Competition Bureau statement regarding its investigation into alleged anti-competitive conduct by Apple

Position statement

OTTAWA, January 6, 2017 — Today, the Commissioner of Competition (Commissioner) announced that he has discontinued an inquiry against Apple Inc. and Apple Canada Inc. (referred to for convenience as “Apple” without distinction between the companies) under the abuse of dominance provision of the Competition Act (Act). The conduct at issue involves certain restrictions and obligations imposed on wireless carriers for the sale and marketing of iPhones to consumers in Canada (the Apple Terms).Footnote 1 This statement summarizes the approach taken by the Competition Bureau (Bureau) in its investigation.

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Background

The conduct at issue includes contractual terms that reference rivals as well as other terms that impose obligations on wireless carriers relating to the sale and marketing of the iPhone in Canada. The Bureau examined this conduct under the abuse of dominance provision (section 79) of the Act. Abuse of a dominant position occurs when a dominant firm or a dominant group of firms in a market engages in a practice of anti‑competitive acts, with the result that competition has been or is likely to be prevented or lessened substantially. As the Bureau has not found sufficient evidence to suggest Apple’s current practices have substantially lessened or prevented competition in any relevant market, or are likely to do so, the inquiry has been discontinued.

Market context

Since the introduction of the iPhone in Canada in 2008, smartphones have firmly established themselves in the daily lives of many Canadians. The growth of smartphones has been explosive: in 2015, 73% of Canadians aged 18 and over owned a smartphone,Footnote 2 compared to 24% in 2010.Footnote 3

Smartphones are cellular handsets that are typically characterized by touch screen interfaces and a focus on software applications instead of just talk and text. Smartphones can be further classified as ‘premium’ or ‘basic’ depending on their market positioning and overall price point. Prior to the introduction of the iPhone in Canada, the majority of Canadians used ‘feature phones’, primarily for talk and text services.

Smartphones are manufactured by Original Equipment Manufacturers (OEMs), such as Apple, Samsung, and LG. Competition among OEMs has been characterized by rapid technological advancement and innovation, and has seen a number of players enter and exit over the years. As new devices are released, OEM market shares can fluctuate considerably. OEMs sell smartphones directly to consumers, through wireless carriers, and through other channels.

Wireless carriers operate networks that provide talk, text, and wireless data to smartphone users, in addition to selling smartphones to consumers. In Canada, the three largest wireless carriers, Bell Mobility Inc., Rogers Communications Inc. and TELUS Corporation, collectively make over 90% of all wireless service revenues in Canada. Other carriers, mostly regional, account for the remainder.

The majority of smartphones in Canada are sold under the subsidy model, where carriers offer customers a handset subsidy (or discount) on the up‑front cost of the smartphone, contingent on the customer signing a contract, typically with a two‑year wireless service plan commitment. The subsidy is then recovered through monthly fees over the course of a contract.

The investigation

In 2014, the Bureau received information suggesting that Apple entered into agreements with Canadian wireless carriers that imposed potentially anti‑competitive obligations and restrictions regarding the sale and marketing of iPhones. The Bureau subsequently commenced an inquiry into the matter that was primarily concerned with the following types of clauses:Footnote 4

  • minimum order quantities or other volume commitments;Footnote 5
  • most‑favoured nationFootnote 6 or any other term that required preferential or parity treatment; and
  • up‑front retail subsidy requirements.

Like many vertical restraints, in theory, the types of clauses described above may have valid business justifications and serve pro‑competitive objectives, but they may also have anti‑competitive consequences. In this particular case, the Bureau considered whether the Apple Terms, individually or collectively, impacted the incentives of carriers to promote and market rival OEM devices, such that Apple’s market position would be entrenched. In that regard, the Bureau considered whether the Apple Terms may have the effect of increasing the price of rival handsets, increasing the price of wireless service to rival handsets, and/or otherwise discouraging wireless carriers from stocking or selling rival handsets.

As part of its investigation, the Bureau has gathered information from industry participants on a voluntary basis and used formal powers to compel Apple and wireless carriers to produce information. The Bureau has also communicated with foreign competition law enforcement agencies, and has monitored the progress of foreign investigations into similar conduct in other jurisdictions.

Analysis

The Bureau’s review focused on assessing whether the Apple Terms violated the abuse of dominance provisions of the Act.

As part of its investigation, the Bureau examined the extent to which Apple may have market power. The Bureau considered several candidate definitions of the relevant market, in particular, whether the market is the supply of smartphones and feature phones, smartphones, or premium smartphones to carriers in Canada. Regardless of how the market is defined,Footnote 7 based on the information gathered, the Bureau is satisfied that Apple has market power, due largely to its market position, the profitability of the iPhone, and the iPhone’s "must‑have" nature for wireless carriers.

Given Apple’s market power, the Bureau’s focus was on any effects the Apple Terms have on rival OEMs, including potential indirect effects through changes to service plans, subsidies, or other forms of support from wireless carriers. As part of its assessment, the Bureau considered the extent to which the Apple Terms prevented wireless carriers from working with competing OEMs to increase their presence in Canada, or otherwise compete with Apple. In addition, the Bureau considered whether pro‑competitive rationales exist on the part of Apple, and whether there was any evidence suggesting that the Apple Terms were intended to harm rivals.

Significant effort was made to identify behavioural impacts on carriers stemming from the Apple Terms, as reflected in business documents, marketing and sales activity, as well as data relating to smartphone sales. On balance, while the evidence suggested impact on carrier decision‑making at the margins, it was not sufficient for the Bureau to conclude that there would be meaningful impact on competing OEMs or, by consequence, consumers.

The Bureau notes that this is an industry that is, overall, both dynamic and innovative. Over the course of the investigation, there have been considerable advancements in the technology contained within smartphones and the features they offer. Although certain OEMs have exited the industry since the introduction of the iPhone, others have entered or expanded. However, the Bureau is also of the view that, as a general principle, a finding that a market is innovative and dynamic does not necessarily preclude a finding that conduct has reduced competition, insofar that a market may be more competitive in the absence of that conduct. In this case, the Bureau did not find compelling evidence to suggest the market would be substantially more competitive in the absence of the Apple Terms.

Conclusion

After conducting analyses of the information gathered over the course of the investigation, the Bureau has concluded that it does not have sufficient evidence to suggest Apple is contravening the Act in respect of the Apple Terms at this time. Specifically, the Bureau did not find evidence to suggest that the Apple Terms resulted in a significant effect on competition. The existing evidence suggests that the Apple Terms do not prevent wireless carriers and other OEMs from adopting strategies that serve to mitigate any potential effects of the Apple Terms.

The Commissioner makes his enforcement decisions based on the available evidence. Should new and compelling evidence come to light of harm in the Canadian marketplace, the Bureau will not hesitate to take appropriate action.

The Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace. The Bureau investigates allegations of anti competitive practices and promotes compliance with the laws under its jurisdiction, including the Act.

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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