Competition Bureau Reaches Decision in Internet Inquiry

Backgrounder

March 17, 1999

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Introduction

After an extensive examination of the Canadian Internet industry, the Competition Bureau has concluded that there are no grounds to warrant an application to the Competition Tribunal for a remedial order.

Conduct of the Inquiry

The formal inquiry was initiated on August 20, 1998, following the receipt on August 12, 1998, of an application under section 9 of the Competition Act by six Canadian residents.

The application for an inquiry alleged that Bell Global Solutions (formerly Bell Sygma) had engaged in a practice of selling high speed Internet services to residential customers at retail prices which were below the tariffed rates at which Internet service providers (ISPs) could obtain, from Bell, certain underlying network facilities required by them to offer similar high speed Internet services. The service offered by Bell utilizes a technology known as "asymmetric digital subscriber line" or ADSL. This technology expands the range and speed of services delivered over copper telephone lines. The application alleged that this practice of "below cost selling" or "margin squeezing" constituted an abuse of a dominant market position contrary to section 79 of the Competition Act.

The six resident complainants operate Internet access service companies in Ontario and Quebec and made the fact of their application to the Bureau public at the time it was filed. The application requested an order of the Competition Tribunal prohibiting Bell from selling ADSL Internet access service below its facility costs.

During the course of the inquiry the Bureau undertook a thorough investigation that involved extensive third party contacts. In addition to obtaining information from the parties, the Bureau obtained information and views from the cable industry, alternative long distance carriers offering Internet service, other ISPs and wireless companies. The Bureau’s examination also considered a number of independent studies on the economics, alternative technologies and the state of competition in the Canadian Internet industry.

The Relevant Provisions of the Competition Act

In determining whether or not grounds exist to proceed with an application to the Competition Tribunal with respect to this matter the Bureau considered three essential questions relating to the elements of section 79, abuse of dominance, of the Competition Act:

(1) Whether Bell, and in particular Bell Global Solutions, "substantially or completely controls" the retail residential Internet market in a relevant geographic market.

(2) Whether Bell has engaged in a "practice of anti-competitive acts" and whether this practice has been engaged in for the "purpose" of having a negative effect on a competitor that is predatory, exclusionary or disciplinary.

(3) Whether competition has been, or is likely to be, prevented or lessened substantially as a result of the alleged practice of anti-competitive acts. In this case, the question is whether Bell held a dominant market position or market power and whether the effect of its retail pricing policy is to entrench or add to that market dominance.

Findings

The confidentiality provisions contained in section 29 of the Competition Act limit the ability of the Bureau to disclose specific information obtained during the course of an inquiry. However, the general findings of the Bureau on the relevant issues are summarized below.

Relevant Market

The relevant product market with respect to this inquiry is the retail supply of Internet services to residential subscribers. In this regard, the Bureau considered two alternative market definitions. The first relevant market considered included both dedicated high speed and lower speed dial up services. The Bureau also considered a narrower market consisting of ADSL and cable modem high speed services. While there is a trend toward growing market demand for higher speed service, the evidence indicated that market growth for lower speed dial up services continues and the lower prices charged for those services impose a significant constraint on the ability of both the cable and telephone companies to price their services.

With respect to the geographic market, the Bureau concluded that the market is national in scope. The presence of a number of significant national competitors operating in multiple points of presence (POPs), offering uniform pricing across Canada together with the ease with which suppliers can establish additional POPs poses an effective constraint on the ability of any company to raise and maintain higher prices in narrow regional or local markets. Nevertheless, for the purpose of assessing this matter, the Bureau considered Bell’s position within both the national market and Bell’s serving territory of Quebec and Ontario.

Competition Assessment

The evidence obtained in the inquiry demonstrated that Bell’s share of the retail Internet market is substantially below the 35% level which the Bureau generally regards as the minimum required to establish a position of market dominance. This is true whether the product market is defined to include high speed and dial up services or dedicated high speed service only, or whether the geographic scope is national or regional.

The evidence established that Bell’s retail prices for ADSL residential Internet service are significantly below cost. However, under section 79 of the Competition Act, below cost pricing, in and of itself, is not sufficient to establish a practice of anti-competitive acts or abuse of a dominant market position. Evidence of purpose or intent and substantial effects on competition must also be demonstrated.

The evidence obtained in the inquiry clearly established that Bell’s below cost pricing strategy was adopted for two reasons. First, due to the highly competitive nature of the retail Internet market, Bell had to price at a level which reflected competitive prices in the market and not its total cost. In particular, Bell’s pricing was in response to competition from the cable companies who are aggressively marketing high speed cable modem service to residential customers at prices which were comparable to or below those charged by Bell for its ADSL service. Second, Bell has a long-term strategic interest in deploying to the market ADSL technology, which expands the range of services available over copper telephone lines.

Finally, the overall evidence with respect to the highly competitive state of the retail Internet market, independent of speed, and low barriers to entry does not support a conclusion that Bell’s retail pricing policy was likely to prevent or lessen competition substantially, or to enable Bell to exercise market power with respect to retail Internet prices.

In addition to concluding that there were no grounds for an application to the Competition Tribunal, the Bureau had concerns that the remedy sought in the application for an inquiry would have impeded the introduction of this new technology and denied consumers the benefits of price and service competition between alternative suppliers.

The Bureau is aware that independent ISPs have recently come under increased competitive pressure with entry into this market of the telephone companies, long distance carriers and cable companies. The Bureau also notes that the CRTC continues to regulate the terms and conditions under which ISPs obtain access to the networks of the telephone companies and is also in the process of establishing a regulatory regime for third party access to the networks of the cable companies. In addition, the cost of ADSL technology is declining. These lower access costs and the resolution of the technical and economic issues with respect to access to cable networks should be expected to improve the position of ISPs in a rapidly growing and increasingly competitive market. Furthermore, the anticipated entry into this market of wireless service providers along with new entrants into local phone service markets will serve as additional sources of competition.

Conclusion

Based on its findings, the Bureau has discontinued the inquiry pursuant to section 22(1) of the Competition Act. As required by section 22, a report of this discontinuance has been provided to the Minister of Industry Canada and the six resident applicants.