Submission by the Commissioner of Competition

Before the Canadian Radio-television and Telecommunications Commission

Telecom Notice of Consultation CRTC 2012-557-3
Wireless Code of Conduct Working Paper

February 6, 2013


1. Introduction

On October 11, 2012, the Canadian Radio-television and Telecommunications Commission ("CRTC") announced a proceeding to establish a mandatory code of conduct for mobile wireless service providers to address issues relating to "the clarity and content in [wireless] service agreements" ("Wireless Code").Footnote 1 On January 28, 2013, the CRTC published a working paper intending to "stimulate discussion" in relation to the Wireless Code ("Working Paper").Footnote 2 Pursuant to section 125 of the Competition Act,Footnote 3 the Competition Bureau ("Bureau") is pleased to provide its comments in response to the Working Paper.

With nearly $20 billion in annual sales,Footnote 4 the wireless sector represents a significant portion of the Canadian economy. As an important piece of infrastructure that allows Canadian firms to compete internationally, the wireless industry is a key part of Canada's digital economy, and its continuing evolution to higher speeds and greater usage is critical to Canada's success in attracting foreign investment, and as a trading nation. Additionally, wireless networks can provide competition to fixed-line networks, which have historically lacked competition.Footnote 5 As such, they may provide a potential alternative for consumersFootnote 6 who are adopting mobile devices for voice and data communications.

The Bureau has recently undertaken significant enforcement activity in this industry. In 2010, the Bureau commenced legal proceedings maintaining that Rogers Communications Inc. ("Rogers") had made false and misleading representations for the purpose of promoting the purchase of wireless services from its subsidiary Chatr Wireless Inc.Footnote 7 In 2011, the Bureau reached an agreement with Bell Canada ("Bell"), prohibiting Bell from disseminating misleading representations about the prices offered for its services, and requiring Bell to pay an administrative monetary penalty of $10 million.Footnote 8 More recently, in September 2012, the Bureau initiated legal proceedings alleging that Bell, Rogers, TELUS Corporation ("TELUS"), and the Canadian Wireless Telecommunications Association ("CWTA") were making, and permitting others to make, false or misleading representations for the purposes of promoting premium text messaging, rich content services, and wireless products.Footnote 9

Notwithstanding this enforcement activity, certain impediments continue to diminish the effect of competitive forces in this industry. First, certain industry practices have tended to impose costs on consumers who wish to avail themselves of competitive alternatives. Second, consumers are not always provided with sufficient information in an adequately clear manner to make informed purchase decisions. These features can deprive consumers, competitors, and the Canadian economy of the beneficial effects of competition in this industry, namely lower prices, higher quality service, and greater innovation. This submission provides recommendations on how the Wireless Code can minimize the effect of these impediments.

This submission was prepared pursuant to the Bureau's role as an advocate for the benefits of competition. In this role, the Bureau advocates that regulators and policy makers regulate only where necessary and that they rely on market forces as much as possible to achieve the benefits from competition. Where market forces are insufficient to achieve certain policy objectives, the Bureau helps regulators implement policies that achieve their objectives in a minimally intrusive way.

In addition to this advocacy role, the Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace. As part of its mandate, the Bureau administers and enforces legislation, including the Competition Act and related statutes, throughout the Canadian economy.

2. Switching Costs Inhibit Competition

The Bureau promotes competitive markets by, among other things, prohibiting mergers and anticompetitive conduct that prevent or lessen competition substantially. Under these provisions of the Competition Act, restrictive, long-term contracts have been found to raise concerns when they create switching costs that harm the ability of firms to enter into or expand in markets.Footnote 10 In past cases, the Competition Tribunal has issued orders limiting such contracts, in one case limiting them to one year,Footnote 11 and in another disallowing them entirely.Footnote 12

The restrictive, long-term contracts used by existing service providers may impose switching costs on consumers. There is extensive economics literature on switching costs that demonstrates how these costs harm competition and reduce consumer welfare.Footnote 13 In general, switching costs may inhibit competition because they can:

  • Counteract efforts by new or recently established service providers to attract customers. In Canadian markets for mobile wireless services, where a small number of large incumbent service providers have created switching costs for a vast majority of consumers, new entrant service providers are forced to provide a competitive offer that compensates for such switching costs in order to attract customers. This may make participating in these markets less profitable, and potentially unprofitable, for these service providers;
  • Reduce the incentive for established service providers to discount their prices and innovate. The pressure on service providers to offer better prices or innovate is a function of consumer mobility. If consumers cannot switch service providers, then efforts by service providers to lower prices to attract new customers are likely to be less fruitful. If only a small portion of wireless consumers have the ability to switch service providers at a given point in time, then a strategy of lowering prices,Footnote 14 innovating, or otherwise bringing competitive forces to market may be less profitable than a situation where the promoting service provider can attract a greater number of customers; and
  • Raise rivals' costs. Since the fixed costs of entering into Canadian wireless markets can be large, entrants may need to attract a significant number of customers in order to achieve a scale and scope of production necessary to compete with incumbent service providers. If entrants cannot attract customers due to high switching costs, then these entrants may not be able to become effective competitors.

The Working Paper specifically mentions two features of wireless contracts that may create switching costs, namely handset locking and excessive termination fees. There is an additional feature of these contracts that may create switching costs – contract duration – that is not addressed in the Working Paper. Each of these three topics is discussed in greater detail below.

A. Wireless Service Contracts Should be Limited in Duration

As reflected in responses received by the CRTC in relation to the Wireless Code, contracts offered by Canadian service providers frequently have a fixed term of 12, 24, or 36 months, with options for renewal on a monthly basis.Footnote 15 Long-term contracts may harm competition where they foreclose access to customers for rival service providers.Footnote 16 In order to maximize competitive forces in a market, consumers must be able to easily move from one service provider to another. However, limiting contract length may also reduce the incentive for service providers to offer high quality devices at attractive prices, or to offer low contract prices.Footnote 17 The Bureau's submission has considered both of these issues.

Canada is one of the only jurisdictions worldwide where a large proportion of wireless contracts are three years in duration. For instance, in the United States, contracts are regularly only two years in duration, and in Europe, service providers are prohibited by law from requiring wireless contracts in excess of 24 months.Footnote 18

The Working Paper, however, does not contain a suggested limit on contract duration and, in fact, explicitly contemplates the continuation of three-year contracts.Footnote 19 The Bureau supports measures to limit contract length and to ensure that consumers maintain the ability to move from one service provider to another. However, if contract lengths are not limited by the Wireless Code, then it is particularly important that contract terms and termination fees are clear and not unnecessarily restrictive, so that customers are not tied to these contracts in a manner that will harm competition.

B. Handset Locking Should be Prohibited

Service providers in Canada regularly "lock" new handsets so that they can only be used on that service provider's wireless network. This means that, regardless of whether a consumer owns his or her wireless device, it can be difficult, costly, or impossible to move the device to a compatible rival network.

Section D7.1 of the Working Paper sets out two options to deal with handset locking. Option 1 states:

"Where the service provider has provided a locked wireless device to a consumer, it must provide the consumer with the means to unlock the device after no more than 30 days of service, at the rate specified in the contract and personalized information summary."Footnote 20

Option 2 of section D7.1, on the other hand, differentiates between situations where a handset has been subsidized by a service provider, in which case a handset cannot be unlocked until 30 days after purchase, and where a device has not been subsidized, in which case a consumer must be provided with the tools to unlock the device immediately after purchase.

Locked handsets are a powerful block to consumers who want to switch service providers. The Bureau believes that device locking should be prohibited in the marketplace, and that service providers should be required to unlock any previously locked devices free of charge. Therefore, the Bureau recommends that Option 1 in section D7.1 be adopted in the Wireless Code, but with no fee attached to the unlocking, as any such fees create switching costs that may harm competition.

C. Termination Fees Should Be Minimized

Even if consumers are able to exit their wireless contracts, and even if device locking is prohibited, excessive termination fees can create a significant switching cost.

It is well known that service providers frequently provide consumers with the option of obtaining a device at a fraction of its retail price in exchange for signing a fixed term service agreement with the service provider. The service provider recovers the cost of the device from the consumer on a monthly basis over a fixed term as part of his or her bill. This is a financing relationship whereby service providers effectively give consumers a "subsidy"Footnote 21 that allows them to obtain expensive devices and amortize their cost over the length of the contract. If a consumer terminates his or her service agreement with a service provider prior to the end of their contract term, then the service provider may require the consumer to pay off any remaining device "subsidy" as part of the termination fees.

Section D3.3 of the Working Paper sets out two options to address termination fees. Option 1 explicitly limits termination fees to any outstanding device "subsidy" owed by the customer to the service provider. Option 2 allows for fees in excess of device "subsidies" to be included in the termination charge.

Where the termination fee exceeds the remaining device "subsidy", excess fees are a form of switching costs imposed on consumers.Footnote 22 Therefore, wireless service providers should be prohibited from charging such excess fees, and the Bureau recommends that Option 1 of section D3.3 be adopted in the Wireless Code.

In the Bureau's view, the Wireless Code should, in fact, go further by explicitly prohibiting the tying of wireless service contracts with device "subsidy" contracts. In other words, the device "subsidy" financing relationship should be allowed to continue after a consumer has switched to a rival service provider, with the monthly payment schedule to the initial service provider remaining intact. Additionally, consumers should be given the flexibility to dictate how and when device "subsidies" are repaid. For instance, consumers should be allowed to make advance payments against device "subsidies", much as homeowners can with respect to mortgage balances, as opposed to being constrained to normal monthly commitments. The Bureau supports methods to add flexibility when repaying device "subsidies".

D. Conclusion on Switching Costs

The ability to choose from multiple competitors is an essential element of a competitive marketplace. By reducing the switching costs that can be created by existing wireless contracts, consumers gain the ability to freely choose the service provider that offers the best service for their needs.

3. Consumers Require Accurate Information to Make an Informed Choice

The Bureau promotes truth in advertising by discouraging deceptive business practices, and by encouraging the provision of sufficient information to enable informed consumer choice. False or misleading representations and deceptive marketing practices can have serious economic consequences, particularly when directed toward large audiences or when they take place over a long period of time. These practices can directly affect consumers, and can also harm competitors who are engaging in honest promotional efforts.

Globally, spending on telecommunications advertising appears to be growing faster than any other sector.Footnote 23 The Bureau applauds the CRTC's efforts to improve clarity and transparency in wireless service contracts, and supports the development of the Wireless Code as a means of improving the operation of wireless markets. At the same time, caution should be taken to ensure that the Wireless Code does not restrict either the content of advertising or other business practices more than necessary. Advertisements, promotions, and agreements that are not false or misleading lead to better informed consumers with more choices available to them, and provide an important means of competition for service providers. Mandating unnecessary restrictions on such activities or contracts could have unintended consequences on the proper functioning of the marketplace.

The Bureau appreciates that the CRTC has provided language on specific issues to which commentators can offer their feedback. The Bureau considers that there are two specific areas of the Working Paper that may allow for service providers to engage in deceptive practices that could mislead consumers. Each is discussed in greater detail below.

A. Advertised Prices Should Disclose All Mandatory Costs

Section D4.1 of the Working Paper states:

"Any advertisement that is incorporated by reference into a contract will include the total amount the customer must pay for the services on a monthly recurring basis. The advertised price must indicate whether it includes sales tax and government-mandated fees."Footnote 24

When a service provider advertises a price to consumers, additional mandatory costs should be clearly disclosed, rather than placed in fine print disclaimers. Pursuant to the Competition Act, when a price is offered to consumers, it must not be false or misleading. It is the Bureau's position that simply including a fine-print disclaimer is not a licence to advertise prices that are not available. Accordingly, the Bureau supports a modification to the text in section D4.1 of the Working Paper requiring that "all-in" prices, clearly identifying all mandatory costs, be represented in all advertising.Footnote 25

B. Limited Plans Should Not be Advertised as "Unlimited"

Section D4.3 of the Working Paper states:

"Service providers that offer 'unlimited' plans must explain at the time of sale and in the personalized information summary whether there are limits to the 'unlimited' plan and whether the service provider retains the discretion to move the customer to a 'limited' plan if these usage limits are exceeded. Service providers must also explicitly explain, in their fair use policies, the amount that will trigger the application of the policy; describe the consequences to the consumer should the policy be applied; and implement internal policies and maintain records that will enable them to demonstrate that they apply fair use policies reasonably."Footnote 26

In the Bureau's view, a claim that a service plan is "unlimited" could be considered misleading if, in fact, the plan is limited in some material way. The Bureau therefore recommends that the Wireless Code not endorse the advertising of plans as "unlimited" when such plans are, indeed, limited in a material respect.

C. Conclusion Regarding Informed Consumer Choice

By adopting the Bureau's recommendations on these two topics, consumers would be provided with better information to enable informed consumer choice. When consumers have the necessary information to understand what they are buying, wireless markets will function more efficiently.

4. The Wireless Code Should be Reviewed After 3 Years

Given the rapid pace of technological change, the likelihood of convergence in the wireless industry, and parallel developments such as mobile payments, the Wireless Code should be reviewed for effectiveness after a maximum of 3 years.

5. Conclusion

The Bureau is pleased to participate in the Wireless Code consultation. Discouraging the creation of switching costs that tend to reduce customer mobility, and effectively encouraging the provision of sufficient information to enable informed consumer choice, will enable Canadians to enjoy the beneficial effects of greater competitive forces in wireless markets, including lower prices, higher quality service, and greater innovation.

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