ARCHIVED -  Telecom Order CRTC 99-591

Telecom Order CRTC 99-591

Ottawa, 25 June 1999

APPLICATION BY CANADIAN ASSOCIATION OF INTERNET PROVIDERS REGARDING ADSL-BASED INTERNET SERVICES

File No.: 8646-C51-01/98

1. On 15 December 1998, the Independent members of the Canadian Association of Internet Providers (CAIP) filed an application pursuant to Part VII of the CRTC Telecommunications Rules of Procedure requesting that pursuant to sections 35(1), 37, 48, 51, 60 and 61 of the Telecommunications Act (the Act), the Commission order Bell Canada (Bell) on an expedited basis to:

(a) immediately cease from providing its affiliates with any facilities and services which are needed or required by those affiliates to provide retail Internet access services to end-user customers (retail IS) using Asymmetrical Digital Subscriber Line (ADSL) technology; and

(b) provide retail IS using ADSL technology, on an in-house basis and at cost-based rates approved by the Commission, if Bell or any of its affiliates wished to provide such services.

2. As alternative relief, CAIP requested that the Commission direct Bell to immediately file a tariff which would permit competitive Internet service providers (ISPs) to purchase, for resale purposes, the retail ADSL Internet access services currently being offered by Bell’s affiliates at rates which are 25% lower than the retail rates currently being charged by those affiliates to end-user customers.

3. In a letter dated 18 December 1998, the Commission established the process to consider CAIP’s application.

THE APPLICATION

4. CAIP submitted that a major factor underlying its concerns is that Bell is both a competitor in the retail IS market and a supplier of bottleneck telecommunications facilities that are required by independent ISPs.

5. CAIP submitted that Bell and its ISP affiliate companies can effectively squeeze competitors out of the retail IS market, because, while the underlying telecommunications facilities required by independent ISPs are provided directly by Bell at tariffed rates, Bell provides retail IS largely through an unregulated affiliate.

6. CAIP stated that its application relates primarily to the provision of ADSL-based high-speed retail IS, by Bell Global Solutions Inc. (BGS). CAIP alleged that irreparable harm is being caused to its members as a result of below-cost pricing practices of BGS in connection with its ADSL-based retail IS offered under the Sympatico trade name.

7. CAIP noted that in Telecom Order CRTC 97-1449, 9 October 1997, the Commission approved Bell Tariff Notice 6077 which CAIP stated allows Bell to provision local copper loop facilities and other ADSL-related components, initially in Ottawa-Hull and Quebec City on a test market basis. CAIP also stated that this tariff enables independent and Bell-affiliated ISPs to obtain the facilities required for the provisioning of high-speed ADSL services to residential end-user customers.

8. CAIP submitted that BGS and another Bell affiliate, Bell Sygma Inc., marketed ADSL-based retail IS to residential end-user customers for $69.95 per month (or $64.95 per month for a 12 month subscription). CAIP also stated that Bell had announced that BGS was launching a new high-speed service, called "Sympatico High Speed Edition", based on Nortel Networks’ 1-Megabyte modem, at $39.95 per month, plus a $14.95 per month modem rental charge.

9. CAIP submitted that the retail rates charged by Bell-affiliated ISPs are far below the costs of acquiring the necessary ADSL-based facilities from Bell. CAIP submitted that the loop and central office costs payable to Bell alone are in excess of $70 per month per subscriber, and that the cost of providing ADSL-based retail ISby independent ISPs is about $150 to $200 per subscriber per month. Since such costs are considerably higher than the monthly rates charged by the Bell-affiliated ISPs for their retail ADSL-based high-speed IS, CAIP submitted that Bell (and its affiliates) are acting anti-competitively, because it is not possible for independent ISPs to compete with the retail prices offered by BGS.

10. In support of its allegations that Bell and its affiliate companies are pricing high-speed IS in a predatory and anti-competitive manner, CAIP cited newspaper articles in which a senior Bell official is quoted as saying that the Sympatico price is a loss-leader and that the real cost of serving a high-speed customer will be at least $75 per month.

POSITION OF PARTIES

11. Comments on CAIP’s application were received from: a large number of ISPs that appeared to be members of CAIP, AT&T Canada Long Distance Services Company, on behalf of itself and ACC TelEnterprises Ltd. (ATTCanada LDS), CADVision Development Corporation (CADVision), Canadian Cable Television Association (CCTA), Canadian Federation of Independent Business, MaxLink Communications Inc., Microcell Telecommunications Inc., Oak Power Corporation, NavNet Communications, Northern Telephone Limited (Northern), O.N. Tel, and an association of ISPs called Responsible Internet Service Companies (RISC).

12. The vast majority of independent ISPs supported the application. Bell and CCTA opposed the application as did two retail IS customers on the basis that the relief sought by CAIP may result in the discontinuance of the retail ADSL-based IS they currently receive from Sympatico.

13. Microcell supported CAIP’s application on the basis that Bell may be providing unduly preferential rate treatment towards its affiliates. O.N. Tel stated that it generally supported the application, and requested that the Commission expand the scope of the proceeding to include all telephone companies, including Northern, that provide retail IS, either directly or indirectly. Northern stated that it does not offer ADSL-based high-speed retail IS, and submitted that O.N. Tel’s request should be denied.

14. RISC supported the application, arguing that if the relief sought by CAIP were not granted, the telephone companies and cable companies would duopolize the high-speed IS market, and competition would not develop in high-speed IS. RISC argued that the issue is not the competitiveness of the IS market, but rather the preferential supply of bandwidth to a Bell affiliate.

15. CADVision, an ISP in Alberta, submitted that Bell may be deliberately pricing its underlying ADSL components and access facilities to discourage independent ISPs from offering high-speed residential retail IS. CADVision submitted that the cost of underlying telecommunications transmission facilities for the provision of ADSL-based IS is much less expensive in Alberta than appears to be the case in Bell’s operating territory. It stated that the cost of providing ADSL data service in Alberta is $39 per month for a turnkey solution obtained from TELUS Advanced Communications Inc. It also stated that an alternative option is available from TELUS Communications Inc. (TCI) at $35 per month where existing copper wire capacity is available and the independent ISP is willing to bundle various telecommunications services itself. CADVision also stated that there was a future third possible solution, involving co-location, which CADVision indicated should cost approximately $25 per month.

16. In its answer to the application and comments from other parties, Bell submitted that there is little dispute on the basic facts underlying CAIP’s application, namely that: (1) the current retail price for usage of high-speed IS is about $40 per month for residential customers; (2) the incremental cost of providing this service exceeds $40 given current technology and demand; and (3) there is no consumer demand for this service at a price that exceeds current cost levels given the capabilities delivered today.

17. Bell submitted that although the provision of residential high-speed retail IS is not currently profitable, it expects significant cost reductions to occur once a mass market is developed and a greater number of functionalities and applications with value to consumers becomes available. Bell submitted that without mass production and thedevelopment of new applications, significant cost reductions will not come about.

18. Bell also submitted that in the near term, solutions to make the provision of high-speed residential IS more economic are first and foremost technical ones. Bell furthersubmitted that substantial cost-saving technological developments are occurring in modems and in the transport of Digital Subscriber Line signals from customer premises to the central office.

19. Bell submitted that high-speed IS represents a growing, but small fraction of the residential retail IS market. Bell also submitted that the Incumbent Local Exchange Carriers (ILECs), such as Bell, provide only a small fraction of such high-speed access, and that the cable companies provide the largest share of this segment of the market.

20. Bell argued that the provision of any service, including high-speed retail IS, is driven primarily by two factors: (1) the prices charged by competitors; and (2) the prices which customers are prepared to pay. Bell submitted that the cable companies have a much larger share of the high-speed segment of the retail IS market and price their @Home IS at $39.00 per month. If Sympatico is to attract customers, Bell argued that it must follow the lead set by the cable companies. Bell submitted that according to focus group sessions and market trials conducted in Ottawa and Quebec City in December 1997, very few customers indicated that they were willing to purchase high-speed ADSL-based IS if it were priced above $50 per month. Thus, Bell submitted that the retail rates charged by BGS are market driven, and are not intended to drive independent ISPs out of the market.

21. Bell submitted that the underlying ADSL-based access facilities have been available to ISPs on a tariffed basis from the outset, and that these tariffs strictly adhere to the Commission’s costing and rating principles. Bell further submitted that it does not directly provide retail IS, and that it is not responsible for the pricing policies of its affiliates. Bell also submitted that there is a role for non-affiliated ISPs in the provision of residential high-speed retail IS, but that they must be prepared to invest in market development. Bell also argued that it is not necessary for all ISPs to invest in developing the high-speed segment of the market, because high-speed IS accounts for only a fraction of the current IS market, and that this will not change for some time.

22. Bell stated that co-location arrangements are in place to enable ISPs to provide their own high-speed retail IS, utilizing the network backbones of their choice. In response to comments by AT&T Canada LDS that an important type of equipment, Digital Subscriber Line Access Multiplexer (DSLAM) is not presently on the list of equipment allowable for co-location, Bell stated that DSLAM devices are currently under discussion at the CRTC Interconnection Steering Committee Co-Location Group (CLG) and that Bell does not oppose the co-location of DSLAM devices to provide high-speed IS. Similarly, Bell stated that it would accept the co-location of modems, such as the Nortel 1-Meg modem, from ISPs. However, it noted that it has not received any requests for such co-location.

23. Regarding the relief requested by CAIP, Bell submitted that if high-speed Sympatico were priced to recover current costs, as requested by CAIP, very few customers would purchase the service at the higher price and the cable companies would become the sole suppliers of retail residential high-speed IS. Bell also submitted that the alternative relief sought by CAIP, which would require Bell to make ADSL-based high-speed IS available to CAIP members at below cost, would in effect result in Bell subsidizing CAIP members, which in Bell’s view, is unrealistic, unworkable and inconsistent with the development of a self-sustaining market. According to Bell, CAIP is in effect requesting that Bell subsidize its members to compete with the cable companies’ provision of high-speed IS, and ultimately any future high-speed Internet provided by competitors. Further, Bell submitted that CAIP’s proposed wholesale/resale model would be unworkable because Bell would be required to set its rates for underlying services at a discount to the volatile market-based retail rates charged by its affiliates.

24. Bell submitted that providing services that do not cover short-term costs is not unusual in competitive markets, especially if there is an expectation that as the technology evolves and usage expands, costs will decrease. Bell argued that the cable companies and Sympatico are kick-starting the market for high-speed IS.

25. Bell also submitted that CAIP’s application is misleading with respect to the ability of independent ISPs to enter the retail high-speed IS market because it overlooks the fact that ISP revenues are not drawn exclusively from usage charges. Bell submitted that the provision of IS provides ISPs an opportunity to pursue revenue from a variety of service offerings and applications. Such revenue sources should, in Bell’s submission, help to offset the financial losses necessary to meet the competitive pricing of retail high-speed IS by the cable companies and the telephone companies.

26. Bell submitted that CAIP has not provided any evidence of the specific anti-competitive harm that its members are alleged to be suffering as a result of ADSL-based high-speed Internet access services provided by Sympatico. Bell argued that very few of the interested parties acknowledged that the cable companies had been offering high-speed IS for many months, and that whatever customer losses they attribute to high-speed IS are more likely attributable to the services offered by the cable companies. Bell noted that one of the ISPs (InterPacific One Inc.), in its comments in this proceeding, stated that 25% of its customer base switched to cable companies’ IS. Bell argued that the application should be rejected because CAIP has not shown that the alleged harm they are suffering is as a result of the conduct of Bell, as opposed to the effects of competition between Sympatico-branded services, other ISPs and the cable companies and their affiliated ISPs.

27. Bell submitted that the retail IS market is vigorously competitive and thus the Commission should not intervene on the basis of what Bell characterized as alleged hypothetical apprehensions on the part of CAIP. Bell further submitted that the Commission has on numerous occasions found retail IS markets to be highly competitive. Bell submitted that the low barriers to entry in the retail IS market and the ease with which subscribers may change suppliers will ensure that the IS market remains competitive, and that its affiliates will not be able to hold onto these customers once the high-speed residential IS market develops.

28. Bell submitted that the Commission has adequate safeguards in place, such as the split rate base and price cap regimes, which provide sufficient protection and disincentives against cross-subsidization of affiliates’ IS by revenue from the telephone company’s Utility services. Bell argued that CAIP is attempting to re-open issues which have already been conclusively dealt with by the Commission, and that the applicant is in effect requesting that the Commission review and vary its previous findings on the adequacy of the Commission’s approved accounting separations methods, as well as its findings on the competitiveness of the retail IS market. Further, Bell submitted that CAIP has not provided any grounds or supporting evidence to warrant such a review and variance.

29. CCTA argued that CAIP’s proposed remedies should be dismissed. CCTA submitted that CAIP’s alternative relief is in effect a request for a discounted wholesale tariff, which in CCTA’s view, is an extreme and intrusive measure that would be costly to implement, have questionable competitive outcomes, and would clearly eliminate the incentive for investment in facilities by ISPs, the telephone companies and the cable companies. CCTA submitted that in Local Competition, Telecom Decision CRTC 97-8, 1 May 1997 (Decision 97-8), the Commission rejected a wholesale resale model of competition in favour of a facilities-based approach because a resale model would only result in competition at the retail level, with the ILECs retaining monopoly control of wholesale level distribution. CCTA proposed that the Commission consider CAIP’s application in the context of the essential facilities doctrine contained in Decision 97-8, and that if certain elements of Bell’s ADSL service are found to be essential, Bell should unbundle these elements and make them available to competitors at tariffed rates.

30. In its reply comments, CAIP acknowledged Bell’s position that the cable companies are a major force in the provision of residential high-speed IS, and may end up being the sole provider of high-speed IS if the relief requested by CAIP were implemented. However, CAIP argued that independent ISPs would not necessarily be worse off, because under the current regime only the cable companies and Bell’s affiliates supply the residential high-speed IS market, and that independent ISPs still face barriers to entry as a result of: (1) lack of third party access to cable company networks; and (2) the anti-competitive pricing practices by Bell’s affiliates.

31. CAIP submitted that it is clear that the ADSL services offered by Bell are not subject to a degree of competition that is sufficient to ensure just and reasonable rates and prevent unjust discrimination, and that therefore the Commission should invoke subsection 35(1) of the Act and order Bell to provide high-speed IS in-house, or alternatively, implement the wholesale/resale model requested by CAIP.

32. CAIP also argued that previous Commission findings that the IS market is generally competitive largely pre-dated Bell’s launch of ADSL-based access services and the low pricing practices of high-speed IS by Bell’s affiliates.

33. While CAIP did not dispute Bell’s claim that Bell’s affiliates purchase the underlying high-speed IS facilities at the same tariffed rates as other ISPs, it argued that these affiliates are able to combine their rate of return with a regulated entity which enjoys a captive customer base, as well as receive regular cash infusions and favourable terms of debt as a result of their affiliation with Bell. Also, in regard to Bell’s argument that independent ISPs can avail themselves of revenue sources from other Internet-based services (e.g., web hosting), CAIP argued that such sources of revenue do not compare to the $110 to $210 per month per subscriber losses incurred by Bell’s affiliates as a result of their low pricing strategies.

34. CAIP also argued that, according to the comments of CADVision, the rates charged by Bell for underlying ADSL transmission facilities appear to be much higher than the rates charged by TCI, which suggests that Bell’s rates may be inflated. If this is the case, CAIP argued that the pricing practices of Bell’s affiliates are even more serious. CAIP submitted that unlike most predatory pricing situations, the Bell family of companies would not experience any losses from their predatory activities, once BGS’ rate of return is combined with that of Bell.

CONCLUSIONS

35. In the Commission’s view, the main issue in this proceeding is whether the test set out in subsection 35(1)of the Act has been met.

36. The Commission notes that subsection 35(1) of the Act states:

"Where the Commission determines as a question of fact that a telecommunications service or class of service provided by an affiliate of a Canadian carrier is not subject to a degree of competition that is sufficient to ensure just and reasonable rates and prevent unjust discrimination and undue or unreasonable preference or disadvantage, the Commission may require the Canadian carrier to provide the service or class of services in any manner, to any extent and subject to any conditions determined by the Commission, if it is satisfied that it would be an effective and practical means to achieving the purposes of section 27 with respect to the service or class."

37. The Commission notes that it has repeatedly found that the retail IS market is highly competitive and dynamic, such that forbearance was appropriate for retail IS provided by: TCI and NBTel Inc. (Telecom Order CRTC 97-471, 8 April 1997); TELUS Communications (Edmonton) Inc. (Telecom Order CRTC 97-928, 30 June 1997); Maritime Tel & Tel Limited, Northwestel Inc. and Sogetel inc. (Telecom Order CRTC 98-619, 23 June 1998); NewTel Communications Inc. (Telecom Order CRTC 97-1667, 14 November 1997); and certain Ontario Telephone Association member companies (Telecom Order CRTC 97-1666, 14 November 1997). In these orders, the Commission found that the retail IS market was characterized by intense rivalry among competitors in terms of aggressive marketing techniques, innovative service offerings and price competition. The Commission also found that there were few entry barriers into retail IS markets, and that a large number of service providers, ranging from small local independent operators to large multinational competitors, had entered the market in a relatively short period of time.

38. The Commission disagrees with CAIP’s submission that high-speed retail IS constitutes a separate market. The Commission notes that in Regulation Under the Telecommunications Act of Certain Telecommunications Services Offered by "Broadcast Carriers", Telecom Decision CRTC 98-9, 9 July 1998, the Commission found that lower and higher-speed IS share sufficient attributes to be considered as reasonable substitutes, and thus are sufficiently competitive with each other to represent one market. The Commission considers that CAIP provided no evidence to demonstrate that the provision of high-speed residential retail IS represents a separate market. Moreover, the Commission considers that even if high-speed IS were to constitute a separate market, based on the record of this proceeding, the Commission considers that it is clear that Bell’s affiliates are not dominant and are subject to a considerable degree of competition given the dominance of the cable companies in this particular segment of the market.

39. The Commission considers that below cost pricing (in the short-run) is not necessarily inconsistent with highly competitive and innovative markets, particularly in instances where substantial technological advances are expected to impact upon the cost of providing certain types of services. In the circumstances of this case, the Commission considers that below cost pricing by Bell’s affiliates is in response to the competitive pressures and pricing initiatives by the cable companies. Contrary to CAIP’s argument, the Commission considers that Bell’s affiliates’ pricing practices can be viewed as evidence of competition in the market place.

40. Given the large number of ISPs (some of which are large multinational firms) and the low barriers to entry into retail IS, the Commission considers that a strategy of predatory pricing would not be workable. In the Commission’s view, it is unlikely that major ISPs could be driven out of the market in sufficient numbers to justify the costs of predation.

41. The Commission considers CAIP has not provided persuasive evidence to justify its claim that CAIP members are suffering serious and irreparable harm as a result of insufficient competition and the pricing practices by Bell’s affiliates. To the extent that independent ISPs may be losing market share, based on the record of this proceeding, the Commission considers that such losses would more likely be the result of competition between the cable companies and Bell’s affiliates.

42. In light of the above, the Commission finds that the provision of high-speed retail IS by Bell’s affiliates is subject to a degree of competition sufficient to ensure just and reasonable rates and prevent unjust discrimination and undue or unreasonable preference. Accordingly, the Commission is not persuaded that it would be appropriate to order Bell to provide such services on an in-house basis pursuant to subsection 35(1) of the Act.

43. The Commission is also not persuaded that it would be appropriate to direct Bell to file a wholesale tariff for resale by ISPs as requested by CAIP. In light of these circumstances, the Commission considers that such an approach would in effect require Bell to subsidize independent ISPs to compete with the cable companies which are the dominant suppliers in the high-speed segment of the market.

44. In light of the above, the Commission hereby denies CAIP’s claims for relief.

45. Consistent with the above, the Commission also denies O.N. Tel’s request to expand the scope of this proceeding to all telephone companies, including Northern.

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