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ARCHIVED -  Telecom Order CRTC 99-1203

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Telecom Order CRTC 99-1203

  Ottawa, 22 December 1999
  Bundling terminal equipment with network service elements
  File Nos.: 8638-C12-15/98 and 8638-C12-16/98
  Summary
  This order removes the restriction on bundling terminal equipment with remaining tariffed network service elements, and extends the current bundling provisions, as outlined in Telecom Decision CRTC 98-4.
  Background
  1. In Forbearance – Regulation of toll services provided by incumbent telephone companies, Telecom Decision CRTC 97-19, dated 18 December 1997 and in Stentor Resource Centre Inc. – Forbearance from regulation of interexchange private line services, Telecom Decision CRTC 97-20, dated 18 December 1997, the Commission stated that given the evolution of competition in the terminal equipment market, it would be appropriate to remove the restriction against the bundling of terminal equipment with network service elements in the case of toll services and the interexchange (IX) private line market, respectively.
  2. Consistent with the conclusions in the above two decisions, in Joint marketing and bundling, Telecom Decision CRTC 98-4, 24 March 1998 (Decision 98-4), the Commission invited comments on its preliminary view that it is appropriate to remove the restriction against the bundling of terminal equipment with the remaining network service elements.
  Views of interveners
  3. Comments and/or reply comments were received from: AT&T Canada Long Distance Services Company [now AT&T Canada Corp.] (AT&T Canada); Call-Net Enterprises Inc. (Call-Net); MetroNet Communications Group Inc. (MetroNet); Microcell Telecommunications Inc. (Microcell); Mitel Corporation (Mitel); Mobility Canada; Rogers Cantel Inc.; Stentor Resource Centre Inc. on behalf of BC TEL, Bell Canada, Island Telecom Inc., Maritime Tel & Tel Limited, MTS Communications Inc., NBTel Inc., NewTel Communications Inc., and TELUS Communications Inc. (TELUS) [Stentor]; and Telecentre Consulting Services (TCS).
  4. Stentor and Mobility Canada supported the Commission's preliminary view that it is appropriate to remove the restriction on the bundling of terminal equipment with the remaining network service elements, whereas the other parties submitted that the removal of this restriction would be premature.
  5. Stentor and Mobility Canada submitted that the Commission's current bundling provisions, as specified in Review of regulatory framework, Telecom Decision CRTC 94-19, 16 September 1994 (Decision 94-19), and modified in Telecom Decision CRTC 97-8, Local competition, 1 May 1997 (Decision 97-8) and Decision 98-4 can easily be applied to the bundling of terminal equipment with all network service elements in order to eliminate any concerns over predatory pricing and other anti-competitive behaviour. Stentor noted that in Decision 94-19, the Commission established the conditions for bundling and the test for imputing costs for bundles containing monopoly and competitive service elements Decision 97-8 expanded the scope of Decision 94-19 to permit the bundling of local services with forborne services, and Decision 98-4 extended these conditions to the bundling of tariffed services with those of an affiliated or non-affiliated company, and non-telecommunications services offered in-house by the Stentor companies. Stentor submitted that the terminal equipment component of a bundled service can be accommodated by the existing bundling provisions and included in an imputation test in the same manner as the services of affiliated or non-affiliated companies as noted in Decision 98-4.
  6. Stentor submitted that the bundling restriction on terminal equipment and network service elements is inconsistent with the Commission's findings in Decision 94-19 that the terminal equipment market was sufficiently competitive to warrant forbearance from regulation. According to Stentor, it is inconsistent for the Commission on the one hand to regulate the sales options available to terminal providers, while on the other hand to declare that market forces are effective in regulating the terminal market.
  7. Stentor contends that the retention of the bundling restrictions on remaining network services is unwarranted in light of the abundance of opportunities available to competitive terminal equipment and network service providers as a result of the significant increases in general network capacity and the entry of competitive local exchange carriers (CLECs), subsequent to Decision 97-8.
  8. Further, Stentor submitted that there are no technical barriers to entry that would prevent manufacturers from being able to produce equipment capable of interfacing with the networks of the Stentor companies. It noted that procedures such as the publication of equipment standards, equipment certification and terminal to network interface disclosure, have been established to permit all equipment manufacturers and suppliers an equal opportunity to compete in the telecommunications market.
  9. Stentor stated that the requirement for disclosure of interface specifications was adopted by Industry Canada and the Commission in 1989, and the process was formalized in Industry Canada's certification procedure CP-01. Stentor stated that CP-01 states that disclosure is intended to provide timely information to manufacturers, to facilitate the competitive supply of terminal equipment and to provide an environment that encourages the development of telecommunications services.
  10. Stentor also stated that in Notification of Network Changes, Terminal-to-Network Interface Disclosure Requirements and Procedures for the Negotiation and Filing of Service Arrangements, Telecom Letter Decision CRTC 94-11, dated 4 November 1994, the Commission addressed on two fronts the requirement for disclosing interface specifications. The Commission stated that while it considers the existing CP-01 disclosure procedure adequate, it will: (a) continue to monitor those competitive services in which the telephone companies have a dominant position and will require appropriate disclosure where necessary; and (b) it will continue to require mandated filing to include disclosure of terminal interface specifications for bottleneck services.
  11. Stentor also submitted that the architecture of terminal equipment is evolving in a manner that all competitors will be able to participate equally in the market. It submitted that through the development of Asynchronous Transfer Mode (ATM), Computer Telephone Interface and workstation technology, the distinction between network functionality and terminal functionality is becoming increasingly blurred. According to Stentor, these changes will see terminal equipment manufacturers evolve Private Branch Exchange (PBX) terminals into non-proprietary extensions of the network. ATM technology and fibre optics provide the capability of handling a mixture of voice, data, video and graphics, and this will transform the terminal equipment into an enterprise hub or switch (i.e., a local area network telephone server) that is quite different from today's stand-alone, proprietary telephone technology. These developments, according to Stentor, will open the market to myriad terminal equipment competitors.
  12. Finally, Stentor submitted that permitting the bundling of terminal equipment and network service elements will result in increased efficiencies for both the Stentor companies and the customer. For example, with the existing restrictions on bundling, customers are commonly required to differentiate network problems from terminal problems, and service agreements must identify specific network service agreements and terminal service agreements. In many instances customers must call different assistance centres for maintenance of their service agreements.
  13. AT&T Canada, Call-Net, MetroNet, Microcell, Mitel and TCS submitted that the Stentor companies should not be permitted to bundle terminal equipment with local network service elements because conditions are not in place to facilitate local facilities-based competition. Microcell submitted that until there is widespread local facilities-based competition, allowing the Stentor companies to bundle terminal equipment with network service elements provided by an affiliated or non-affiliated company, would allow for the potential for undue preference in favour of the Stentor companies.
  14. Mitel submitted Bell's affiliation with major terminal equipment manufacturer Nortel Networks Corporation (Nortel), puts Bell in a position to leverage its monopoly in the local telephony market to advantage Nortel vis-à-vis other terminal equipment suppliers. Mitel submitted that since the parent company, BCE Inc., could focus on the combined return of the two companies, bundles containing terminal equipment could be priced in a manner that would be detrimental to terminal equipment competitors because Nortel could price its terminals lower than would otherwise be the case, and BCE Inc. could still earn an "adequate" rate of return.
  15. Mitel submitted that if Bell were to purchase terminal equipment exclusively from Nortel, competitive terminal equipment suppliers such as Mitel would be greatly disadvantaged, particularly since CLECs account for only a small percentage of terminal equipment sales.
  16. Mitel also contends that while various mechanisms for disclosure of terminal-to-network interface technical standards are in place, these mechanisms are not always properly followed by the Stentor companies. It stated that in Telecom Order CRTC 97-1055, dated 5 August 1997, the Commission found that Bell and TELUS had breached the requirements for disclosure by failing to properly disclose the Nortel-developed network-to-terminal specification for calling name identification (CNI) on Megalink. Consequently, while Nortel's PBXs were able to accommodate CNI, Mitel's were not.
  17. Mitel submitted that, contrary to Stentor's submission that the blurring of the line between network and terminal features will enable competitors to integrate and transform network/terminal technology, such a blurring will make it more difficult to ensure that proper network interface disclosure is provided by the Stentor companies.
  18. Thus, Mitel submitted that if bundling is permitted, the risk of non-disclosure or inadequate disclosure is likely to increase since the difficulty of determining precisely what needs to be disclosed will be combined with an economic incentive not to disclose.
  19. TCS submitted that bundling of terminal equipment with network service elements would make it easier for Stentor-member companies to conceal anticompetitive abuses, such as improper cross-subsidization. TCS also cited a number of instances in which it believes BC TEL has acted anti-competitively in the terminal equipment market.
  Conclusions
  20. The Commission notes that the issues raised by interveners such as AT&T Canada, Call-Net, MetroNet, and Microcell were also raised in an application filed by Microcell on behalf of numerous applicants (including AT&T Canada, Call-Net, MetroNet), pursuant to section 62 of the Telecommunications Act to review and vary Decision 98-4. Among other things, the applicants requested that the former Stentor-member companies not be permitted to bundle local tariffed services with competitive services, until such time that the barriers to local competitive entry have been substantially removed. In denying that application, in Application to review and vary Telecom Decision CRTC 98-4: Joint marketing and bundling, Telecom Decision CRTC 98-20, dated 6 November 1998, the Commission stated, among other things, that what the applicants characterized as barriers to entry into the local telephony market have been resolved and that the CRTC Interconnection Steering Committee (CISC) process to implement local competition is functioning as intended. The Commission notes that considerable further progress has been made in the implementation of local competition since the release of Decision 98-20, and that competitive local service providers have entered into numerous markets across the country. Moreover, the Commission stated in paragraph 59 of Decision 98-20 that the complete elimination, or even partial elimination, of barriers to entry in the local market is not a precondition for the Stentor companies to bundle services.
  21. The Commission notes that, as indicated in Decision 98-20, numerous competitive safeguards for bundling have been established to allow for the bundling of a variety of tariffed and other services.
  22. In the Commission's view, the application of the Commission's existing bundling provisions would sufficiently address the concerns expressed by interveners, including those of Mitel and TCS regarding the ability of the former Stentor-member companies to leverage their dominant position in the local exchange market into the terminal equipment market.
  23. More specifically, the Commission considers that the existing safeguards regarding the bundling of tariffed and other services can be easily extended to accommodate the bundling of terminal equipment and one or more tariffed service elements. These safeguards are as follows: (a) the bundled service must cover its cost; (b) competitors must be able to offer their own bundled service through the use of stand-alone, tariffed, bottleneck components in combination with their own competitive elements; and (c) resale of the bundled service is permitted.
  24. The Commission further considers that the terminal equipment component of a bundled service can be included in an imputation test (a fundamental feature of the bundling provisions) in the same manner as other services of affiliated or non-affiliated companies. Consistent with Decision 98-4, the imputation test would require that for a bundled service which includes one or more tariffed service elements, essential services (including those referred to as "bottleneck" services in Decision 94-19) must be costed at tariffed rates. Below-cost single-line residential exchange service would also be costed at tariffed rates. Other components and service elements would be costed using Phase II costs. Finally, the acquisition costs of any service elements in the bundle acquired from an affiliated or non-affiliated company would be included in the imputation test.
  25. The Commission notes that consistent with its requirements for bundled services in general, bundled services including terminal equipment components and one or more tariffed network service elements, must receive prior Commission approval. In addition, to prevent anticompetitive pricing, an imputation test, as described above, must be submitted with the application for approval of such bundled services, consistent with the Commission's practice for other bundled services.
  26. In the Commission's view, the approach taken in this order is entirely consistent with the Commission's bundling framework, which culminated in Decision 98-4. Also, as stated in that decision, such a framework for the bundling of tariffed and other services strikes an appropriate balance between the concerns of competitors with respect to the potential for anti-competitive price abuses and the concerns of the former Stentor-member companies regarding their ability to provide cost-effective integrated solutions.
  Secretary General
  This document is available in alternative format upon request and may also be viewed at the following Internet site: www.crtc.gc.ca
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