On October 1, 2014, the Competition Bureau (the “Bureau”) announced that Bell Aliant Regional Communications Inc. (“Bell Aliant”) had addressed the Bureau’s vertical foreclosure concerns regarding its proposed acquisition of O.N. Tel Inc. (“Ontera”). It did so by granting to Bragg Communications Inc. (“Eastlink”) a 20-year indefeasible right of use (IRU) of between two and four strands of fibre on Ontera’s fibre network ring south of Kapuskasing Ontario.
Bell Aliant is the incumbent telephone company in Atlantic Canada and parts of Quebec and Ontario, including rural Ontario. In addition to providing telephone and internet services in some communities in Northern Ontario, Ontera also operated a high-capacity fibre optic ring used by competing providers of telecommunications services in Northern Ontario to provide connectivity to Southern Ontario. Eastlink is an incumbent cable operator and competing provider of telecommunications services in Eastern Canada and a number of communities in other parts of the country, including in Northern Ontario.
The Vertical Foreclosure Concern
The Bureau released a position statement describing the analysis underpinning its concern regarding Bell Aliant’s acquisition of Ontera. The specific competition concern identified by the Bureau was that Bell Aliant would partially or fully foreclose access to Ontera’s fibre optic ring by competitors to Bell Aliant in the downstream markets for telephone, television and/or wireless broadband internet services and for bundles of these services in 16 communities in Northern Ontario.
Definition of Relevant Downstream Markets
This definition of the relevant downstream markets is similar to the approach identified by the Bureau in its assessment earlier this year of the proposed acquisition by Eastlink of a rural incumbent telephone company, Bruce Telecom. In that case, the Bureau identified relevant product markets for wireline broadband internet services and for bundles of home telephone, television and/or wireline broadband internet services. The Bureau declined to include mobile and fixed wireless services in these product markets, on the basis that there are significant performance and price differences between wireline and wireless broadband services. Bundled product markets were said to exist due to the significant price break granted for bundles as well as the advantages of having a single bill and dealing with a single service provider. Lastly, the Bureau defined the relevant geographic markets as the two communities where Eastlink and Bruce Telecom both provided telecommunications services, stating that it was appropriate to aggregate locations when multiple premises in a region face the same competitive options for the relevant products.
Definition of Relevant Upstream Markets
For purposes of its vertical foreclosure analysis of the Bell/Ontera transaction, the Bureau also identified relevant upstream markets. These markets were defined as the markets for the provision of high-bandwidth backhaul services between origin and destination pairs served by Ontera’s fibre ring. Presumably the origin or destination of each of the pairs was one of the 16 communities where Bell Aliant competed in the relevant product markets with a non-vertically integrated competitor using Ontera’s backhaul services.
Ability and Incentive to Foreclosure
The Bureau found that Bell Aliant would have the ability to foreclose access to backhaul services by downstream competitors as it would be the only provider of these services following the proposed transaction and that entry in the relevant backhaul markets was unlikely.
The Bureau also found that Bell Aliant would likely have strong incentives to foreclose access to backhaul for several reasons. First, the Bureau found that margins on backhaul services are lower than margins on retail telephone, television and wireline broadband internet services. Second, the Bureau determined that retail customers would likely switch to Bell Aliant if it engaged in foreclosure. As a result, Bell Aliant would be likely to capture profits lost on upstream sales by profits on increased downstream sales. Third, the Bureau found that Bell Aliant would enjoy increased profits on its existing customer base following foreclosure. According to the Bureau’s position statement, these conclusions were supported by the parties’ strategic documents.
Impact of Foreclosure
Finally, the Bureau determined that there was “vigorous and dynamic” rivalry between Bell Aliant and competitors using Ontera’s fibre optic ring in the relevant markets prior to the proposed transaction. By jeopardizing that rivalry, the Bureau concluded that Bell Aliant’s acquisition of Ontera was likely to result in a substantial prevention or lessening of competition in the relevant downstream markets.
Assessment of IRU
According to the position statement, the Bureau conducted “significant market testing” of the IRU agreement and found that it addressed its vertical foreclosure concerns.