Changing the Channel on Canadian Communications Regulations

8/16/2019 Changing the Channel on Canadian Communications Regulations

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Institut

C.D. HOWE Institute

commentary NO. 451

Changing the Channelon Canadian

CommunicationsRegulation

Canada's communications sector is set to undergo major policy reform.

The federal government should replace ineffective Canadian content regulations

with direct subsidies, introduce more legal and economic rigour in

regulatory hearings, and eliminate ownership restrictions on

communications companies and wireless spectrum.

Benjamin Dachis and Daniel Schwanen


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$12.00

978-0-88806-975-7 0824-8001 (print); 1703-0765 (online)

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I N S T I T U T

C. D.

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Daniel Schwanen

Vice President, Research

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May 2016I R

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C.D. Howe Institute publications undergo rigorous external reviewby academics and independent experts drawn from the public andprivate sectors. Te Institute’s peer review ensures the quality, integrityand objectivity of its policy research. Te Institute will not publish anystudy that, in its view, fails to meet these standards.

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The Institute’s Commitment to Quality

About The Authors

B Dis Associate Director, Research,at the C.D. Howe Institute.

D S

is Vice President, Research,at the C.D. Howe Institute.


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The Study In Brief

Canada’s communications and broadcasting world has changed dramatically in recent decades. And morechanges are coming. But our communications and broadcasting statutes and regulations have not kept pace.

echnology changes have enabled new services like Netflix that are changing fundamentally how

Canadians watch V. Various technologies now provide broadband access to a worldwide ocean ofInternet content, with different wireless and wireline platforms competing for subscribers. Yet Canadianregulation of the communications sector still rests on a model born in an earlier era of over-the-air televisionbroadcasting and technological constraints that inhibited competition among communications carriers.

A recently announced federal government review of Canadian communications and broadcastingpolicies should ask specific questions about current policies: Does the Canadian Radio-television and elecommunication’s (CRC’s) regulatory approach intensify competition or merely help individualcompanies or interest groups? Does the framework for mandating access to essential facilities encourageinvestment in innovative communications technologies? What, if anything, should the federal governmentdo to put Canadian broadcasters on a level playing field with international competitors? What role, if any,

should Ottawa play to ensure that Canadians have a choice of compelling V viewing options that tellCanadian stories?

Tis Commentary argues that the federal government review of broadcasting and communications policyshould conclude that:

• Ottawa should construct a unified policy framework for the Broadcasting Act and the elecommunications Act that recognizes the convergence in conduits for accessing and delivering content;

• Ottawa should eliminate the CRC’s responsibility for Canadian cultural promotion and mandate theDepartment of Canadian Heritage to assume the role of articulating a policy framework for Canadian content;

• o finance Canadian content, government should not impose specific taxes on broadcasters, broadbandproviders or on content streamed via broadband, such as Netflix. Instead, Ottawa should support Canadian

content production directly from general revenues. Te federal government should also eliminate exhibitionquotas for Canadian V programming and replace them with subsidies or tax preferences for connectingCanadian audiences to Canadian content;

• Te CRC should face more economic and legal rigour in its hearings and defer to the Competition Bureauin countering specific anti-competitive conduct, protecting consumers and reviewing mergers; and

• Rather than support new entrants in spectrum auctions, the federal government should eliminate foreignownership restrictions on Canadian communications companies and maximize the public benefits fromthe use of spectrum but defer to the Competition Bureau to counter anti-competitive conduct in spectrumacquisition.

Tese reforms would fundamentally change how Ottawa regulates Canadian broadcasting and communication.It is time for federal broadcasting and communications policy to keep pace with changing technology.

C.D. Howe Institute Commentary © is a periodic analysis of, and commentary on, current public policy issues. Michael Benedictand James Fleming edited the manuscript; Yang Zhao prepared it for publication. As with all Institute publications, the

views expressed here are those of the authors and do not necessarily reflect the opinions of the Institute’s members or Board

of Directors. Quotation with appropriate credit is permissible.

o order this publication please contact: the C.D. Howe Institute, 67 Yonge St., Suite 300, oronto, Ontario M5E 1J8. Te

full text of this publication is also available on the Institute’s website at www.cdhowe.org.


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echnological change has also driven “convergence”in the user experience among different platforms foraccessing and distributing content. Canadians cannow access content from their desktops, smartphonesor television sets. We now have a wide range ofchoices regarding whether the content arrives by

radio wave or along coaxial or fibre optic cable.Meanwhile, information flows are global. Tecompetitiveness of the Canadian economy willdepend on access to global ideas and markets. o access those vast sources of knowledgeand information, Canadians depend on thecommunications infrastructure where theylive and work. While Canadian regulationshapes the economic incentives for providers ofcommunications facilities to invest in new andfaster technology, the current regulatory regime forthe broadcasting and communication sectors restson a model born in an earlier era.

When home television ownership started tospread in the 1950s, one-way V or audio signalsrequired a high amount of bandwidth acrossscarce radio spectrum. Content producers couldnot connect with individual users, and wirelineconnections to homes were primarily for telephones.In that era, spectrum scarcity favoured channels with the greatest viewership, crowding out diversity

of content. High fixed costs and a lack of competingtransmission technologies made communications

providers natural monopolies, which begat closeregulation.

oday, radio frequencies no longer limit thechannels on offer. Users can access programmingcontent on the Internet from global providers likeNetflix. Te digitization of content delivery makes

the range of programming choices effectivelyunlimited.

The Need for Regulatory Reform

Against that backdrop, Canada’s legislativeframework reflects an out-dated structuralseparation between broadcasting and communications. Te CRC applies two separate statutes: theBroadcasting Act and the elecommunications Act . Te disputes over the applicable statutory regime

in various CRC decisions concerning contentdelivered to new devices and by Internet-basedcontent providers (such as Netflix and Apple V)are a consequence of such separation.

Te regulatory model for communicationsproviders is also ill-suited to current technologythat allows users to access information across various wireline and wireless media. Indeed,competition among communications providers isincreasingly about greater quality and higher speed

of information flows. Tis new kind of competitionrequires companies to invest in new technology and

Tose listed as authors of this paper wish to recognize the decisive contribution to much of the analysis herein and to earlier

drafts of this study, made by current and former Institute Fellows involved at different stages of this project. Many thanks

also to all reviewers and to participants at the C.D. Howe Institute’s November, 2015 conference for their feedback and

input at various stages of this work. We retain responsibility for any errors in this paper.

Te future is digital. Te newest information communicationstechnology has changed how people communicate, and this newtechnology makes our economy more efficient through broadenedaccess to information.


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better communication infrastructure. Consumerscan choose among various wireless providers and wireline carriers with different technologies. Inthis setting, regulating based on natural monopoly

assumptions rooted in an earlier technology mayactually chill dynamic forms of competition ratherthan remedy hypothetical inefficiencies.

A Roadmap for Reform of Communications

Regulation

echnological change has intensified the potentialcompetition both among producers of content for viewers and providers of communications facilities

for subscribers. In particular, digital informationcan be accessed efficiently through a variety ofplatforms. Such convergence will enhance thecompetition between incumbent wireline carriers,on the one hand, and wireless carriage and other wireline facilities on the other. Consumers can nowaccess content from wireless broadband or througheither coaxial cable or optic connections, improvingconsumer welfare, constraining incumbents’ marketpower and enhancing incentives for facilities

providers to provide faster and more reliableinfrastructure.However, the scope for convergence’s full benefits

is inhibited by Canada’s current approach tocommunications regulation. oday, communicationsproviders invest in innovative new infrastructure with uncertain returns – new investments thatare a kind of upfront competition. Te CRC’sregulatory approach toward new communicationsinvestment is overly restrictive, hinderingcompetition and long-run efficiency.

o modernize Canadian communicationsregulation, rather than creating a single law for thesector, Ottawa should establish a unified legislativeframework, noting that the current fragmentation

is incompatible with current technology.1 Teincreasing competition among conduits foraccessing content makes the CRC’s traditionalmonopoly regulation less relevant than it usedto be. Moreover, the federal government shouldclearly divide regulatory responsibilities among theCRC (which regulates communications carriers,broadcasters and broadcast distributors in the publicinterest), the Department of Canadian Heritage(responsible for outlining Canadian content

policy), the Department of Innovation, Science andEconomic Development (ISED, formerly IndustryCanada, which allocates radio spectrum used in wireless communications) and the CompetitionBureau (which, as an independent law-enforcementagency, applies the Competition Act as a law ofgeneral application).

o address the fragmentation, Ottawa shouldenact the following broad reforms:

• First, the CRC’s responsibility for Canadian

cultural promotion should be eliminated, withthis responsibility – along with direct financialsupport – assumed by the Department ofCanadian Heritage;

• Second, the CRC should defer to theCompetition Bureau in countering specific anti-competitive conduct, protecting consumers andreviewing mergers, except where a market failureexists that competition law cannot remedy; and

• Tird, ISED’s aims in radio spectrum allocationshould be streamlined, mandating ISED to

maximize the public benefits from spectrumuse but to defer to the Competition Bureau to

1 Tis follows the recommendations of the C.D. Howe Institute’s Competition Policy Council, which has previously

presented the need for an expert panel to review and update the regime (C.D. Howe Institute Competition Council 2014).

Many panellists at the Institute’s November 2015 conference on the “Future of elecommunications and Broadcasting”

supported the idea (See conference summary at: https://www.cdhowe.org/speeches-and-presentations/conference-report-

future-canadian-telecommunications-and-broadcasting).


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counter anti-competitive conduct in spectrumacquisition.

Canadian Cultural Promotion

Te federal government promotes Canadiancontent for television in three main ways. First, itsupports production of Canadian content, eitherdirectly (e.g., via the National Film Board) or byrequiring broadcasters, as a condition of obtainingtheir licence, to support Canadian production(by either directly funding it or via contributionsthrough vehicles like the Canadian Media Fund).Second, Ottawa sets exhibition quotas – a certain

number of Canadian channels and a certainproportion of Canadian content must be madeavailable as part of content distributors’ offeringsto subscribers. Tird, the government maintains apublic broadcaster with nationwide coverage andofferings in both of Canada’s official languagesthrough CBC/Radio-Canada.

Why Support Canadian Content?

Support for Canadian content is rooted in the ideathat it is a public good to connect Canadians toinformation, along with educational and culturalproducts, from their own country and communities,and to a diversity of voices. Tis is because theseconnections promote informed choices, enhanceCanada’s diverse cultures and build communities. As well, there are arguably positive spillovers oneconomic activity outside the arts and culturesector, for example by contributing to the creationof new designs and uses for goods and services.2

Te contribution of cultural policy to theseimportant policy goals is well established in boththe literature (for a review, see Schwanen 1997 and2001) and in public examinations of governments’

roles in supporting Canadian culture and publicbroadcasting.3 In theory, private companies wouldnot produce as much of this social good as would beideal. Public support of some kind, it is widely feltamong Canadian content supporters, fills that gap.

Te question under consideration here is notthat of public support for cultural, educationalor news production. Te question is whether thepolicy tools we are using to meet cultural policygoals – in particular through communications

and broadcasting policies – are effective, or evensustainable in light of technological change andchanging Canadians’ preferences.

wo alleged market failures underlie the casefor subsidizing Canadian cultural production:First, producing programming involves highfixed costs and uncertainty about demand (i.e.,it is difficult to predict a hit series in advance).However, after a program is produced, the costsfor further distributing the content are negligible.

Consequently, the market favours programming with the largest projected audiences. Content forsmaller audiences with slightly different tastesmay be crowded out by the scale advantages ofproducing for a neighbouring mass market.

Te second alleged market failure is that demandfor new production is variable and periodic,particularly in a smaller market. A market withoutstable and predictable demand for content maybe unable to cultivate and maintain the cluster of

2 See Goldthwaite (1993) for examples from the Renaissance. For a more contemporary example, Kearney and Levine (2015)

find that the introduction of Sesame Street across the United States had a strong effect on school readiness, especially for

children from economically disadvantaged areas.

3 Te 1929 Royal Commission on Radio Broadcasting (Canada 1929) stated, “At present, the majority of programs heard

are from sources outside of Canada. It has been emphasized to us that the continued reception of these has a tendency to

mould the minds of young people in the home to ideals and opinions that are not Canadian.”


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talent and related services to sustainably continue totell local stories.

Tese arguments are often subsumed underthe heading “cultural and information goods are

different.” And, to be sure, they often have uniquecharacteristics. (For a list of such characteristics, seeGrant and Wood 2004). However, these argumentscan also be overdone, given that Canadians shouldhave a unique advantage in telling Canadian stories,even against larger competitors, who may be less well tuned to Canadians’ needs. As well, new, low-cost production and dissemination technologiesshould make it easier to produce Canadian contentdespite its relatively small market size.

And while these alleged market failures mayaffect the availability of Canadian cultural orinformation products and activities, the case forsubsidizing Canadian content rests on not onlymaking Canadian content available, but morefundamentally on the extent to which Canadiansactually partake of that content (Schwanen 1997). Te ultimate goal of a policy devoted to supportingcultural or information content is to haveCanadians connect, watch, and listen to, or even

interact with, this Canadian content. Put simply,the test for Canadian content’s value is whetherCanadians willingly connect to it.

In this context, the key policy goal with respectto Canadian content should shift from “pushing”it on V and radio to promoting the connectionof Canadian content with Canadian audiences,across any platform, in a context where all offeringscompete for Canadians’ time and attention. Teinstruments of Canadian content promotion should

be rethought with this in mind.

Financial Support for Canadian Content

Ottawa’s largest single tool promoting Canadiancontent is its support of the Canadian Broadcasting

Corporation (CBC), which received just over $1billion in direct support in the 2014/15 fiscal year.4 Ottawa also provides funding for independentlyproduced programming through the CanadianMedia Fund (CMF) and tax credits. CMF fundingcomprises roughly one-quarter of total funding forCMF-eligible programming.

Cable or satellite service providers, known asBroadcast Distribution Undertakings (BDUs),also make significant contributions to Canadian

programming.5

BDUs with more than 2,000subscribers must contribute 5 percent of their grossrevenues from broadcasting-related activities tocreating Canadian programming, and the CMFreceives at least 80 percent of such contributions.BDUs that operate a community channel arepermitted to count such “local expression”expenditures toward their 5 percent target.6 In total,BDUs contributed between $460 million and nearly$500 million per year toward Canadian contentcreation between 2010 and 2014 (See Figure 1).

Exhibition Quotas for Canadian Content

In addition to financial support requirements,BDUs must also broadcast a certain amount ofCanadian programming. Under recently announcedchanges, major Canadian over-the-air broadcasters will be required by August 2017 to offer 50 percentCanadian content daily during evening prime timehours. Meanwhile, Canadian specialty channels will

4 See Public Accounts of Canada (Dec. 7, 2015), online at: http://www.tpsgc-pwgsc.gc.ca/recgen/cpc-pac/2015/vol2/pch/ap-

pa-eng.html.

5 Te material in this section draws heavily from C.D. Howe Institute (2015) and Hunter, Iacobucci, and rebilcock (2010).

6 See http://www.crtc.gc.ca/eng/info_sht/tv13.htm.


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need to provide Canadian content covering35 percent of overall broadcast time.7

The Changing Landscape of Canadian ContentPromotion – The Need for Policy Change

Te traditional methods that the federalgovernment used to promote Canadian contentmay have been effective in an era of limited viewingoptions. Tat is, there was a great deal of spectrumscarcity, and governments could influence what was

shown on that limited spectrum. At first, Canadians were limited to watching what was broadcastover-the-air and received in their homes. Later,Canadians could choose from a rapidly growingnumber of channels. Te government-imposedBDU financial contributions and exhibition quotas

were effective in ensuring that BDUs presentedCanadians with Canadian content (Hunter,Iacobucci, and rebilcock 2010).

Now, Canadians live in a world in whichspectrum scarcity no longer constrains

7 See Let’s alk V Ruling (March 12, 2015), online at: http://www.crtc.gc.ca/eng/archive/2015/2015-86.htm.

Figure 1: Broadcast Distribution Undertakings (BDU) Contributions to Canadian Content

Note: Local Program Improvement Fund is a since-discontinued program to support small broadcasting stations.

Source: Communications Monitoring Report 2015, Figure 4.3.10; See: http://www.crtc.gc.ca/eng/publications/reports/policymonitoring/2015/cmr4.htm#f4310.

41% 43% 42% 45% 47%

27% 25% 25% 29%

33%

10% 10% 10%

11%12%

22% 22% 23%16%

9%

450

460

470

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490

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0

10

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2010 2011 2012 2013 2014

$ Millions

Share of BDU

Contributions(percent)

CanadianMedia Fund

Localexpression

Otherindependentfunds

LocalProgramImprovementFund

Annual Total BDUContribution(right axis)


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viewer choice since viewers are not limited toprogramming carried over the airwaves. Instead, viewers can access a universe of content fromaround the globe, and Canadian content must be

competitive with those offerings. Notably, Internet-based programmers such as Netflix are not requiredto make either financial contributions or followexhibition quotas. It is the emergence of theseservices in a new technological era that requires arethinking of support for Canadian content.

Under the Broadcasting Act , the CRChas authority to mandate contributions frombroadcasters and broadcasting distributors toCanadian programming. Yet, in an age when

Canadians can access content online, a model forcontent-promotion in which Canada’s broadcastersare differentially saddled with content quotas orcontributions to media funds only penalizes certainCanadian-based conduits. Avoiding this outcome would seem to call for changes to policies thatpromote the availability of Canadian content.

Changing Financial Support

Some have suggested a general tax on broadbandaccess to fund domestic cultural production (Ontario2014). However, since some portion of the tax wouldbe borne by broadband subscribers, such a tax mightexclude some people from Internet connectivity.Moreover, the targeted tax base would be overbroadrelative to the benefits of the cultural programmingsince those benefits would not accrue to businessusers of broadband services, nor to individualsubscribers in their multifaceted need to access theInternet beyond cultural or news programming, suchas internet shopping or banking.

If policymakers believe that Canadian contentis a general public good, contributions to Canadianprogramming should be most appropriately fundedfrom general revenues, making the size of thesubsidy transparent to taxpayers and compellingconversations about the value of Canadian content. Te funding should then be allocated under the

auspices of the Department of Canadian Heritage, whose core mandate encompasses promotingCanadian culture.

Such financial support should not distinguish

between the means by which content producersconnect with Canadians. Te core of Canada’scultural policy with respect to reproducibleaudio-visual content should reward broadcastersor distributors of Internet-based content forcapturing a share of Canadians’ time and interest with Canadian content that is otherwise notcommercially provided. It follows, then, that insteadof requiring broadcasters to fund programs that mayor may not be viewed by Canadians, government

should support voluntary plans by broadcasters(and other distributors) that demonstrably engageCanadian audiences with Canadian content. TeDepartment of Canadian Heritage could, forexample, provide support for plans depending ontheir proposed mix of Canadian news and publicaffairs, regional diversity, drama, amateur sports,documentary, personal interest, minority languageand cultural programming.

Te Department of Canadian Heritage could

form a working group of experts who are at arm’slength from the department to evaluate the plans. Te experts would not evaluate editorial content,but the type of programming and plans to promotethe content to Canadian audiences by, for example,making it easily accessible to their subscribers. Tebidder or bidders offering the better connectionof such Canadian content, and at the lowest costto the government, would win the Department’sfinancial support.

Te government could ensure that its publicsupport does not go toward programming thatprivate companies would provide without subsidy,by setting a duration (say five years), after whichthe success of engaging with audiences could beassessed and funding for different distributorsmight be re-evaluated accordingly. Tis long-termreview of audience engagement would reconcile theeconomic goal of supporting initially uneconomic


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content that eventually connects with a wideaudience.

Changing Exhibition Requirements

Starting on March 1, 2016, Canadian BDUs wererequired to offer minimally priced, minimal choice,channel offerings. In addition, BDUs are limitedin the extent to which they can require buyers topurchase packages of channels. Buyers can now“pick-and-pay” for only the channels they want,but BDUs will still be required to have a majorityCanadian channels on offer.

Tis ruling ignores the potential economic

benefits of bundling. Bundling can make bothconsumers and BDUs better off if the result is, forexample, more channel offerings (Hunter, Iacobucciand rebilcock 2014). A broad prohibition onbundling may result in consumers not having accessto bundle options when those might, in fact, makethem better off if the restrictions on bundling meanless choice.

Te result of these pick-and-pay rules is thatCanadian distributors are saddled with additional,

unnecessary costs. Consumers might react byfleeing traditional broadcasters in favour ofInternet-based offerings, hurting both domesticbroadcasters and Canadian content producers.

The Role of the CBC

Te CBC originated as a national radio broadcasterin the 1930s, an era of spectrum constraints andhigh fixed costs for delivering programmingnationwide. It served to curate a common sense

of national identity and convene conversationsabout issues facing Canada. However, in an eraof platform convergence, when print, video andaudio are increasingly accessed online and mediaproduce content for multiple conduits, the distinctrole served by the CBC is unclear. Specifically, what market failure does the CBC address? Putsimply, why does the CBC warrant a direct subsidyfor its operating budget but not the National Post ,

Maclean’s , L’actualité , Vice magazine or Canadaland’spodcasts? What are the economic arguments for thepublic funding the full salaries of Peter Mansbridgefor news coverage, Don Cherry for intermission

hockey commentary, or Eugene Levy on Schitt’sCreek, but not Christie Blatchford of the NationalPost , Greg Zaun for baseball commentary, or the railer Park Boys on Netflix?

Te answer, in our mind, is that the CBC wouldbest contribute to the public policy objectivesdescribed above by more clearly complementing theofferings of commercial distributors and producers, while still being subject to an “audience relevance”test. In other words, the competition should be

for viewership of otherwise non-commerciallyattractive Canadian content, rather than foradvertising revenues, other than incidental ones. Te content should include publicly subsidizedarts and culture from across Canada, cross-countryinformation (respecting the diversity of voices),official and Aboriginal language services, in-depthdocumentaries and public affairs programming,promotion of Canada abroad, and newer and moreexperimental art. Funding should be commensurate

with the demonstrated ability to engage Canadian,and even non-Canadian, audiences to theseofferings. A funding baseline could be establishedby comparing the CBC to similar organizationsaround the world, taking cost structures andaudience share into account.

A Way to Support Canadian Content in a World of

New Technology

New technologies require a fundamental rethinkingof how governments support Canadian content.Hunter, Iacobucci and rebilcock (2010) arguethat the only mechanisms that will remain effectivein promoting Canadian content in a worldof Internet-centric television are either directsubsidies to content producers or through a publicbroadcaster. Tat view is still fundamentally correct.Once Canadian producers receive these subsidies,they would need to produce compelling television


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in order to find broadcasters willing to exhibit theirshows. But this market-driven outcome will occuronly if governments remove the outdated exhibitionquotas that are no longer effective in today’s V world.

It should be emphasized that we are notproposing a reduction in the funding that goesto cultural, arts or other Canadian content orprogramming. We are agnostic on that score.Instead, we are proposing a reallocation of thedirect source of this funding away from imposedcontributions by the BDUs, as a condition of gettingtheir licence, toward the Department of CanadianHeritage. Our proposal is a reallocation of thereward scheme as a more efficient use of funds from

the point of view of achieving public policy.

Competition and

Communications Regulation

Regulatory policy should be based on howcompetition works in current practice. Te priorfederal government’s approach to communicationsregulation encouraged the entry of morecompetitors into a market – such as a fourth

wireless carrier – contending that this wouldbenefit consumers (Beaudry and Speers 2016).Such structural approaches that emphasizedredistribution of static surplus shares betweenproviders and consumers are being supplanted bya new view that competition is more dynamic inindustries, such as communications, with rapidtechnological change.

Tis modern approach focuses less on determining what a market should look like through prescriptiveregulation; instead, it addresses abuses of marketpower and barriers to entry. Te advantage of thisstrategy is that it preserves incentives to competefor the market through consumer-orientedinnovations while constraining anti-competitiveconduct. o adapt this approach, Ottawa shouldreform the communications regulatory regime byrequiring the CRC to defer to the CompetitionBureau when it comes to anti-competitive conductand merger reviews, unless there is a demonstrable

market failure – such as a clear monopolization –that warrants a sector-specific intervention.

Dynamic Efficiency in CommunicationsRegulation

Te value of communications technology isin enabling users to better access content.Communications services are, therefore,complements to the content that users access, botheconomically and technologically. Providers ofcommunications services do not merely competeon price but attract subscribers based on theavailable speed and quality of access to evolving

types of content. Tis means competition incommunications has a highly dynamic element:providers must constantly innovate to maintainmarket share or face a diminished value as newforms of carriage supersede earlier-generationtechnologies.

Tere is a trade-off between static and dynamicefficiency in the communications context (Laffontand irole 2000). A new communicationstechnology may provide some market power,

allowing monopolistic pricing, until surpassed bya subsequent technology generation. However, ifthe regulator mandates access for later entrants toan incumbent’s network, it dilutes the incumbent ’sexpected return that first motivated the company toinvest in the next-generation technology.

Once the technology is rolled out and provento attract customers, mandating access will allownew entrants to drive down the consumer price toan upfront access fee based on the provider’s broadincremental costs. However, it is unlikely that theaccess fee can accurately capture the uncertaintiesthat the incumbent faced ahead of making theinvestment. Such incumbent firms face risksaround the costs of new technology and consumers’ willingness to pay for the enhanced service. Teirrate of return needs to reflect that risk in orderfor them to invest. If the regulator systematicallyallows access and underestimates the risks todeploying previously unproven technology, an


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incumbent considering deploying next-generationinfrastructure will reduce future investmentsaccordingly.

Te consequence of mandating access to an

incumbent’s infrastructure would be an otherwiseslower pace for the rollout of new infrastructure. Tat is, in exchange for lower short-term prices,consumers sacrifice the long-run gains frominnovative, new infrastructure.

Te relationship between regulators andcommunications providers is fraught with differentinformation levels on each side: regulators haveimperfect information about the risks and coststhat a provider faces (Hausman and aylor

2012). Terefore, the regulatory approach mustbe adapted for a “second-best world” in whichinformational barriers stand in the way of the idealcompetitive equilibrium.8 Put simply, regulatorsmust be attentive to the risk that their regulatoryinterventions may inhibit competition if theyformulate regulation on incorrect assumptions orare wrong about the future.

Tis regulatory failure risk is compounded when technology changes quickly. Te benefits

of regulating should be weighed against possiblelosses from the market failure in question – suchas the different information available to marketparticipants – but also against the risk of losses ifthe particular measure inhibits economic efficiency.

Tis “knowledge problem” faced bycommunications regulators motivates the

change from a primarily ex ante approach to apresumptively ex post framework (Ohlhausen2015). Prescriptive rules are ill-suited to a dynamicindustry that is being buffeted by disruptive

technological changes and in which players competethrough innovation. Ex-post enforcement is likelymore appropriate in sectors with fast-changingtechnology than ex-ante regulation. Indeed,there are instances in which the ex ante rules arepredicated on misjudgments about the future thatmay constrain communications providers’ flexibilityto adapt to and drive technological change.9

Competition through Competition Law

In contrast to ex ante prescriptive industrialregulation, competition law provides a generalframework of remedies against unilateral and multi-firm conduct that prevents or lessens competitionand against marketing practices that reduceconsumers’ trust in advertisement.

Te Competition Act also features a regime forreviewing and challenging mergers where thesemay prevent or lessen competition. Additionally,

the Competition Act forbids certain discrete classesof conduct that unambiguously impair consumer welfare (e.g., cartel arrangements, bid-rigging ordeliberately misleading advertising).

Of relevance to the communications context,the “reviewable conduct” sections of Canada’sCompetition Act provide for remedies against tied-

8 Te appropriate lens for welfare trade-offs in communications regulation is to distinguish between first- and second-orderlosses, as well as losses from regulatory delay (Hausman and aylor 2012). First-order welfare losses result when a provider

with a lower-cost technology is inhibited from entering a market – and the price reflects a provider with a higher marginal

cost. Second-order losses occur from a provider with market power pricing above marginal cost – the classic monopoly

situation. Losses from regulatory delay result from regulatory restraints on new services being offered, depriving consumers

of their full willingness to pay.

9 Te US Federal Communications Commission’s takes an ex ante approach. In contrast, the Federal rade Commission

takes on ex post enforcement to protect consumers using competition law. In order to preserve the flexibility and incentives

for dynamic competition, Ohlhausen (2015) argues that the Federal Communications Commission should recognize the

risks inherent in imposing ex ante rules and defer instead to the ex post stance of countering demonstrably anti-competitive

conduct when it actually occurs.


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selling, vertical price restraints (e.g., restrictions onresale prices), abuse of a firm’s dominant position,and agreements that impair competition. In the caseof abuse of dominance, the Competition Bureau

must demonstrate a lessening of competitionflowing from the particular conduct. For theirpart, firms can review the jurisprudence that hashoned the applicable tests for determining marketscope and the presence of market power whenassessing whether to take a particular action.Canadian jurisprudence has defined market poweras the ability of a single firm or a group of firms toprofitably maintain prices above the competitivelevel, or other elements of competition such as

quality, choice, service or innovation below thecompetitive level for a significant period of time.10 Notably, the Competition Bureau has elaboratedon its approach to the application of abuse ofdominance in the communications context.11

Additionally, the Competition Act provides forremedies against misleading representations. Recentcases concerning advertising regarding the company with the least dropped calls and premium textmessages are examples of communications firms

covered by competition policy.12Finally, the merger provisions of the Competition

Act allow for a merger to be blocked or proceed onlyon certain conditions if the Competition Bureauis able to demonstrate that it would substantiallylessen or prevent competition.

Iacobucci and rebilcock (2007) argue for areform of Canadian communications regulation toembrace competition law principles and segmentresponsibilities to leverage the Competition

Bureau’s comparative advantages. Tey contend thattechnological change has displaced the advantageof a sector-specific regulator for potential anti-competitive conduct by communications providers

and that the CRC is ill-equipped to administerthe analytical approaches taken in competition law.Indeed, the remedies provided by competition lawinvolve greater rigour than the CRC’s approachesto discriminatory access and predatory pricing.Nonetheless, Iacobucci and rebilcock (2007)highlight that while market power in competitionlaw provides an effective lens to identify pricesthat are higher than what would emerge from freecompetition, the Competition Bureau is not a

price regulator and lacks the capability for ongoingregulation, as it does not undertake hearings orissue licences. Tey allow a place for the CRCto regulate prices or access conditions where ademonstrable market failure, such as a naturalmonopoly over a last-mile connection, inhibits anefficient outcome.

o summarize, in order to apply competitionlaw to the communication system, the federalgovernment should enact the following changes:

(1) anti-competitive conduct should be countered bythe Competition Act ;

(2) a regulatory solution should be imposed only where there is a demonstrable market failure thatcompetition law cannot address; and

(3) regulatory measures should be as unintrusiveas possible and carefully calibrated to addressthe demonstrated market failure, weighing thepotential economic benefits from a particularintervention against the risk of imposing greater

10 See Canada (Commissioner of Competition) v. Canada Pipe Company Ltd ., 2006 FCA 236 at para. 6; and see: Competition

Bureau, Te Abuse of Dominance Provisions: Enforcement Guidelines (Sept. 20, 2012) – online at: http://www.

competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03497.html.

11 See Competition Bureau, Information Bulletin on the Abuse of Dominance Provisions as Applied to the

elecommunications Industry (2008) – online at: http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/02690.html.

12 See Canada (Competition Bureau) v. Chatr Wireless Inc ., 2013 ONSC 5315 and Te Commissioner of Competition v. Rogers et

al ., 2013 ONSC 3224.


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inefficiency (e.g., by increasing barriers to entryor diminishing incentives for competition).

While the CRC should have the final jurisdictionover the communications sector, the CompetitionBureau and modern competition principles shouldhave a greater role in CRC decisions.

Issues with the CRTC’s Current Approach

Currently, the CRC’s mandate is a mix ofeconomic and nebulous public interest objectives.Recent critical CRC decisions apply economiclanguage but exhibit inconsistent application ofpro-competitive principles, lacking the rigour of the

economically grounded legal tests that are requiredunder the Competition Act .13

Te problematic issues in the CRC’s currentregulatory approach are:

a) It does not appropriately consider regulation’simpact on competition and dynamic efficiency;

b) In the CRC’s essential facilities determination,a finding of market power (including thedefinition of the market) lacks the analyticalrigour that would be required in a competitioncase, and the CRC significantly underweightsthe risk that its decisions impair incentives forcompetition through investment and innovation;

c) Competition law provides ex post remediesthat are often preferable to ex ante regulatorymeasures, but the CRC fails to consider

whether it can defer to competition law tocounter discrete anti-competitive conduct ratherthan pre-emptively regulate;

d) Te CRC’s framework that is meant to preventanticompetitive behaviour lacks the analyticaleconomic rigour that would be required forcomparable remedies (e.g., abuse of dominance,refusal to deal, tied-selling) in competition law;and

e) Te CRC’s review of mergers involvingbroadcasters lacks a coherent policy basis, re-treading ground covered by the CompetitionBureau’s merger review and imposing regulatory

burdens that inhibit the pro-competitivereorganization of the communications sector.

Tese flaws in the CRC’s approach had numerousconsequences in recent major decisions (see Box1 for a summary and the Appendix for details ofthese cases).

Modernizing Communications Regulation

Best regulation practices are changing. Globally, thebest regulators try not to shape how a market willlook – as the CRC has been prone to doing inrecent rulings – but rather concentrate their effortson market power abuses. Tese principles applyequally in Canada’s communications industry, andthe federal government should reorganize how itregulates communications and broadcasting so that:

1. Te Competition Bureau has a mandate toprovide analysis of market power and competitiveeffects to the CRC;

2. Te CRC’s analysis expressly considers thepotential risks of regulatory intervention tolong-run competition and dynamic efficiency and

weighs these risks against the potential for, andlosses from, anti-competitive impairments;

3. Te CRC’s analysis considers whethercompetition law provides remedies for potentialanti-competitive conduct or deceptive marketingand defers to competition law as a framework ofgeneral application;

4. Te essential facilities doctrine is codified in theelecommunications Act , with the CRC’s analysis

of market power required to be legally equivalentto the determination of market power under theCompetition Act , with that legal analysis subject to

13 In 2006, the federal government issued a policy direction to the CRC that it “rely on market forces to the maximum

extent feasible…” (see Schultz 2008). However, this does not have the same rigour as applying legal tests as they exist in the

Competition Act to CRC rulings.


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Box 1: Te Limited Economic Reasoning of Recent CRC Rulings

Te CRC made a number of important rulings between 2013 and 2015. Tese rulings will have

major implications for the broadcasting and communications sector in the coming years, but they arefounded on limited economic reasoning. In these cases, the CRC ruled that:

• fibre-to-the-premises constituted an essential facility and the CRC granted competitors mandatoryaccess to BCE’s broadband services;

• BDUs have limits on requiring buyers to purchase packages of channels. Buyers can now “pick-and-pay” for only the channels they want;

• to qualify under the digital media exemption order, BDUs must offer Internet-streamed, on-demand video content to all Canadians regardless of whether they subscribe to a particular BDU;

• firms cannot offer their subscribers access to mobile V without incurring data usage charges unlesssuch a policy also applies to third-party mobile V streaming; and

• Bell’s acquisition of Astral Media could proceed on conditions of financial contributions to Canadianprogramming initiatives and the divestiture of various television and radio stations.

In all of these cases, the CRC either did not describe clearly the economic rationale for its rulingor it did not take into account the potential pro-competitive reasons for firm behaviour it forbid. TeCRC rulings may have come out differently if they had followed the legal and economic rigourrequired in provisions of the Competition Act . See Appendix for details on these rulings.

a correctness standard on appellate review;

5. Abuses of market dominance (e.g., unduepreference) clauses are removed from theelecommunications Act and addressed under theCompetition Act ’s abuse-of-dominance provisions;and

6. Te CRC no longer has authority to reviewmergers in the broadcasting sector.

o be clear, the CRC will still be the primaryregulator of the communications sector. Requiring

an independent analysis of market power andcompetitive effects by the Competition Bureau would leverage the comparative advantage of thisagency in rigorous economic analysis of markets(as also argued by Iacobucci and rebilcock, 2007).Moreover, it would ensure that the analyticalframework for assessing market power in thecommunications context is consistent with thatunder the Competition Act .

In decisions concerning alleged essentialfacilities and purported market failures that wouldrequire direct regulation (e.g., prescribed terms ofretail service or limitations on wholesale contractprovisions), the elecommunications Act shouldexpressly require the CRC to refer the matter tothe Competition Bureau. Te Competition Bureaushould be mandated to provide findings on marketpower and competitive effects based on a theory ofharm. As well, the Competition Bureau should be

authorized to highlight any risk regulation posesto competition and identify any Competition Actprovisions that might apply ex post to hypothesizedconduct in question (i.e., supplanting the role of exante regulation).

Te Competition Bureau’s submission shouldbe published with sufficient lead time to theproceedings so that parties may comment. If theCRC does not adopt the Bureau’s analysis, the


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CRC should provide reasons for its departure. As applies to determinations of law by theCompetition ribunal under the Competition Act ,the CRC’s analytical approach to assessing market

power should be subject to a correctness standardon judicial review. Should there be such judicialreview of a CRC decision, the market-powerfinding should be assessed in light of the Bureau’sdetermination and the sufficiency of the CRC’sreasons for departing that analysis. As Krauseand Bibic (2012) and Hunter, Gauvin and Krause(2008) argue, greater appellate scrutiny of CRCdecisions would ensure consistency and rigour inCRC analysis.

However, should the CRC find there is amarket failure that competition law cannot remedy,it should formulate regulatory measures to addressthat failure. As Iacobucci and rebilcock (2007)observe, the Competition Bureau is not a priceregulator, and the CRC has both unique sectoralperspective and capability for ongoing monitoringof compliance that would be critical to formulatinga viable remedy.

Spectrum Allocation andInnovation, Science and

Economic Dev elopment Policy

Another major policymaking body in Canadiancommunications policy is the Department ofInnovation, Science and Economic Development(ISED), formerly Industry Canada. It works closely with the Competition Bureau, but sets policy for wireless spectrum and foreign ownership.

Spectrum Allocation

Spectrum allocation presents an area, the radiospectrum, where an otherwise open-access, publicgood must be regulated to provide an orderlyallocation with the greatest public benefit. Tisinvolves technical considerations as well asdevelopment of allocation mechanisms, such ascentralized coordination of radio-spectrum ranges

for particular functions and auctions for spectrumblocks to maximize the public’s benefit from theexclusive use of this public resource. Auctions area very efficient way of allocating this spectrum.

However, Ottawa’s rulebook is not the best way toenhance competition.

As has been thoroughly reviewed by Church and Wilkins (2013), the previous government rejecteddeferring to competitive forces and designingauctions to allocate spectrum to the highest valueusage. Instead, its auction approach aimed atachieving a particular market structure involvingcaps on participants and set-asides for new entrants. Tis policy limited transfers of wireless spectrum

licenses to other carriers without a clear analyticalframework for assessing competitive consequences.

Church and Wilkins (2013) outline thesuboptimal technological consequences that mayresult from this policy such as high consumerprices and the slow introduction of the latesttechnology. Tey further argue that actual marketpricing contradicts the assumptions about lacklustrecompetition underlying the previous federalgovernment’s desire to bring new carriers into the

wireless market. Tat approach reflects the outdatedbelief that having more competitors is always betterand does not recognize the competitive constraintsfaced by incumbents (C.D. Howe InstituteCompetition Council 2011).

More fundamentally, the previous government’sapproach, which remains in place today, toshaping industry structure through a restrictedspectrum auction, departs from a deference tomarket forces and competition law principles.

Abuse of dominance provides a remedy for marketforeclosure as a result of acquiring essential inputs. As well, the Competition Bureau has recourseagainst asset acquisitions that prevent or lessencompetition.

Terefore, fostering competition rather thanincreasing the number of competitors should bethe principle informing spectrum policy, withdeference to competition law in the case of ademonstrable market failure. In the allocation of


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wireless spectrum, ISED should assign spectrumbands for functions and design auctions tomaximize the public benefits from this public good.However, ISED should not pick winners or seek

to regulate the structure of the communicationsindustry through spectrum allocation. If thereare competition concerns arising from wirelessspectrum acquisitions, the Competition Act providesremedies.

Remove Foreign Ownership Restrictions

Te Canadian government places restrictions onforeign ownership, both on spectrum purchase

and on firms engaged in communications andbroadcasting. At present, the elecommunications Act and its regulations require that a communicationscompany be Canadian controlled. Non-residentscannot control more than 20 percent of acommunications operating company, 33.3 percentof a holding company and 46.7 percent of votingshares. Te Broadcasting Act requires Canadianownership and control of the broadcasting system,including broadcast distribution undertakings.

However, these restrictions do not apply to firms with less than a 10 percent share of the Canadianmarket.

We recommend that Ottawa eliminate foreignownership restrictions both in spectrum andin communications and broadcasting. Teserestrictions limit the size of Canadian companiesand their available investment capital. Removingforeign ownership rules for both spectrum andcompanies themselves would bring Canadian firmsinto a more integrated global or North Americanmarket, whether through new entry or acquisitionby US or other firms. Eliminating ownership rules

would benefit Canadian consumers through lowercapital costs and quicker technology adoption.Canadian communications firms would becomemore integrated in a contiguous communications

market, which would allow firms to share the largefixed costs of setting up networks to serve manycustomers (C.D. Howe Institute CompetitionPolicy Council 2011).

Foreign ownership restrictions are alsounnecessary when ISED can use the nationalsecurity provisions and other provisions of the Investment Canada Act to block potential purchasesthat could compromise critical communicationsinfrastructure, or threaten the goals of broadcasting

policy. Te question of whether the attainmentof cultural policy goals requires forbidding ordiscriminating against foreign ownership per se isa hot topic – often too hot for rational discussion. While the business side of producing andexhibiting Canadian content is mostly the businessof Canadians at the moment, this is becauseof restrictions on foreign capital and businessexpertise.

One would think that Canadian owners,

executives and producers might have an inherentknowledge of the Canadian cultural market thatgives them an advantage over foreign competitors,even if ownership were more open to foreigners. And foreign owners would certainly not be exemptfrom the rules of the Canadian marketplace, suchas those governing distribution and exhibitionrights, limits on media concentration or supportfor Canadian content. Tere are many examplesof cultural products and media that recognizably

and successfully speak to the experience of onecountry’s culture, but have been financed, producedor distributed by entities from another.14 In

14 Moviegoers of not too long ago may recall widely acclaimed offerings such as Il Postino, Like Water for Chocolate, Shakespeare

in Love, Priscilla, Queen of the Desert and Fargo and associate the stories respectively with Italy, Mexico, England, Australia

and the US. Yet, the first three were released by an American-based company (Miramax) and the last two by a European-

based company (PolyGram). Tere are many similar examples in publishing and music recording.


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1 6

short, opening the door to foreign capital andexpertise would likely deepen the pool of resourcesavailable to Canadian cultural productions and workers, without sacrificing the production and

dissemination of Canadian content.

Conclusions a nd

Recommendations

Te federal government must reform Canada’scommunications regulatory regime to recognizethe sector’s rapid technological change. Regulationshould move beyond outdated presumptions ofthe sector being a natural monopoly and focus

instead on enabling dynamic competition amongservice providers. Te mandate of Canada’scommunications regulator should be to ensurecompetitiveness, facilitate market forces andintervene only in the case of demonstrable marketfailures that cannot be counteracted throughcompetition law.

In a reformed Canadian communicationsregulation regime, responsibilities should beclarified and streamlined. We recommend that:

1. Te Department of Canadian Heritage take thehelm on promotion of cultural programming.Specifically, it should replace broadcasters infinancing Canadian content, and the CRC shouldeliminate Canadian content exhibition quotas.

2. Te CRC defer to the Competition Bureaufor ex post enforcement against anti-competitiveconduct or deceptive marketing. A sector-specificregulator like the CRC will still have a role

in the future. But changing technologies meansthat it should draw on some of the regulatoryprinciples that exist in broader competition law.

3. Te CRC should be required to adopt amore rigorous approach to its own regulatoryinterventions, particularly in weighing risksof creating inefficiency through ex ante rulesagainst assessed benefits. For mandating accessto essential facilities, the CRC’s market-powerdetermination should be legally equivalent tothe determination of market power under theCompetition Act . Given the redundancy and

dubious benefit, the CRC’s role in reviewingbroadcasting mergers should be eliminated.

4. ISED allocate spectrum to maximize publicbenefit without any pre-determined policyaim for industry structure and remove foreignownership limits.


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1 7 Commentary 451

Many recent high-profile cases would likely have

been resolved in a different way if CRC decisions were more infused with competition policyprinciples. We address these cases in turn.

Assessing Market Power for “Essential Facilities”:

Fibre-to-the-Premises Mandatory Access15

In this decision, the CRC found that fibre-to-the-premises (FP) constituted an essentialfacility and granted competitors mandatory access

to BCE’s broadband services on the basis that: i)the essentiality test is not applied service-by-serviceand consumers are likely indifferent to the varioustechnologies; ii) the relevant product market was wholesale high-speed access (HSA) services; iii) wholesale HSA services, of which FP are part,are required to provide the downstream retailservice; iv) denial of wholesale HSA service wouldlimit competition in the downstream market suchthat incumbent carriers had market power in wholesale HSA services, including FP; v) last-mile HSA facilities could not be feasibly duplicatedby competitors; and vi) there was a competitiveincentive to continue investing in FP even ifmandatory access for competitors diminished theeconomic benefit to the incumbent.

Tis decision is problematic because: i) theCRC failed to consider whether the pricingof non-FP services, including the alreadymandated HSA access to legacy technologies,

would constrain the pricing of FP such that the

incumbent lacked market power for FP pricing;and ii) the CRC gave only cursory considerationto whether mandatory access would curtailinvestment in FP and did not consider thepotential lessening of dynamic competition fromthe reduction in returns in a risky new technology.

Indeed, the competition analysis would havebeen more rigorous in the Competition Act context:specifically, the CRC should have considered whether other HSA services constrained FP

pricing. Instead, the CRC included FP in theoverall product market for HSA services but thenfailed to consider whether the FP provider hadmarket power in provision of that particular service.

Furthermore, the CRC should have consideredthe impacts on dynamic efficiency, considering whether FP represented competition throughenhanced product quality. With an economicframework, the regulatory result may have indeedbeen the same as what transpired. However, a more

rigorous economic analysis would have brought moreclarity to questions of incumbents’ market power.Notably, in this matter, the Competition Bureau

declined to opine on whether the incumbentspossessed market power with respect to FP.However, the Bureau indicated that a findingthat FP was in the same product market asresidential wireline would point to a lack of FPmarket power.16

Appendix: Recent Broadcasting and Communications Cases

15 elecom Regulatory Policy CRC 2015-326 at paras. 36-52 – see: http://www.crtc.gc.ca/eng/archive/2015/2015-326.htm.

16 Competition Bureau, Submission by the Commissioner of Competition Before the Canadian Radio-television and

elecommunications Commission – elecom Notice of Consultation CRC 2013-551 – Review of wholesale services and associated

policies ( June 27, 2014), online at: http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03755.html.


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Mandating Pick-and-Pay:

Channel Unbundling under the Let’s Talk TV

Proceedings17

In this decision, the CRC required pick-and-pay on the basis that the measure wouldimprove consumer choice and flexibility despiteacknowledging certain BDU arguments thatbundling packages may, in fact, also enhanceconsumer choice.

Te analysis lacked any discussion of thecompetitive constraint on bundling from otherBDUs’ offerings or the pro-competitive rationalefor bundling.18 Te CRC’s analysis contrasts

with what would be required under the tied-selling provision of the Competition Act – i.e.,a demonstration that bundling would lessencompetition. Tis highlights an example of where,having not identified any market failure, the CRCshould have deferred to market forces and couldhave looked to competition law for the appropriatetest of whether intervention would benefitconsumers.

Requiring BDUs to Offer BDU-owned Video-on-Demand Services to Non-subscribers:

Prohibiting Video-on-Demand Service Exclusivity

under the Let’s Talk TV Proceedings19

In this decision, in order to qualify under the digitalmedia exemption order, the CRC required BDUsto offer “hybrid” video-on-demand services (i.e.,Internet-streamed, on-demand video content) to allCanadians regardless of whether they subscribe to aparticular BDU.

Admittedly, BDUs may continue to offerexclusive VOD content but will be subject tothe normal broadcasting requirements, includingCanadian content. BDUs have noted that this

places them at a competitive disadvantage tothe exempt non-BDU providers of Over-the- op content (e.g. Netflix) who do not face suchrequirements.

In prohibiting exclusive hybrid VOD services,the CRC did not consider, at least in its publicruling, any pro-competitive explanation for offeringexclusive video-on-demand services to BDUsubscribers as a means of competing for subscribers with rival BDUs or examine how or in what market

the exclusive services would impair competition. Again, a more rigorous analysis of the competitiveconsequences would have been required underthe tied-selling, exclusive dealing or abuse-of-dominance provisions of the Competition Act .

Importantly, the Competition Bureau hadprovided a submission for these proceedings,20 in which the Bureau contended that exclusive VODcontent could put competing ISPs at a competitivedisadvantage in attracting subscribers. It is notable

that the CRC did not reference this submission ordiscuss the competitive implications in rendering itsdecision. As discussed, the absence of the CRC’sexpress consideration of the competitive implicationsof exclusive VOD is a gap in the decision.

Te Bureau’s submission in this proceedingalso underscores the importance of imposing therigorous analytical frameworks required underthe Competition Act to proceedings that involvecompetition. While alleging that exclusive VOD

17 Broadcasting Regulatory Policy CRC 2015-96 – see: http://www.crtc.gc.ca/eng/archive/2015/2015-96.htm.

18 See Hunter, Iacobucci and rebilcock (2014), Crawford and Yurukoglu (2012) and Crawford and Cullen (2007) for further

rationales for bundling.

19 Broadcasting Regulatory Policy CRC 2015-86 at paras. 92-106 – see: http://www.crtc.gc.ca/eng/archive/2015/2015-86.

htm.

20 Competition Bureau, “Submission by the Commissioner of Competition Before the Canadian Radio-television and

elecommunications Commission – Broadcasting Notice of Consultation CRC 2015-87” (April 25, 2015) – see: http://

www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03910.html.


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content could hinder competition for subscribers,the Bureau’s submission failed to either discussthe possession of market power or consider thatoffering exclusive content to subscribers could

represent a non-price, pro-competitive response.Moreover, the Bureau’s submission failed toconsider the BDU’s incentive for making the VODcontent available (i.e. would the BDU invest in theVOD channel if prohibited from exclusivity?). In aproceeding under the Competition Act , the Bureau would have faced the burden to show that the BDUpossessed market power and the exclusive access tocontent impaired competition.

Zero-rated Mobile TV as Undue Preference:Prohibition on Unlimited Mobile TV Services to

Wireless Subscribers21

In this decision, the CRC prohibited zero-rated,(i.e., without incurring data usage) streaming ofmobile V services by Bell and Vidéotron as anundue preference for their subscribers to accessprovider-owned services compared with third-partymobile V services.

Te CRC speculated on the potential impactof zero-rate streaming on the growth of mobile V services but did not provide an analysis of anyalleged market failure or examine the competitiveconsequences of this conduct. Te CRC did notdescribe how or in what market competition mightbe impaired nor did it consider pro-competitiveexplanations for the conduct such as competitionfor subscribers with other mobile providers usingowned-content.

Te CRC’s analysis contrasts with theCompetition Act ’s abuse of dominance provisions

that require a demonstration of competitionlessening. Te lack of any analysis of the market,market power or lessening of competition inthe CRC’s undue preference determination

underscores the more rigorous legal standardsrequired under the Competition Act . It is unclear why the communications context requires the lessrigorous test through undue preference compared tothe abuse of dominance standard required in otherindustries.

Interestingly, a critical aspect of this decision, which is being appealed to the Federal Court of Appeal, concerned the dispute around whether themobile V provider was operating as a broadcaster

and, therefore, outside the elecommunications Act. Te CRC found that the use of communicationsfacilities brought the provider within theelecommunications Act and its prohibition onundue preference. Te example underscores theartificial separation between “broadcasting” and“communications” in a context of convergence where viewers may access the same content through various means.

Duplicating Merger Review for Broadcasters:CRTC’s “public interest” Approval in the Bell/

Astral Merger 22

After a lengthy process, the CRC approvedBell’s acquisition of Astral Media on conditions offinancial contributions to Canadian programminginitiatives and the divestiture of various televisionand radio stations. Te CRC’s “public interest”review and conditional approval followed anextensive examination and conditional approval bythe Competition Bureau.23

21 Broadcasting and elecom Decision CRC 2015-26 – see: http://www.crtc.gc.ca/eng/archive/2015/2015-26.htm.

22 Broadcasting Decision CRC 2013-310 – see: http://www.crtc.gc.ca/eng/archive/2013/2013-310.htm.

23 Competition Bureau, “Competition Bureau Review of the Proposed Acquisition of Astral by Bell” (March 4, 2013), online

at: http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03544.html


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In the backgrounder of its conditionalapproval document, the Bureau noted the entities’programming services are high-demand “musthaves” for other distributors. Te Bureau also

identified concerns about the market power thatthe new vertically integrated entity would wield innegotiating with programmers and the potentialfor raising rivals’ costs. Consequently, the Bureau’sconditional approval required divestitures to addresscompetitive concerns around increased prices, lessinnovation and reduced V programming choice.

Following the Bureau’s conditional approval,the CRC held a public process to considerthe public interest and evaluate “a wide set of

factors,” including the nature of programming andservice to the communities involved, as well asregional, social, cultural, economic and financialconsiderations. Focal, though not determinative, was the funding (so-called “tangible benefits”) toCanadian programming that the combined entity would be required to contribute. Discrete issuesconsidered by the CRC were the concentrationof ownership in television and radio, impacts onindependent production, vertical integration and

anti-competitive behaviour.On the latter two competition-related aspects,

the CRC made summary findings without cleareconomic reasoning. Specifically, the CRC statedthat vertical integration could “impede the efficientdelivery of programming at affordable rates andreasonable terms of carriage and ultimately workagainst a competitive and dynamic marketplace inthe Canadian broadcasting system” and asserted

that “consolidation provides the whole entity (i.e.,both programming and distribution undertakings) with greater opportunity and more incentive toact in an anti-competitive manner.” Te CRC,

therefore, imposed conditions in respect ofcompetition atop the conditions required by theCompetition Bureau.

Te review achieved the extraction of somesavings to shareholders from the takeover,channelling a slice of these economic gains to fundCanadian programming. However, the economicbenefit from the duplicative review is unclear. TeCRC gave only a cursory analysis of competitiveeffects reflected in its sparse reasons on vertical

integration and anti-competitive conduct comparedto the Competition Bureau’s more rigorousbackgrounder.

Moreover, a public interest review process aimedat funding for Canadian content from a merger inthe broadcasting sector risks negatively affecting thecompetitiveness of broadcasters who must compete with globally available conduits for content thatare unencumbered by such profit-skimming from aproposed transaction. Tat is, Canadian broadcasters

are encumbered by costs and constraints that theirunregulated international competitors do notface, stifling their flexibility and attractiveness toinvestors. Again, accepting Canadian programmingprovides a public good, it is not clear that a tax onmerger transactions involving a broadcaster is themost efficient revenue base to fund that benefit.


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May 2016 Gray, David, and Colin Busby.Unequal Access: Making Sense of EI Eligibility Rules and How to Improve Tem. C.D. Howe Institute Commentary 450.

May 2016 Pierlot, James, and Barry Gros. “DC Plans and the ORPP: Why Fees Matter.” C.D. HoweInstitute E-Brief.

May 2016 Robson, William B.P., and Alexandre Laurin. Worse Tan It Looks:Te rue Burden and Risks ofFederal Employee Pension Plans. C.D. Howe Institute Commentary 449.

April 2016 Ciuriak, Dan, Ali Dadkhah, and Jingliang Xiao. “Better In than Out? Canada and the rans-Pacific Partnership.” C.D. Howe Institute E-Brief.

April 2016 Sen, Anindya. “Joint Venture: A Blueprint for Federal and Provincial Marijuana Policy.” C.D.Howe Institute E-Brief.

April 2016 Busby, Colin, and Robson, William B.P. Controlling the Public Purse: Te Fiscal Accountability ofCanada’s Senior Governments, 2016. C.D. Howe Institute Commentary 448.

April 2016 Klassen, Ken. “Auditing the Auditors: ax Auditors Assessments and Incentives.” C.D. Howe

Institute E-Brief.March 2016 Parkin, Michael. “Mounting Evidence: Findings from Natural Experiments in Inflation

argeting.” C.D. Howe Institute E-Brief.

March 2016 Found, Adam. “apping the Land: ax Increment Financing of Infrastructure.” C.D. HoweInstitute E-Brief.

March 2016 Robson, William B.P., and Alexandre Laurin. Where the Bucks Stop: A Shadow Federal Budget for 2016. C.D. Howe Institute Commentary 447.

March 2016 Beine, Michel, Robin W. Boadway, and Serge Coulombe. Moving Parts: Immigration Policy, Internal Migration and Natural Resource Shocks. C.D. Howe Institute Commentary 446.

March 2016 Schwanen, Daniel. “National Priorities 2016 – At the Global Crossroads: Canada’s radePriorities for 2016.” C.D. Howe Institute E-Brief.

February 2016 Vegh, George. “Learning from Mistakes: Improving Governance in the Ontario ElectricitySector.” C.D. Howe Institute E-Brief.


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6 7 Y o n g e S t r e e t , S u i t e 3 0 0 ,

T o r o n t o , O n t a r i o

M 5 E 1 J 8

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Changing the Channel on Canadian Communications Regulations

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