Position Statement
See the news release that corresponds to this position statement.
OTTAWA, February 15, 2017 — After a nine‑month investigation of BCE Inc.’s (Bell) acquisition of Manitoba Telecom Services (MTS), the Commissioner of Competition, Bell and Xplornet Communications Inc., (Xplornet) reached a Consent Agreement that addresses the Commissioner’s concerns regarding the merger’s effect on mobile wireless services in Manitoba.
Both Bell and MTS currently provide mobile wireless services in Manitoba. Mobile wireless services refer to the voice and data services included in your cell phone plan, such as texting and internet access. Canadian households depend on mobile wireless services for important aspects of daily life, from basic communication needs related to work and safety, to more advanced needs related to convenience and entertainment. A significant portion of Canadian household income is spent on mobile wireless bills. This is particularly true for low income households who spend a disproportionately large amount on these services.
Based on an analysis of information collected during this inquiry, the Competition Bureau (Bureau) concluded that as a result of coordinated behaviour among Bell, TELUS and Rogers, mobile wireless prices in Canada are higher in regions where Bell, TELUS and Rogers do not face competition from a strong regional competitor. Conversely, the Bureau concluded that where Bell, TELUS and Rogers face competition from a strong regional competitor, prices are substantially lower. The Bureau concluded that the lower prices are caused by the presence of a strong regional competitor who can disrupt the effects of coordination among Bell, TELUS and Rogers.
The Bureau conducted a thorough pricing analysis using confidential internal company data. The results of this analysis showed that mobile wireless pricing in Saskatchewan, Thunder Bay, Quebec and Manitoba is substantially lower than in the rest of Canada. These are all areas that have a strong regional competitor. A simple review of the Bell, TELUS and Rogers websites demonstrates the magnitude of these price differences. To illustrate, as of February 14, 2017, Bell’s website offered a 5GB plan in Ontario for $105 but that same plan was offered for $60 in Manitoba. The same pattern is apparent when considering “flanker” brands. For example, as of February 14, 2017, Bell’s flanker brand, Virgin, offered on its website a 5GB plan in Ontario for $75 and offered that same plan in Manitoba for $48.The Bureau’s investigation also found that, generally, Canadians in areas with a strong regional competitor use substantially more data than Canadians in areas without a strong regional competitor.
The Bureau concluded that these differences in price could not be explained by factors such as quality, differences in demand or demographics, but instead were based on the existence or non‑existence of a strong regional competitor. As a result, the Bureau determined that if Bell were permitted to acquire MTS, Manitoba’s regional player, Manitobans would pay significantly more for mobile wireless services and have fewer options for this important service.
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i. Background
On May 2, 2016, Bell announced an agreement to acquire MTS for $3.9 billion (the Proposed Transaction). Bell also entered into an agreement with TELUS Corporation (TELUS) pursuant to which Bell will sell to TELUS a significant number of the post‑paid wireless subscribers that Bell acquires from MTS and assign to TELUS approximately one‑third of the MTS dealer locations (the TELUS Transaction).
During the course of its review, the Bureau conducted interviews with numerous stakeholders, including customers, mobile wireless carriers, consumer organizations and government and regulatory agencies. The Bureau obtained records and data from a number of market participants on a voluntary basis and pursuant to court orders obtained under section 11 of the Competition Act (the Act). The Bureau consulted with the Canadian Radio‑television and Telecommunications Commission, and the Spectrum, Information and Technologies and Telecommunications Branch of Innovation Science and Economic Development Canada, as well as industry, financial, and economic experts.
The Bureau also invited Canadians to share their comment on the Proposed Transaction in an online form on the Bureau’s website, and received more than 1,800 forms which better informed its investigation.
ii. Analysis
The Bureau assessed whether the Proposed Transaction was likely to substantially lessen competition for mobile wireless services in Manitoba and analyzed both the unilateral and coordinated effects that likely would have arisen from the Proposed Transaction. The Bureau’s investigation considered the full breadth of Bell and MTS’ products and service offerings in Manitoba. Competition concerns were identified only in mobile wireless services.
Unilateral effects occur when a merger eliminates competition between two firms which allows the merged firm to exercise market power. An exercise of market power refers to the ability to profitably sustain a material price increase, without effective discipline from competitive responses by rivals.Footnote 1
Coordinated effects involves interaction by a group of firms (including the merged firm), that is profitable for each firm, because of the firms’ accommodating reactions to the conduct of the others. In essence, firms who repeatedly compete in the same market can develop an unspoken understanding that each firm will respond cooperatively to the behaviour of the other firms. While the coordinating firms may not explicitly communicate with each other, this behavior facilitates higher market prices. For instance, a firm may raise its price if it expects others to follow, even if it would not have been profitable to do so independently.
Market definition
The relevant product market was found to be postpaidFootnote 2 mobile wireless plans sold to consumers. Corporate customers constitute a separate product market as they purchase services through alternate channels and have different requirements. The Bureau’s analysis indicated that consumers who are interested in postpaid mobile wireless plans are unlikely to consider prepaidFootnote 3 plans or landline telephones to be a close substitute.
The relevant geographic market for assessing the Proposed Transaction was found to be no broader than the province of Manitoba. Mobile wireless carriers can, and do, set different prices for mobile wireless plans in different Canadian provinces.
Competitive effects
MTS is the incumbent mobile wireless carrier in Manitoba and maintains a strong position in the market. The Proposed Transaction would eliminate the competition that currently exists between MTS and Bell. The Bureau found that this would lead to a unilateral exercise of market power that would not be constrained by other factors, such as the repositioning of or expansion by remaining competitors or the entry of a new competitor.
In addition to the unilateral effects of the Proposed Transaction, the focus of the inquiry centered on whether and how much the Proposed Transaction would impact both the ability and the incentives of Bell, TELUS and Rogers to more effectively coordinate their pricing decisions in Manitoba, to the detriment of competition. The Bureau found that the Proposed Transaction would likely lead to a substantial increase in the price for mobile wireless plans due to the increased ability and incentive for a coordinated exercise of market power between Bell, TELUS and Rogers in Manitoba. In coming to this conclusion, the Bureau took into consideration, among other factors, the extent of network competition, MTS’ long‑term viability and the low likelihood of entry or expansion by other potential mobile wireless service carriers in Manitoba.
In assessing the likelihood of coordinated effects resulting from the Proposed Transaction, the Bureau considered the degree of multi‑market exposure among firms. Firms have multi‑market exposure when they compete across several geographies or product lines. Multi‑market exposure can lead to a reduction in competition when a firm chooses not to compete aggressively in one market, for fear of their competitor’s retaliation in other markets. If however, firms with multi‑market exposure encounter a firm that does not possess these same incentives in a particular market, coordination can break down in that space.
Multi‑market exposure among Bell, TELUS and Rogers is significant, and encompasses a number of geographies and business lines at both the wholesale and retail level. Information collected during the inquiry supported the likelihood that Bell, Rogers and TELUS weigh the advantages from vigorous competition in one area against the danger of retaliation in other areas. Ultimately, the Bureau found that multi‑market exposure softens competition among Bell, TELUS and Rogers. MTS, as a regional carrier, lacks multi‑market contact with other competitors and was found to play a disruptive role in the market by spurring Bell, TELUS and Rogers to compete vigorously.
In addition to multi‑market exposure, the Bureau found that Canadian mobile wireless markets possess a number of factors which make them susceptible to coordination. Mobile wireless markets are highly concentrated and possess high barriers to entry and expansion, as described further below. The Bureau’s investigation revealed that pricing is transparent and closely monitored by competitors, and that the threat of retaliation from competitors is a significant factor in pricing decisions. Notably, Bell, TELUS and Rogers can signal their future pricing intentions by using promotional pricing with pre‑specified end dates, as well as by publicly announcing their future pricing strategies in investor calls.
The Bureau tested the coordinated effects theory empirically by comparing Rogers, TELUS and Bell’s internal pricing data in markets with and without a strong regional carrier. The Bureau’s analysis was systematic and showed the significance and persistence of the pricing differential. As noted above, Bell, TELUS and Rogers all posted pricing on their websites that corroborates the results of the price study both in terms of the observed pricing pattern and the general magnitude of the pricing differential.
The Bureau examined alternative explanations for why prices are lower in regions like Manitoba. However, the Bureau did not find a consistent relationship between any measure of quality, coverage, demographics or geographic characteristics that could explain the price differences.
Ultimately, the Bureau found that the Proposed Transaction would eliminate the spur to competition provided by MTS as a strong regional competitor. The Bureau’s investigation concluded that MTS’ presence is the likely reason for the lower prices in Manitoba. Thus, the Bureau determined that the elimination of MTS would likely cause prices in Manitoba to rise toward levels observed in regions without a strong regional competitor.
The Bureau assessed Bell’s efficiencies claims, and did not find that the cognizable efficiencies outweighed the significant anticompetitive effects likely to result from the Proposed Transaction.
Barriers to entry
The mobile wireless industry is characterized by high barriers to entry. A significant barrier in becoming a mobile wireless carrier is access to scarce spectrum. Mobile wireless carriers must obtain a spectrum licence, through auction or resale, to use prescribed bands of wireless spectrum. A supplier must also, among other things, deploy an extensive network of towers, antennas and transceivers across many different locations, develop a retail distribution network, obtain access to flagship smartphones, and build customer service systems. Further, the dynamic nature of the mobile wireless market means carriers continuously face technological change, which requires sophisticated personnel with specialized expertise. As a result of the high barriers to entry in the mobile wireless industry, the Bureau concluded that it was unlikely that a new competitor could enter the province of Manitoba in a timely manner to constrain the likely price increases resulting from the Proposed Transaction.
iii. Remedy and conclusion
In order to address the likely substantial lessening of competition arising from unilateral and coordinated effects for mobile wireless plans in Manitoba, Bell has agreed to complete the TELUS Transaction, divesting a significant number of MTS post‑paid subscribers and approximately one‑third of MTS dealer locations to TELUS; and to divest assets and provide transitional services to Xplornet, including the divestiture of 40 MHz of spectrum, six retail stores and 24,700 subscribers.
Xplornet is a leading carrier of rural broadband internet through fixed wireless and satellite networks throughout Canada, including rural Manitoba. Xplornet also has the fourth largest spectrum holdings in Canada, which includes existing spectrum holdings in Manitoba.
In addition to the divestiture of assets to Xplornet, the Consent Agreement establishes certain transitional services that Bell must provide to Xplornet, including expedited access to Bell’s towers in Manitoba for a period of five years, temporary access to a mobile wireless network in a specified territory in Manitoba for a period of three years, support for wireless handset procurement for a period of five years, certain negotiated mobile wireless roaming services for a period of five years, and discounts on Bell Media’s advertising inventory in Manitoba for a period of three years. In addition, postpaid Bell Mobility customers in Manitoba who are under contract at the time of the consent agreement will be able to switch to Xplornet without penalty. Xplornet plans to enter the mobile wireless market in Manitoba using the divested assets, and facilitated by the transitional services provided by Bell. Readers are invited to consult the registered Consent Agreement for further details on the assets being acquired by Xplornet and transitional services being provided by Bell to Xplornet.
The Commissioner is satisfied that the terms of the Consent Agreement, including Bell’s commitment to complete the TELUS Transaction, divest assets and provide transitional services to Xplornet, and Xplornet’s planned entry into the mobile wireless market in Manitoba, address his concerns related to the Proposed Transaction.
The 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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