Competition Bureau Intervention Telecom Notice of Consultation CRTC 2016-192

June 29, 2016

Table of contents

  1. Introduction
  2. Summary
  3. The economic effects of differential pricing
  4. Remedy
  5. Answers to questions in the notice of consultation
  6. Questions for interrogatories
  7. Conclusion

I. Introduction

  1. This proceeding has important implications for the benefits that competition delivers to consumers. The Commissioner of Competition ("Commissioner") therefore wishes to intervene in this proceeding to provide insight and assistance to the Canadian Radio‑television and Telecommunications Commission ("CRTC") in considering the potential competitive implications of differential pricing.Footnote 1
  2. This submission is based on public information, and is made in the context of the legislative framework applicable to this consultation. Accordingly, these submissions will not predetermine the Commissioner’s position in any current or future investigation pursuant to the Competition Act. The purpose of these submissions is, rather, to provide insight and assistance to the CRTC in respect of the competition issues in this proceeding, as well as general recommendations concerning an appropriate regulatory framework.
  3. Based on the public record at this time, the Competition Bureau ("Bureau") has no evidence that any content owners have experienced lost commercial opportunities as a result of differential pricing. The potential for harm discussed in this submission is based on economic theory. The Bureau takes the potential for harm to competition seriously, and is providing this submission to illustrate the risks associated with certain types of differential pricing.

II. Summary

  1. Differential pricing can influence the fundamental choices that consumers make. When an Internet Service Provider ("ISP") makes one product available at a lower cost than others, consumers may be incentivized to switch to that product. This is not always bad. In fact, discounting is an important strategy that businesses use to compete.
  2. However, some ISPs have commercial relationships with content providers. In some cases, ISPs and content providers are part of the same corporate family. In other circumstances, ISPs may receive payments from a content provider if the ISP can entice its customers to consume more of that content. These "affiliations" can provide a strategic lever for ISPs to have the ability and incentive to use differential pricing in a manner that may harm competition.
  3. When this strategic lever exists, ISPs can financially benefit from making affiliated content appear more attractive, and competing content less attractive. This influence can cause consumers to switch to affiliated content not because of a higher intrinsic value, but rather because an ISP has strategically convinced consumers that the content is more valuable than market forces would otherwise dictate.
  4. This behaviour can harm competition, stall innovation, and increase prices for consumers.
  5. Subsection 27(2) and section 36 of the Telecommunications Act are both available to the CRTC to prevent ISPs from engaging in differential pricing that involves any content that the ISP is affiliated with. The Commissioner recommends that the CRTC consider using these tools to promote competition and ensure greater consumer choice.

III. The economic effects of differential pricing

What is differential pricing?

  1. Differential pricing occurs when an ISP charges one price when a consumer generates one type of internet traffic, and another price for other types of internet traffic.
  2. One type of differential pricing is known as "zero‑rating". Zero‑rating occurs when an ISP exempts the internet traffic associated with use of a particular service from a consumer’s data cap.
  3. Differential pricing involves at least two groups of services: a "Favoured Group", which is offered at a lower price, and a "Disadvantaged Group" that does not receive such treatment.
  4. Consideration of "price", in this context, should not be limited to the expenditure of money that a consumer makes to use a service. Non‑price factors are also valued by consumers.Footnote 2 Non‑price factors that we include in the term "price" in this submission include quality, choice, service, innovation, and any other dimension of a product or service that buyers value.Footnote 3

Differential pricing can harm the economy

  1. By making Favoured Group content potentially cheaper to consume, differential pricing can create an incentive for an ISP’s customers to switch their usage toward Favoured Group content, and away from Disadvantaged Group content.Footnote 4 This switching behaviour can be adverse to competition, as it results not from a superior product being offered in the market, but instead from the strategic behaviour of the ISP.
  2. In some commercial settings, an ISP may receive payments from a content provider if the ISP can entice its customers to consume more of that content. In other settings, ISPs and content providers are part of the same corporate family. In either of these settings, ISPs can have a monetary incentive to engage in differential pricing.
  3. We refer to these relationships as "affiliations". This term goes beyond the standard description of the corporate relationship between the ISP and the content owner, and also includes situations where an ISP obtains a financial benefit from a content owner related to the increased use of its content.
  4. On one hand, when an ISP does not receive such a financial benefit, then the ISP is not considered "affiliated with" the content owner. When an ISP is not affiliated with the content owner, differential pricing does not harm competition and can benefit consumers. This type of differential pricing benefits some and injures others but, on balance, increases the overall efficiency of the economy.
  5. On the other hand, when an ISP favours its affiliated services, competition and consumers can be harmed. This type of differential pricing can both:
    1. prevent the launch of innovative new services, and
    2. distort competition "for" the market. This type of differential pricing benefits some and injures others but, on balance, has an overall negative effect because of the economic harm (i.e., deadweight loss) it generates.Footnote 5
    When that happens, consumers may suffer in that they face higher prices, less choice, and decreased innovation.

Differential pricing can prevent the launch of innovative new services

  1. When a company is deciding whether to either launch a new service, expand an existing service, or otherwise innovate in a market, it considers both the costs and the expected return associated with doing so.
  2. An ISP that has no affiliated content does not have the incentive to impede the launch of innovative new products. More content, and better content, increases the value of the ISP’s services to consumers, and thus increases the revenue that this ISP can expect to charge for its services. For example, an ISP may choose to partner with an arm’s length content provider so that the ISP’s customers can receive lower prices when accessing content. This makes the ISP more attractive in the eyes of consumers, and is an important behaviour for the proper functioning of the marketplace.
  3. An ISP that is affiliated with a content provider, however, may have an incentive to stop others from launching new services, expanding existing services, or otherwise innovating. By engaging in differential pricing, the ISP may be able to reduce the attractiveness of alternatives to its affiliated content by making them relatively more expensive. This, in turn, limits the number and/or quality of alternatives that customers can turn to when the ISP’s affiliated content provider increases its price.Footnote 6Footnote 7 This makes price increases more likely.Footnote 8
  4. To be clear, the Bureau does not oppose all forms of vertical integration. For example, vertical integration can result in lower prices when it allows an ISP to access content at cost, as opposed to paying a margin to a content supplier (i.e., removing double marginalization).Footnote 9 The risk associated with vertical integration exists when it allows an ISP, in the context of this submission, to strategically alter the number and/or quality of its competitors.Footnote 10
  5. When this happens, consumers can face less choice, a lower level of innovation, and higher monetary prices. Consumer prices, in this situation, are not a result of an ISP creating a superior product, but rather represent the ISP’s strategic reduction of the relative attractiveness of its rival’s product.
  6. The potential negative impact on content creation and innovation may be significant in an environment where there is only a small number of distributors that serve a large proportion of Canadians. In this respect, it could take only one or two large Canadian ISPs engaging in differential pricing to have a significant effect on the incentives for non‑affiliated content creators to launch a new product, expand an existing product, or otherwise innovate.

Differential pricing can distort competition "for" the market

  1. The ability of content providers to attract users and build up demand is a virtuous cycle. For example, when two or more people play the same video game, they can get enjoyment not just from playing the game, but also from discussing strategies and interacting with others who also play that game. In this situation, the desirability of content increases when others also consume it, such that having a large number of subscribers increases the willingness of other consumers to subscribe. In economics, this effect is called "network economies."Footnote 11
  2. The evolution of competition in industries where there are network economies is often characterized by an initial period in which a number of competitors vie to sign‑up customers. For each customer they sign up, the value of their network increases. After some time, a "tipping point" may emerge where it becomes apparent to all that one product has an insurmountable lead and will win the race.Footnote 12 That product then becomes the standard going forward, much like how Microsoft Word is the current standard for word processing.Footnote 13
  3. Even if network economies do not result in one specific "winner", the competitors to a product that establishes significant network economies may not be particularly effective in constraining the leading product. For example, even though there are alternative word processing suites available, few consumers or businesses tend to switch away from Microsoft Word.
  4. By favouring its affiliated content, the ISP could increase the network effects of that content by directing consumers towards it. This could harm rival content by causing its network effects to be diminished or lost, thereby making it a less effective competitor to the ISP’s affiliated content.
  5. In an extreme case, differential pricing can cause the "tipping point" to happen in the "wrong" direction, such that content with lower intrinsic value "wins", contrary to what market forces would prescribe.
  6. When either of these effects happen, content that is not affiliated with the ISP loses at least some of its attractiveness to consumers — not on the merits — but because an ISP strategically disadvantaged it.
  7. When a product loses network economies because of differential pricing, it can become less effective in serving its role as a vigorous competitive force in the market. Such diminishment of competition can mean that consumers will face higher monetary prices, less choice, and decreased levels of innovation.

Differential pricing does not harm competition unless content is affiliated

  1. Differential pricing does not raise concerns where the Favoured Group content is unaffiliated with the ISP. In this circumstance, the ISP’s motive in imposing differential pricing can only be to strengthen its competitive offer vis‑à‑vis its competitors. Since the Favoured Group content is not affiliated with the ISP, the ISP does not obtain a financial benefit from any effects that differential pricing has on content creators. Unaffiliated ISPs would not engage in differential pricing unless there is some other motivator (e.g., strengthening its competitive offer).
  2. Differential pricing that does not harm competition benefits some and injures others but, on balance, increases the overall efficiency of the economy. Differential pricing that negatively affects competition benefits some and injures others but, on balance, has an overall negative effect because of the economic harm (i.e., deadweight loss) it generates.

How to measure the effects of differential pricing

  1. The economic theory set out above is based on an economic concept called "customer foreclosure".Footnote 14 In this theory, an ISP makes Favoured Group content more attractive in an attempt to cause customers to switch their consumption away from Disadvantaged Group content.
  2. Baker (2011) sets out the now standard method of quantitatively determining whether an ISP may be financially incented to engage in this type of foreclosure.Footnote 15 This analysis concerns two effects from differential pricing:
    1. Any cost to the ISP associated with customers leaving its service, and
    2. The benefit that the ISP receives from customers shifting their consumption to the ISP’s affiliated content.
  3. The Commissioner recommends that the CRTC should consider these factors in its examination. Particularly, when conceptualizing the benefit that an ISP receives from customers shifting consumption to the ISP’s affiliated content, it may be important to determine:
    1. the financial benefit that the ISP gains from each customer (or unit of consumption), and
    2. the number of customers (or units of consumption), that will switch their consumption to Favoured Group content as a result of differential pricing.Footnote 16
    The larger these two factors are, the more likely it is that an ISP will engage in this type of differential pricing.

Differential Pricing May be Contrary to the Telecommunications Act

  1. Subsection 27(2) and section 36 of the Telecommunications Act are both mechanisms that may be available to the CRTC to address the harms associated with differential pricing practices by ISPs that favour affiliated content.
  2. Differential pricing that negatively affects competition may constitute unjust discrimination or undue preference pursuant to subsection 27(2) of the Telecommunications Act.
  3. Differential pricing is discriminatory or preferential by definition. The practice, in all of its forms, favours one group of content creators over another.
  4. That discrimination or preference meets the standard of being unjust or undue when it is inconsistent with the public interest.Footnote 17 Differential pricing of affiliated content meets this test, because it affects consumer choice not as a result of an ISP or its affiliate creating a superior product, but rather because the ISP has strategically reduced the relative attractiveness of its rival’s product. The ISP is leveraging its market position to the detriment of Disadvantaged Group content, rather than allowing market forces to determine which forms of content are consumed.
  5. The public interest in this matter is further encapsulated in the Canadian Telecommunications Policy set out in section 7 of the Telecommunications Act. Differential pricing that harms competition may be inconsistent with several parts of section 7 and can be prohibited on that basis.Footnote 18 In particular:
    1. Contrary to subsection 7(b) of the Telecommunications Act, differential pricing of affiliated content leads to higher prices for consumers. Higher prices may manifest as a larger financial burden to access internet services or content, but can also affect the quality, variety, and service levels associated with those services or content.
    2. Contrary to subsection 7(c) of the Telecommunications Act, when differential pricing harms competition, the Canadian telecommunications landscape is less efficient. It is well known that competitive markets maximize economic efficiency. In telecommunications, achieving economic efficiency is paramount, given the role of telecommunications services as an input into many other industries, and the negative spill‑over effects that can be present. For example, when a practice raises the price for a small business to access internet services, then that business must either absorb that cost increase or pass it on to its consumers, which can further cause lost economic efficiency.
    3. Contrary to subsection 7(g) of the Telecommunications Act, differential pricing can harm innovation. Competition is a key driver of innovation, which in turn drives productivity, efficiency and economic growth. And, for consumers, innovation brings more choices and higher quality products and services in a dynamic marketplace.
  6. It may also be contrary to section 36 of the Telecommunications Act for an ISP to strategically use its market position as a distributor to materially affect the market position of affiliated content. In doing so, an ISP may control the content or influence the meaning or purpose of telecommunications carried by it for the public.
  7. When an ISP does so, it may strategically shift consumers to Favoured Group content and/or away from Disadvantaged Group content. In this circumstance, it is the ISP's action, and not market forces, that influences the meaning or purpose of content; the shift arises not from the creation of a superior product, but rather because the ISP strategically reduces the relative attractiveness of its rival's product.
  8. However, absent the commercial relationship between the ISP and its affiliated content, market forces are operating to pick winners and losers. In this circumstance, it is the market, rather than the ISP, that is influencing the meaning or purpose of telecommunications.
  9. The risk that a telecommunications company may misuse its market position is precisely the concern underlying section 36 of the Telecommunications Act. This provision originates with Bell's efforts in 1967 to expand its powers beyond telephony service and into the telecommunications industry more generally.Footnote 19 The Director of Investigation and Research under the Combines Investigation Act (the predecessor position to the Commissioner of Competition under the Competition Act) cautioned that the expansion of Bell's powers could result in Bell misusing its expanded market position.Footnote 20 The Bill expanding Bell's powers was subsequently amended to prohibit control of content or the meaning or purpose of messages.Footnote 21 In creating this amendment, the Chairman of the House Committee noted the role of the Director of Investigation and Research played in establishing this safeguard, which is now found in section 36 of the Telecommunications Act.Footnote 22
  10. The position being advocated herein by the Commissioner is also consistent with previous decisions under section 36 and its predecessor provisions. Such decisions include:
    1. prohibiting a Canadian telecommunications firm from engaging in publishing involving editorial control over content or in the creation or distribution of its own databases;Footnote 23
    2. prohibiting a Canadian telecommunications firm from providing an electronic version of the Yellow Pages directory;Footnote 24
    3. granting approval to involvement by an Canadian carrier in the content of that carrier's own Internet Service;Footnote 25 and
    4. finding that a noticeable degradation of time sensitive traffic caused by internet traffic management practices would amount to controlling or influencing the content of telecommunications within the meaning of section 36 of the Telecommunications Act.Footnote 26

IV. Remedy

  1. The CRTC should consider establishing a regulatory framework that prohibits differential pricing that harms competition.
  2. Differential pricing can harm competition — and overall economic welfare — when an ISP increases the attractiveness of an affiliated service, or reduces the attractiveness of an unaffiliated service, to a consumer. An appropriate standard for regulating differential pricing should focus on the effect that such a practice has on competition.Footnote 27
  3. In this context, content is "affiliated with" an ISP whenever an ISP obtains a financial benefit from the owner of that content related to the increased use of that content. This goes beyond the standard description of the corporate relationship between the ISP and the content owner, and also includes any circumstance in which an ISP obtains a financial benefit from a content owner related to the increased use of its content.
  4. Prohibiting differential pricing of affiliated content by ISPs tailors a remedy to the underlying economic harm and, as such, is a remedy that relies on market forces to the maximum extent feasible.Footnote 28
  5. In a situation where an ISP merely promotes consumption of a service, but does not receive a financial benefit from the owner of that service related to the promotion, then the ISP is not considered "affiliated with" the content owner.
  6. In the Bureau’s submission, any regulatory framework should encompass all aspects of an ISP’s offer that consumers value.Footnote 29 The framework should address all forms of differential billing by ISPs, but should also address the non‑price factors that ISPs control, such as quality of services. Otherwise, the regulatory framework may contain gaps that could permit harm to competition.
  7. Notwithstanding the above, in circumstances where other legitimate policy objectives exist, such as ensuring that Amber Alerts are provided on a zero‑rated basis, the CRTC should consider exercising its discretion to balance any negative effects on competition with other effects in the public interest.
  8. Additionally, in the Bureau’s submission, when differential pricing does not affect competition, the practice should not be prohibited. This type of conduct generally falls into one of two categories:
    1. First, differential pricing that does not favour affiliated content is a legitimate form of competition that should not be prohibited. When an ISP favours unaffiliated content, it does so in an effort to enhance its competitive offering to entice consumers to switch to its internet services from competing services. This is competition at work.
    2. Second, other types of differential pricing that do not affect competition should be permissible. For example, zero‑rating applications that enable consumers to monitor data usage is only problematic if an ISP does so in order to favour its affiliated application versus a third party option. Similarly, zero‑rating services during a particular time period is also unlikely to harm competition unless it somehow confers an advantage on affiliated content.
  9. Banning differential pricing of unaffiliated content can remove a competitive option for ISPs, and would accordingly be overbroad, in the Bureau’s submission. Doing so reduces the spectrum of conduct over which businesses can compete, and can therefore result in higher prices, less choice, and decreased innovation.

V. Answers to questions in the notice of consultation

  1. In Telecom Notice of Consultation 2016‑192, the CRTC has provided 15 specific questions regarding the treatment of differential pricing.Footnote 30 The Bureau’s answers to these questions are set out in Appendix A to this submission.

VI. Questions for interrogatories

  1. In Telecom Notice of Consultation 2016‑192‑1, the CRTC provided that parties to this consultation "may propose questions to be included in the Commissioner’s request for information to parties".Footnote 31 Accordingly, the Bureau requests that the questions set out in Appendix B to this submission be included in the CRTC’s interrogatory requests.

VII. Conclusion

  1. For the purposes of this proceeding, the designated representative of the Commissioner is:

    Vicky Eatrides
    Deputy Commissioner of Competition, Competition Promotion Branch
    Competition Bureau
    21st Floor, 50 Victoria Street
    Gatineau, Quebec K1A 0C9
  2. The Bureau does not intend to participate in public hearing, but is prepared to appear if the CRTC so requests.

Appendix A: answers to questions in the notice of consultation

Q.1: What types of billing practices constitute differential pricing practices for the purpose of developing a regulatory framework to govern such practices?

  1. The regulatory framework should not be based solely on "billing practices", which is too narrow. The regulatory framework should address both price and non‑price aspects of ISP conduct.Footnote 32
  2. Any practice that reduces the attractiveness of a service to a consumer can constitute differential pricing. An ISP may, for example, engage in differential pricing without making any changes that will be visible on a customer’s bill. One way would be for an ISP to slow down access to a rival application in order to favour an affiliated application.Footnote 33 Such a practice could have the same or similar effect on competition as differential billing practices, and consequently lead to same economic harm.
  3. Any regulatory framework should encompass all aspects of an ISP’s offer that consumers value.Footnote 34 The framework should address all forms of differential billing by ISPs, but should also address the non‑price factors that ISPs control, such as quality of services. Otherwise, the regulatory framework may contain gaps that could permit harm to competition.

Q.2: To what extent do these practices exist in Canada’s internet access service market? Provide specific examples.

  1. The Bureau is aware of two general examples of differential pricing in Canada’s internet access services markets:
    1. Videotron's Unlimited Music service, in which Videotron exempts the traffic associated with use of certain streaming audio services from its customers' data caps, but offers no similar exemption to competing services (e.g., streaming radio stations).Footnote 35
    2. Bell's Crave TV, Rogers’ and Shaw’s Shomi, and Videotron’s Club illico services, in which certain ISPs exempt the traffic associated with use of these products from its customers' data caps, but offer no similar exemption to competing services (e.g., Netflix).Footnote 36Footnote 37

Q.3: Are there Internet access differential pricing practices that may not raise regulatory concerns (for example, applications that enable consumers to monitor their data usage that may not count towards a data plan, or plans that zero‑rate data traffic during a particular time period)? If so, please explain.

  1. When differential pricing does not affect competition, the practice should not be prohibited. This type of conduct generally falls into one of two categories:
    1. First, differential pricing that does not favour affiliated content is a legitimate form of competition that should not be prohibited. When an ISP favours unaffiliated content, it does so in an effort to enhance its competitive offering to entice consumers to switch to its internet services from competing services. This is competition at work.
    2. Second, other types of differential pricing that do not affect competition should be permissible. For example, zero‑rating applications that enable consumers to monitor data usage is only problematic if an ISP does so in order to favour its affiliated application versus a third party option. Similarly, zero‑rating services during a particular time period is also unlikely to harm competition unless it somehow confers an advantage on affiliated content.
  2. Banning differential pricing of unaffiliated content can remove a competitive option for ISPs, and would accordingly be overbroad, in the Bureau's submission. Doing so reduces the spectrum of conduct over which businesses can compete, and can therefore result in higher prices, less choice, and decreased innovation.

Q.4: What are the potential benefits to consumers, application providers, and ISPs associated with some or all internet access differential pricing practices?

  1. Differential pricing practices provide different benefits for different industry participants. The magnitude of these benefits relative to the harm to others depends on whether or not the differential practices harm competition.Footnote 38
  2. In some cases, consumers may pay a relatively lower price for Favoured Group content. For example, in the absence of zero‑rating, consumers would face a data cap. This constraint is removed with zero‑rating. Alternatively, consumers may receive preferentially lower monetary prices for Favoured Group content when content providers offer lower monetary prices for the consumers of its affiliated ISPs.
  3. In other differential pricing schemes, such as conduct that degrades the quality or speed of Disadvantaged Group content, consumers may not benefit at all from differential pricing. In this example, consumers do not get to access Favoured Group content on better terms; they just do not receive Disadvantaged Group content on the same terms of Favoured Group content.
  4. Application providers in the Favoured Group benefit in two ways:
    1. First, when differential pricing practices harm competition, application providers (e.g., content owners) may be able to charge higher prices as a result of being insulated from the forces of competition and innovation. For example, if differential pricing increases the relative value of content, then application providers may wish to increase their prices to reflect that additional value.
    2. Second, Favoured Group application providers may gain increased network economies from serving a greater number of consumers. In other words, when a greater number of people watch or listen to the same shows, these shows can become relatively more valuable to consumers.Footnote 39 These increased network effects can represent extra value associated with application providers’ products.
  5. Some ISPs may benefit from two sources:
    1. First, an ISP may earn increased revenues when a Favoured Group provider gives the ISP a financial payment in exchange for the increased traffic flowing to it as a result of the differential pricing. For example, an ISP may enter into an agreement where a streaming audio provider pays a fee to the ISP for each additional hour that the ISP’s customers use a streaming audio service. This can increase the revenues of the ISP.
    2. Second, when differential pricing harms competition, an ISP may profit from weakened horizontal competition in the market for internet access services. For example, if an ISP offers popular content at relatively lower prices than other ISPs, then some consumers may switch their internet access subscriptions to that ISP. Alternatively, the ISP may use differential pricing of unaffiliated content to attract more internet access customers. Either of these examples can result in increased profits for the ISP.

Q.5: What are the potential risks to consumers, application providers, and ISPs associated with some or all Internet access differential pricing practices?

  1. The potential risks of differential pricing can be less obvious. There are, however, real risks that can accompany differential pricing practices. The magnitude of these risks relative to the benefits to others depends on whether or not the differential practices harm competition.Footnote 40
  2. Consumers pay a relatively higher price for Disadvantaged Group content. For example, consumption of Disadvantaged Group content may cost relatively more against a consumer’s data cap than Favoured Group content. Or, alternatively, consumers may receive Disadvantaged Group content at a lower quality, slower speed, or relatively higher price as compared to Favoured Group content.
  3. When differential pricing harms competition, the relatively higher price of Disadvantaged Group content may also cause consumers to consume a product that is less valuable to them, or exit the market altogether. Both of these effects generate economic harm (i.e., deadweight loss).
  4. Consumers can also be deprived of the benefits of competition and innovation. When it becomes more expensive to consume Disadvantaged Group content, fewer consumers may consume it. This can make it less lucrative for Disadvantaged Group providers to serve the market, and may result in some providers leaving the market entirely. It also may mean that new content providers may not launch a product at all, which can harm innovation, reduce consumer choice, and result in higher prices for consumers.
  5. Application providers in the Disadvantaged Group can be denied access to consumers. This can manifest itself in two effects.
    1. First, Disadvantaged Group application providers may be less likely to launch a new product or expand their services to customers in Canada. For example, a provider may wish to launch a new product or expand their services in Canada, but face difficulties in doing so if differential pricing has made Favoured Group content so relatively valuable to consumers that consumers will not switch to a new entrant in sufficient numbers to make launching a new service, expanding an existing service, or otherwise innovating viable. This can result in decreased profits for those application providers, as compared to a situation where there is no differential pricing.
    2. Second, Disadvantaged Group application providers may lose network economies, which can make their content less valuable to consumers. This can result in decreased profits if consumers switch their consumption to competing services, or are no longer willing to continue to consume the Disadvantaged Group content at the same prices as they were paying prior to the differential pricing.
  6. Some ISPs may lose profits by becoming less attractive competitors to ISPs that engage in differential pricing practices. For example, even in a situation where a competing ISP favours unaffiliated content, all other ISPs must find a new way to provide additional value to their consumers, or they risk losing those consumers to the competing ISP.

Q.6: How should the benefits and risks identified above be weighed and how might they inform whether any specific internet access differential pricing practice contravenes subsection 27(2) of the Act?

  1. A benefit to an ISP, or a cost to a consumer, cannot be viewed myopically. An integrated analysis of these benefits and costs must be made. Differential pricing that does not harm competition benefits some and injures others but, on balance, increases the overall efficiency of the economy. Differential pricing that negatively affects competition benefits some and injures others but, on balance, has an overall negative effect because of the economic harm (i.e., deadweight loss) it generates.Footnote 41
  2. A guiding principle in any regulatory framework regarding differential pricing should, in the Bureau's submission, be the effect that the conduct in question has on competition. Differential pricing that negatively effects competition should be prohibited as unjust discrimination or undue preference pursuant to subsection 27(2) of the Telecommunications Act.
  3. Differential pricing is discriminatory or preferential by definition. The practice, in all of its forms, favours one group of content creators over another.
  4. That discrimination or preference meets the standard of being unjust or undue when it is inconsistent with the public interest.Footnote 42 Differential pricing of affiliated content meets this test, because it affects consumer choice not as a result of an ISP or its affiliate creating a superior product, but rather because the ISP has strategically reduced the relative attractiveness of its rival's product. The ISP is leveraging its market position to the detriment of Disadvantaged Group content, rather than allowing market forces to determine which forms of content are consumed.
  5. The public interest in this matter is further encapsulated in the Canadian Telecommunications Policy set out in section 7 of the Telecommunications Act. Differential pricing that harms competition may be inconsistent with several parts of section 7 and can be prohibited on that basis.Footnote 43 In particular:
    1. Contrary to subsection 7(b) of the Telecommunications Act, differential pricing of affiliated content leads to higher prices for consumers. Higher prices may manifest as a larger financial burden to access internet services or content, but can also affect the quality, variety, and service levels associated with those services or content.
    2. Contrary to subsection 7(c) of the Telecommunications Act, when differential pricing harms competition, the Canadian telecommunications landscape is less efficient. It is well known that competitive markets maximize economic efficiency. In telecommunications, achieving economic efficiency is paramount, given the role of telecommunications services as an input into many other industries, and the negative spill‑over effects that can be present. For example, when a practice raises the price for a small business to access internet services, then that business must either absorb that cost increase or pass it on to its consumers, which can further cause lost economic efficiency.
    3. Contrary to subsection 7(g) of the Telecommunications Act, differential pricing can harm innovation. Competition is a key driver of innovation, which in turn drives productivity, efficiency and economic growth. And, for consumers, innovation brings more choices and higher quality products and services in a dynamic marketplace.

Q.7: To what extent, if any, do differential pricing practices give ISPs the ability to act as "gatekeepers" that are able to determine or influence which internet applications are more likely to be accessed than others by consumers? If so, explain whether this is appropriate.

  1. Differential pricing practices can allow ISPs to determine or influence which internet applications are more likely to be accessed by consumers.
  2. This can be an inappropriate role for an ISP when it harms competition. Differential pricing can harm competition when an ISP uses differential pricing to favour affiliated content. This can artificially increase the attractiveness of Favoured Group content, and can lower any network effects present in Disadvantaged Group content.
  3. When an ISP uses differential pricing to favour unaffiliated content, however, competition can be enabled, rather than being negatively affected. In that circumstance, discounting activity in telecommunications is like discounting activity in other areas of the economy; the ISP aims to use its promotion in order to attract customers and to compete effectively against its rivals.

Q.8: Are differential pricing practices examples of market forces working as they should, or are they examples of anti‑competitive behaviour?

  1. When ISPs use differential pricing to promote unaffiliated content, this can be an example of market forces working as they should. In this case, ISPs may enhance the attractiveness of their offerings to consumers, and compete along a range of factors.
  2. When ISPs use differential pricing to promote affiliated content, however, this can have negative effects on competition and, ultimately, economic welfare. Differential pricing involving affiliated content can strategically reduce the attractiveness of rival content.

Q.9: Are ISPs being sufficiently transparent with respect to the information they provide to consumers about the Internet access differential pricing practices they use? How aware are consumers about the implications of these practices?

  1. Full disclosure of differential pricing practices is not a remedy for the harm these practices can cause. In circumstances where differential pricing affects the perceived value of Disadvantaged Group content, no amount of disclosure regarding the ISP’s pricing practices will fix that perception, and consumers may respond to the price differential irrespective of the disclosure.
  2. The Bureau is not generally aware of either:
    1. how ISPs are marketing and disclosing differential pricing practices, or
    2. how informed consumers are regarding the implications of differential pricing practices.

Q.10: To what extent do internet access differential pricing practices fall within the scope of section 36 of the Act? If any such practices engage section 36 of the Act, what considerations ought to guide the Commission in assessing whether to approve these practices under this section?

  1. It may also be contrary to section 36 of the Telecommunications Act for an ISP to strategically use its market position as a distributor to materially affect the market position of affiliated content. In doing so, an ISP may control the content or influence the meaning or purpose of telecommunications carried by it for the public.
  2. When an ISP does so, it may strategically shift consumers to Favoured Group content and/or away from Disadvantaged Group content. In this circumstance, it is the ISP's action, and not market forces, that influences the meaning or purpose of content; the shift arises not from the creation of a superior product, but rather because the ISP strategically reduces the relative attractiveness of its rival's product.
  3. However, absent the commercial relationship between the ISP and its affiliated content, market forces are operating to pick winners and losers. In this circumstance, it is the market, rather than the ISP, that is influencing the meaning or purpose of telecommunications. See paragraphs 44‑45.

Q.11: Having regard to the responses to the questions above, what restrictions, if any, should be placed on any specific differential pricing practices associated with retail internet data usage?

  1. The CRTC should consider establishing a regulatory framework that prohibits differential pricing that harms competition.

Q.12: Should specific types of applications, such as those associated with social needs, be treated differently or be exempt from a regulatory framework on differential pricing practices, and if so, why? How might any such applications be defined, categorized, and assessed?

  1. Only differential pricing that favours affiliated content may harm competition. In some cases, differential pricing for social aims may not meet the standard of being affiliated with an ISP. If so then, in the Bureau’s submission, that type of differential pricing should not be prohibited by any regulatory framework.
  2. Negative effects to competition may be permissible, in the regulator's discretion, when other legitimate policy goals exist. For example, a situation could arise where an ISP zero‑rates traffic associated with the transfer of medical records. The Bureau does not oppose such measures when they are a result of a regulator fulfilling its mandate.

Q.13: Do any other factors influence whether differential pricing practices should or should not be permitted in certain cases? For example, should permission depend on whether:

  • the ISP controls multiple parts of the supply chain, including the transmission facilities and the data applications;
  1. For competition to be harmed, it is necessary that an ISP is affiliated with other parts of the supply chain — i.e., content providers.
  • the differential pricing practice is based on economic or purely technical parameters;
  1. In the Bureau’s submission, the regulatory framework should not vary based on whether the differential pricing practice is based on "economic" (e.g., monetary) or "technical" (e.g., non‑monetary) parameters. Consumers are generally interested in more than just the monetary price that they pay for a product — they also care about the service levels they receive when using the product and the quality of the product, as well as other features.
  2. Accordingly, differential pricing can occur along any dimension of an ISP’s service offer that consumers value. In the Bureau’s submission, any regulatory framework should take into account the wide variety of benefits that consumers receive, and look beyond the simple monetary price of the service.Footnote 44
  • the differential pricing practice affects the success of the application or service in question;
  1. The strongest case for prohibition of differential pricing that harms competition occurs when one can show a clear negative effect that flows from the conduct. However, this will not always be easy to do. Estimating the effects of business conduct, where it is even possible, is a complicated process which can require large amounts of data and industry knowledge to properly implement. Meanwhile, as the applicant and complainants jostle over whose estimation of effects is more correct, consumers may be subject to ongoing harm through higher prices, less choice, and decreased levels of innovation.
  2. In the Bureau’s submission, there should be no requirement in the framework that a complainant be required to show any actual effects of differential pricing. Rather, where differential pricing of an ISP’s affiliated content exists, the CRTC should consider prohibiting it by default. Other standards may create uncertainty, invite strategic applications, and lengthen any interim period where harm is occurring while a determination is being made.
  • there is a societal benefit to doing so;
  1. In the Bureau’s submission, strong consideration should always be given to the social cost of lost competition. However, in circumstances where other legitimate policy objectives exist, such as the efficient provision of information during an emergency, the CRTC may wish to consider exercising its discretion to balance any negative effects on competition with other effects on the public interest.
  • the ISP makes the offer available to all application providers offering the same or similar services or applications; or
  1. On its face, a rule to this effect looks appealing. In theory, an ISP cannot be seen as favouring its affiliated content while, at the same time, it applies the same rules to all other content. However, a rule that allows any form of differential pricing involving affiliated content may be impractical.
  2. For example, how can an ISP, in isolation, identify all of the application providers in a particular class of services? How can one ensure that all providers are aware of the offer? And, even if those issues can be surpassed, how willing will a competing service provider be to furnish its competitor with the necessary technical details of its service?
  3. In the Bureau’s submission, an exemption based on these types of universal offers may be difficult to monitor and enforce, and should not be regarded as an adequate remedy for the economic harm that differential pricing can create.
  • the practice affects broadcasting policy?
  1. Differential pricing of affiliated content can harm competition and, in the Bureau’s submission, this is a sufficient basis for regulatory intervention. The CRTC should, however, consider making necessary amendments to broadcasting policy to achieve this objective.

Q.14: Should the commission’s ITMP framework be modified to address differential pricing practices and, if so, how?

  1. See answer in paragraph 103. The CRTC should consider establishing a regulatory framework that prohibits differential pricing that harms competition, and the CRTC should consider making necessary amendments to related policies to achieve this objective.

Q.15: Describe how any transparency concerns about the information that is made available to consumers with respect to differential pricing practices could be mitigated.

  1. See answer to Question 9.

Appendix B: questions for interrogatories

  1. For all content providers:
    1. provide examples of situations, inside or outside of Canada, where you did not launch, ceased offering your service, or scaled down your offering because of the existence or prospect of an ISP offering or introducing differential pricing practices.
      1. This request is relevant paragraphs 18‑23 of this submission.
    2. describe every situation, inside and outside of Canada, where you have lost customers or traffic as a result of an ISP introducing differential pricing. Did these lost customers divert to a service that you regard as a rival?
      1. This request is relevant to Part III of this submission.
    3. describe the types of costs that you must incur before entering a market or launching a new product.
      1. This request is relevant paragraph 18 of this submission.
    4. have you sought a differential pricing advantage from an ISP for your service? If so, describe the advantage you sought and whether you were successful in seeking it.
      1. This request is relevant to the Part III of this submission.
    5. what proportion of your operating revenue is earned from Canadian ISPs? What proportion of your operating revenue is earned from a single Canadian ISP?
      1. This request is relevant to paragraph 23 of this submission.
  2. For all ISPs:
    1. what proportion of the promotions or service offerings that you provide or intend to provide in the next two years are owned or affiliated with you?
      1. This request is relevant to paragraph 14 of this submission.
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