Why vertical integration in Canada’s communications market should be a concern to Canadians

Maple leafThe average consumer has no idea what vertical integration means, let alone why he or she should be concerned about it.  But that doesn’t make vertical integration in the broadcasting and telecommunications markets any less of a threat to Canadians.

Vertical integration generally means ownership by one company of more than one element of the production or supply chain of a good or service.  It’s like owning the factory that makes potato chips and also the grocery store that sells them.  Maybe also the farm that grows the potatoes to make the chips.

In the broadcasting industry, the chain includes the “production company” which creates “programming”, the “programming service” which aggregates the programming and the “distribution service” which provides access via cable, satellite or IPTV to programming services by the ultimate consumer.  The CRTC has been grappling with concerns related to vertical integration in the broadcasting industry for the past few years after it approved the huge acquisition by Shaw Cable of the many programming services owned by the former Canwest Global and then shortly thereafter the equally significant, if not more so, acquisition by Bell of the many programming services owned by the former CTVglobemedia.

The CRTC has recognized that vertical integration in the broadcasting industry can be harmful to competition and therefore to consumers, and that’s why it has adopted many safeguards as part of a new policy framework.  The CRTC’s regulatory framework related to vertical integration can be found here. The CRTC was also sufficiently concerned with the market power that would result from too much vertical integration that it denied Bell’s attempt to acquire Astral Media last October. (link)

But as we embark in yet another proceeding to consider further vertical integration in the broadcasting market (Bell/Astral round 2), it is worthwhile to stop and consider whether the concerns relating to vertical integration are truly being addressed.

The biggest concern expressed by independent distributors such as TELUS (and also less vertically integrated players like Rogers) relates to access to content controlled by vertically integrated companies.   You see, when a vertically integrated company like Bell (which is Canada’s largest local and long distance telephone company,  largest national satellite direct-to-home television distribution undertaking, second largest national wireless carrier, largest ISP and also operates a growing regional IPTV television distribution service) owns programming services like CTV Network, TSN and Discovery Channel, it has every incentive to use the content it controls to drive consumers to its own distribution services.  It might seek to offer this content exclusively on Bell services to entice consumers to switch to Bell.  It makes rational business sense to use such content exclusives to drive subscriptions to its distribution services because Bell knows that it makes a lot more money by selling subscriptions its distribution services (satellite TV, wireless, ISP, etc.) to consumers than selling advertising on its programming services or collecting wholesale subscription fees for its specialty services from other distributors.

And despite new CRTC rules that allegedly prohibit such exclusives by vertically integrated distributors, they are still happening in the market today.  These exclusives, however temporary, are eroding the competitiveness of independent distributors which are the best defence against increased prices for consumers and lesser quality of service.

These content exclusives are occurring in different ways.  For example, Shaw recently was able to get away with making itself first to launch Movie Central on the go despite repeated attempts by TELUS to launch this premium Movie Central content on its own Optik on the go platform launched months before Shaw.  When TELUS complained and sought to invoke the CRTC’s “anti-competitive head start” rule, which was supposed to prevent this type of competitive advantage being exploited by vertically integrated companies such as Shaw, the CRTC found that the rule could not apply to this situation. (Read about the CRTC decision)

The CRTC’s rules are set out by platform, i.e. there are separate rules that apply to TV distribution and to “new media” (now renamed “digital media”).  The “on the go” service that was at issue in this complaint related to a TV service (Movie Central) that was being offered on a “digital media” platform (meaning that it is delivered over the Internet or received on mobile devices).  Shaw was able to exploit a loophole in the CRTC’s vertical integration framework by making its “on the go” service contingent to the “television” subscription to the Movie Central service.  In such circumstances, the rules in the Digital Media Exemption Order could not apply because the service was not restricted “based on a consumer’s subscription to a specific mobile or retail Internet access service”.  Rather, Shaw restricted its Movie Central on the go service to subscribers to the Movie Central service on its cable TV service.  TELUS therefore argued that in the circumstances the Pay Television Regulations should to apply since the Movie Central on the go service was an extension to the Movie Central pay TV service but the CRTC refused to accept this argument and the complaint was denied on very technical grounds leaving the loophole gaping open.

Other cases of exclusivity of content that we are seeing in the market today aren’t the result of outright refusal to provide access to the content but rather unreasonably prolonged negotiations.  This has to be the oldest trick in the book and yet allowed to occur.  For example, Bell is currently the only provider of lots of Bell Media content on a TV everywhere basis.  Why?  Not because Bell refuses to provide the content on this basis to other distributors (it was chastised enough for this during the hearing last fall regarding its failed attempt to acquire Astral Media); rather, now Bell remains ostensibly the exclusive provider of its Bell Media content on other platforms because the offer it has made to other distributors is unreasonable.  Certainly the offer that was made to TELUS is unreasonable and that is why TELUS is unable to offer this content on an “on the go” basis to its subscribers.  Presumably the offers made to other distributors were unreasonable as well since no other distributor is currently carrying the same extent of Bell Media content on other platforms as Bell.

You might ask, have you taken this to the CRTC for arbitration?  The CRTC does indeed provide dispute resolution, including arbitration if parties can’t agree on terms to offer content but TELUS has some strong reservations about the effectiveness of the current arbitration framework.  Its past experience with arbitration for content services (not surprisingly relating to Bell Media services) has demonstrated that there is an unequal sharing of risk between parties in the arbitration process.  This is explained in greater detail in our final submission in the first Bell/Astral proceeding which can be found here.

All of these deficiencies in the current safeguards relating to vertical integration further erode the protection of consumers against the harm caused by abuse of market power by the large vertically integrated broadcasting and telecommunications companies.

The CRTC has thus far treated vertical integration as a broadcasting issue but ultimately it is much more than that.  Vertically integration in Canada has far reaching effects, much further than mere television distribution.  That is because those same vertically integrated companies in the broadcasting sector are also Canada’s biggest telecommunications providers.

Canada has an internationally admired model of platform competition that has seen world leading deployments of fibre to the node, gigabit passive optical networks, DOCSIS 3.0, high speed packet access (HSPA), high speed packet access plus (HSPA+) and long term evolution (LTE) wireless deployments to ensure that Canada remains at the vanguard of technology. Continued investment by these private companies is vital to the success of Canada’s economy.  But now vertical integration has injected new incentives and opportunities for anti-competitive behaviour in the communications sector which puts competition in the communications sector at risk.

We’ll have some further comments on all this in our submission to the CRTC regarding Bell’s second attempt to acquire Astral Media.  We hope that others will speak up as well.  Interventions must be filed on or before April 5th.  The CRTC’s Notice of Public Hearing on this important matter can be found here.