Telecommunications Policy Review Panel:- The Changing Telecommunication Environment

Competition Issues in an ILEC vs. Cable Duopoly

A.5      Is the Canadian competitive environment in telecommunications likely to evolve into a form of duopoly (i.e. incumbent local exchange carriers (ILECs) versus cable companies)? If so, what would be the implications for the telecommunications and ICT markets? What would be the implications for the regulatory framework?

22. While the Bureau is not in a position to predict the likely evolution of the telecommunications market, it does recognize that new technologies have already shown the potential to break down traditional barriers to entry in the local telecommunications market, and make broader local competition more attainable. The Bureau expects that any forecasting of the telecommunications market of the future should bear such technological developments in mind.

23. The ongoing CRTC Local Forbearance proceeding⁶ is considering the issue raised in this question.  The Commission’s proceeding will likely clarify whether a duopoly exists, or is likely to evolve, and whether such a duopoly provides sufficient competition to justify deregulation.

24. Assuming, for the purposes of this question, that the market does evolve into a form of duopoly between Incumbent Local Exchange Carriers (ILECs) and cable companies, the implications for the telecommunications market could be substantial improvements over the monopoly conditions that have, for so long, dominated this sector.⁷

25. The Bureau considers that the potential positive outcomes of a cable/ILEC duopoly might include a decreased likelihood for unilateral effects (i.e., that a firm could profitably raise prices above competitive levels) due to the degree of rivalry between the cable companies and the ILECs.⁸  Aggressive price competition and innovation are other potential benefits that could be expected since most of the costs of service provision (i.e., network costs) by either the ILECs or the cable companies are fixed and sunk, the cost to provision VoIP would be incremental and the services offerings would be of similar quality.

26. Notwithstanding the theoretical potential for positive outcomes of a cable/ILEC duopoly, without detailed information regarding the market in question, the Bureau cannot provide a definitive answer as to whether the environment contemplated by the Panel’s question would be sufficiently competitive to protect the interests of users. However, the Bureau is well placed to provide guidance on the analysis that should be undertaken, and the factors that should play a key role, in determining the competitiveness of a duopoly market.

27. The Bureau has substantial expertise and experience in analyzing the competitiveness of a wide range of markets across a variety of industry sectors and routinely performs competitive analyses in accordance with its mandate under the Competition Act.  Defining relevant product and geographic markets, and the assessment of market power within those markets, are key steps in the analysis that underpins the enforcement of both the merger and abuse of dominance provisions of the Act. Moreover, the techniques and analytical tools that the Bureau employs are constantly updated and refined to reflect advances in economic and antitrust theory. In this regard, the Bureau recently released a revised version of its Merger Enforcement Guidelines (MEGs).⁹

28. In the paragraphs that follow, and in an attempt to shed light on the potential market implications of a cable/ILEC duopoly, the Bureau sets out the circumstances under which two competing networks in the same market could be sufficient to warrant forbearance.

29. Two competing networks in the telecommunications market may provide sufficient competition where:

1. At least two unaffiliated networks, where the entrant is capable of providing access at a lower cost to each potential location where access to the PSTN is demanded. The area for which forbearance applies will be the geographic region for which the two networks have relatively similar geographic footprints, either actual or potential locations that can be added to a network at relatively low cost.
2. From the perspective of consumers, both networks have similar features available and equivalent quality of access.
3. Industry characteristics are such that the coordinated exercise of market power is not likely to be a significant issue.

30. To assess the degree of competitiveness in a duopoly market, the Bureau would look to a number of factors, including the degree of rivalry between the competing firms; the nature of change and innovation in the market; the stage of market growth; barriers to entry; and the presence of strong potential facilities-based entrants.

31. In practical terms, the Bureau would also look to the competitive issues that are typically raised by stakeholders in the telecommunications market. The main areas of concern tend to be predation, consumer poaching and cross-subsidization.

32. The Bureau considers that certain of these competitive concerns are less likely to arise in the context of a cable/ILEC duopoly. For example, if the cable companies have already invested in a sunk network that is ubiquitous and exists for reasons other than to supply telecommunications services, possible attempts at predation by the ILECs would be unlikely to induce exit. For predation to induce exit in this scenario, the ILEC’s prices would have to fall below the rival’s average avoidable costs. Depending on the magnitude of the fixed and sunk capital costs of the network, this could be substantially lower than long run average incremental cost, and such a tactic may not be profitable for LECs.  The existence of a ubiquitous network serving residential customers¹⁰ suggests that the cable companies may require only incremental investment to adapt their networks to provide local telecommunications services to residential customers. The capitalization and stability of the cable companies also suggests that they may not be at a disadvantage to ILECs with respect to access to capital. A similar analysis would be required for business customers.    

33. With respect to consumer poaching, the Bureau notes that these concerns arise when the firms compete customer by customer by offering very low prices. The result is that the rival may not have sufficient gross profits to recover its sunk costs and will be forced to exit even though the ILEC’s prices are not predatory. In the case of an ILEC/cable duopoly, the scale at which the cable companies could roll out telecommunications services and their potentially lower costs suggest that this concern may not be justified. 

34. Nevertheless, the Bureau retains the authority under section 79 of the Competition Act to investigate alleged claims of predation, whether carried out through direct price cuts, price squeezes, or consumer poaching.   The Bureau is committed to exercise its responsibilities in this area.  It will continue to assess evidence of unduly aggressive pricing, capacity expansion, or other practices instituted to drive out entrants.  It will examine claims that entrants have inadequate access to capital markets to allow them the funding to survive attempts at predation.  The Bureau also assesses evidence of the alleged predator’s ability to recoup lost profits from predation through charging higher prices after the predation is successful.  An important aspect of assessing that evidence is to determine if those high post-predation prices will themselves encourage new entry.   Such assessments are well within the Bureau’s authority and expertise, and need not be retained by a price regulator.¹¹