Competition Bureau Statement Regarding the Proposed Acquisition of Bruce Telecom by Eastlink

OTTAWA, August 19, 2014 — This statement summarizes the approach taken by the Competition Bureau in its review of the proposed acquisition by Bragg Communications Inc. (Eastlink) of Bruce Telecom from the Municipality of Kincardine, pursuant to an agreement announced on January 22, 2014. Following an investigation, the Bureau determined that the proposed acquisition would likely have substantially lessened competition in the sale of wireline broadband internet services and bundles of home telephone, television and/or wireline broadband internet services in Port Elgin and Paisley, Ontario.

On August 12, 2014, after significant dialogue and multiple meetings with the parties where the Bureau communicated its specific concerns and responded to the parties’ submissions, including proposed remedies, the Bureau informed the parties that it would be making an application to the Competition Tribunal under sections 92 and 104 of the Competition Act to challenge the proposed acquisition. However, on August 14, 2014, the Bureau was advised by Eastlink that it had decided not to proceed with the proposed acquisition.

This non-notifiable merger was brought to the Bureau’s attention via several consumer complaints. In conducting its review, the Bureau obtained information from the parties, as well as a range of market participants, including competitors, customers and industry experts.Footnote 1

Background

On January 22, 2014, the Municipality of Kincardine entered into an Asset Purchase Agreement with Eastlink for the sale of Bruce Telecom.

Bruce Telecom is the incumbent telecommunications company for a large portion of Bruce County, Ontario. In operation for more than 100 years, it currently offers home telephone, television, wireline broadband internet, and wireless services across its incumbency area, which covers the towns of Kincardine, Tiverton, Port Elgin and Paisley, in addition to their surrounding rural areas.

Halifax-based Eastlink is a privately-held company that owns and operates cable systems across Canada. Within Bruce Telecom’s incumbency area, Eastlink owns and operates the cable systems in the towns of Port Elgin and Paisley, through which it currently offers home telephone, television and wireline broadband internet services in direct competition with Bruce Telecom.

Analysis

Most households and businesses in Port Elgin and Paisley now have the option of purchasing wireline broadband internet services and bundles of home telephone, television and/or wireline broadband internet services from two competing firms — Bruce Telecom, a telephone company, and Eastlink, a cable company. If Eastlink had acquired Bruce Telecom, the merged entity would have been the only option for these households and businesses when purchasing such services.

The development of competition in wireline telecommunications markets across Canada has been largely dependent on the expanding, dynamic and sustained local rivalry between telephone companies and cable companies. The Bureau observed that households and businesses in Port Elgin and Paisley have benefited from this rivalry in the form of higher quality services, increased internet speeds, lower prices for bandwidth, and the introduction of new products, new product features and new dimensions of rivalry.

The Bureau concluded that had the proposed acquisition taken place, households and businesses in Port Elgin and Paisley would likely have paid materially higher prices, had less choice, and received materially lower service quality for certain of their wireline telecommunications services. The Bureau was also very concerned that absent the dynamic rivalry that currently exists between the parties, Eastlink’s incentives to innovate, invest in its network, and deploy the latest technologies within Port Elgin and Paisley would have been substantially lessened.

The Bureau determined that the proposed acquisition would have substantially lessened competition in two relevant product markets:

  1. the market for wireline broadband internet services and
  2. the market for bundles of home telephone, television and/or wireline broadband internet services.Footnote 2

Wireline broadband internet services offer households and businesses high speed and high data volume connectivity to the internet, usually at a flat monthly rate. The vast majority of households and businesses seeking high speed internet access choose from among those firms that have built out networks to their premises, usually through the installation of copper, coaxial or fibre-optic lines, or a combination thereof.

The Bureau determined that mobile wireless and fixed wireless telecommunications services are not close substitutes for wireline broadband internet services. Not only are there important performance differences between wireline and wireless modes, such as speed differences in internet connectivity, but the Bureau determined that there are also significant price differences that cause wireless services to be an unattractive and uneconomical alternative for consumers given the heavy and increasing data usage of many households and businesses.

The Bureau also recognized that the parties operate in a dynamic and innovative industry characterized by ongoing technological improvements in wireless communications. However, the Bureau determined that improvements in the quality and pricing of wireless broadband internet services were unlikely to occur in a sufficient or timely manner to constrain the merged entity’s enhanced market power in wireline broadband internet services. The Bureau also took into account ongoing improvements in wireline telecommunications technologies, most notably the expanding deployment of fibre-to-the-premises (FTTP) networks.

Furthermore, wireline broadband internet services are often marketed and sold in bundles with home telephone and television services. These bundles tend to be priced significantly lower than the aggregate price of their individual components and also offer consumers the added convenience of dealing with only one bill and one telecommunications provider. The Bureau concluded that there are no close substitutes for bundles of telecommunications services.

The Bureau also determined that Port Elgin and Paisley were the relevant geographic markets for assessing the likely competitive effects of the proposed acquisition. Households and businesses purchasing wireline broadband internet services and bundled services select their service provider (or providers) from the set of firms that can offer such services directly to their premises. Where multiple premises in a region have the same competitive options, as is the case in Port Elgin and Paisley, it is appropriate to aggregate those premises for the purposes of delineating a relevant geographic market.

With respect to entry, the Bureau concluded that it was unlikely that the merged entity would have been constrained by other competitors entering the relevant markets. Barriers to entry into the provision of wireline telecommunications are high due to the sunk costs associated with building out a network and establishing a market presence, the importance of economies of scale in achieving viability, and the challenge of overcoming the historically strong position of well-entrenched incumbents. The likelihood of entry into Port Elgin and Paisley was further compromised by their relatively low population densities.

The Bureau notes that the proposed acquisition impacted relatively small communities. However, because dynamic and sustained rivalry between telephone companies (such as Bruce Telecom) and cable companies (such as Eastlink) is at the foundation of competition in wireline telecommunications in Canada, and because competitive telecommunications markets are fundamental to a modern digital economy, the Bureau will not hesitate to take enforcement action if it determines that future mergers in this industry are likely to result in a substantial lessening or prevention of competition.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case-by-case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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