Competition Bureau Review of the Proposed Acquisition of Astral by Bell

Backgrounder


OTTAWA, March 4, 2013 — The Competition Bureau announced today that, following an extensive review of BCE Inc.'s proposed acquisition of Astral Media Inc., it has reached an agreement that preserves competition in the supply of English and French pay and specialty television programming services in Canada, and has filed a Consent Agreement with the Competition Tribunal.

Bell and Astral participate in the television programming industry, in which content is produced, packaged and distributed to consumers through televisions and, increasingly, on mobile phones, tablets and other Internet-connected devices.

Under the terms of the Agreement, Bell must divest itself of Astral's ownership interests in the following pay and specialty programming services: Family Channel, Teletoon, Teletoon Retro, Disney XD, the Cartoon Network, Disney Jr. (English and French), Historia, Séries+, Télétoon, Télétoon Rétro, MusiquePlus and Musimax. Additionally, the Agreement includes behavioural restrictions on Bell, including a prohibition on imposing restrictive bundling requirements on any provider seeking to carry The Movie Network or Super Écran.

The proposed transaction is also subject to review by the Canadian Radio-television Telecommunications Commission (CRTC) under the Broadcasting Act. The CRTC's decision on whether a proposed transaction is in the public interest takes into account a wide set of factors as reflected in the Broadcasting Act, including regional, social, cultural, economic and financial considerations.

The Bureau's investigation began shortly after the proposed transaction was announced in March 2012. In reaching its conclusions in this matter, the Bureau took into account the relevant facts and information, including comments and information provided by market participants and industry experts, the review of tens of thousands of records, the analysis of large volumes of industry financial and economic data, and the regulatory framework.

This statement summarizes the approach taken by the Bureau in its review of the proposed transaction.1

Industry Background

The supply of television programming services to distributors and the resulting effects on consumers were ultimately the main focus of the Bureau's review.

Astral owns a number of media properties in television, radio, out-of-home advertising (e.g., billboards), and digital media. As a result, the Bureau also carefully assessed the impact of the proposed transaction on advertising markets and consulted with many market participants including advertisers and media buying agencies. The Bureau concluded that the proposed transaction was unlikely to result in a substantial lessening or prevention of competition in any relevant advertising markets. With respect to radio advertising, the Bureau is satisfied that the radio divestitures being proposed by Bell to comply with the CRTC Common Ownership Policy are sufficient to ensure the transaction will not result in a substantial lessening or prevention of competition in any radio market.

With respect to the television programming industry, it is broadly composed of three types of activities: production (the creation of content), aggregation (the creation of programming services) and distribution (the delivery of programming services to consumers).

Traditional programming distributors include incumbent cable companies such as Shaw, Rogers and Videotron, telecommunications carriers such as Bell and TELUS which provide Internet Protocol-based television services (IPTV), and Direct-to-Home (DTH) satellite services providers Bell and Shaw. Distributors enter into affiliation agreements with programming service providers for the right to distribute or broadcast pay and specialty services. In addition to setting out the carriage fees associated with a service, these agreements may contain a variety of terms that govern the manner in which a distributor is licensed to distribute, market, or package a particular programming service. For example, an affiliation agreement may provide financial incentives for a distributor to carry a particular channel as part of its basic cable package.

Video programming may also be distributed to Canadian households over the Internet, whether streamed to Internet-connected televisions or other devices (e.g., Netflix) or downloaded for later viewing (e.g., iTunes). These services are generally referred to as over-the-top services (OTT) and they have resulted in increased choice for Canadian consumers and increased innovation in the industry.

Proposed Transaction

On March 16, 2012, Bell and Astral announced an agreement whereby Bell would acquire all of the issued and outstanding shares of Astral.

Bell is Canada's largest communications company. In 2011, following its acquisition of CTV, Bell launched Bell Media which currently has an interest in over 30 specialty programming services, including TSN, which is Canada's leading specialty service, and RDS, which is Canada's leading French language specialty service. Bell is also one of Canada's largest distributors of television programming services through Bell Satellite TV and Bell Fibe TV.

Astral is the largest independent owner of English and French language specialty and pay programming services in Canada. Astral has an interest in many programming services, including such popular specialty services as Canal Vie, Canal D, Séries+, Historia, VRAK.TV, MusiquePlus, and Teletoon. Astral also operates pay services such as Super Écran, the Family Channel and The Movie Network. These services are licensed to distributors, including Bell, for distribution to consumers.

Combined, Astral and Bell would have had an interest in over 50 English and French language specialty and pay programming services, some of which are in high demand from consumers and therefore of significant importance to distributors.

Competitive Effects Analysis

The Bureau's review focussed on whether the proposed transaction would provide Bell with enhanced market power in negotiating the terms of access to programming services with distributors, including the carriage fees and packaging terms included therein.

Without the divestitures contained in the Agreement, the Bureau determined that the proposed transaction would have likely prevented or lessened competition substantially in the form of increased prices, less innovation and reduced choice for television programming.

Certain of Bell and Astral's programming services are high-demand, often referred to in the industry as "must haves". Therefore, if a distributor was unable to access these services on commercially reasonable terms, the distributor would likely lose a significant number of its customers. The Bureau concluded that the addition of all of Astral's programming services to Bell's existing portfolio, as contemplated by the proposed transaction, would have increased Bell's market power and thereby its ability to: (i) negotiate higher fees from distributors for the right to resell its programming; and (ii) impose contractual terms on distributors that limit choice and flexibility in their offerings to consumers. Ultimately, some or all of the impact on distributors would have been passed on to consumers, including through higher subscription prices and less choice.

The Bureau also found that Bell, as a vertically integrated entity operating as a distributor in its own right, has the economic incentive to leverage its programming in a way that disadvantages rival distributors to the benefit of its own distribution service. Bell may accomplish this in a number of ways, including raising rivals' costs, limiting rivals' consumer offerings, and stifling innovation.

Presently, Astral has no such economic incentive as it is not vertically integrated. Therefore, decisions made today by Astral relating to the supply of its programming services are not made with a view to disadvantaging any distributors. The Bureau concluded that following the transaction, Bell would have the incentive to leverage Astral's current portfolio of programming services in a way that disadvantages rival distributors to the benefit of its own distribution services.

Apart from potentially raising costs to competitors, the Bureau concluded that the acquisition of Astral's programming services would also potentially enhance Bell's ability to restrict current and future competitors' ability to innovate by launching new programming services, and distributing services in new and innovative ways. For example, by acquiring Astral's programming services, Bell may also gain the associated rights for video-on-demand and broadband (i.e., Internet streaming) and mobile distribution for such services. The Bureau considered that the control of these ancillary rights, which allow consumers to access content remotely, are becoming increasingly important and would afford Bell the opportunity to limit how and when its competitors could create, launch and offer to consumers, innovative products and services.

The Bureau carefully considered the regulatory framework, including the CRTC's Vertical Integration Framework and dispute resolution processes. Ultimately, the Bureau determined that structural and behavioural commitments were needed to address the likely competitive impact arising from the proposed transaction. The merged entity will remain subject to the CRTC's regulatory framework.

Remedies

To address the Commissioner's conclusions regarding the negative impact on competition from its acquisition of Astral, Bell has agreed to divest a significant portion of the English and French-language services that it would have acquired from Astral. Bell has also agreed to behavioural restrictions to complement these divestitures. These remedies were necessary to ensure that the transaction would not result in a substantial lessening or prevention of competition.2

The remedy package was designed based on a number of factors, including the characteristics of each service, and the pre-exisiting strength of Bell and Astral's portfolios in French and English programming services, respectively. The package of divested assets accounts for a substantial portion of the overlap, as measured by subscriber revenues, for specialty services (including the Family Channel, which is generally marketed and supplied like a specialty service). This divestiture package, coupled with the behavioural restrictions detailed below, significantly reduces the incremental bargaining leverage that the merged entity would have gained when negotiating for the supply of its progamming services to distributors.

Pursuant to the Agreement, Bell must divest itself of Astral's ownership interests in the following English and French-language services:

English and French-language Services to be Divested
English-Language Services French-Language Services
1. The Family Channel 1. Séries+
2. Teletoon 2. Historia
3. Teletoon Retro 3. Télétoon
4. Disney XD 4. Télétoon Rétro
5. Disney Jr. 5. Musique Plus
6. Cartoon Network 6. Musimax
  7. Disney Jr.

The Agreement between the Commissioner and Bell also includes behavioural restrictions that will limit Bell's ability to impose anti-competitive terms on its competitors and leverage certain programming services in its negotiation with distributors.

Based on the review of existing affiliation agreements, the Bureau concluded that Bell would have had an added ability and incentive to negotiate affiliation agreements whose terms could reduce the incentives of competitors to launch new programming services that compete with Bell's own programming services. The Agreement therefore prohibits Bell from negotiating or enforcing these restrictive terms.

With respect to Bell's acquisition of Astral's pay services, particularly The Movie Network and Super Écran, the Bureau recognized that these services are supplied and distributed differently than other programming services. In particular, these pay services have a lower number of subscribers and high fees, and are marketed as stand-alone premium services by distributors, allowing consumers to opt in and out more readily. In this respect, and on the basis of how these services have historically been offered to distributors and consumers, the Bureau determined that certain characteristics of these pay services limited Bell's ability to leverage these services in a way that is detrimental to consumers. The Agreement ensures that Bell will continue to make The Movie Network and Super Écran available on a stand-alone basis so that these services cannot be used in an anti-competitive way via bundling or other restrictive terms.

The Agreement also includes a behavioural restriction limiting Bell's ability to directly or indirectly tie the carriage of any of its programming services to the carriage of any other programming services.

For more details, please consult the Agreement, which will be available shortly on the Competition Tribunal web site.

Footnotes

1 Analytical methodologies are applied, and enforcement decisions are made, on a case-by-case basis. The methodologies and conclusions discussed in this statement are specific to the review of the proposed transaction in question and are not binding on the Commissioner. The legal requirements of section 29 of the Competition Act, and the Bureau's policies and practices regarding the treatment of confidential information, limit the Bureau's ability to disclose information obtained during the course of a merger review. (back to footnote reference 1)

2 The standard for achieving an acceptable remedy is set out by the Supreme Court in Canada (Director of Investigation and Research) v. Southam Inc. In this case, the Court concluded that "the appropriate remedy for a substantial lessening of competition is to restore competition to the point at which it can no longer be said to be substantially less than it was before the merger." (back to footnote reference 2)


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