Background

On April 4, 2014, the Ontario Ministry of Northern Development and Mines announced that it had reached an agreement to sell Ontera, a wholly-owned subsidiary of the Ontario Northland Transportation Commission, to Bell Aliant Regional Communications Inc.

Bell Aliant is the incumbent telecommunications provider in Atlantic Canada and much of rural Quebec and Ontario, including the vast majority of Northern Ontario. In Northern Ontario, it currently offers telephone services, wireline broadband internet services and, in a number of localities, television services under the NorthernTel and Bell brands. It also owns and operates the high-capacity fibre-optictelecommunications lines that provide long-distance voice, video and data connectivity between its Northern Ontario operations and the wider national and international telecommunications network.

Based in North Bay, Ontario, Ontera is an integrated telecommunications provider with extensive operations in Northern Ontario. Its primary line of business is the ownership and operation of an approximately 1000 kilometre high-capacity fibre-optictelecommunications line (or “ring”) that provides voice, video and data connectivity to Southern Ontario for telecommunications companies operating in Northern Ontario, including and especially those companies that compete directly against Bell Aliant at the retail level in the provision of wireline telecommunications services.

Analysis

The transportation of voice, video and data signals over long distances through high-capacity fibre-optic telecommunications lines is known as “backhaul” (or more precisely, “interexchange transport”). Backhaul services are the lifeblood of telecommunications across Canada’s vast geography and the fibre-optic lines through which these services are provided are the electronic highways that connect local telephone and cable networks to the broader national and international telecommunications network, thereby enabling customers of those local networks to place long-distance telephone calls, access high-speed internet services, and obtain wireline television services.

Bell Aliant and Ontera currently own and operate the only two backhaul networks that connect many Northern Ontario communities to networks outside the region. Households and businesses in most of the Relevant Communities generally have the option of purchasing wireline telecommunications services from two competing firms:

1. Bell Aliant, a vertically integrated telephone company that is able to supply itself with backhaul services; and
2. a non-vertically integrated competitor that is dependent on Ontera for backhaul services. Furthermore, the Bureau determined that all the Relevant Communities would likely have experienced expanded and improved wireline telecommunications services in the future as a result of the dynamic rivalry between Bell Aliant and its competitors.

Given this market structure, the Bureau was concerned that the proposed transaction would likely enable and incent Bell Aliant to either partially or fully foreclose its primary competitor in each of the Relevant Communities from access to Ontera’s fibre-optic ring. The Bureau was concerned that such a foreclosure would likely affect the ability of those competitors to compete effectively, thereby resulting in materially higher prices, less choice and materially lower service quality for certain wireline telecommunications services. The Bureau was also very concerned that a dampening or elimination of the dynamic rivalry that currently exists between Bell Aliant and its downstream competitors would have substantially prevented expansion and substantially lessened innovation, network investment and technological improvements in the Relevant Communities.

The Bureau evaluated the proposed transaction using the approach to vertical mergers outlined in the Bureau's Merger Enforcement Guidelines. It determined that the relevant upstream markets were the provision of high-bandwidth backhaul services on various origin and destination pairs across Ontera’s backhaul network and that the relevant downstream markets in each of the Relevant Communities were the provision of telephone, television and/or wireline broadband internet services, including bundles of these services.²

The Bureau also concluded that barriers to entry into both the upstream markets and the downstream markets are high due to the sunk costs associated with building out a network and establishing a market presence, the importance of economies of scale in achieving viability, and the challenge of overcoming the historically strong positions of well-entrenched incumbents. The likelihood of entry into many of the Relevant Communities was further compromised by their relatively low population densities.

The Bureau determined that post-transaction Bell Aliant:

1. would likely have the ability to foreclose its downstream rivals from access to backhaul services because it would be the only entity with backhaul infrastructure serving the Relevant Communities; and
2. its ability to foreclose was unlikely to be constrained by entry.

The Bureau also found that Bell Aliant would likely have strong incentives to engage in vertical foreclosure. The Bureau’s review confirmed that the margins on backhaul services are generally significantly lower than those earned on the sale of telephone, television and wireline broadband internet services to households and businesses downstream. Furthermore, data obtained over the course of the review indicated that Bell Aliant had a high likelihood of recapturing at the downstream level profits lost from foreclosure upstream (i.e. such a strategy would cause a sizable number of retail customers to switch from the unintegrated competitor to Bell Aliant’s own retail operations).In addition, the data indicated that Bell Aliant had a large pre-existing customer base downstream on which to enjoy increased margins from a foreclosure strategy. Strategic documents produced by the parties pursuant to requests for information offered further insight into the merged entity’s post-transaction incentives.

Lastly, compelling evidence and information obtained from the parties, third parties, and the public record clearly indicated that the rivalry between Bell Aliant and its downstream competitors in Northern Ontario is vigorous and dynamic and that by compromising that rivalry, the proposed transaction would likely result in a substantial lessening and/or prevention of competition in the relevant downstream markets.

Conclusion

In light of the above, the Bureau conveyed its competition concerns to the parties. Following an extensive dialogue with the Bureau regarding these concerns, Bell Aliant agreed to provide to Eastlink a 20-year IRU to between two and four strands of fibre on the entirety of Ontera’s backhaul network south of Kapuskasing, Ontario. The Bureau has carried out significant market testing of this agreement and is satisfied that it addresses the competition issues in this matter and that in light of the agreement, the proposed transaction is unlikely to result in a substantial lessening or prevention of competition with respect to the sale of the relevant telecommunications services in the Relevant Communities. As a result, the Bureau will not challenge the proposed merger.

The Relevant Communities are: