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ARCHIVED - Telecom Decision CRTC 2004-66

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Telecom Decision CRTC 2004-66

  Ottawa, 8 October 2004
 

Application by Shaw Cablesystems G.P. against TELUS Communications Inc. concerning high speed Internet promotions

  Reference: 8622-S9-200312710 and 8622-S9-200312710
  In this Decision, the Commission denies an application by Shaw Cablesystems G.P. requesting that the Commission place restrictions on promotions by TELUS Communications Inc. of its higher speed Internet services.

1.

On 23 September 2003, the Commission received an application from Shaw Cablesystems G.P. (Shaw) filed pursuant to Part VII of the CRTC Telecommunications Rules of Procedure and sections 24, 25, 27(2), 27(3), and 27(4) of the Telecommunications Act (the Act) requesting that the Commission issue an order:
 

(i) declaring that by offering Internet services (IS) at below-cost rates, for periods of up to 36 months, TELUS Communications Inc. (TCI) has conferred an undue preference on itself, contrary to subsection 27(2) of the Act;

 

(ii) declaring that offering a telecommunications service at a rate that is below-cost for periods greater than three months, (including both the enrolment and benefit period) does not qualify as a legitimate promotional offering;

 

(iii) directing TCI to cease offering its high-speed IS to customers at below-cost rates for periods in excess of three months;

 

(iv) declaring that by offering a student bundle containing residential local exchange, IS and other telecommunications services, absent prior tariff approval by the Commission, TCI has breached the Commission's bundling rules and conferred an undue preference on itself, contrary to sections 24, 25 and 27 of the Act;

 

(v) directing TCI to immediately cease offering its student bundle; and

 

(vi) directing TCI to comply on a going-forward basis with all Commission decisions in respect of the bundling of tariffed services and of promotions.

2.

Campbell River TV Associations (CRTV), on 3 October 2003, Canadian Cable Television Association (CCTA), on 20 October 2003, The Independent Members of the Canadian Association of Internet Service Providers (IMCAIP), on 22 October 2003, and Call-Net Enterprises Inc. (Call-Net), on 27 October 2003, supported Shaw's application. TCI responded on 23 October 2003, and Shaw replied on 3 November 2003. Seven individuals filed comments early in October 2003.

3.

The Commission considered bundling issues (iv), (v) and (vi) of this application in an expedited hearing and ruled on them in Shaw Communications G.P v. TCI Communications Inc. - Violation of bundling safeguards, Telecom Decision CRTC 2004-23, 2 April 2004 (Decision 2004-23). The Commission found that the student bundle was not a bundle, and denied Shaw's request that TCI be directed to cease providing the student bundle.

4.

In this decision, the Commission considers and dispenses with the remainder of Shaw's application.
 

Background

5.

In a series of orders, the Commission has forborne with certain conditions from the regulation of retail IS in all of TCI's territory:
 
  • Telecom Order CRTC 97-471, 8 April 1997 (Order 97-471) for TCI-Alberta (formerly AGT);
 
  • Telecom Order CRTC 97-928, 30 June 1997 (Order 97-928) for TCI Communications (Edmonton) Inc.; and
 
  • Forbearance from retail Internet services, Telecom Order CRTC 99-592 for all other Canadian carriers, 25 June 1999 (Order 99-592).

6.

In Orders 97-471 and 97-928, the Commission stated that it was retaining its powers under subsections 27(2), 27(3) and 27(4) of the Act with regard to issues related to wholesale customer access to the underlying network components necessary to provide retail IS, and to safeguard against the incumbent local exchange carrier (ILEC) extending any undue preference with respect to its retail IS. In Order 99-592, the Commission stated that it was retaining subsection 27(2) in its entirety.

7.

In Application by Canadian Association of Internet Providers regarding ADSL-based Internet services, Telecom Order CRTC 99-591, 25 June 1999 (Order 99-591), the Commission dismissed an application by Canadian Association of Internet Providers requesting that the Commission direct Bell Canada to price its retail IS, and the wholesale components needed to provide IS, to permit Internet service providers (ISPs) to profitably provide IS in competition with Bell Canada.

8.

In Edsonet v. TELUS Communications Inc. - Digital subscriber line services in Edson, Alberta, Telecom Decision CRTC 2003-3, 31 January 2003 (Decision 2003-3), the Commission dismissed an application by Edsonet, alleging that TCI was engaging in predatory below-cost pricing of its IS. In that decision, the Commission noted that, as stated in Order 99-591, below-cost pricing was not necessarily inconsistent with a competitive market. Further, the Commission determined that there was no evidence to suggest that Edsonet was being unjustly targeted, or unjustly discriminated against by TCI through lower-priced residential IS in the Edson market.
 

The application

9.

Shaw alleged that TCI was offering new customers massive discounts from its regular rates for higher speed IS. Shaw submitted that TCI's sales staff was permitted to selectively give additional discounts to secure customers. Based on reports from Shaw's staff, Shaw submitted that TCI was offering higher-speed IS at prices as low as $16.95 per month, and providing discounts for periods of up to 36 months.

10.

Shaw argued that TCI promoted its higher speed Internet at unusually large discounts, in terms of both the magnitude and length of time for which the discount was available. Shaw argued that TCI's promotions were designed to discourage entry and to force existing competitors to exit the market for high speed Internet. Shaw stated that the Commission had repeatedly recognized that below cost pricing for an extended period of time was inconsistent with telecommunications policy and the public interest.

11.

Shaw submitted that TCI's marketing has had a material negative impact on Shaw, and that Shaw's Internet disconnects due to competitive offers had increased since TCI started the practice of deep discounts. Shaw also submitted that other ISPs had been similarly affected by TCI's IS promotions.

12.

Accordingly, Shaw argued that by engaging in a practice of offering Internet services at prices well below Shaw's estimate of costs for a lengthy period of time, TCI was conferring an undue preference on itself and an undue disadvantage on other ISPs. Shaw argued that initially competitors lost, but ultimately consumers would lose. Shaw noted that, according to the Act, if there was a preference, the burden of showing that the preference was not undue rested with the carrier engaging in preferential behaviour.
 

Other parties' positions

13.

CRTV, CCTA and IMCAIP submitted that TCI's promotional prices were below cost for extended periods of time. They argued that the magnitude of the discounts had a detrimental effect on competition.

14.

IMCAIP submitted that the proceeding initiated by Shaw was the fifth Part VII application alleging anti-competitive conduct by ILECs in the retail high speed IS market. IMCAIP argued that these applications had demonstrated the need to change the regulation of high speed IS to address anti-competitive practices by incumbents, since the incumbents' practices were hurting competition. According to IMCAIP, unjust discrimination, undue preference and below cost pricing by incumbents lessened competition and there was insufficient competition to protect user interests.

15.

IMCAIP also argued that through below cost pricing of IS, TCI extended an undue preference to itself in the higher speed IS market, and eliminated competitors, resulting in a less efficient and less innovative market.

16.

Call-Net agreed with Shaw that offering of forborne retail IS at prices well below cost for an extended period of time was contrary to subsection 27(2) of the Act. Call-Net submitted that, because virtually all competing IS providers resell TCI's IS services, below cost pricing of IS by TCI for extended periods of time discriminated against competitors, and extended an undue preference to TCI's IS.
 

TCI's response

17.

In response to Shaw's allegation that TCI extended an undue preference to itself by below cost pricing of its IS, TCI remarked that, in respect of Internet access services provided by TCI, the Commission had forborne from subsection 27(1) of the Act, and retained its powers and exercised its duties under subsection 27(2) of the Act only in respect of access to underlying network components and as a safeguard against an undue preference being granted to affiliates.

18.

Accordingly, TCI argued that the Commission did not have the power to investigate allegations of undue preference, pursuant to subsection 27(2) of the Act, in relation to pricing of Internet access services to end-users, i.e. the retail market.

19.

Further, TCI argued that it priced high speed IS according to prevailing market rates available to customers having similar requirements and circumstances. TCI submitted that offers from Shaw and TCI demonstrated that the high speed IS market is competitive. TCI noted that Shaw posted its offers on its website, and that TCI developed its offers to compete with Shaw's offers.

20.

TCI argued that it was not dominant in the high speed segment of the IS market. TCI stated that as of 30 June 2003, it had 468,800 IS customers, while Shaw had 880,606 broadband Internet customers, giving TCI a market share of less than 35%. TCI noted that a 35% market share is the minimum at which Canadian competition authorities will even consider allegations of anti-competitive conduct.

21.

TCI noted that Shaw recognized that below cost pricing was not normally an issue in a competitive market, and that prices could be below cost for short periods of time. TCI noted that in Order 99-591, the Commission had found that the high speed IS market segment was sufficiently competitive to protect user interests and to prevent undue preference and unjust discrimination.

22.

TCI argued that its high speed IS promotions are short run initiatives. Further, TCI argued that since it is not dominant in the high speed IS market, any allegation that TCI sets prices for high speed IS below costs in order to force competitors to exit this market would be untenable.

23.

TCI argued that Shaw had not demonstrated any harm from TCI's IS promotions. TCI noted that while, in this proceeding, Shaw alleged that it had experienced an increase in the number of its disconnects since TCI began its current practice of offering deep discounts on its high-speed service, Shaw had also publicly stated that there had been no impact on Shaw's business beyond customer confusion.
 

Shaw's reply

24.

Shaw noted that TCI had not filed any costing information, nor had it argued that its prices for IS were above costs. Shaw argued that the only possible conclusion was that TCI's IS rates did not cover costs, and that TCI had engaged in predatory pricing.

25.

Shaw also submitted that TCI argued incorrectly that the Commission had forborne from subsection 27(2) of the Act in respect of pricing of IS to end customers.

26.

Finally, Shaw argued that TCI had not followed the lead of others in pricing of high speed IS promotions; instead, TCI's prices for IS were far below the prices of other high speed Internet offers.
 

Commission's analysis and determination

27.

As referenced in paragraph 5 above, the Commission forbore pursuant to section 34 of the Act from regulation of Internet access services finding that these services were subject to sufficient competition to protect the interests of retail Internet service users.

28.

Given the terms of forbearance regarding retail Internet services, which include both dial-up and higher speed IS, the Commission retained its powers under subsection 27(2) of the Act with respect to TCI's IS. Therefore, the Commission is of the view that it has retained powers sufficiently broad to consider the allegations made by Shaw regarding unjust discrimination or undue preference in the provision of TCI's high-speed Internet services.

29.

Regarding Shaw's allegations of unjust discrimination and undue preference by TCI in offering promotions to new customers, pursuant to subsection 27(4) of the Act, the burden of establishing that the discrimination is not unjust or the preference undue rests with TCI.

30.

The Commission notes that parties to this proceeding made reference to several earlier Commission decisions where the Commission found Internet access markets to have sufficient competition to protect the interests of customers. The Commission further notes that it stated in IMCAIP against certain incumbent cable and telephone carriers - Provision of higher-speed access and retail Internet services including Lite service, Telecom Decision CRTC 2004-28, 5 May 2004, that there is rigorous competition including facilities-based competition between separate and unaffiliated telephone and cable competitors, and independent ISPs, and that statistics from the NBI/Sone Report indicate that in 2002, telephone carriers had 3.6 million IS subscribers, cable carriers had 2.3 million IS subscribers and independent ISPs had 4.3 million IS subscribers. The Commission also stated that end-users have greatly benefited from the operation of this market.

31.

The Commission notes that Shaw is a separate facilities-based carrier that has a larger share of the higher-speed IS market than TCI. TCI's market share is estimated at approximately 35% of the higher-speed IS market. The Commission considers that TCI is not dominant in the higher-speed IS market.

32.

The Commission notes that in prior decisions it determined that the IS market is characterized by rivalrous behaviour, including vigorous and aggressive marketing campaigns, and that users have a choice of a variety of pricing plans in the market for IS. The Commission considers that the reduction, in recent years, in the cost of modems for access to higher-speed Internet access services has lowered barriers to customers switching service providers and thereby contributed to rivalry among service providers in the market. The Commission considers that such rivalrous behaviour is an indication of a robustly competitive market.

33.

The Commission considers that TCI has demonstrated that the extent of competition in the provision of higher-speed Internet access services is such that any targeting of promotions by TCI to new customers would not result in unjust discrimination and would not provide TCI with an undue preference.

34.

The Commission notes that in past decisions regarding IS promotions the Commission has found that the fact that promotions offered below cost may not necessarily be anti-competitive and, instead, might be a response to the competitive pressures and pricing initiatives of competitors.

35.

In Review of promotions, Telecom Public Notice CRTC 2003-1-1, 13 March 2003, it suspended consideration of applications for ILEC promotions in the local wireline market until a decision is issued on the matters raised by that Public Notice. The Commission notes that, since retail Internet services are not tariffed services, they would not fall within the Commission's restrictions on promotional pricing.

36.

Based on the above analysis, particularly the state of competition in the IS market, the Commission denies the remainder of Shaw's application not considered by Decision 2004-23; specifically, the relief sought that the Commission direct TCI to cease offering higher speed Internet service at promotional prices as indicated in items (i), (ii) and (iii) of its application.
  Secretary General
  This document is available in alternative format upon request and may also be examined at the following Internet site: http://www.crtc.gc.ca

Date Modified: 2004-10-08

Date modified: