications market were prompted by the actions taken by Rogers, Bell or Telus, as opposed to actions taken by Microcell. This conclusion is reinforced by the nature of competition between these competitors in other telecommunications and broadcast distribution markets.
In summary, significant factors existed pre-merger that constrained coordination (in particular, growing demand, innovation, competitive history). None of these constraining factors are in any way affected or diminished by the merger. As a consequence, the Bureau could not show that this transaction would increase the likelihood for coordination within the industry post-merger.
Analysis of Microcell as a Maverick
As noted above, an important focus of the Bureau's merger examination was whether Microcell played the role of a maverick in the mobile telecommunications market in the past and the likelihood that it would be able to continue this role in the future. In particular, the Bureau considered Microcell's history of offering innovative, competitive products in the past, including its flat-rate price plans, per-second billing and its City Fido plan in Toronto and Vancouver.
At the same time, the Bureau also considered the fact that Microcell has a significantly smaller coverage area than its competitors and limited participation in data services and the business market. While Microcell's churn rate had decreased marginally in its last quarter, it remained above the industry average. In addition, from a marketing perspective, Telus, Bell and Rogers enjoy opportunities to offer service bundles to consumers based on product offerings from other markets that Microcell could not match. As well, the Bureau found that prices offered by competitors in different areas of Canada did not differ greatly, regardless of whether or not Microcell was present in those markets.
As noted above, a maverick is a firm that may have less to gain from coordination or be less threatened by punishments from rivals because of the kinds of products it sells or its cost structure. The Bureau undertook a detailed review of Microcell's financial situation in an effort to understand its current and future financial requirements. The company, which had recently emerged from court protection under the Companies' Creditors Arrangement Act (in May 2003), was not considered a "failing firm", as described in Section 93(b) of the Competition Act. It was recognized, however, that Microcell faced significant challenges in its efforts to implement its current business plan. In particular, Microcell's network required significant additional capital investments in order to support the increased load resulting from its City Fido product offering. This was reflected in its recent significant revisions to its projected capital expenditure budget. This in turn placed pressure on its ability to support funding for the next generation of product and service offerings, as well as other important company initiatives that were intended to allow it to compete on a more even basis with other competitors in the market. At the same time, its competitors are moving forward with significant capital investment in newer generations of technology and network enhancements and are preparing to launch new product offerings.
The Bureau's findings on the question of Microcell's past role and its likely future role as a maverick recognized that Microcell had, in the past, introduced competitively aggressive price and service offerings. However, Microcell faced significant challenges going forward in implementing its current business plan. While Microcell had some limited cost advantages due to its smaller network, the impact of this was diminishing due to the need for it to significantly expand the density of its existing coverage. It lacked product offerings in other markets that would have allowed it to offer bundles and it was absent from segments of the market that would have provided additional revenue to help finance the costs of network improvements. At the same time, the Bureau took into account that substantial evidence suggested that the relevant markets post-merger are unlikely to support coordinated effects, which is an important element of a case involving a maverick. In light of these findings, the Bureau concluded that, to whatever extent Microcell may have played the role of a maverick in the past, it was unlikely to be able to do so in the future given the very significant constraints it faced.
In light of the above analysis, the Bureau concluded that:
- The transaction would not create or enhance market power in the mobile wireless market;
- The merger would not increase the likelihood of coordinated behaviour among the major cellular telephone companies, who are expected to continue to compete vigorously to add and maintain subscribers on their networks; and,
- Microcell would have faced significant challenges in maintaining its position as competitors move forward with the next generations of cellular service offerings.
Under section 92 of the Competition Act, the test for the Bureau to challenge a merger before the Competition Tribunal is whether a transaction is likely to prevent or lessen competition substantially. In this case, the Bureau determined that the evidence did not support such a conclusion on either a unilateral or interdependent basis. As a result, an application to the Competition Tribunal challenging this transaction was not warranted.
Merger review is fact specific and the Bureau's conclusions in this case are based on its findings at this time with respect to the operation of the relevant markets. Readers are cautioned from drawing conclusions relating to future matters given the dynamic evolution of markets, technology and business structures and given the unique facts of every transaction. When reviewing future transactions, the Bureau will look closely at the competitive circumstances pertaining at that time in the affected markets and will make a decision based on a careful examination of all the relevant facts.
April 12, 2005
1 The Bureau established fees and associated service standards in November 1997 for a number of services and regulatory processes under the Competition Act, including statutory merger notification filings and Advance Ruling Certificate requests. There are three service standards associated with merger filings – non-complex, complex and very complex. A very complex case may require up to five months to collect and analyze the necessary information and provide the merging parties with the Bureau's conclusions regarding the competitive impact of the proposal. This type of transaction is typically characterised by indications early in the preliminary examination that the transaction is likely to create or enhance market power as described in the Bureau's Merger Enforcement Guidelines (MEGs). Generally, mergers between the leading participants in concentrated industries, where it is reasonable to conclude the market share and concentration thresholds set out in the MEGs are surpassed, and where high barriers to entry are evident, fall within this category. These transactions often involve considerations of complex areas of inquiry such as the failing firm factor or efficiencies defence, as well as other considerations such as the availability of a practical remedy or a unique theory of anti‑competitive harm.
2 A maverick is a firm with a strong incentive to deviate from coordinated behaviour and to thereby provide a strong stimulus to competition in the market.
3 For a complete discussion of the concepts of a "hypothetical monopolist" as well as a "non-transitory price increase" which are referred to in this section, please refer to "Part 3 - Market Definition" in the Bureau's 2004 MEGs.
4 Available evidence on the own-price elasticity of demand for wireless services and the cross-price elasticity of demand for wireless services with respect to the price of wireline services suggests that both are low. Ward and Woroch (2003) find cross-price elasticities of 0.18 in 2000 and 0.13 in 2001 using U.S. data. Using the same data, Ward and Woroch (2003) estimate the own-price elasticity at –0.60. See Rodini, M., Ward, M. And Woroch, G., "Going Mobile: Substitutability Between Fixed and Mobile Access," 27 Telecommunications Policy 457. Dzieciolowski and Galbraith (2004) provide similar results based on Canadian data. See Dzieciolowski, K and Galbraith, J.W., "Indicators of wireline/wireless competition in the market for telecommunications services," CIRANO: Scientific Series, Montreal, October 2004.
5 Microcell has been granted Competitive Local Exchange Carrier (CLEC) status by the CRTC. This allows its customers to retain their telephone number when they transfer their phone service from their local incumbent service provider to Microcell.
6 Some consumers (particularly younger consumers) are starting to view wireless and other evolving technologies as a substitute for wireline. In the next few years, it is possible that wireless may become a substitute for wireline. For example, as technological developments reduce the cost of airtime, wireless will likely become a closer substitute for primary-line wireline service. However, the question of whether wireless telecommunications services are sufficiently close substitutes for wireline services to constrain the market power of a hypothetical wireline monopolist was not relevant to the Bureau's analysis and therefore not considered in this matter.
7 An industry term which measures the monthly loss of customers by each of the mobile telecommunications companies in the industry.
8 See, for example, the recent decisions by both the U.S. Department of Justice Antitrust Division and the Federal Communications Commission regarding the acquisition of AT&T Wireless Services, Inc. by Cingular Wireless Corporation, where both adopted a local market approach to their analysis.
9 The findings in this review are the same whether the geographic market is defined at the provincial or local level. Thus, as a matter of convenience, provincial markets, in which the most consistent and reliable data was available, were used as an aggregate description of the market.
10 See, for example, Telecom Decisions 94-15, 98-4 and 98-18, each of which concludes that the market for mobile wireless communications is competitive.
11 Advancements in Voice over the Internet and delivery of video through DSL telephone lines are two examples of the technological changes that are driving these markets.
12 During the course of the Bureau's review of the Rogers/Microcell transaction, Bell launched an aggressive promotion intended to attract the most profitable of the Microcell customer base. Subsequently, following the completion of the transaction, Telus announced a similar promotion targeting both Rogers and Microcell customers.
13 This conclusion could differ if market conditions began to reflect a more traditional, mature market in terms of growth expectations and penetration rates.
14 Paragraph 5.19 of the Bureau's 2004 MEGs notes that "(t)acit understandings arise from mutual, yet independent, recognition that, post-merger and under certain market conditions, firms can benefit from competing less aggressively with one another".
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