Before the Canadian Radio-Television and Telecommunications Commission

BEFORE THE CANADIAN RADIO-TELEVISION AND TELECOMMUNICATIONS COMMISSION

IN THE MATTER OF

REVIEW OF WHOLESALE MOBILE WIRELESS SERVICES, TELECOM NOTICE OF CONSULTATION CRTC 2014-76, 20 FEBRUARY 2014

INTERVENTION OF CANADIAN NETWORK OPERATORS CONSORTIUM INC.

15 MAY 2014 TABLE OF CONTENTS EXECUTIVE SUMMARY ...... 1 1.0 INTRODUCTION ...... 5 1.1 Relief Requested ...... 6 1.2 Structure of Submission ...... 7 2.0 THE COMPETITIVE STATE OF CANADA’S WIRELESS MARKET...... 8 2.1 Importance of Competitive Markets & Assessing Levels of Competition ...... 8 2.2 Market Concentration in the Canadian Wireless Market ...... 9 2.2.1 A Portrait of the National Wireless Market ...... 9 2.2.2 Provincial-Level Analysis ...... 12 2.3 Service Pricing ...... 15 2.4 Profitability of Carriers ...... 18 2.4.1 Accounting profits ...... 18 2.4.2 Economic profit ...... 21 2.5 A Closer Look at the Evidence Presented in the C-W Report ...... 22 2.6 Barriers to Entry ...... 24 2.6.1 Spectrum ...... 25 2.6.2 Roaming ...... 31 2.6.2.1 The Industry Canada Framework has not resulted in Competitive Wholesale Roaming Services ...... 32 2.6.2.2 The Status Quo leads to breaches of s.27(2) of the Act ...... 35 2.6.2.3 Domestic roaming rates are not just and reasonable and remedial action is required ...... 36 2.6.3 Antenna Tower and Site Sharing ...... 37 2.6.3.1 The Industry Canada Framework has not resulted in Competitive Wholesale Antenna Tower and Site Sharing ...... 38 2.6.4 Vertical Integration and Service Bundling ...... 41 2.6.5 Deployment of New Technologies ...... 43 2.6.6 Coordinated Interaction ...... 44 2.7 Wireless Services are not Substitutable with Wireline Services ...... 46 2.7.1. Technical Non-Substitutability ...... 47 2.7.2 Economic (Price) Non-Substitutability ...... 48 2.8 Conclusion ...... 51 3.0 MARKET DEFINITION AND THE ESSENTIALITY OF WHOLESALE WIRELESS SERVICES ...... 53 3.1 Market Definition ...... 53 3.1.1 Product Markets ...... 53 3.1.2 Geographic Markets ...... 54 3.2 The Applicable Criteria and Tests to Justify Regulatory Intervention ...... 55 3.2.1 Telecom Decision 94-19 Criteria ...... 55 3.2.2 The Telecom Decision 2008-17 Essential Services Test ...... 55 3.2.3 The Essential Services Test as Revised by CNOC in the Proceeding Initiated by TNC 2013-551 ...... 56 3.3 The Application of the TD 94-19 Criteria and Essential Services Tests to Wireless Services ...... 57 3.3.1 Wholesale Roaming and Full MVNO Services ...... 57 3.3.1.1 TD 94-19 Criteria ...... 57 3.3.1.2 Essential Services Test ...... 59 3.3.2 Antenna Tower and Site Sharing Services ...... 60 3.3.2.1 TD 94-19 Criteria ...... 60 3.3.2.2 Essential Services Test ...... 62 3.4 Conclusions ...... 63 4.0 PROPOSED REMEDIES ...... 63 4.1 Introduction ...... 63 4.2 What is a Mobile Virtual Network Operator (“MVNO”)? ...... 64 4.3 Technical Primer ...... 66 4.4 Technical Implementation Proposal ...... 69 4.4.1 Principles for the Provision of MVNO Services ...... 69 4.4.2 Technical Implementation Details ...... 70 4.4.2.1 Overall Design ...... 70 4.4.2.2 Interconnection ...... 71 4.4.2.3 Voice-Traffic Interconnection ...... 71 4.4.2.4 SMS Traffic Interconnection ...... 72 4.4.2.5 Data Traffic Interconnection ...... 72 4.4.2.6 Phone Numbers and Point Codes ...... 73 4.4.2.7 Billing and Settlement ...... 73

4.4.2.8 Pricing ...... 73 4.5 MVNO benefits ...... 74 4.5.1 Ladder of Investment ...... 74 4.5.2 The Benefits of a Full MVNO Framework ...... 75 4.5.2.1 The General Advantages of the Full-MVNO Model ...... 75 4.5.2.2 Spectrum Scarcity ...... 76 4.5.2.3 Vertical integration and service bundling ...... 76 4.5.2.4 Deployment of new technologies ...... 76 4.6 A Tariffed Wholesale Roaming Service Is Required ...... 77 4.6.1 Seamless Roaming ...... 77 4.7 Tariffed Tower and Site Sharing Services Are Required ...... 79 4.8 Regulatory Considerations ...... 79 4.8.1 Equality of Inputs ...... 79 4.8.2 The Commission’s Jurisdiction to Order an MVNO Interconnection Remedy .... 80 5.0 THE DETERMINATIONS SOUGHT ARE CONSISTENT WITH THE TELECOMMUNICATIONS POLICY OBJECTIVES AND POLICY DIRECTION ...... 82 5.1 The Determinations Sought in this Submission Promote the Telecommunications Policy Objectives ...... 82 5.2 The Determinations Sought in this Submission Are Consistent with the Policy Direction ...... 84 6.0 CONCLUSION AND REQUEST TO APPEAR AT HEARING ...... 86 6.1 Relief Sought ...... 86 6.2 Request to Appear ...... 87 APPENDIX ...... 88

iii

LIST OF FIGURES

Figure 1: Revenue and Subscriber Growth in the Canadian Wireless Market, 2008-2012 .... 10 Figure 2: Revenue Shares of Wireless Services, 2012 ...... 11 Figure 3: Subscriber Market Shares in Canada, 2012 ...... 12 Figure 4: Average Monthly Prices of Wireless Voice Services, PPP adjusted $CDN ...... 16 Figure 5: Average Monthly Prices for Mobile Internet (greater than or equal to 3G Technology), PPP-adjusted $CDN ...... 17 Figure 6: EBITDA Margins in the Wireless Sector, International Comparison, 2004-2012 .. 19 Figure 7: FCF Margins in the Wireless Sector, International Comparison, 2004-2012 ...... 19 Figure 8: Average Revenue per User (US$, 4Q2012) ...... 24 Figure 9: Summary of Holdings for Cellular, PCS, AWS and BRS Spectrum ...... 27 Figure 10: Summary of Holdings and Available Cellular, PCS, AWS, BRS and 700 MHz Spectrum (Total 544 MHz) ...... 28 Figure 11: Overall Spectrum Licence Awards ...... 30 Figure 12: Illustration of Spectrum Capacity Compared to Fibre Optic Strand Capacity ...... 47 Figure 13: Baseline Monthly Costs for Average Wireline User to Substitute with Wireless Service ...... 51 Figure 14: Areas of Responsibility for Various Mobile Wireless Operator Types ...... 65 Figure 15: High Level View of IMS NNI ...... 70 Figure 16: Illustration of IBCF Usage between MVNO and MNO ...... 70 Figure 17: Bell GSubscriber Market Share, by province, 2008-2012 ...... 89 Figure 18: TCC Subscriber Market Share, by province, 2008-2012 ...... 90 Figure 19: Rogers Subscriber Market share, by province, 2008-2012 ...... 91 Figure 20: Other Subscriber Market Share, by province, 2008-2012 ...... 92 Figure 21: New Entrants Subscriber Market Share, by province, 2008-2012 ...... 93

LIST OF TABLES

Table 1: Wireless Subscriber Market Share by Province, 2012 (%) ...... 13 Table 2: Canadian Ranking in 2013 OECD Price Basket Analysis ...... 17 Table 3: EBITDA and Free Cash Flow for Incumbent WSPs in Canada, 2013 ...... 20 Table 4: EBITDA Margins in Canada, Sectoral Comparison, 2012...... 21 Table 5: ARPU Comparison, Canada, US and UK ...... 24 Table 6: Bell Group Subscriber Market Share, by province, 2008-2012 ...... 88 Table 7: TCC Subscriber Market Share, by province, 2008-2012 ...... 89 Table 8: Rogers Subscriber Market Share, by province, 2008-2012 ...... 90 Table 9: Other Subscriber Market Share, by province, 2008-2012 ...... 91 Table 10: New Entrants Subscriber Market Share, by province, 2008-2012 ...... 92

EXECUTIVE SUMMARY

ES1- Based on an analysis of market concentration, service pricing, incumbent profitability, barriers to entry and substitutability of wireless and wireline services – the state of mobile wireless competition in Canada is tenuous, at best. The evidence demonstrates that the introduction of new players, by way of a complementary wholesale market, will strengthen the market and discipline the market power of incumbents.

ES2- The national mobile wireless market is characterized by broad coverage of mobile wireless services, rapid technological evolution, very large revenues and dominance by a small number of national incumbents who control over 90% of the Canadian mobile wireless market (2012). These levels of market concentration are generally mirrored in the provinces. Overall, the three new entrants have a combined market share that is less than 3%1.

ES3- In terms of service pricing, Canada rates poorly in the international rankings for several different baskets of mobile wireless services including voice, text, data and other features.

ES4- With regards to the profitability of carriers, Canada has above-average earnings before interest, taxes, depreciation and amortization (“EBITDA”) margin in addition to above average free cash flow (“FCF”). Both of these margins were significantly higher than those of the United States. Most notably, the EBITDA margin of the Canadian mobile wireless sector is well above that of other high-capital expenditures (“CAPEX”) sectors such as oil and gas extraction and utilities.

ES5- In Canada, licensed spectrum is a finite resource that is subject to extreme demand. Moreover, spectrum auctions are infrequent and winning bids require very deep pockets. As a result of these conditions, incumbent carriers perpetually monopolize spectrum assets generally and the prime spectrum bands in particular. Consequently, access to

1 Canadian Radio-television and Telecommunications Commission, “Communications Monitoring Report September 2013” (“2013 CMR”), p. 161, Figure 5.5.5. The 2013 CMR may be viewed at http://www.crtc.gc.ca/eng/publications/reports/policyMonitoring/2013/cmr2013.pdf.

licensed spectrum has become a significant barrier to entry into the Canadian mobile wireless market.

ES6- To further aggravate the barrier that constitutes access to licensed spectrum, some mobile wireless incumbents either underutilize or “warehouse” significant portions of their spectrum. Clearly, this amounts to inefficient use of spectrum that could otherwise be placed in the hands of the new entrants.

ES7- Industry Canada’s framework for mandated roaming services has failed. The framework relies on negotiations that are in essence “take it or leave it” propositions of rates, terms and conditions by the incumbents. This is so because of the significant market power that the incumbents enjoy over national and regional wholesale roaming services and the bargaining power that they leverage from it. The final offer arbitration mechanism devised by Industry Canada is not suitable for resolving inequitable wholesale roaming arrangements.

ES8- The Commission has also recognized a situation of discrimination with regards to the rates that some carriers charge to domestic roaming partners in Telecom Notice of Consultation 2013-6852 (“TNC 2013-685”). In CNOC’s view, the approach that the incumbents have taken with regards to wholesale roaming services is nothing short of a full breach of s.27(2) of the Telecommunications Act3 (the “Act”) and regulatory intervention by the Commission is warranted.

ES9- Industry Canada’s framework for mandated antenna tower and site sharing has also failed to achieve its intended goals. Incumbents possess sufficient market power in this category of services to negotiate advantageous arrangements amongst themselves – but entrants do not possess such advantages. CNOC is particularly concerned by the costs, delays and access denials or suboptimal access allotments offered by incumbents due to reservations for “imminent future use”. As is the case for wholesale roaming, Industry Canada’s final

2 Wholesale mobile wireless roaming in Canada – Unjust discrimination / undue preference, Telecom Notice of Consultation CRTC 2013-685, 29 January 2014. 3 Telecommunications Act, S.C. 1993, c. 38, as amended. 2

offer arbitration mechanism has failed in this area. Remedial regulatory intervention by the Commission over antenna tower and site sharing services is therefore required.

ES10- Vertical integration and service bundling by the incumbents represents a significant barrier to entry that protects incumbents’ market position and prevents competitive rivalry from materializing to the point where it could otherwise moderate or even eliminate the potential of incumbents to earn supernormal profits.

ES11- Only the incumbents are able to quickly deploy massive capital investments to adopt new technologies by upgrading networks and absorbing corresponding operating costs. As a consequence, the unavoidable lag that entrants face in the adoption of new technologies constitutes a significant barrier to entry.

ES12- The risk of sophisticated coordinated interaction amongst incumbents may also constitute a barrier to entry. In fact, the Competition bureau has stated that Canadian mobile wireless markets are characterized by other factors that, when combined with high concentration and very high barriers to entry and expansion, create a risk of coordinated interaction in these markets.4

ES13- Wireless and wireline services are generally not substitutable with each other from either a technical or economical perspective. This reality further accentuates the tenuous state of competition in Canada’s mobile wireless market.

ES14- For the purpose of market analysis, the applicable geographic markets should be both national and regional (i.e., ten provincial and one pan-territorial).

ES15- The application of the Telecom Decision CRTC 94-195 (“TD 94-19”) criteria to mandated wholesale Full MVNO, roaming and antenna tower and site sharing services suggests that regulation of these services is required. Indeed, the application of the Telecom Decision

4 Intervention of the Commissioner of Competition dated 29 January 2014 in the proceeding initiated by TNC 2013- 685, para 9. 5 Review of Regulatory Framework, Telecom Decision CRTC 94-19, September 16, 1994. 3

CRTC 2008-176 (“TD 2008-17”) essential services definition, and the application of this definition as modified by certain CNOC recommendations7, confirm that all of these services are essential services.

ES16- The Commission should recognize the essential character of the above noted services and order the following relief: (1) tariffed national and regional wholesale Full MVNO services; (2) tariffed wholesale national and regional wholesale roaming services (inclusive of seamless roaming); and (3) tariffed national and regional wholesale tower and site sharing services. All services should be based on Phase II costs plus a reasonable mark-up and subject to equality of inputs principles. This form of regulatory relief is the only means on ensuring that competitors are able to overcome the high barriers to entry and expansion that characterize the mobile wireless market.

ES17- The determinations sought by this submission are consistent with the Policy Objectives of the Act and the Policy Direction.

6 Revised regulatory framework for wholesale services and definition of essential service Telecom Decision CRTC 2008-17, 3 March 2008. 7 Review of wholesale services and associated policies, Telecom Notice of Consultation CRTC 2013-551, 27 October 2014, as amended by Review of wholesale services and associated policies, Telecom Notice of Consultation CRTC 2013-551-1, 8 November 2013. The revisions proposed by CNOC to the definition of “essential services” are set out at paragraph 119 of its intervention dated 31 January 2014 in that proceeding as follows: (i) The facility is required as an input by competitors to provide telecommunications services in a relevant downstream market; (ii) The facility is controlled by a firm that possesses upstream market power such that not providing access to the facility would likely result in a substantial lessening or prevention of competition in the relevant downstream market; and (iii) It is not economically efficient for competitors to duplicate the functionality of the facility. 4

1.0 INTRODUCTION

1. In Telecom Notice of Consultation 2014-768 (“TNC 2014-76”), the Commission initiated a proceeding to determine whether the wholesale mobile wireless services market is sufficiently competitive and, if not, what regulatory measures are required. The Commission prefaced this by highlighting the importance of mobile wireless services in Canada – a segment of the telecommunications industry that has generated $20.4 billion in revenue and serves almost 28 million wireless service subscribers in Canada who rely on voice text and data services on their wireless devices to satisfy their ever evolving communications needs9.

2. Based on the supporting evidence presented in this intervention, CNOC clearly demonstrates that the wholesale mobile wireless market is not competitive. Accordingly, CNOC is proposing remedial measures that the Commission should take to correct the market failures that have deprived Canadian consumers of competitive retail mobile wireless services and prices. These measures promote the objectives of the Act and adhere to the Policy Direction10.

3. CNOC’s position is notably aligned with the views of the Competition Bureau, as articulated in the proceeding initiated by TNC 2013-685. In its submission, the Competition Bureau referred to the shortcomings of the expert report prepared by Jeffrey Church and Andrew Wilkins11 (the “C-W Report”) (referenced in the TNC 2013-685 proceeding by the Companies12) when stating:

8 Review of wholesale mobile wireless services, Telecom Notice of Consultation 2014-76, 29 September 2014. 9 Id. at para 1. 10 Order Issuing a Direction to the CRTC on Implementing the Canadian Telecommunications Policy Objectives, P.C. 2006-1534, 14 December 2006, SOR/2006-355, Canada Gazette Part II, Vol. 140. No. 26, 27 December 2006 (“Policy Direction”). 11 Jeffrey Church and Andrew Wilkins, “Wireless Competition in Canada: An Assessment”, University of Calgary School of Public Policy SPP Research Paper, September 2013, available online at: http://www.policyschool.ucalgary.ca/?q=content/wireless-competition-canada-assessment. 12 Intervention of Bell Mobility Inc., Bell Aliant Regional Communications, Limited Partnership (in respect of its subsidiaries NorthernTel, Limited Partnership; Télébec, Limited Partnership and KMTS); and Northwestel Inc., and the members of the Comcentric Group (Bruce Telecom of the Municipality of Kincardine, Brooke Telecom Co-Operative Limited, Hay Communications Co-Operative Limited, Huron Telecommunications Co-Operative Limited, Quadro Communications Co-Operative, Tuckersmith Communications Co-Operative Limited, and Mornington Communications Co-Operative Limited) dated 29 January 2014 in the proceeding initiated by TNC 2013-685, para 14. 5

“(…) the C-W Report does not provide adequate support for Bell’s claims that mobile wireless markets in Canada are competitive. Instead, based on the factors described above, the Bureau believes that incumbent service providers do have market power in the provision of retail mobile wireless services, and the CRTC should take this fact into account when considering this matter.”13 (Emphasis added.)

4. The economic and market data to which CNOC refers in this intervention constitute compelling evidence in support of this conclusion.

5. CNOC is confident that the Commission will act to remedy the failure of Canada’s wireless market, which has been identified by the Commissioner of Competition, endured by new entrants and imposed upon consumers. Regulatory intervention of the nature recommended in this submission will ensure that competitors have access to the wholesale inputs that they require in order to compete vigorously in downstream retail mobile wireless markets. In turn, this will ensure that Canadians will meet the highest international standards for low mobile wireless service prices, high levels of choice in terms of providers, services and plans, as well as better coverage and reliability.

1.1 Relief Requested

6. CNOC requests four things of the Commission:

i. To mandate access to national and regional wholesale tariffed Full MVNO services on terms and conditions that are consistent with Equivalence of Input (“EOI”) principles.

ii. To mandate access to national and regional wholesale tariffed roaming services on terms and conditions that are consistent with EOI principles.

iii. To mandate access to national and regional wholesale tariffed services for shared access to antenna tower and sites on terms and conditions that are consistent with EOI principles.

13 Supra note 4 at para 13. 6

iv. To order that seamless roaming be a mandated feature of wholesale roaming services to the full extent that the feature is available on the network of the roaming provider.

1.2 Structure of Submission

7. The balance of this document is structured as follows: • Part 2.0 analyzes the competitive state of Canada’s wireless market based on market concentration, service pricing, profitability of carriers, barriers to entry and wireless/wireline substitutability;

• Part 3.0 applies the forbearance test articulated in TD 94-19 and the essentiality test set out in TD 2008-17 with the addition of the revisions recommended by CNOC in the proceeding initiated by Telecom Notice of Consultation CRTC 2013-55114 (“TNC 2013-551”) to wholesale mobile wireless markets.

• Part 4.0 sets forth CNOC’s recommended measures for regulatory intervention to remedy the failure of Canada’s wireless markets. These measures include the implementation of mandated wholesale full Mobile Virtual Network Operator (“Full MVNO”) services in addition to mandated roaming and antenna tower and site sharing services with associated cost-based tariffed rates.

• Part 5.0 makes the case for why CNOC’s submissions are consistent with the Canadian telecommunications policy objectives set out in section 7 of the Act and the Policy Direction.

• Part 6.0 contains CNOC’s conclusions and request to appear.

14 Supra note 7. 7

2.0 THE COMPETITIVE STATE OF CANADA’S WIRELESS MARKET

2.1 Importance of Competitive Markets & Assessing Levels of Competition

8. Market competition has always been a concern, not only for governments, but for consumers as well. If a market is not sufficiently competitive, there can be significant negative impacts on the welfare of the economy and consumers including but not limited to:

. Less consumer choice; . Higher prices; . Lower quality of services; and . Lower levels of innovation.

9. Increased competition in the Canadian wireless sector translates into greater consumer choice, higher quality of services and lower prices. Competition eliminates the risk that a few large companies will dictate market prices above reasonable rates for a sustained period of time. In addition to protecting consumers, increased competition also ensures that the access to the market is equitable for all, enabling entry by new service providers.

10. Using largely secondary research, CNOC explored the state of mobile wireless markets in Canada and has concluded that the state of mobile wireless competition in Canada is tenuous, at best. Furthermore, the evidence demonstrates that the introduction of new players, by way of a complementary wholesale market, will strengthen the market and discipline the market power of incumbents.

11. These conclusions, rest on CNOC’s application of the following measures for gauging competition levels:

. Market concentration . Service pricing . Incumbent profitability . Barriers to entry . Non-Substitutability of wireless and wireline services

2.2 Market Concentration in the Canadian Wireless Market

2.2.1 A Portrait of the National Wireless Market

12. The national mobile wireless market is characterized by broad coverage of mobile wireless services, rapid technological evolution, very large revenues and dominance by a small number of national incumbents.

13. Wireless services – including services that support smartphones – are available to 99% of Canadians.15 Services making use of Long Term Evolution (“LTE”) technology, while not as ubiquitous, were available to 72% of Canadians in 201216, up from 45% in 201117. Wireless penetration (the % of population with a wireless subscription) has steadily increased in Canada, reaching 79.4% in 201218.

14. The Canadian wireless market generated $20.4 billion in revenues in 2012, accounting for approximately 46% of overall telecommunications revenues19. During the 2008-2012 period, the wireless market in Canada grew at a robust pace, with revenues increasing at an average annual rate of 6.2%20. The number of wireless subscribers has also continued to rise in recent years, from 22.1 million in 2008 to 27.9 million in 2012, although there has been a clear slowdown in the rate of increase of subscribers21. Wireless revenue and subscriber growth are depicted graphically in Figure 1.

15 2013 CMR, p. 165. 16 Id., at p. 157. 17 Canadian Radio-television and Telecommunications Commission, “Communications Monitoring Report September 2012” (“2012 CMR”), p. 165. The 2012 CMR may be viewed at http://www.crtc.gc.ca/eng/publications/reports/policymonitoring/2012/cmr.htm. 18 2013 CMR, p. 157. 19 TNC 2014-76, para 1. 20 2013 CMR, p. 42, Table 3.1.1. 21 Id., at p. 23, Table 2.2.1. 9

Figure 1: Revenue and Subscriber Growth in the Canadian Wireless Market, 2008-2012

10.0% Revenues Subscribers 8.0%

6.0%

4.0%

2.0%

0.0% CAGR, 08-12 2009 2010 2011 2012

Source: CRTC (2013) “Communications Monitoring Report,” Table 5.5.1, p. 158.

15. A breakdown of wireless services shows that basic voice services still account for the largest share (i.e., 47%) of wireless revenues as shown in Figure 2 below22. The growth potential of basic voice and long distance services, however, seems to have tapped out. Pre-paid wireless revenues (including basic voice and long distance) have declined 27% over the past four years and now account for roughly $0.7 billion of total wireless revenues23. Post-paid revenues, while not experiencing the same decline as pre-paid revenues, fell 7% in the period, from $10.8 to $10.1 billion24.

22 Id., at p.159, Table 5.5.2. 23 Id., at p.159, Table 5.5.3. 24 Ibid. 10

Figure 2: Revenue Shares of Wireless Services, 2012

Roaming (Voice + Other Data) 1% 8%

Data Basic Voice 31% 47%

Terminal Equipment and Handheld Devices Long Distance 7% 6%

Source: CRTC (2013) “Communications Monitoring Report,” Table 5.5.2., p. 159.

16. Revenues from data services, on the other hand, are growing very rapidly. In 2010, data use was responsible for $3.9 billion out of $18.0 billion of total wireless revenues (i.e., 22% of the total)25. By 2012, however, data revenues had reached $6.3 billion, representing 31% of total wireless revenues26. Roaming revenues for data have also experienced significant growth during the same period27.

17. Given the significance of the wireless market, a lack of vigorous competition in that market is of significant concern, since it imposes huge inefficiencies and costs on Canadians and their economy.

18. Figure 3 shows market shares (in terms of subscribers) for the wireless sector in Canada. Rogers, the Bell Group28 and TELUS – the three large, incumbent facilities-based wireless service providers (“WSPs”) – dominated 90% of the Canadian wireless market in 2012, with new entrants accounting for only 5% of the market, and other service providers being responsible for the remaining 5%.29 The only provinces where neither Rogers, Bell nor TELUS had dominant market

25 Id., at p. 159, Table 5.5.2. 26 Ibid. 27 Ibid. 28 “Bell Group” includes Bell Canada, NorthwesTel Mobility, Bell Mobility, Télébec, NorthernTel, SkyTerra, Virgin, and Latitude Wireless. 29 2013 CMR, p. 161, Table 5.5.4. 11

shares were Manitoba and Saskatchewan, where the incumbents MTS Allstream and SaskTel held, respectively, 53% and 71% of the subscriber market share30. In Quebec, although the “big three” still dominated the market, Vidéotron has been gaining some ground. These major regional differences are also clearly outlined in the Appendix included in this submission which sets out market shares by region, by national incumbent and other provider types for the period 2008-2012.

Figure 3: Subscriber Market Shares in Canada, 2012

Notes: 1) ‘Bell Group’ includes Bell Canada, Northwestel Mobility, Bell Mobility, Télébec, NorthernTel, SkyTerra, Virgin, and Latitude Wireless; 2) ‘Other’ includes MTS Allstream, Sasktel and smaller WSPs; and 3) ‘New entrants’ include the new wireless entities that acquired spectrum in Industry Canada’s 2008 AWS spectrum auction.

Source: CRTC (2013) “Communications Monitoring Report,” Figure 5.5.4, p. 161.

2.2.2 Provincial-Level Analysis

19. A regional analysis of market concentration presents an accurate picture of the identities, dominant positions and market power of the largest firms in each regional market31.

20. According to the 2013 CRTC Communications Monitoring Report (“2013 CMR”), with the exception of Saskatchewan and Manitoba – both of which have exceptionally strong regional incumbents – wireless subscriber market shares held by the Bell Group, TELUS and Rogers jointly were usually in the 90% range in 201232.

30 Id., at p.162, Table 5.5.2. 31 As demonstrated in the Appendix. 32 2013 CMR, p.161, Figure 5.5.4. 12

21. Market concentration can be measured using concentration ratios (CRs) which denote the market share held by the largest players in the market. CR2, for instance, is calculated as the sum of the market shares held by the two largest players in the market; CR3 is the market share of the three largest players in the market and so on. A CR3 in the 90% range is characteristic of an oligopolistic or monopolistic market.33 Table 1 summarizes wireless subscriber market shares, as well as CR2 and CR3 by region.

Table 1: Wireless Subscriber Market Share by Province, 2012 (%)

Region Bell New 34 35 TELUS Rogers Other CR2 CR3 Group entrants Canada 28 28 34 5 5 65 90 British 18 40 39 3 0 79 97 Columbia Alberta 23 50 24 3 0 74 97 Saskatchewan 10 10 9 0 71 81 91 Manitoba 5 9 33 0 53 86 95 Ontario 28 20 44 6 1 72 92 Quebec 33 28 29 10 0 62 90 New 58 23 19 0 0 81 100 Brunswick Nova Scotia 54 29 16 0 0 83 99 Prince Edward 58 27 15 0 0 85 100 Island Newfoundland 73 25 2 0 0 98 100 and Labrador The North 90 0 0 0 10 100 100

Notes: 1) “Other” includes MTS Allstream, SaskTel, and smaller WSPs; 2) “Bell Group” includes Bell Canada, Northwestel Mobility, Bell Mobility, Télébec, NorthernTel, SkyTerra, Virgin, and Latitude Wireless; 3) “New

33 http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/vwapj/cb-meg-2011-e.pdf/$FILE/cb-meg-2011-e.pdf. 34 Canadian Media Concentration Research Project: http://www.cmcrp.org/the-wireless-project/. 35 Ibid. 13

entrants” refer to the new wireless entities that acquired spectrum in Industry Canada’s 2008 AWS spectrum auction; and 4) The North includes Yukon, the Northwest Territories, and Nunavut.

Sources: 1) Market share estimates were obtained from the CMR 2013; 2) CR2 and CR3 estimates obtained from the Canadian Media Concentration Research Project.

22. The incumbents have argued that the Canadian wireless market is competitive at both the national and regional levels due to the presence of regional WSPs and new entrants from the 2008 spectrum auction. The table above, however, provides strong indication that, with the exception of Manitoba and Saskatchewan, regional markets were dominated by the three national incumbents, and in those two markets, regional carriers were very dominant in their own right, as well as jointly dominant with the national incumbents.

23. The three new entrants – Globalive Wireless Management Corp. dba WIND Mobile36 (“WIND”), Public Mobile Inc. (“Public Mobile”) and Data & Audio Visual Enterprises Wireless Inc. dba Mobilicity (“Mobilicity”) – are not considered to be significant players given that their combined market share is less than 3%37 and the assets of two of the three players38 are either subject to sale or bankruptcy protection. Although regional WSPs such as Quebecor Media on behalf of its affiliate Videotron G.P.39 (“Videotron”) and Bragg Communications Inc. dba EastLink40 (“EastLink”) have gained wireless market share, it is still too early to determine whether they will emerge as significant, viable players over the long term.

24. The risk of anticompetitive behaviour in the Canadian market exists at both the regional and national levels. Whether there are three or four WSPs, the industry is still an oligopoly.

36 Wind intervention dated 29 January 2014, para 20. 37 2013 CMR, p.161, Figure 5.5.5. 38 Namely Public Mobile and Mobilicity. 39 Para 17 of the Videotron reply dated 10 February 2014 notes: “Dès qu’on se laisse convaincre par le message des titulaires et de leurs experts, et qu’on en vient à croire que, oui, en effet, le marché du sans-fil est tout à fait concurrentiel, une « position de dominance » dans le marché de l’itinérance intérieure se transforme en un simple « pouvoir de négociation », les « possibilités d’abus » deviennent tout à coup des « propositions à valeur ajoutée » et la « dépendance envers les titulaires » se transforme en une « forte disposition à payer ».” 40 Para 6 of the EastLink intervention dated 29 January 2014 notes “In this environment, where the incumbents have incentive to deliberately keep their wholesale prices unreasonably high and the new entrants have no bargaining power, it is not possible for market forces to produce commercially reasonable domestic roaming rates.” 14

2.3 Service Pricing

25. In a perfectly competitive market, firms are ‘price takers’, i.e., no single firm has the power to set, by itself, the market price.41 In markets that are not perfectly competitive, firms have some degree of market power. The Competition Bureau formally defines market power as “the ability to set prices above competitive levels”.42 This phenomenon is present in the Canadian mobile wireless telecom sector and is cause for concern.

26. From a competition policy perspective, what is important is that pricing is commensurate with the opportunity cost of the production inputs, including capital. Limited data often presents challenges to any analysis of service pricing, making it difficult to establish the position of prices in relation to long-run marginal and average costs. However, while some reports suggest that Canadian consumers enjoy competitive rates for mobile wireless voice and data services, a closer examination reveals that Canadians pay higher prices compared to other countries.

27. The 2013 update of the Wall Communications Report (the “Wall Report”) on Price Comparisons of Wireline, Wireless and Internet Services in Canada and with other Foreign Jurisdictions43, prepared for the CRTC and Industry Canada, looked at comparable baskets of services offered in six different countries – Canada, US, UK, France, Australia and Japan. As Figure 4 and Figure 5 highlight, prices of mobile offerings in Canada ranked consistently among the top-three highest.

28. Figure 4 compares the average monthly prices for different baskets of mobile wireless services (including voice, text, data and other features) in six countries. Prices were converted to Canadian dollars and adjusted by Purchasing Power Parity (“PPP”) for comparability. The figure compares three categories of wireless voice services: Level 1 (low-volume use), Level 2 (average-

41 Geoffrey Jehle and Philip Reny (2011) “Advanced Microeconomic Theory,” Third Edition, p. 165. 42 Competition Bureau (2012), “Preventing Abuse of Market Power” available at: http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/h_02758.html. 43 Wall Communications (2013) “Price Comparisons of Wireline, Wireless and Internet Services in Canada and with Foreign Jurisdictions. 2013 Update,” prepared for the CRTC and Industry Canada, available at http://www.wallcom.ca/pdfs/price-comp-report_2013update.pdf 15 volume use) and Level 3 (high-volume use).44 Canada’s average monthly prices for wireless services are second most expensive in Levels 1 and 2, and third most expensive in Level 3.

Figure 4: Average Monthly Prices of Wireless Voice Services, PPP adjusted $CDN

160 140 120 100 80 60 40 20 0 Level 1 (low-volume use) Level 2 (average-volume use) Level 3 (high-volume use)

Canada US UK France Australia Japan

Source: Wall Communications (2013).

29. Figure 5 compares the average monthly prices for different baskets of mobile Internet services in six countries. The Wall Report breaks down mobile Internet services into two categories: Level 1 (2 GB of data per month) and Level 2 (5 GB of data per month). Canada had the third-most expensive price for Level 1 and the most expensive price for Level 2.

44 A detailed description of the services included in each basket can be found in the Wall Report (2013), p. 13. 16

Figure 5: Average Monthly Prices for Mobile Internet (greater than or equal to 3G Technology), PPP-adjusted $CDN

0 Level 1 (2 GB/month) Level 2 (5GB/month)

Canada US UK France Australia Japan

Source: Wall Communications (2013).

30. As shown in Table 2 below, taken from the C-W Report, the 2013 OECD Communications Outlook, also finds that Canada ranks high among other countries in terms of prices for wireless services.45 Out of 34 countries (with the most expensive country being ranked as 34th), Canada’s rank ranged from 18th to 30th for different service packages and data plans.

Table 2: Canadian Ranking in 2013 OECD Price Basket Analysis

*Canadian total basket cost is lower than for the US. Note: Analysis includes 34 OECD countries ranked from lowest total cost (1st) to highest (34th). Source: OECD (2013) “Communications Outlook 2013,” as presented in the C-W Report (2013), p. 15.

45 OECD (2013) “OECD Communications Outlook 2013,” available at http://dx.doi.org/10.1787/comms_outlook- 2013-en. 17

2.4 Profitability of Carriers

31. Supernormal profit levels provide a strong indication that a particular market is not competitive, occurring when firms with market power set prices above their long-run average cost. This section investigates the existing evidence on whether the profit levels of the three major incumbent wireless players in Canada are consistent with competitive profit levels.

2.4.1 Accounting profits

32. The first point of reference for the analysis involves accounting profits. Although accounting profits cannot be seen as definitive evidence that a market is insufficiently competitive, comparisons with other countries and other sectors with high capital expenditures (“CAPEX”) can provide some level of indication on whether profit levels are “too high.”

33. Comparing the industry-wide earnings before interest, taxes, depreciation and amortization (“EBITDA”) and free cash-flow (“FCF”) margins of the wireless sector of 19 developed countries (in Figure 6 and Figure 7, respectively), it is evident that Canada had an above-average EBITDA margin of 44% (vs. an un-weighted average of 40%) and an above-average cash-flow margin of 30% (vs. an un-weighted average of 27%). In particular, the wireless sector’s EBITDA and FCF margins in Canada were significantly above those in the U.S (i.e., they were 37% and 21%, respectively).

Figure 6: EBITDA Margins in the Wireless Sector, International Comparison, 2004-2012

60% 50% 40% 30% 20% 10% 0%

Source: G. Campbell (2011 and 2013) “Global Wireless Matrix,” Bank of America Merrill Lynch, as presented in the C-W Report (Table 6, p. 30).

Figure 7: FCF Margins in the Wireless Sector, International Comparison, 2004-2012

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: G. Campbell (2011 and 2013) “Global Wireless Matrix,” Bank of America Merrill Lynch, as presented in the C-W Report (Table 6, p. 30).

34. Table 3 shows 2013 financial information for the three large, incumbent, facilities-based WSPs in Canada. Overall, the EBITDA margins for all three WSPs were very high, ranging from 40% (Bell) to 43.4% (Rogers). To a certain extent, these high margins are expected due to the nature of the wireless business. More specifically, as the C-W report notes, the wireless sector is characterized by: . High fixed and sunk capital costs; and . Economies of scale and scope46

Table 3: EBITDA and Free Cash Flow for Incumbent WSPs in Canada, 2013 Canada Bell TELUS Rogers (CAD, millions) Operating Revenues 5,849 6,177 7,270 Service .. 5,641 6,748 Equipment and Other .. 536 522 Operating Expenses (net of D and A) 3,509 3,573 4,113 EBITDA 2,340 2,604 3,157 CAPEX 639 712 865 Free Cash Flow (FCF) 1,701 1,892 2,292

Total EBITDA Margin 40.0% 42.2% 43.4% FCF Margin 29.1% 30.6% 31.5%

Note: Estimates refer only to the wireless activities of each company. Source: 2013 Annual Financial Reports for Bell, TELUS and Rogers.

35. However, more significantly, the EBITDA margin of the Canadian wireless sector is well above that of other high-CAPEX sectors such as oil and gas extraction and utilities, which are also characterized by high fixed and sunk capital costs and/or economies of scale and scope

Table 4: EBITDA Margins in Canada, Sectoral Comparison, 2012 EBITDA Margin Total Economy 12% Oil and gas extraction and support activities 28% Mining and quarrying (except oil and gas) 17% Utilities 27% Telecommunications 32% Real estate 31%

Source: Calculations based on Statistics Canada estimates (CANSIM Table 180-0003).

36. Summarizing the evidence analyzed in this section, it can be seen that the wireless sector in Canada has above-average profit levels when compared to:

. The wireless sector of other developed countries; and . Other sectors in the Canadian economy that also present high fixed costs and economies of scale and scope.

37. The above evidence raises concerns about the existence of supernormal profits in the Canadian wireless sector.

2.4.2 Economic profit

38. The evidence presented in the previous section immediately provides some indication that the Canadian wireless sector is not nearly as competitive as it could be. Another important consideration is whether there is evidence of supernormal profits in the sector. Indeed, the C-W Report frames this question as the key issue in terms of competition when stating: “…whether prices track long-run average costs, namely, whether wireless providers make monopoly profits.”47

47 C-W Report, Summary. 21

39. The C-W Report purports to provide a partial answer to this question by examining the financial performance of Rogers Wireless during the 1986-2012 period. Church and Wilkins estimate the company’s internal rate of return (“IRR”) to be 12.2% (in nominal terms), in line with the US average during a similar period, which, they argue, is not consistent with “the exercise of significant market power [by Rogers] or the inefficient exercise of market power over the investment cycle.”48 Church and Wilkins note, furthermore, that the 12.2% IRR is an ex-post rate, and likely understates the true ex-ante pre-tax cost of capital for Rogers Wireless.

40. The Competition Bureau, however, contested the conclusions of the C-W Report, stating that its profitability analysis had three important shortcomings49:

. Examined only one WSP (Rogers); . Did not measure the WSP’s cost of capital; and . A proper interpretation of the profitability analysis that forms the centerpiece of the report does not support the conclusions contained in the report

41. CNOC agrees with this critique by the Competition Bureau, and believes that the response provided by Church and Wilkins to these views did not convincingly address the issues raised.50 As noted in Part 1 of this submission, CNOC is particularly supportive of the Competition Bureau’s explicit statement that incumbent service providers do have market power in the provision of retail mobile wireless services.51

2.5 A Closer Look at the Evidence Presented in the C-W Report

42. The C-W Report analyzed some of the same evidence discussed in the previous sections, and yet reached a conclusion that is diametrically opposed to CNOC’s findings. While in CNOC’s view, the evidence clearly points to an uncompetitive, highly concentrated market with significant

48 Id., at p. 24. 49 Supra note 4 at para 11. 50 Jeffrey Church and Andrew Wilkins “Wireless Competition in Canada: Response to the Competition Bureau”, February 10, 2014, available at https://services.crtc.gc.ca/pub/ListeInterventionList/Documents.aspx?ID=212275&Lang=e (third reply from top to bottom) 51 Supra note 4. 22

barriers to entry, the C-W Report claims that “there is not a competition problem in mobile wireless services in Canada.”52

43. In CNOC’s view, an important reason for this difference is that the C-W Report repeatedly understates negative metrics of competitiveness in Canada’s mobile wireless sector. When looking at price comparisons, for instance, the C-W Report presents the OECD data shown in Table 2 remarking that “… Canada is clearly not an outlier among the OECD countries in the 2013 report.”53 Although technically true, it seems more accurate to say that Canada was found to have consistently high prices out of 34 countries surveyed. In fact, Canada had above-median prices in all mobile wireless service categories shown in Table 2.

44. Similarly, the C-W Report notes correctly that average revenue per user (“ARPU”) reflects not only prices but also quantities of services. Thus, all other things being equal, ARPU will be lower in countries where pre-paid connections are more prevalent, and higher in countries that make more intensive use of data. On that basis, the C-W Report argues, it should not be surprising that Canada’s ARPU is so high, as Canadians are champions in mobile data use and have a low adoption of pre-paid connections. However, as shown in Figure 8 below, when we compare Canada’s mobile ARPU to that of countries that have similar profiles of voice and data use – particularly the UK and the US, Canada’s ARPU is still substantially higher.

52 C-W Report, p. 1. 53 C-W Report, p. 15. 23

Figure 8: Average Revenue per User (US$, 4Q2012)

Source: G. Campbell (2013) “Global Wireless Matrix 1Q2013,” Bank of America Merrill Lynch, as presented in the C-W Report, Figure 2, p. 6.

Table 5: ARPU Comparison, Canada, US and UK Canada US UK ARPU ≈US$60 ≈US$51 ≈US$28 Pre-paid Share of Connections ≈19% ≈27% ≈48% Monthly Minutes of Use per Capita* ≈230 ≈780 ≈220 Smartphone Penetration as a Share of Mobile Penetration ≈47% ≈37% ≈39% Monthly Smartphone Data Usage per Capita ≈250 MB ≈250 MB ≈240 MB Capital Intensity ≈14% ≈16% ≈11%

Source: All estimates from the C-W Report: 1) ARPU from Figure 2, p. 6; 2) Pre-paid share of connections from Figure 5, p. 9; 3) Monthly minute use per capita (with conservative BoA Non-CPP adjustment) from Figure 7B, p. 11; 4) Smartphone penetration as a share of mobile penetration from Figure 8, p. 12; 5) Monthly smartphone data usage per capita from Figure 10, p. 13; 6) Capital intensity from Figure 14, p. 19.

2.6 Barriers to Entry

45. Under certain market conditions, barriers to entry permit incumbents to exercise significant market power, maintain prices above competitive levels and earn supernormal profits. These supernormal profits are inefficient because they imply that incumbents are earning an economic return that is higher than the opportunity cost of the resources used in production.

46. The wireless sector displays several barriers to entry, which increase the risk of incumbents raising prices above competitive levels – in this case, above long-run average costs.54 This section describes each of these barriers to entry in turn.

2.6.1 Spectrum

47. First and foremost, licensed spectrum is a sine qua non condition for provision of services in the Canadian wireless market, and entry into that market requires the licensing of spectrum from the Government of Canada. Indeed, mobile services are increasingly data intensive, thus access to significant wireless spectrum is an essential requirement for new wireless companies to offer competitive prices.

48. Spectrum is a finite resource and can only accommodate a limited number of simultaneous users and correspondingly, service providers. Industry Canada – the spectrum regulator – generally provides exclusive right of use to assigned frequencies to specific license holders for designated services for specific lease periods. As there is reasonable expectation of license renewal on the part of licence holders, including incumbents, the market value of the spectrum has become incorporated into the overall equity valuation of the wireless firms. While industry analysts that follow the telecommunications sector generally do not attribute a specific dollar value to spectrum as part of the overall asset base, they consider it to be essential to wireless operations. In addition, academics such as Kenneth R. Carter have also considered spectrum as a long-lived asset.55

49. Spectrum for mobile wireless applications is now only made available through periodic auctions and at a very significant cost to entrants. Canada’s most recent spectrum auction was in in January/February 2014. Prior to that, the most recent auction was held in 2008. In effect, six years had passed between the opportunities for market entry. In the 2014 auction, the winning bids totalled $5.27 billion56. Costs were so high that the vast majority of the spectrum was acquired by

54 C-W Report, p. 22. 55 Kenneth R. Carter, “Spectrum Licences as Long-lived Assets”, Columbia Institute for Tele-Information, Columbia Business School, April 2001, available at: http://kennethrcarter.com/vita/pubs/AccountingSpectrum.htm. 56 Industry Canada (2014), “700 MHz Spectrum Auction-Process and Results,” press release, February 19, 2014, available at: http://news.gc.ca/web/article-en.do?nid=816869. 25 incumbents, with the winning bids of the three incumbents combined representing 95% of the total auction proceeds of $5.27 billion57. Correspondingly, with their bids, these incumbents – which have far deeper pockets than the regional WSPs and new entrants – captured the prime metropolitan markets and spectrum assignments in the ‘beach front’ 700 MHz spectrum.

50. Furthermore, in the 2014 auction, very little market entry occurred. Videotron’s acquisition of spectrum outside of Quebec could qualify as a form of market entry, and it was also the only case where a company obtained spectrum outside of a region where it already provided wireless services. However, Videotron’s intentions remain unclear as that company has yet to deploy any facilities or mobile services to put its newly acquired spectrum to use. The other ‘new entrant’ was Feenix, which obtained a licence in the Territories – a market with a combined population of approximately 140,000.

51. Spectrum holdings are highly concentrated in the hands of the three national incumbents. Even before the 2014 auction, the three incumbents were dominant in spectrum holdings with 85% of all frequency licenses in private hands58. Figure 9 illustrates the dominance of the three major incumbents with reference to their spectrum holdings.

57 Ibid. 58 Industry Canada (2010) “Consultation on a Policy and Technical Framework for the 700 MHz Band and Aspects Related to Commercial Mobile Spectrum,” Figure 4.5, available at http://www.ic.gc.ca/eic/site/smt- gst.nsf/eng/sf09949.html#s4. 26

Figure 9: Summary of Holdings for Cellular, PCS, AWS and BRS Spectrum

Note: Percentage of total spectrum holdings weighted by population.

Source: Industry Canada (2010) “Consultation on a Policy and Technical Framework for the 700 MHz Band and Aspects Related to Commercial Mobile Spectrum,” Figure 4.5, available at http://www.ic.gc.ca/eic/site/smt- gst.nsf/eng/sf09949.html#s4

52. Figure 10 below illustrates the spectrum currently held by service providers as well as the spectrum available for auction (shown as 700 MHz and BRS). As discussed above, the 700 MHz spectrum has already been auctioned, and has largely been placed in the hands of the national players. With respect to the Broadband Radio Service (BRS, 2500-2690 MHz) spectrum which is scheduled for auction in 2015, it is nowhere near sufficient (in quantum or propagation characteristics) as the basis for a new entrant to compete with incumbents. Another complicating factor is that a significant portion of the remaining 700 MHz spectrum not in wireless use is held by the broadcasting arms of the vertically-integrated incumbents.

Figure 10: Summary of Holdings and Available Cellular, PCS59, AWS60, BRS61 and 700 MHz Spectrum (Total 544 MHz)

Note: Percentage of total spectrum holdings weighted by population.

53. This concentration of spectrum effectively constitutes a barrier to entry and long-term viability of new competitors in the Canadian wireless market. Incumbent WSPs received spectrum principally in the 800 MHz band essentially at no cost and subsequently have paid relatively low annual spectrum fees as ongoing lease charges. Incumbents have increased their spectrum holdings through acquisitions and licensing processes (i.e., both beauty contests and auctions). In the acquisition of Clearnet in 1995, for instance, TELUS gained 30 Mhz of spectrum, although subsequently it had to return some spectrum in BC and Alberta due to Industry Canada’s spectrum cap regulations. Bell acquired significant spectrum in the 2002, 2008 and 2014 auctions in addition to its initial spectrum allotment as the original incumbent.

59 Personal Communications Services. 60 Advanced Wireless Services. 61 Broadband Radio Service. 28

54. The necessity to license spectrum is a real barrier to entry. And while it is a barrier created by government regulation, it is important to recognize that the costs of acquiring spectrum have not been symmetrical for incumbents and entrants. Although incumbents and entrants do compete directly with one another at auctions, much of the spectrum held by incumbents – particularly the best quality spectrum below 1 GHz62 – was granted to incumbents at nominal cost. Both Rogers (Cantel) and the prior incumbent WSPs obtained their spectrum through comparative-review processes (rather than auctions) held in the 1980s (800 MHz: 1982-83 and 1989) and in 1995 (1900 MHz).63 In this regard, the incumbents have a significant cost advantage that entrants can never duplicate.

55. Rogers, which initially developed as a cable company before launching its wireless operations, similarly gained spectrum through its acquisition of the Microcell assets. Rogers has also been the biggest winner in the 2008 AWS and more recently in the 2014 700 MHz auctions. In the 2014 auction, Rogers paid $3.2 billion or $4.32/MHz/pop to acquire 22 paired blocks64. The spectrum – mainly in the A-B blocks corresponds to that of AT&T in the US and the corresponding handset ‘ecosystem’. As a result, Rogers will be able to launch 4G services early. The price paid per MHz by Rogers ($4.32) is more than twice that paid by its nearest rival TELUS ($2.05) and far beyond the price paid either by the highest regional competitor – Videotron ($0.83) or new entrant – Feenix ($0.26).

56. Overall, the results of the 2014 auction illustrate the dominance of the three national incumbents in obtaining the crucial spectrum resource. The national incumbents paid $5.27 billion for their combined new spectrum holdings or 95% of the total auction proceeds. Figure 11 below, sourced from Industry Canada, provides a visual summary of their dominance in winning spectrum licences both in the preferred bands and shows the massive quantity of licences acquired.

62 Prior to the licensing of 700 MHz in 2014, the 800 MHz held by Rogers and the incumbent telephone companies was considered to have the best propagation characteristics, and therefore, offered the most cost-efficient network characteristics. 63 Industry Canada (2010), “A Brief History of Cellular and PCS Licensing,” available at https://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf08408.html. 64 Supra note 59. 29

Figure 11: Overall Spectrum Licence Awards

57. In addition to being two of the three dominant owners of spectrum assets, Rogers and Bell make significantly less efficient use of their spectrum than Telus does with its own, based on measures of bandwidth (MHz) per subscriber.65 Whether the Bell and Rogers’ spectrum is underused or simply ‘warehoused’, it would appear that a significant part of their spectrum holdings could be used in a more productive fashion by re-farming and auctioning to other wireless service providers that would use the spectrum for the actual delivery of innovative new services and lower costs for the consumer. If this unused spectrum were to be placed in the hands of the new entrants, the intensity of use and benefits to consumers would increase significantly.

58. The residual property rights of spectrum belong to the Crown as licensees have no ownership rights in spectrum. Consequently, there are a number of mechanisms by which Industry Canada as representative of the Crown, could accomplish re-distribution: either via a take back and re-licensing process or a sub-licensing by the current incumbent licensees to new competitors.

65 TELUS Press Release Synopsis by Gary Ng ‘TELUS Says Its Spectrum Efficiency Outshines Bell, Rogers”, March 6, 2013 - Source: http://www.iphoneincanada.ca/carriers/telus/telus-says-its-spectrum-efficiency-outshines-bell- rogers-chart/ 30

However, even if Industry Canada, in its capacity as the spectrum regulator, were to resolve the spectrum inefficiency or warehousing issue, as the case may be, this measure by itself would not be sufficient to address the other underlying issues behind the lack of competition in the wireless sector. Those issues need to be addressed by the Commission.

2.6.2 Roaming

59. Roaming is a pre-requisite for the development of competitive mobile voice and data service offerings (including Short Message Service or “SMS”) by new wireless companies and, at the market level, for attaining effective competition in the mobile service sector. Roaming refers to situations where a wireless carrier relies on the networks of other wireless carriers to provide voice and data services when their customers travel outside their geographic coverage areas.

60. Wireless roaming policy falls within the shared jurisdiction of Industry Canada and the Commission.

61. As noted in TNC 2013-685, the Commission has forborne from regulating mobile wireless since the mid-1990s – except with respect to its powers under section 24 and subsections 27(2), 27(3) and 27(4) of the Act. Consequently, wireless carriers are not subject to any requirement to obtain prior Commission approval of rates, terms or conditions for mobile wireless services, including wholesale roaming66.

62. The Ministry of Industry asserts its jurisdiction by virtue of its responsibility for spectrum management in Canada as conferred upon it by the Department of Industry Act67, the Radiocommunication Act68 and the Radiocommunication Regulations69. Specifically, subsection 5(1) of the Radiocommunication Act70 gives the Minister of Industry the power to fix and amend the terms and conditions of spectrum licences71. The Minister of Industry may further suspend or

66 TNC 2013-685, para 3. 67 Department of Industry Act, S.C. 1995, c.1., s.4(1)(k). 68 Radiocommunication Act, R.S.C. 1985, c.R-2. 69 Radiocommunication Regulations, SOR/96-484. 70 Supra note 68, s.5(1). 71 Revised Frameworks for Mandatory Roaming and Antenna Tower and Site Sharing, DGSO-001-13, March 2013, Spectrum Management and Telecommunications, Industry Canada, para 4. 31

revoke a radio authorization if the licensee has contravened the Radiocommunication Act72, the Radiocommunication Regulations73 or the terms or conditions of the radio authorizations.

2.6.2.1 The Industry Canada Framework has not resulted in Competitive Wholesale Roaming Services

63. In November 2007, Industry Canada issued its Policy Framework for the Auction for Spectrum Licenses for Advanced Wireless Services and other Spectrum in the 2Ghz Range (the “Policy Framework”) in which the Minister announced his decision to mandate roaming services among network operators providing cellular services, Personal Communications Services (“PCS”) and Advanced Wireless Services (“AWS”). In doing so, Industry Canada declared: “The department agrees that mandated roaming is important to promote competition and supports the orderly development of radiocommunication in light of the policy objectives of the Telecommunication Act”74. The Policy Framework went on to cite the key intended features of the mandatory roaming regime and notably emphasized that “By using this process, the department expects that roaming would be offered at commercial rates that are reasonably comparable to rates that are currently charged to others for similar services”75.

64. Immediately following the publication of the Policy Framework, Industry Canada launched a public consultation which in November 2008 resulted in CPC-2-0-17, the Conditions for Licence for Mandatory Roaming and Antenna Tower and Site Sharing and to Prohibit Exclusive Site Arrangements76 (the “Conditions of Licence”). At the outset, the Conditions of License are introduced by their stated intent “…to encourage the deployment of advanced networks that provide the greatest choice of basic and advanced services available at competitive prices to the greatest number of Canadians”77. The Conditions of License went on to describe a process for: obtaining preliminary information and analysis, submitting a roaming proposal, addressing costs,

72 Supra note 68. 73 Supra note 69. 74 Policy Framework, at p. 8. 75 Id. at pp. 8-9. 76 Conditions for Licence for Mandatory Roaming and Antenna Tower and Site Sharing and to Prohibit Exclusive Site Arrangements, Client Procedures Circular CPC-2-0-17, Spectrum Management and Telecommunications, Industry Canada, Issue 2, March 2013, (as amended) (“Conditions of Licence”). 77 Conditions of License, p. 2, section 2.1. 32

as well as related negotiations and arbitrations, in addition to listing all applicable license conditions.

65. From an economic and commercial perspective, the current roaming regime has fallen short of its intended goals. This is not surprising. At its core, the status quo regime relies on unfettered commercial negotiations that are subject to light regulatory procedural parameters. Since the regime places no checks on the significant market power of incumbent national (and in some cases, regional) carriers, those large carriers confront their smaller non-dominant counterparts with unmitigated bargaining power that is proportionate to the market power they enjoy as a result of the control they have over their full suite of wholesale wireless offerings over broad geographic areas in addition to the vertically integrated nature of their operations. Conversely, entrants have nothing to offer that is of interest to the large incumbents. The end result is that roaming “negotiations” effectively become little more than “take it or leave it” propositions – a reality that has been repeatedly described on the record of the TNC 2013-685 proceeding by new entrants such as WIND, EastLink and Videotron and public interest interveners like Benjamin Klass78 and The Public Interest Advocacy Centre (“PIAC”), the Consumers Association of Canada (CAC), the National Pensioners Federation (NPF), and the Council of Senior Citizens Organizations of British Columbia (COSCO) (collectively, PIAC/CAC/NPF/COSCO)79.

66. National carriers80 have claimed that the inclusion of a final offer arbitration mechanism in the roaming regime provides smaller carriers with recourse if the outcome of roaming negotiations is undesirable. They go on to suggest that arbitration ensures that there can be no unjust discrimination or undue preference conferred by an incumbent provider, in contravention of s.27(2) of the Act81.

67. These types of assertions ignore both the unique circumstances of new entrants and the limitations of arbitration as a dispute resolution process in this context.

78 Benjamin Klass reply dated 10 February 2014, paras 12 and 14-16. 79 PIAC/CAC/NPF/COSCO intervention dated 29 January 2014, paras 30-31. 80 See for example Rogers intervention dated 29 January 2014, paras 56-59; Telus intervention dated 29 January 2014, paras 49-55. 81 Ibid. 33

68. WIND succinctly summarized the reasons why arbitration was never an option for it following negotiations with Rogers Communications Partnership (“Rogers”) (then the only wireless operator that was technologically capable of providing roaming services to WIND) in 2009 – despite the fact that Rogers was only willing to offer artificially-inflated rates and restrictive terms on a “take it or leave it” basis. Wind states:

“Commercial arbitration as contemplated in the Conditions of Licence was not an option for WIND because of (i) the time pressures for WIND’s commercial launch and the time that any such arbitration would be expected to take; (ii) the lack of guidance to an arbitrator as to what the “commercially reasonable” standard entails; (iii) the informational disadvantage faced by WIND (i.e., Rogers likely had hundreds of roaming agreements from around the world from which they could pick and choose in argument whereas this was WIND’s first roaming agreement); and (iv) the costs in terms of people and money to pursue the arbitration. Effectively, given the inadequacy of the only available recourse provided in the Policy Framework and Conditions of Licence, at that time Rogers was a virtually unconstrained monopoly provider of domestic roaming, and delaying WIND’s access to roaming by way of a drawn-out arbitration would be nothing but beneficial for Rogers and punitive for WIND. Rogers therefore exercised its overwhelming upstream market power in the form of rates that discriminate unjustly against WIND, thus providing Rogers with an undue and unreasonable preference, and subjecting WIND to an undue and unreasonable disadvantage.”82

69. Several other interveners highlighted the limitations of the final offer arbitration process. Notably, the Commissioner of Competition stated that “In addition to being costly, arbitration only addresses a single dispute. Entrants disputing multiple arrangements could be faced with bringing multiple arbitrations and could be disadvantaged vis-à-vis well capitalized incumbents.”83 Likewise, EastLink84 and Videotron85 noted that arbitration is not a viable channel for recourse given the cost and time intensive nature of the process. Furthermore, as Videotron noted in its intervention, it is impossible for an arbitrator to determine “reasonable commercial rates” because there’s never truly been a functional roaming market in Canada86.

82 WIND intervention dated 29 January 2014 in TNC 2013-685 proceeding, para 21. 83 Competition Bureau reply dated 10 February 2014 in TNC 2013-685 proceeding, para 27. 84 EastLink reply dated 10 February 2014 in TNC 2013-685 proceeding, paras 31-32. 85 Videotron intervention dated 29 January 2014, paras 31-33. 86 Id., at para 31. 34

70. CNOC shares all of the above-noted criticisms with regards to the suitability of Industry Canada’s final offer arbitration process in the context of wholesale wireless roaming arrangements. While arbitration has been successful in settling contentious commercial arrangements in other industries, it is incapable of, at least consistently, resulting in equitable and cost-efficient outcomes in Canada’s wholesale roaming environment. This is predominantly a consequence of the significant market power enjoyed by the mobile wireless incumbents and the bargaining power disparity between them and their much smaller roaming partners. Consequently, “reasonable commercial roaming rates” have not been negotiated in these circumstances.

71. As will be more fully explained in the next section, this status quo provides incumbent carriers with opportunities to conduct themselves in contravention of s.27(2) of the Act.

2.6.2.2 The Status Quo leads to breaches of s.27(2) of the Act

72. In TNC 2013-685, the Commission noted the prima facie discriminatory practice of some Canadian wireless carriers to charge significantly higher rates, on more restrictive terms and conditions to Canadian roaming partners compared to their roaming arrangements with U.S.-based carriers. The issue to be examined then, as articulated by the Commission87, was whether this practice breaches s.27(2) of the Act by subjecting certain Canadian carriers to unjust discrimination or undue preference.

73. CNOC maintains its position that these practices undoubtedly subject Canadian wireless carriers to unjust discrimination and undue preference. As noted in CNOC’s intervention in the TNC 2013-685 proceeding88, the high wholesale rates that entrants begrudgingly accept ultimately translate into retail roaming rates that are several orders of magnitude higher than the retail rates of national carriers for comparable services. The outcome is a substantial lessening competition.

74. In turn, the inability of small carriers to offer competitive roaming services has negative impacts on Canadian consumers. Specifically, consumer choice becomes constrained with regards

87 TNC 2013-685, para 6. 88 CNOC intervention dated 29 January 2014, para 10. 35

to factors such as service affordability and geographic coverage. In CNOC’s view, discrimination resulting in such an outcome, which can only be considered public harm, surely meets the statutory threshold for “unjust” or “undue”89.

75. Moreover, in accordance with s.27(4) of the Act, the onus is on the national and regional incumbent carriers to demonstrate that the preferences and discrimination identified are not unjust. At no point in the TNC 2013-685 proceeding have the incumbents discharged that onus.

76. More specifically, for the reasons already described above, incumbent arguments that mobile wireless markets are competitive and that a final offer arbitration process is sufficient to ensure that domestic roaming rates are reasonable are without merit. Finally, the attempt by the incumbents to limit the field of appropriate comparators for domestic roaming arrangements, on the basis of bilateral/unilateral agreement structures, geography and other factors is artificial and consists of nothing more than an attempt to distort the reality that, as WIND aptly put it, “roaming services are roaming services”.90

2.6.2.3 Domestic roaming rates are not just and reasonable and remedial action is required

77. The lack of competitiveness of domestic roaming rates is evident in the very fact that the Commission chose to initiate the proceedings associated with TNC 2013-685 and this proceeding of its own motion.

78. The federal government also shares the concern that domestic roaming rates are excessive and is treating this as an urgent matter. As a result, the government has taken the unprecedented step of including a provision in Bill C-3191 to limit wholesale wireless roaming rates in Canada pending the outcome of the TNC 2013-685 and TNC 2014-76 consultations. More specifically, Division 16 of Bill C-31 sets out the formula that would be used to calculate the maximum wholesale rate for domestic wireless voice, data and text services that one wireless company can charge another in Canada.

89 Per S.27(2) of the Act. 90 Wind intervention dated 29 January 2014 in TNC 2013-685 proceeding, para 19. 91 An Act to implement certain provisions of the budget tabled in Parliament on February 11, 2014 and other measures, Bill C-31, 41st Parliament, Second Session, 62-63 Elizabeth II, 2013-2014, First Reading March 28, 2014. 36

79. In conclusion, it is evident that domestic roaming rates are not just and reasonable and that regulatory action is required to remedy the situation. If this review of wholesale mobile services is to steer the Canadian wireless industry towards competition, changes to wholesale roaming policy are required. Accordingly, CNOC urges the Commission to adopt the Full MVNO solution as outlined in Part 3 of this submission as an important aspect of a viable long term solution to overcome the competitive woes of Canada’s wireless industry – including the lack of a viable path for competitors to work their way to becoming Mobile Network Operators (“MNOs”). More specifically, CNOC recommends that the Commission set tariffed rates for wholesale Full MVNO services on a Phase II cost-plus basis. Roaming rates established on the same basis should also be available to accommodate those competitors who do wish to operate their own full wireless networks using licensed spectrum.

2.6.3 Antenna Tower and Site Sharing

80. Tower and site sharing, much like roaming, is a prerequisite for the development of competitive service offerings by new wireless entrants and, at the market level, for attaining effective competition in the mobile wireless service sector.

81. Antenna tower and site sharing refers to situations where a provider obtains negotiated access to the antenna sites, rooftops or other applicable supporting structures and sites owned by a competing provider for the purpose of fixing and operating equipment necessary to the provisioning of wireless services. In many instances, either due to municipal concerns, aesthetics or simple economics, it makes sense for the carriers to share such towers and sites. Often, the purchasing party (particularly as it concerns entrants) is completely reliant on this access to deliver its wireless services to the areas and consumers that it wishes to target.

82. As is the case with roaming policy, antenna tower and site sharing falls within the shared jurisdiction of Industry Canada and the Commission.

83. As noted in TNC 2014-76, the Commission has forborne from regulating wholesale tower and site sharing except with respect to its powers under section 24 and subsections 27(2), 27(3)

and 27(4) of the Act. Consequently, wireless carriers are not subject to any requirement to obtain prior Commission approval of rates, terms or conditions for mobile wireless services, including wholesale tower and site sharing services92.

84. The Ministry of Industry asserts its jurisdiction by virtue of its responsibility for spectrum management in Canada as conferred upon it by the Department of Industry Act93, the Radiocommunication Act94 and the Radiocommunication Regulations95. Specifically, subsection 5(1) of the Radiocommunication Act96 gives the Minister of Industry the power to fix and amend the terms and conditions of spectrum licences97. The Minister of Industry may further suspend or revoke a radio authorization if the licensee has contravened the Radiocommunication Act98, the Radiocommunication Regulations99 or the terms or conditions of the radio authorizations.

2.6.3.1 The Industry Canada Framework has not resulted in Competitive Wholesale Antenna Tower and Site Sharing

85. For the most part, mandatory roaming and antenna tower and site sharing regulation have evolved in parallel. Industry Canada first concluded as part of the Policy Framework “… that it is in accordance with the orderly development and efficient operation of radiocommunication in Canada to mandate antenna tower and site sharing and to prohibit exclusive site arrangements for all licensees including broadcasting certificate holders.”100 Thereafter, a public consultation was launched to consider proposed conditions of license for both mandatory roaming and antenna tower and site sharing which resulted in the Conditions of License.

86. Industry Canada subsequently issued a call for comments in February 2009 over problems that arose during tower and site sharing negotiations. As a result of that process, Industry Canada issued Guidelines for Compliance with the Conditions of License Relating to Antenna Tower and

92 TNC 2014-76, para 17. 93 Supra note 67. 94 Supra note 68. 95 Supra note 69. 96 Supra note 68. 97 Supra note 71. 98 Supra note 68. 99 Supra note 69. 100 Policy Framework at p. 8. 38

Site Sharing and to Prohibit Exclusive Site Arrangements101 in April 2009, which attempted to clarify some of the ambiguities that arose from the language contained in the Conditions of License. Later, roaming and tower and site sharing policies followed the same review process as mandatory roaming (described in Paragraph 64 above) that resulted in framework revisions that were adopted in March 2013102.

87. Of the three national incumbents, Bell and TELUS share network facilities and capacity. Rogers, Bell and Telus have also negotiated mutually advantageous tower sharing agreements based on their extensive networks that have been developed over several decades. In effect, contrary to the situation of new entrants, national incumbents have sufficient market power in this and other categories of facilities to ensure equitable treatment by other incumbents, but new entrants have no such leverage.

88. CNOC is concerned that that despite Industry Canada’s ongoing effort to make antenna tower and site sharing more equitable, there remains a real risk that incumbents will leverage their market power in this area and exploit this barrier to entry in a number of different ways.

89. CNOC is particularly concerned by three vulnerabilities of the Conditions of Licence that have been highlighted by entrants103 over the course of Industry Canada’s 2012 proceeding which sought comments on proposed revisions to the frameworks for mandatory roaming and antenna tower and site sharing: (1) Prohibitive costs to secure access on a shared tower; (2) Delays in obtaining access to a shared tower; and (3) Access denials or suboptimal access due to reservations for “imminent future use”.

90. These vulnerabilities exist because it is new entrants who require access to ubiquitous incumbent structures, whereas the reverse is not true, giving incumbents significant market power when it comes to negotiating access terms and conditions (including rates, timing and availability)

101 Guidelines for Compliance with the Conditions of License Relating to Antenna Tower and Site Sharing and to Prohibit Exclusive Site Arrangements, GL-06, Spectrum Management and Telecommunications, Industry Canada, Issue 1, April 2009. 102 Supra note 76. 103 See paragraph 28 of Wind’s submission in the call for comments initiated by Canada Gazette Notice Reference No. DGSO-001-12; See also pages 6 and 8 of Public Mobile’s submission in the same proceeding. 39

with new entrants. This unequal bargaining power allows incumbents to unduly discriminate against their competitors with respect to tower and site sharing access.

91. The three major vulnerabilities experienced by new entrants that flow from this situation are discussed in turn below.

92. First, in the absence of a tariffed backstop for shared access to antenna towers and sites, commercial rates for those services are at risk of being inconsistent and disproportionate to the underlying costs. In this regard, the comments set out above regarding the inadequacy of negotiations and final arbitration procedures to generate just and reasonable domestic roaming rates, apply equally to rates for antenna tower and site access. Such rates are not presently just and reasonable.

93. Second, CNOC wishes to caution the Commission against a regulated framework that is tolerant of unjustified provisioning delays by wholesale service providers. In the wireline context, members of CNOC have been subject to damaging wholesale service provisioning delays caused by incumbent providers104. Given that access to shared wireless structures is a barrier to competing in the relevant downstream retail market, it is imperative that the Commission impose safeguards to ensure that competitors are able to obtain shared access in a timely fashion. In CNOC’s view, these safeguards could be implemented via the application of Equality of Inputs (“EOI”) principles, which essentially require that a carrier must offer wholesale services to third party competitors and its own retail operations on equal terms, including timeliness. EOI is further described in Section 4.8.1 below.

94. Finally, CNOC is concerned with the lack of accountability with respect to frequent and questionable claims by incumbents that available tower and site space (which often amounts to a significant percentage of the facility’s capacity) is reserved for “imminent future use”. CNOC submits that a more stringent oversight mechanism for reviewing such claims is required to

104 While CNOC members have experienced such delays with various services from both the ILECs and Cable Carriers, CNOC’s Part 1 Application to Improve the Quality of Wholesale High-Speed Access Services The Respondents Provide to Independent Internet Services Providers, 27 September 2013 (Revised 12 November 2013), is perhaps the best example of this behavior on the public record on a Commission proceeding. 40

minimize the risk that entrants are arbitrarily denied shared access and to ensure that shared structures are utilized efficiently. CNOC is confident that this objective could be accomplished by applying EOI principles.

95. Overall, it is clear that Industry Canada’s framework for mandated antenna tower and site sharing access has fallen short of its goal of facilitating timely and affordable competitor access to these structures and locations. In CNOC’s view, tariffed rates for shared access to wireless structures coupled with the application of EOI principles is the only way to make definitive leaps towards greater mobile wireless competition. These remedies are discussed in greater detail in subsequent sections.

2.6.4 Vertical Integration and Service Bundling

96. The service bundling that is facilitated by the vertical integration of national and regional incumbents also represents a significant barrier to entry that protects incumbents’ market position and prevents competitive rivalry from materializing to the point where it could otherwise moderate or even eliminate the potential of incumbents to earn supernormal profits. Virtually all of the incumbents control not only wireless networks, but also wireline networks and services, as well as broadcasting distribution and programming assets. This vertical integration allows the incumbents to offer consumers service bundles, consisting of wireless and wireline telephony, data and video services that is virtually impossible for new entrants to match.

97. Incumbents can use service bundling to ‘tie in’ their customers as the advantages of the overall incumbent service bundles outweigh those that new entrants can offer in terms of price or service quality for specific services.

98. Service bundling in and of itself is not harmful to competition – in fact, consumers can clearly benefit from it, where it is merely a product of supplier efficiency. However, as is the case with wireless services and the benefits that incumbents obtained from disproportionate access to underlying spectrum assets, it is important to keep in mind that the incumbents’ ability to offer service bundling is not necessarily because they are more efficient than entrants. Rather it results from the decades of regulatory protection that they enjoyed which enabled them to develop very

large scale infrastructure that they now use for the joint delivery of wireless and wireline telephony, data and video services.

99. Incumbent telephone companies, for example, enjoyed decades of rate-regulated monopoly protection in the delivery of public-switched telephone network (“PSTN”) services. Likewise, Rogers enjoyed decades of regulatory protection for its cable TV distribution services. These legacy monopolies gave them the ability to develop their networks, including, ultimately, broadband access facilities and other key elements required for service bundling.

100. Accordingly, the incumbents are vertically-integrated communications services providers generating efficiencies that smaller, independent mobile wireless service providers cannot hope to replicate. The vertically integrated incumbents can also enjoy various opportunities for self- dealing in terms of pricing, access to services and conditions of services among business units in comparison to the access provided to unaffiliated third-party service providers.

101. There are services provided by incumbents both to their own business units and to third- party service providers where the two are in competition. This situation creates a clear economic incentive for the incumbent to favour its own business unit in the absence of a robust regulatory regime105. For example, as video content becomes more prevalent on wireless devices, large vertically integrated firms such as Bell, Rogers and Videotron that both produce and distribute content will have a financial incentive to offer better terms of trade to their own wireless distribution platforms than those offered to their competitors, the smaller cable companies and ISPs. Although the CRTC has implemented a vertical integration framework, the remedies available so far are mainly ex-post remedies. That regime cannot be expected to be comprehensive and efficient in dealing with the exercise of market power for service bundles involving mobile wireless services. Additional mobile wireless wholesale services regulation is required.

105 One example is the recent practice of certain carriers to assign preferential mobile data caps that solely apply to the viewing of programming and content which their affiliates own. The Commission is currently reviewing these practices by virtue of the Part 1 application by Benjamin Klass requesting the fair treatment of Internet services by Bell Mobility (Klass application) and the Part 1 Applications by CAC-COSCO-PIAC regarding Rogers’ Anyplace TV service and Videotron’s Illico.tv Service. 42

2.6.5 Deployment of New Technologies

102. Canadian incumbent telecommunications common carriers have often claimed that they constitute a constant source of technological innovation. However, a closer examination of the mobile wireless industry in particular indicates that global manufacturers – such as Ericsson and Huawei for networks and Samsung and Apple for consumer devices, respectively – have been responsible for most of the technological innovation and, correspondingly, provision of risk capital to develop the next technological platforms. Canadian incumbents are largely adopters of these innovative global technologies and networks which are deployed as they become available. Accordingly, the incumbents also do not shoulder the lion’s share of the financial risks associated with such innovation. The incumbent WSPs adopt these technologies based on licensing agreements for rollout in the Canadian market. Apple, for instance, launched its new iPhone 5 last year in the US and this was followed by roll out in Canada and other markets in the following months.106

103. Each new technology window requires massive capital investment to upgrade networks as well as to pay for corresponding operating costs. The financial requirements associated with technological change are beyond the resources of all competitors except for the three national incumbents and perhaps the two large regional incumbents.

104. For smaller WSPs that must interconnect with the incumbents or share their facilities, this constant technological change can serve as a pretext by incumbents to delay timely access and/or increase access fees.

105. Associated with the benefits of the latest mobile network technology, the large national and regional incumbents also have ‘first in line’ access to the best spectrum, and most advanced handsets and other smart devices that have the latest customer features and functionality. Thus, for example, the handsets offered by the 2008 new wireless entrants – WIND, Public Mobile and Mobilicity – initially had to operate on 2G technology and thus were unable to offer data intensive

106 See iPhone in Canada announcement on April 16, 2014 available at: http://www.iphoneincanada.ca/iphone-5- 2/rogers-fido-bell-virgin-telus-price-drop-32gb-64gb-iphone-5-models/. 43

services such as video-streaming (or, if offered, only a small number of customers could effectively access the required bandwidth for those services).

2.6.6 Coordinated Interaction

106. In highly concentrated sectors of the economy (e.g. banking, oil and gas, telecommunications, etc.) companies are frequently observed to change prices, service offerings and terms/quality of service in near-simultaneous fashion. While overtly setting prices in a coordinated fashion can be seen as anti-competitive, there is nothing to prevent a company from responding quickly to changes initiated by another competitor – whether that change is pricing, service offerings or quality of service.

107. The advantages of such informally coordinated market behaviour for incumbents include reduction in potential loss of market share to other incumbents, as well as creating an additional financial barrier to entry for new entrants and other niche players. Coordinated interaction can create the illusion of competition, but with prices set above competitive rates.

108. In the wireless sector, incumbents frequently announce changes in service offering and associated prices. At any one time, the three national incumbents have dozens of wireless service offerings both on a standalone basis and in triple or quad-play bundles in the various geographic markets. This should be seen as part of incumbents’ overall marketing and sales strategy to maintain market presence (‘share of mind’) for the overall company and create preference (‘top of mind’) for specific service offerings. Constant marketing and in particular, advertising campaigns require large marketing budgets that only the national (and to a lesser extent, regional) incumbents can afford. Incumbents also have the resources to prepare in advance a range of market strategies comprised of various offerings and price points to rapidly counter their competitors. One closely related strength enjoyed by incumbents is the brand recognition that follows from their vertically integrated operations and significant geographic presence and service coverage.

109. It’s worth noting that CNOC has observed recent instances of what appears to be synchronized pricing behavior from Rogers, Bell, Telus and many of their affiliated brands (i.e. Virgin, Fido and Koodo). Within a short window in the first quarter of 2014, several news outlets

44 reported that these carriers implemented universal 5$ price increases to all new base plans107. The risk of coordinated behavior in this market is an ongoing clear and present danger.

110. The Competition Bureau has recognized the danger of coordinated market behaviour by the national incumbents in the wireless sector. In its November 29th, 2013, Statement on Telus’ Proposed Acquisition of Public Mobile, the Competition Bureau stated that:

“… the industry is characterized by very high barriers to entry and expansion; the ready availability to market participants of information regarding prices, rival firms and market conditions; and the existence of joint ventures and industry organizations that could facilitate the communication and dissemination of information among market participants. As a result of these factors, mergers between wireless providers have the potential to not only substantially lessen or prevent competition through a unilateral exercise of market power, but to also facilitate the coordinated exercise of market power by market participants. Furthermore, even small increases in concentration in wireless markets may lead to a substantial prevention and/or lessening of competition.”108 (Emphasis added.)

111. The Competition Bureau provided additional commentary on the risks of coordinated interaction in the wireless industry in its January 29th, 2014 intervention in the TNC 2013-685 proceeding on roaming:

“In the Bureau’s view, mobile wireless markets in Canada are characterized by high concentration and very high barriers to entry and expansion. Furthermore, Canadian mobile wireless markets are characterized by other factors that, when combined with high concentration and very high barriers to entry and expansion, create a risk of coordinated interaction in these markets.109 (Footnote omitted, emphasis added.)

107 See The Huffington Post (2014) “Wireless Price Hike Strangely Similar Across All 3 Major Telcos” available at: http://www.huffingtonpost.ca/2014/03/19/wireless-price-hike-_n_4981211.html ; See also Newstalk 1010 (2014) “Smart phone carriers raise contract rates” available at: http://www.newstalk1010.com/news/2014/03/17/smartphone-carriers-raise-contract-rates; See also CBC News (2014) “Wireless Carriers hike prices across Canada” available at: http://www.cbc.ca/news/business/wireless-carriers-hike-prices-across-canada-1.2575886. 108 Competition Bureau “Statement Regarding the Proposed Acquisition by TELUS of Public Mobile,” Industry Context section, available at http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03633.html. 109 Supra note 4 at para 9. 45

112. Coordinated market action in the wireless and broader telecommunications industry can reduce competition from new players and increase prices for consumers. In the absence of a comprehensive regulatory regime that reduces the risk of coordinated market action by incumbents, under existing market conditions in which incumbents are so dominant, new competitors and consumers can suffer negative consequences.

2.7 Wireless Services are not Substitutable with Wireline Services

113. The question of whether or not wireless services can, or might, become substitutes for traditional wireline services is a key consideration in assessing the competitive state of Canada’s wireless industry. The context of this analysis is that if these services are indeed substitutes, then wireless and wireline providers operating in the same geographic area can be considered true competitors, therefore lessening the need for regulation of either of these service providers’ wholesale services.

114. The Commission has notably determined that wireless voice services are, to some extent, in fact substitutes for wireline voice services110, but the question of whether these two platforms are substitutable with regards to data services has yet to be fully examined. To this end, CNOC commissioned Nordicity to prepare an expert report based on the technical and economic (pricing) evidence regarding the extent to which wireless and wireline data services may act as substitutes for each other. Nordicity’s report111, entitled “Wireless Substitutability – Examination of the Substitutability of Wireless for Wireline Broadband Connectivity” (“Nordicity Substitutability Report”) is included in this filing as Attachment “A” to this submission.

115. Based on Nordicity’s evidence, it is evident that, in the vast majority of circumstances, wireless and wireline data services cannot be considered substitutes for each other.

110 Obligation to serve and other matters, Telecom Regulatory Policy CRTC 2011-291, 3 May 2011. 111 Nordicity (2013) “Wireless Substitutability – Examination of the Substitutability of Wireless for Wireline Broadband Connectivity.” (“Nordicity Substitutability Report”) 46

2.7.1. Technical Non-Substitutability

116. In a technical comparison of wireless and wireline data services, it is immediately clear that wireline technologies feature greater capacity / speeds than wireless technologies from an end- user perspective112. Rysavy Research effectively summarized the difference in these capabilities when stating: “Relative to wireless networks, wireline networks have always had greater capacity and historically have delivered faster throughput rates. Figure 5 shows advances in typical user throughput rates and illustrates a consistent 10x advantage of wireline over wireless technologies.” “Over time, wireless networks will gain substantial additional capacity … but they will never catch up to wireline.”113 (Figure 5 omitted.)

117. To further illustrate the very large difference in capacity between wireless and wireline technologies, consider Figure 12 below which illustrates the total theoretical capacity for all the spectrum up to 100 GHz (of which mobile wireless is a very small fraction) compared to the capacity of a single fibre optic strand:

Figure 12: Illustration of Spectrum Capacity Compared to Fibre Optic Strand Capacity

112 Nordicity Substitutability Report, Figure 2. 113 Rysavy Research (2013) “Mobile Broadband Explosion: The 3GPP Wireless Evolution” http://www.rysavy.com/Articles/2013-08-4G-Americas-Mobile-Broadband-Explosion.pdf (at page 12) 47

118. As explained by Nordicity, the above Figure “…is a stark reminder that from a technical and physical perspective, mobile wireless networks will simply never have the capacity that can be realized by wireline systems, particularly fibre-optic based systems such as FTTH deployments. Each user would essentially require its own private, dedicated wireless tower to deliver the same throughput achievable with home-based FTTH connections. Such a deployment is not economically feasible.”114

2.7.2 Economic (Price) Non-Substitutability

119. Although wireless and wireline services are not technically substitutable for each other, consumers may not compare the two platforms solely through that lens. Price is consistently one of the most important factors that influences what consumers buy or don’t buy. Based on this consideration, Nordicity created sample scenarios around customer needs and usage patterns, with a view to examining the cost of providing services in each scenario using mobile wireless technologies compared to wireline technologies.

120. Nordicity’s scenarios were constructed based on usage of specific applications, time spent using them, as well as the possibility of concurrent users115 (and the Nordicity report fully describes all usage assumptions and cites supporting sources116). CNOC should underline that Nordicity referred to the best-value mobile wireless packages (relative to the usage scenario) of Bell, Rogers and Telus for the purpose of this comparison. The following paragraphs briefly set out the results of Nordicity’s economic comparison.

121. Scenario 1, which tracks the price of usage117 for a light, occasional use, single-person dwelling is projected as follows:

114 Nordicity Substitutability Report, p. 35. 115 Id., p. 49. 116 Id., Figures 38 and 39. 117 This scenario assumes data usage of 21.34 GB per month based on the projections of the Nordicity Substitutability Report, p. 53. 48

Capacity Excess Capacity Overage Cost Service Base Cost Overage Cost Total Cost Included (GB) Used (GB) ($/ GB)

Wireline 5-6 Mbps Plan 38 0.00 $ 3.00 $ 48.00 $ - $ 48.00 Wireline 25 Mbps Plan 140 0.00 $ 2.00 $ 64.00 $ - $ 64.00 Wireline 50+ Mbps Plan 400 0.00 $ 2.00 $ 107.00 $ - $ 107.00 ROGERS Mobile Flex Rate for Hubs 20 1.34 $ 10.00 $ 90.00 $ 13.35 $ 103.35 BELL Mobile Internet Flex Plan 15 6.34 $ 10.00 $ 105.00 $ 63.35 $ 168.35 TELUS Mobile Internet Flex 10 11.34 $ 51.20 $ 80.00 $ 580.38 $ 660.38 As explained by Nordicity: “In Scenario 1, we can already see that for one provider at least, the option of using mobile wireless services has become quite expensive. In fact, apart from the 50+ Mbps plan wireline offering, all wireless options were more expensive than the wireline options.”118

122. Scenario 2, which tracks the price of usage119 for a moderate use, single-person dwelling is projected as follows:

Capacity Excess Capacity Overage Cost Service Base Cost Overage Cost Total Cost Included (GB) Used (GB) ($/ GB)

Wireline 5-6 Mbps Plan 38 32.49 $ 3.00 $ 48.00 $ 97.46 $ 145.46 Wireline 25 Mbps Plan 140 0.00 $ 2.00 $ 64.00 $ - $ 64.00 Wireline 50+ Mbps Plan 400 0.00 $ 2.00 $ 107.00 $ - $ 107.00 ROGERS Mobile Flex Rate for Hubs 20 50.49 $ 10.00 $ 90.00 $ 504.88 $ 594.88 BELL Mobile Internet Flex Plan 15 55.49 $ 10.00 $ 105.00 $ 554.88 $ 659.88 TELUS Mobile Internet Flex 10 60.49 $ 51.20 $ 80.00 $ 3,097.00 $ 3,177.00 As explained by Nordicity: “In Scenario 2, the differences in pricing become readily apparent. While this is already more capacity than may be used by a typical home today, it is not uncommon, and will be much more common in the future. Prices for wireless are around 5x more expensive than wireline.”120

123. Scenario 3, which tracks the price of usage121 for a moderate use, multi-person dwelling is projected as follows:

118 Id., p. 59. 119 This scenario assumes data usage of 70.49 GB per month based on the projections of the Nordicity Substitutability Report, p. 54. 120 Id., p. 60. 121 This scenario assumes data usage of 121.77 GB per month based on the projections of the Nordicity Substitutability Report, p. 55. 49

Capacity Excess Capacity Overage Cost Service Base Cost Overage Cost Total Cost Included (GB) Used (GB) ($/ GB)

Wireline 5-6 Mbps Plan 38 83.77 $ 3.00 $ 48.00 $ 251.32 $ 299.32 Wireline 25 Mbps Plan 140 0.00 $ 2.00 $ 64.00 $ - $ 64.00 Wireline 50+ Mbps Plan 400 0.00 $ 2.00 $ 107.00 $ - $ 107.00 ROGERS Mobile Flex Rate for Hubs 20 101.77 $ 10.00 $ 90.00 $ 1,017.72 $ 1,107.72 BELL Mobile Internet Flex Plan 15 106.77 $ 10.00 $ 105.00 $ 1,067.72 $ 1,172.72 TELUS Mobile Internet Flex 10 111.77 $ 51.20 $ 80.00 $ 5,722.75 $ 5,802.75 As explained by Nordicity: “In Scenario 3, the comparison no longer seems fair at all. In this scenario, it is interesting to note that in 2 of the 3 wirelines packages, the included bit cap has still not been exceeded, while for the wireless plans, overage charges exceed $1,000. Overall costs are now at least 10x more for wireless.”122

124. Finally, Scenario 4, which tracks the price of usage123 for a moderate to heavy use, multi- person dwelling is projected as follows:

Capacity Excess Capacity Overage Cost Service Base Cost Overage Cost Total Cost Included (GB) Used (GB) ($/ GB)

Wireline 5-6 Mbps Plan 38 244.26 $ 3.00 $ 48.00 $ 732.78 $ 780.78 Wireline 25 Mbps Plan 140 142.26 $ 2.00 $ 64.00 $ 284.52 $ 348.52 Wireline 50+ Mbps Plan 400 0.00 $ 2.00 $ 107.00 $ - $ 107.00 ROGERS Mobile Flex Rate for Hubs 20 262.26 $ 10.00 $ 90.00 $ 2,622.61 $ 2,712.61 BELL Mobile Internet Flex Plan 15 267.26 $ 10.00 $ 105.00 $ 2,672.61 $ 2,777.61 TELUS Mobile Internet Flex 10 272.26 $ 51.20 $ 80.00 $ 13,939.75 $ 14,019.75 As explained by Nordicity: “In Scenario 4, it would seem there is no conceivable rationale for considering wireless with today’s pricing and service options. On the 50+ Mbps wireline plan, we have still not exceeded the bit cap, leading for a monthly charge of $107, while at even the best wireless prices, the same usage would cost over $2,700 per month.”124

125. Overall then, even light users of data will see a very clear discrepancy in the prices paid for wireline and wireless services. As usage increases, that discrepancy becomes more and more acute to the point where it is simply inconceivable to even consider wireless as an option.

122 Id., p. 61. 123 This scenario assumes data usage of 282.26 GB per month based on the projections of the Nordicity Substitutability Report, p. 56. 124 Id., p. 62. 50

126. In summary, Figure 13 below provides a useful overview of the non-substitutability of wireless services for wireline services, based on price. The chart, prepared by Nordicity, illustrates the current costs that an ‘average’ user would expect to pay for wireless services based on the current average usage on wireline platforms today. This comparison averages 2013 upload and download usage data collected by Sandvine125, which results in a combined 39.2 GB of usage per month.

Figure 13: Baseline Monthly Costs for Average Wireline User to Substitute with Wireless Service

Baseline Cost Comparison for Average User

$- $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

$51.45

Wireline $64.00

$107.00

$281.50 $1,572.48 $346.50 Wireless

Lowest Cost / Speed Medium Cost / Speed Highest Cost / Speed

127. For all of the above reasons, it is evident that wireless and wireline services are generally not substitutable with each other either from a technical or economical perspective – the two most relevant factors influencing customer choice in purchasing telecommunications services. Accordingly, the Commission should reject any and all claims from parties in this proceeding that wireless and wireline services are substitutable.

2.8 Conclusion

128. In Part 2.0 of this intervention, we have shown that mobile wireless markets, both retail and wholesale, are far from competitive in Canada. The evidence in support of this conclusion includes:

125 Id., at p. 40, Figure 27. 51

. The extremely high degree of market concentration in the provision of mobile wireless retail services by three national incumbents and in a couple of regions, a regional incumbent;

. The higher prices paid by Canadian consumers for mobile wireless services based on international comparisons;

. The higher profitability of the Canadian national wireless incumbents (using measures such as EBITDA, FCF and ARPU) relative to international counterparts and Canadian counterparts in other intensive industries characterized by high fixed and sunk capital costs;

. Barriers to entry associated with factors such as the advantages enjoyed by incumbents with respect to spectrum acquisition, unregulated domestic roaming, unregulated antenna tower and site sharing, vertical integration and service bundling, access to new technologies at relatively low cost and risk, and coordinated interactions; and

. The non-substitutability of wireless and wireline services.

129. In the following Part of this intervention we demonstrate that based on these considerations there is a need for the Commission to remedy the market failures described above by mandating a series of regulated wholesale services that competitors require in order to deliver their own mobile wireless retail services to consumers.

3.0 MARKET DEFINITION AND THE ESSENTIALITY OF WHOLESALE WIRELESS SERVICES

130. This section is divided into three parts which, collectively, address the issue of the extent and manner in which CNOC believes the Commission should reassert its jurisdiction under certain provisions of the Act from which the Commission has previously forborne in order to impose wholesale regulatory measures on incumbent national and mobile wireless carriers.

131. The three main sections of this Part are as follows: (1) recommendations with regards to appropriate market definitions for wholesale wireless services; (2) A review of the relevant forbearance criteria set out in TD 94-19, the essentiality test articulated in TD 2008-17 and the recommended modifications to the essentiality test that CNOC proposed in the proceeding initiated by TNC 2013-551; and (3) application of the forbearance criteria and essentiality tests to the current market conditions governing wholesale roaming services, antenna tower and site sharing services and a Full MVNO service that is proposed in this submission.

3.1 Market Definition

3.1.1 Product Markets

132. In light of the very limited substitutability between wireless and wireline services and the joint use of mobile wireless devices and networks for the provision of voice, data and video services, a wholesale service required to support all of these retail mobile wireless services must be considered a separate and distinct product market.

133. In particular, CNOC is of the view that three distinct wholesale services are required to support all retail competition in mobile wireless services.

134. The first service is domestic roaming, which has already been acknowledged by Industry Canada as being necessary for retail competition, although no specific corresponding wholesale service has been developed to date.

135. The second service is a Full MVNO service that encourages Full MVNOs to deploy their own network infrastructure, rather than just becoming a reseller of the incumbents. Although Full

MVNO and roaming services are partially substitutable with each other, a Full MVNO arrangement will create an incentive for competitors to invest in their own network infrastructure by becoming full MNOs, which will, in turn, provide them a greater ability to differentiate their retail services from those of the incumbents. However, some competitors will not wish or be able to migrate from a Full MVNO to a MNO solution (which requires roaming) in part or all of their operating territories. Therefore, both Full MVNO and roaming services are required. Due to their shared characteristics, both are considered together in the analysis that follows in Section 3.3 below. The technical implementation details of the Full MVNO service are further described in Section 4.4.

136. The third wholesale service required in support of retail mobile wireless competition is antenna tower and site sharing access, which has also already been acknowledged by Industry Canada as being necessary for retail competition, although no specific corresponding wholesale service has been developed to date.

3.1.2 Geographic Markets

137. CNOC is also of the opinion that an analysis of the retail mobile wireless sector solely at a national level would mask the existence of several regional (i.e., ten provincial and one pan- territorial) markets in Canada. On the other hand, some retail mobile wireless services (e.g. nationwide roaming services) have a defined national character. Thus, wholesale services required to support retail competition must take this reality into account.

138. Since retail incumbents can either be national or regional in nature, the wholesale roaming, Full MVNO and antenna tower and site sharing services should also reflect this reality. Accordingly, the appropriate geographic markets for such services will be both national and regional (i.e., ten provincial markets and one pan-territorial market). To the extent that the Commission adopts a cost-based pricing approach for these wholesale services, the use of national and regional geographic markets for the development of these services will also recognize that national incumbents have national costs while regional incumbents only have regional costs.

3.2 The Applicable Criteria and Tests to Justify Regulatory Intervention

3.2.1 Telecom Decision 94-19 Criteria

139. TD 94-19126 articulates criteria which guide the Commission in its application of s. 34 of the Act, which grants the Commission its powers of forbearance. The criteria revolve around the accepted principle that a market cannot be workably competitive if the dominant firm possesses substantial market power.

140. CNOC has summarized the TD 94-19 criteria as follows: • The first step in assessing competitiveness is defining the relevant market • The next step in assessing market competitiveness involves determining the market share held by the largest firm, as well as the market shares of other firms in the market • The Commission should consider a number of factors in addition to market share:

o Market demand conditions, which comprise the following factors: . The availability of economically feasible and practical substitutes; . The costs to customers of switching suppliers (the higher these costs, the greater the market power of the dominant firm); . Whether the product is an essential input, for example, a bottleneck service, into the customer's production process.

o Supply expansion responses of firms o Likelihood of entry o Lengthy construction periods and high sunk investment costs o Whether rivals have enough capacity to constrain the incumbent telephone companies’ anti-competitive behavior

o Evidence of rigorous competitive behavior o The nature of innovation and technological change in the relevant market

3.2.2 The Telecom Decision 2008-17 Essential Services Test

141. In TD 2008-17, the Commission indicated “that to be essential, a facility, function, or service must satisfy all of the following conditions:

126 Id., at section III, b. 55

(i) The facility is required as an input by competitors to provide telecommunications services in a relevant downstream market;

(ii) The facility is controlled by a firm that possesses upstream market power such that denying mandated access to the facility would likely result in a substantial lessening or prevention of competition in the relevant downstream market; and

(iii) It is not practical or feasible for competitors to duplicate the functionality of the facility.”127 (Footnote omitted.)

3.2.3 The Essential Services Test as Revised by CNOC in the Proceeding Initiated by TNC 2013-551

142. In its intervention dated 31 January 2014 in the proceeding initiated by TNC 2013-551, CNOC suggested two changes to the essentiality test delineated in TD 2008-17: (1) Replacing the word ‘denying’ in the second criterion by the words ‘not providing’; and (2) Clarifying that the third criterion refers to economically efficient duplication, not physical or technical duplication.

143. Thus, CNOC proposed that the definition of essential services to be revised as follows:

(i) The facility is required as an input by competitors to provide telecommunications services in a relevant downstream market;

(ii) The facility is controlled by a firm that possesses upstream market power such that not providing access to the facility would likely result in a substantial lessening or prevention of competition in the relevant downstream market; and

(iii) It is not economically efficient for competitors to duplicate the functionality of the facility.”

127 TD 2008-17, at paragraph 36. 56

3.3 The Application of the TD 94-19 Criteria and Essential Services Tests to Wireless Services

144. In this section, CNOC follows the directives of the Commission contained in paragraph 17 of TNC 2014-76 by applying the TD 94-19 criteria to wholesale roaming services, antenna tower and site sharing services and CNOC’s proposed mandated Full MVNO service. In each case, CNOC also applies the TD 2008-17 essential services test as revised by CNOC in the proceeding initiated by TNC 2013-551, rather than applying both the original and revised tests. This is done for the sake of simplicity; however, CNOC is of the view that under a proper application of the Commission’s essential facility test as articulated in TD 2008-17, the outcome of the analysis will be the same as it is under CNOC’s modified definition for each of the proposed wholesale services.

145. As noted in Section 3.1.1 above, Full MVNO and roaming services share many attributes and are partially substitutable with each other. Accordingly, they are being considered together for the purpose of the analysis carried out in Section 3.3.1 below.

146. For each of the mobile services that are listed, the Commission’s directives also request that parties identify, with supporting rationale, the regulatory measures that should apply and how those measures should be implemented.128 CNOC responds to both of those requests in Section 4.0.

3.3.1 Wholesale Roaming and Full MVNO Services

3.3.1.1 TD 94-19 Criteria

147. As noted above, the markets for wholesale roaming and Full MVNO services are both national and regional in scope and so both need to be considered.

148. It is also clear that the national and regional incumbents can exercise substantial market power over both national and regional wholesale roaming and Full MVNO service markets. As noted in Part 2, the incumbents collectively possess a total retail wireless market share in excess of 90%. Although CNOC does not have data that is specific to wholesale roaming service market

128 TNC 2014-76, paragraph 17. 57

shares, it is self-evident, based on the extremely high retail-market share enjoyed by the incumbents, that they also hold an extremely high share of the wholesale domestic roaming market. In the case of Full MVNO, CNOC is not aware of any existing arrangement that meets the definition of this service as set out in Section 3.3.1.2 below. The absence of this service constitutes a serious impediment to the development of more competitive retail markets for mobile wireless services.

149. With regard to market demand conditions, there are no economically feasible and practical substitutes to wholesale roaming and Full MVNO arrangements.

150. Switching suppliers is not a practical alternative for competitors either. This is so for a number of reasons. First, none of the incumbents are motivated to cooperate with new competitors. Therefore, attempting to switch incumbent suppliers would be pointless in most cases. Second the presence of different legacy technologies in the various incumbent networks would make it difficult for a competitor to switch roaming or Full MVNO arrangements and retain the same geographic footprint it had prior to the change. Finally, there is no substitute to a roaming and/or Full MVNO arrangement with an incumbent that a competitor can employ to provide its own retail services. Accordingly, wholesale roaming and Full MVNO arrangements are essential bottleneck inputs into competitors’ retail mobile wireless services.

151. Given their small scale relative to incumbents, competitors must depend on incumbent roaming and Full MVNO services in order to provide their own competitive retail services. Therefore, any supply expansion capabilities of competitors are immaterial to their ability to compete at the retail level unless such access is granted. Given all of the barriers to entry identified in Section 2.6 of this intervention, including the advantages enjoyed by incumbents with respect to spectrum acquisition, unregulated antenna tower and site sharing, vertical integration and service bundling, access to new technologies at relatively low cost and risk, and coordinated interactions, meaningful entry that is sustainable is not likely absent mandated roaming and Full MVNO services.

152. As also discussed, mandated negotiations and the availability of a final offer arbitration process have not proven sufficient on their own to enable competitors to obtain domestic roaming arrangements on reasonable terms and conditions.

153. The construction of mobile wireless networks and deployment of network capacity also requires lengthy construction periods and high sunk investment costs. Therefore, competitors will not be able to compete with incumbents at the retail level or negotiate reasonable wholesale arrangements with them absent the mandated roaming and Full MVNO services that will enable them to reach a reasonably large scale.

154. As already noted, mobile wireless networks are not sufficiently competitive in Canada.

155. Innovation and technological change are being driven predominantly by network and handset manufacturers and do not serve as checks against the market power of incumbents in either the wholesale or retail segments of the market.

156. Based on all of these considerations under the TD 94-19 framework, it is clear that mandated wholesale roaming and Full MVNO services are required to promote competition and that forbearance is premature.

3.3.1.2 Essential Services Test

157. An application of the revised essential services definition to wholesale roaming and Full MVNO services is straightforward. The next three paragraphs apply the first, second and third elements of the definition, respectively, to the services in question.

158. Wholesale roaming and Full MVNO services are required as an input by competitors to provide services in the retail mobile wireless market. The Minister of Industry has explicitly acknowledged this fact with respect to wholesale roaming services. CNOC submits that the same finding applies to a Full MVNO service, as well. In CNOC’s view, the Full MVNO service is an essential means of overcoming the significant barriers to entry described in Section 2.6. For this

reason, both wholesale roaming and Full MVNO services are required by competitors to provide competitive downstream mobile wireless services.

159. The second stage of the essentiality test is easily satisfied. The facilities in question are controlled by incumbent firms that possess market power derived from their extremely high market shares and the existence of considerable barriers to entry. Not providing access to wholesale roaming and Full MVNO services will perpetuate a status quo where the domestic roaming arrangements dictated by incumbents are in prima facie breach of s.27(2) of the Act and the national market shares of new entrants are incapable of piercing a 3% ceiling129. Consequently, not providing access to these facilities has and would continue to result in a substantial lessening or prevention of competition in the downstream market.

160. Finally, it is clearly not economically efficient for competitors to duplicate the functionality of wholesale roaming or Full MVNO facilities. Doing so would require the development of very large regional and national networks in addition to ownership of unavailable and extremely expensive spectrum assets.

161. Therefore, both wholesale roaming and Full MVNO services meet the definition of essential services, as revised by CNOC.

3.3.2 Antenna Tower and Site Sharing Services

3.3.2.1 TD 94-19 Criteria

162. As is the case for wholesale roaming and Full MVNO services, the markets for antenna tower and site sharing services are both national and regional in scope and so both need to be considered.

163. Both national and regional incumbents can exercise substantial market power over antenna tower and site sharing services in national and regional markets. Although CNOC does not possess data that is specific to antenna tower and site sharing services, high incumbent market shares for

129 2013 CMR, p.161, Figure 5.5.5. 60 those services is self-evident based on the extremely high retail-market shares for mobile wireless services that incumbents otherwise enjoy.

164. With regard to market demand conditions, there are no economically feasible and practical substitutes to antenna tower and site sharing services. While competitors may be able to finance limited tower builds of their own, such opportunities are rare and costly.

165. Switching suppliers in this context is not a practical alternative for competitors for the same reasons that are listed above for wholesale roaming and Full MVNO services. First, none of the incumbents are motivated to cooperate with new competitors. Therefore, attempting to switch incumbent suppliers would be pointless in most cases. Second the presence of different legacy technologies in the various incumbent networks would make it difficult for a competitor to switch antenna tower and site sharing arrangements and retain the same geographic footprint it had prior to the change. Finally, there is no economically feasible or practical substitute to an antenna tower and site sharing arrangement with an incumbent that a competitor can consistently employ to provide its own retail services. Accordingly, antenna tower and site sharing services are bottleneck inputs into competitors’ retail mobile wireless services.

166. Given their small scale relative to incumbents, competitors must depend on incumbent antenna tower and site sharing in order to provide their own competitive retail services. Therefore, any supply expansion capabilities of competitors are immaterial to their ability to compete at the retail level unless such access is granted. Given all of the barriers to entry identified in Section 2.6 of this intervention, including the advantages enjoyed by incumbents with respect to spectrum acquisition, unregulated domestic roaming, vertical integration and service bundling, access to new technologies at relatively low cost and risk, and coordinated interactions, meaningful entry that is sustainable is not likely absent mandated antenna tower and site sharing services.

167. It should also be underscored that the challenges surrounding mandated negotiations and the availability of a final offer arbitration process with regards to antenna tower and site sharing are as pronounced as they are for wholesale roaming services.

168. The construction of antenna towers and sites requires lengthy construction periods and high sunk investment costs. Most competitors are unable to engage in such developments on a scale required to compete with incumbents at a retail level. Access to shared antenna towers and sites on a mandated basis will enable competitors to eventually reach the scale that will allow for deployment of towers and sites where appropriate.

169. As already noted, mobile wireless networks are not sufficiently competitive in Canada.

170. Innovation and technological change are being driven predominantly by network and handset manufacturers and do not serve as checks against the market power of incumbents in antenna tower and site sharing.

171. Based on all of these considerations under the TD 94-19 framework, it is clear that shared antenna tower and site services are required to promote competition and that forbearance is premature.

3.3.2.2 Essential Services Test

172. Antenna tower and site sharing services unquestionably meet the essential services definition. This is demonstrated in the subsequent paragraphs.

173. First, the Minister of Industry has explicitly acknowledged that antenna tower and site sharing services are required as an input by competitors to provide services in the retail mobile wireless market. This finding was the raison d’être for Industry Canada’s mandated negotiation and final offer arbitration framework for shared towers and sites. The shortcomings of that regime do not change the fact that competitors need shared access to antenna towers and sites in order to compete in the relevant downstream market.

174. The second stage of the essentiality test is easily satisfied. The facilities in question are controlled by incumbent firms that possess market power derived from their extremely high market shares and the existence of considerable barriers to entry. Not providing access to shared antenna

towers and sites has and would continue to result in a substantial lessening or prevention of competition in the downstream market.

175. Finally, competitors do not possess the required capital to duplicate the functionality of shared antenna tower and site access in an economically efficient manner. Competitors who have deployed towers have done so in a limited way. As a rule, competitors do not possess the deep pockets required to deploy antenna towers and sites ubiquitously on an economically efficient basis.

3.4 Conclusions

176. In summary, the application of the TD 94-19 criteria affirms that none of the services examined should continue to be forborne – quite the opposite, all services in question warrant regulatory intervention. Likewise, the Commission should consider wholesale roaming services, shared antenna tower and site services and mandated Full MVNO services as essential services based on the application of the TD 2008-17 test as modified by CNOC, or as the original test should be properly interpreted.

177. With the essential character of these services established, the subsequent section will recommend appropriate regulatory measures and implementation strategies.

4.0 PROPOSED REMEDIES

4.1 Introduction

178. As indicated in the preceding sections, CNOC recommends that the Commission take action to remedy the competitive failures of the Canadian wireless industry by implementing a regulated full MVNO framework and complementary mandated services for wholesale roaming and shared antenna tower and site services. This section examines CNOC’s proposed remedies in detail.

179. The section begins by defining the term MVNO and then moves on to categorizing the different types of MVNO models that exist. After this brief introduction comes a primer of defined

63 terms and concepts that are necessary to understanding CNOC’s blueprint for the technical implementation of the full MVNO framework which immediately follows. Finally, CNOC describes how this technical framework addresses the various barriers to entry and identifies where complementary mandated services are required.

180. Overall, this section is aimed at: (i) presenting a technical framework that will allow for the creation of full MVNOs in the Canadian market; and, ii) showing a clear and realistic path for MVNOs to become MNOs.

4.2 What is a Mobile Virtual Network Operator (“MVNO”)?

181. An MVNO is a company that provides mobile communication services, sells subscriptions, and bills customers under its own brand but does not have its own spectrum license. Mobile industry experts define MVNOs according to “how much of the communication network they control”.130 The application of this definition results in two basic MVNO types:

• Branded Reseller MVNO: This model requires a ‘turn-key’ traffic contract with a MNO. Under this model, service capabilities are governed by the MNO. The MVNO has no control over any network elements. The MVNO merely provides its brand and sometimes, its distribution channels. This is the only type of MVNO model currently in use in Canada. This is often referred to as ‘white label’ or ‘reseller’ as the MNO operates the vast majority of the service components

• Full MVNO: An MVNO of this type must invest in, build and operate its own backbone network in addition to securing interconnection agreements with other carriers to terminate traffic. A carrier of this type must also build a variety of facilities including its own Mobile Switching Center (“MSC”) and Home Subscriber Server (“HSS”) in order to interconnect with traditional MNOs.

130 Telektronikk, “Mobile Virtual Network Operators”, http://www.telenor.com/wp- content/uploads/2012/05/T01_4.pdf 64

182. The diagram below illustrates the different aspects of operating a mobile wireless network, and shows which aspects are under control of the operator described (indicated by the blue shading).

Figure 14: Areas of Responsibility for Various Mobile Wireless Operator Types

183. Currently in Canada only Branded Reseller MVNOs exist, under brands such as Brightroam, Cityfone, PC Mobile, and 7-Eleven Speak Out Wireless. According to a market impact study, “This is the model that requires the lowest investment for a new venture, therefore the fastest to implement. However, most of the business levers remain with the network provider. Therefore, the new venture has a very limited control of the business levers and value proposition of the service”.131 Further, Branded Reseller MVNOs generally operate in the prepaid space, which only serves 19% of all wireless customers.132

131 Valoris, “Mobile Virtual Network Operator (MVNO) basics: What is behind this mobile business trend”, http://www.valoris.com/docs/MVNO_basics.pdf. 132 Canadian Radio-television and Telecommunications Commission, “Communications Monitoring Report September 2013”, 200, http://www.crtc.gc.ca/eng/publications/reports/policyMonitoring/2013/cmr2013.pdf. 65

184. In contrast, the Full MVNO model requires investment in return for the ability to control more aspects of service offerings. This model is facilitated by a regulatory framework that enables the following:

• The ability to launch services and handsets independently of MNOs: This allows MVNOs to introduce new services frequently and not be constrained by the MNOs’ own pace and approach to service introduction. • The ability to select the best alternative access network: To reduce cost, MVNOs should be able to link to several MNOs so that they are not tied to exclusive arrangements. • The ability to issue SIM cards: This capability avoids unnecessary disclosure of the MVNO subscribers’ personal and commercial information to the MNOs. In addition to this privacy safeguard, this ability also protects MVNO market intelligence. • The ability to obtain its own International Mobile Subscriber Identity (“IMSI”) codes, interconnection rights, and establish its own international roaming agreements, if desired. • The ability to build a network inlay: To attain a better cost structure where the company’s customer density warrants it, a true MVNO can make arrangements so that customers are not roaming at all in a portion of the network. This can be achieved through the use of Wi-Fi, licensed spectrum, or other new technologies as they become available.

4.3 Technical Primer

185. As noted at the outset of this section, CNOC’s technical Full MVNO implementation blueprint will make use of numerous terms and acronyms. This subsection presents a list of these terms and concepts as well as their associated definitions for the sake of convenience.

• IP Multimedia Subsystem (“IMS”): The IMS (also known as the IP Multimedia Core Network Subsystem) is an architectural framework for delivering IP multimedia services. It was originally designed by the wireless standards body 3rd Generation Partnership Project (“3GPP”), as a part of the vision for evolving mobile networks beyond GSM.

• Home Subscriber Server (“HSS”): The HSS or User Profile Server Function (“UPSF”) is a master user database that supports the IMS network entities that actually handle calls. It

contains the subscription-related information (i.e., subscriber profiles), performs authentication and authorization of the user, and can provide information about the subscriber's location and Internet Protocol (“IP”) information. It is similar to the GSM Home Location Register (“HLR”) and Authentication Centre (“AuC”).

• Interconnection Border Control Function (“IBCF”): The IBCF is used in IMS networks as a gateway to external networks. The IBCF provides Network Address Translation (“NAT”), firewall, and other IP connectivity functions needed for the secure interconnection of two IMS networks.

• Mobile Switching Center (“MSC”): The MSC is a telephone exchange that makes the connection between mobile users within the network, from mobile users to the public switched telephone network and from users on one mobile network to users on other mobile networks. The MSC also administers handovers to neighboring base stations, keeps a record of the location of the mobile subscribers, and is responsible for subscriber services and billing.

• Gateway Mobile Switching Center (“GMSC”): The GMSC is a special kind of MSC that is utilized to route calls outside the mobile network. Whenever a call to a mobile subscriber comes from outside the mobile network or the subscriber wants to make a call to somebody outside the mobile network, the call is routed through the GMSC. In practice, the GMSC is just a function that can be part of a MSC.

• Short Message Service Center (“SMSC”): A SMSC is the portion of a wireless network that handles SMS operations, such as routing, forwarding and storing incoming text messages on their way to desired endpoints. Wireless network operators connect SMSCs through Short Message Service (“SMS” gateways).

• Packet Data Network Gateway (“PGW”): The PGW provides connectivity from devices to external packet data networks by being the point of exit and entry of traffic. The PGW performs policy enforcement, packet filtering for each user, charging support, lawful interception and packet screening.

• GPRS Tunneling Protocol (“GTP”): The GTP is the tunneling protocol defined by the 3GPP standards to carry GPRS data within 3G/4G networks.

GTP is used to establish a GTP tunnel, for user equipment, between a Serving Gateway (“S- GW”) and Packet Data Network Gateway (“P-GW”), and an S-GW and Mobility Management Entity (“MME”). A GTP tunnel is a channel between two GPRS support nodes through which two hosts exchange data. The S-GW receives packets from the user equipment and encapsulates them within a GTP header before forwarding them to the P-GW through the GTP tunnel. When the P-GW receives the packets, it decapsulates them and forwards them to the external host.

GTP comprises the following separate protocols:

o GTP-C— Performs signaling between the S-GW and P-GW in the core GPRS network to activate and deactivate subscriber sessions, adjust the quality of service parameters, or update sessions for roaming subscribers who have arrived from another S-GW. GTP-C supports transport of control packets in IPv4 format.

o GTP-U— Transports user data within the core GPRS network and between the Radio Access Network (RAN) and the core network. GTP-U supports IPv4 and IPv6 user data, but transport is IPv4.

• Network to Network Interface (“NNI”): In telecommunications, a NNI is an interface that specifies signaling and management functions between two networks. A NNI circuit can be used for interconnection of signaling (e.g., SS7), IP (e.g., MPLS) or Asynchronous Transfer Mode (“ATM”) networks. A network-to-network interface is also known as a network node interface.

• Real-time Transport Protocol (“RTP”): The RTP defines a standardized packet format for delivering audio and video over IP networks. RTP is used extensively in communication and entertainment systems that involve streaming media, such as telephony, video teleconference applications, television services and web-based push-to-talk features.

• Session Initiation Protocol (“SIP”): SIP is a signaling communications protocol, widely used for controlling multimedia communication sessions such as voice and video calls over IP networks. The protocol defines the messages that are sent between peers which govern establishment, termination and other essential elements of a call. SIP can be used for creating, modifying and terminating sessions consisting of one or several media streams.

• SIP-ISUP Internetworking (“SIP-I”): SIP-I, or the Session Initiation Protocol with encapsulated ISDN User Part (“ISUP”) signaling, is a protocol used to encapsulate Signaling System 7 (SS7) signaling within SIP messages to create, modify, and terminate communication sessions. Services using SIP-I include voice, video telephony, fax, and data.

• Transferred Account Procedure Date Record Format Specification Version No. 3 (“TAP3”): In traditional GSM roaming scenarios, TAP is the process that allows a visited network operator (“VPMN”) to send billing records of roaming subscribers to their respective home network operator (“HPMN”). TAP3 is the latest version of the standard and will enable billing for a host of new services that networks intend to offer their customers. In reference to the proposed Full MVNO framework, the TAP process would be utilized by the MNO to send billing records to the MVNO.

4.4 Technical Implementation Proposal

4.4.1 Principles for the Provision of MVNO Services

186. The following proposed MVNO model is founded on the principle that the framework for wireless competition must allow for the transition from a network of isolated single MNOs to a network of fully interoperable networks permitting subscribers of any wireless carrier, i.e., MNO or MVNO, to complete calls, transmit data, and transmit and receive SMSs with at least the same ease and efficiency as at present. Only with this degree of interoperability can there be the true wireless competition necessary to fulfill the promise of wireless price competition and service innovation.

4.4.2 Technical Implementation Details

4.4.2.1 Overall Design

187. At a high level, the interconnection between the host MNO and the MVNO is an IMS NNI. This model is shown in the following GSM Association (“GSMA”) diagram:

Figure 15: High Level View of IMS NNI

In this model, an IBCF is used at the border of the MNO and MVNO for the interconnection of the two networks.

Figure 16: Illustration of IBCF Usage between MVNO and MNO

188. As shown in Figure 16 above, there is a single logical point of interconnection between the MNO and the MVNO – a private data interconnection that carries all interconnection traffic over IP. This connection carries the signaling traffic (routing and call setup) between the two networks as SIP messages via the IMS “Mw” interface (conceptually similar to an SS7 interface in a legacy

circuit switched network). Bearer traffic such as audio, video or other media is transported between the two networks via the IMS “Gi/Sgi” interface as RTP data traffic. Beyond the IMS-NNI connection depicted above, a GTP-based data connection between the host networks Serving Gateway and the MVNOs Packet Data Network Gateway (“PDN-GW”) will be established over the same interconnection for the interchange of data traffic.

4.4.2.2 Interconnection

189. The interconnection model proposed is based largely on the existing GSMA IP Exchange (“IPX”) model133 and the GMSA IMS Roaming & Interworking Guidelines with the notable exception that the interconnection between an MNO and MNVO is done over a private IP link rather than through a public IP exchange. This direct connection between the two service providers can be created using leased lines, over the public Internet using Internet Protocol Security (IPSec), or VPN connectivity. While there is a single logical point of interconnection between the MVNO and MNO, due to the inherent nature of IP networking this could be one or more physical connections to achieve redundancy.

190. To facilitate this interconnection, the MVNO will be required to provide one or more data interconnection links to the host MNO. Similar to the principles established by the Commission for other unilateral interconnection services, the MVNO provider would be responsible for: (a) providing the interconnecting facility between its network and the host MNO network; and (b) paying Commission-approved tariff rates to the MNO for all traffic routed from the MVNO to the MNO, as well as for traffic routed from the MNO to the MVNO.

4.4.2.3 Voice-Traffic Interconnection

191. Following the GSMA interconnection model, there are essentially two types of voice interconnection traffic to be considered: 1. Voice originating on a circuit bearer (for example, GSM voice) will be interchanged using SIP-I signaling.

133 GSM Association Official Document (IPX White Paper) (2007) available at: http://www.gsma.com/technicalprojects/wp-content/uploads/2012/05/ipxwp12.pdf. 71

2. Voice originating on a packet bearer (for example, SIP or IMS voice) will be interchanged using standard SIP.

192. The two types of signaling are required in recognition that some MNOs may still have GSM based networks which require SIP-I signaling. As MNOs move towards new network standards, such as Voice over LTE (“VoLTE”), the requirement to support SIP-I signaling will diminish.

193. Regardless of the signaling method used, all media traffic will be encapsulated using the RTP protocol and transmitted as UDP data over the IP connection between the two networks. To ensure all calls placed to the PSTN are terminated by the MVNOs network, “Home Routing” will be enforced for all calls. Since all call termination is being handled by the MVNO network, the MVNO should only be charged for the radio access and transport portion of the call.

4.4.2.4 SMS Traffic Interconnection

194. Following the GSMA standards for carrier to carrier exchange of traffic via IP, all SMS traffic is interchanged between the MVNO and MNO utilizing SMS via SIP MESSAGE requests. This interconnection should follow the existing widely used GSM standards for “Short Message Service over IMS”. Bill and keep would be the most appropriate method of charging for SMS interconnections.

4.4.2.5 Data Traffic Interconnection

195. All data traffic will be “home routed” to the MVNO’s PDN-GW via the GTP tunnel established between the two parties. For the data interconnection between the host network Serving Gateway and the MVNO PDN-GW, the billing model would follow the existing Commission rules for wholesale high-speed access services interconnection. All data traffic transferred via the GTP interconnection will be based on a monthly capacity charge, offered in increments of 100 Mbps and a monthly interface charge, where required.

4.4.2.6 Phone Numbers and Point Codes

196. Registered MVNOs would be able to request number allocations from the Canadian Numbers Administrator (“CNA”) including, where applicable, a Mobile Network Code in accordance with the National Numbering Plan and would comply with the Telecom Decision CRTC 2005-72134.

197. Registered MVNOs could request signaling point code allocations from the CNA in accordance with the Signaling Point Code Numbering Plan and Guidelines, and any related rules. Once a signaling point code is obtained, the standard process for the exchange of Global Title Translation point code information for geographic Central Office Codes between qualifying Canadian telecommunications service providers should be followed.

4.4.2.7 Billing and Settlement

198. All billing for voice origination and termination would be sent from the MNO to the MVNO using the GSMA standard TAP3 format.

4.4.2.8 Pricing

199. All rates for interconnection (both voice and data) except SMS traffic interconnection should be based on Phase II costs plus a reasonable mark-up135. While rate components will need to be determined during a follow-up proceeding, in CNOC’s view, the cost components could be broken down as follows: (1) the radio access component from the wireless handset to the antenna tower; (2) the backhaul from the antenna tower to the point of interconnection; and (3) the actual interconnection.

200. With regards to SMS interconnection specifically, bill and keep would be the most appropriate method for pricing.

134 Implementation of wireless number portability, Telecom Decision CRTC 2005-72, 20 December 2005. 135 In its intervention dated 31 January 2014 in the proceeding initiated by TNC 2013-551, CNOC proposed some changes to CRTC Phase II costing and mark-up policies, procedures and processes. To the extent that the Commission accepts those proposals, the same approach would apply to the wholesale services described in this intervention. 73

4.5 MVNO benefits

4.5.1 Ladder of Investment

201. The introduction of a regulated framework for the creation of Full MVNOs would represent a platform for operators to embark upon a ladder of investment (“LOI”). The LOI can be deﬁned as a regulatory approach that ensures service-based entry and facility-based entry are complements in promoting competition. This approach enables new entrants to grow their business and customer bases over time without facing the majority of the challenges encountered by prior new entrants in the Canadian market.

202. Australia provides a compelling international example of LOI success in practice. TPG Internet was an Australian MVNO provider until 2013 spectrum auctions were held in that country136. At that time, TPG Internet made the strategic business decision and investment to move from MVNO to become a MNO.

203. Merely embarking on the first step of the LOI and becoming an MVNO requires a considerable investment on the part of the operator seeking to enter the wireless market. It has been estimated that it takes an average of US $25–US$50 million of peak project funding to launch an MVNO137. The cost is estimated to be $12-$15 million USD to meet initial infrastructure requirements from a direct capital investment perspective.138 This ensures that that any new entrant into this space must be a committed investor willing to make a long term investment into the design, build out, and deployment of the network.

204. Further, this framework will enable a MVNO to continue climbing the LOI towards becoming an MNO by buying spectrum (to the extent it is available) and building wireless network inlays. This path is aligned with Industry Canada’s decision to use Tier 3 serving areas (with the exception of the Northwest Territories, Yukon and Nunavut) for the 2015 2500 Mhz spectrum

136 Ovum, “A Fourth Australian MNO emerges from spectrum auction”, available at: http://ovum.com/2013/05/10/a- fourth-australian-mno-emerges-from-spectrum-auction/. 137 Roger Entner, “Entering the Wireless Market – What you need to Know to Launch and Operate Your own Wireless Business”, Ovum, 2006, p. 5. 138 Nereo Business Consultants, “MVNO Business Essentials”, available at: http://www.prepaidmvno.com/wp- content/uploads/2010/10/mvnobusinessessentials-1.pdf. 74

auction.139 As Tier 3 service areas consist of 59 smaller regional service areas140, a MVNO would be able to seek to acquire spectrum in one or more of these service areas with lower capital costs than previous Tier 2 auctions. Accordingly, with a reasonable amount of additional investment MVNOs will be able to make the transition to becoming MNOs and serve customers on their own networks. Of course, scarcity of spectrum will still not place newly established MNOs on an entirely equal footing with incumbents, but it will still significantly advance the competitive landscape. This approach runs in parallel with the business plans of those independent network operators that are focused on developing regional footprints.

205. In essence, both Full MVNO and wholesale roaming services would allow competitors to be facilities-based within their serving territories..

4.5.2 The Benefits of a Full MVNO Framework

206. This section describes how a mandated Full MVNO service would address some of the barriers to entry described in Section 2.6 of this submission.

4.5.2.1 The General Advantages of the Full-MVNO Model

207. It should be noted at the outset that CNOC’s proposed MVNO model replaces the voice, non-SMS data, and SMS data interconnection proposals that CNOC put forward in the TNC 2013- 685 proceeding that examined whether there exists a situation of unjust discrimination or undue preference with respect to domestic wholesale roaming arrangements in Canada. While both proposals are similar in terms of the vital coverage benefits that they provide, the Full MVNO model has the advantage of being more modern and adaptable to changes in wireless technology.

208. In essence, the Full MVNO framework will: (a) ensure that MVNOs are able to terminate calls on their own behalf, allowing for full control of the end-to-end call service; (b) provide the customers of an MVNO with the ability to access all voice and data services and features of the MNO, with differentiated features overlaid by the MVNO; and (c) establish just and reasonable

139 Consultation on a Licensing Framework for Broadband Radio Service (BRS) 2500 MHz, DGSO-004-12, Spectrum Management and Telecommunications, Industry Canada, Issue 1, October 2012, at s. 3.7. 140 Service Areas for Competitive Licensing, Industry Canada, Issue 3, December 2006. 75

rates for all of the wholesale components of the service based on Phase II costing plus a reasonable mark-up.

4.5.2.2 Spectrum Scarcity

209. The Full MVNO model ensures that the finite nature of spectrum resources can no longer act as a barrier to entry in mobile wireless markets. Through the purchase of a full-MVNO service, an entrant can gain access to prime bands of licensed spectrum that have and will likely continue to be perpetually monopolized by large incumbents in the outcome of every major and infrequent spectrum auction.

210. At the same time, the mandated Full MVNO service will create a new wholesale revenue source for firms with spectrum holdings that does not currently exist.

211. In addition, to the extent that spectrum is available, albeit of limited quality and in limited quantities, those MVNOs who wish to do so and have the necessary resources will have a path towards becoming MNOs at least on some type of regional, if not greater, level.

4.5.2.3 Vertical integration and service bundling

212. The proposed MVNO model will assist new entrants in bridging the gap that exists between incumbents and competitors in terms of being able to bundle services. While most incumbents will retain the considerable vertical integration and bundling advantage that stems from their significant wireline telecommunications, broadcasting distribution and programming assets, MVNOs who also have wireline operations would finally be able to offer attractive wireless services in conjunction with wireline voice, high-speed Internet, and in some cases, programming, service offerings.

4.5.2.4 Deployment of new technologies

213. Another clear advantage of CNOC’s proposed MVNO model over alternative interconnection arrangements is that the configuration is modern and forward looking. Accordingly, MVNOs will have access to leading wireless technologies such as LTE and IMS

while also enjoying the ability to accommodate new technologies, services and features as they are rolled out by the host MNO.

4.6 A Tariffed Wholesale Roaming Service Is Required

214. As explained in Section 2.6.2 of this submission, new entrant MNOs have no choice but to utilize roaming arrangements to compete in the retail mobile wireless market. Naturally, given the vital character of these services to competitors and the market conditions that currently exist, wholesale roaming services meet the essential service definition, as applied in Section 3.3.1.

215. For these reasons, CNOC urges the Commission to also set tariffed rates for national and regional roaming services. These rates should also be based on Phase II costs plus a reasonable mark-up.

216. Such rates could be identical or almost identical to the rates set for Full MVNO services. This is because the incumbent MNO must perform virtually the same tasks for a competitor whether servicing another roaming MNO or providing service to a Full MVNO.

217. It warrants emphasis that both Full MVNO services and wholesale roaming services are forms of facilities-based competition. Both services facilitate the ability of competitors to make full use of the features of their own networks141 while differentiating their retail services from those of the incumbents.

4.6.1 Seamless Roaming

218. Finally, CNOC urges the Commission to require incumbents to provide seamless roaming as a feature of the tariffed wholesale roaming service.

219. Seamless roaming is a service element that ensures uninterrupted communication hand- offs between home and host networks.

141 While MVNOs do not own spectrum, they do own and operate their own networks. 77

220. In Telecom Decision CRTC 2011-360142, the Commission reviewed an application by WIND which, in part, requested that the Commission mandate seamless roaming. In that decision, the Commission determined that there was insufficient evidence on the record to make a finding of preference (and therefore to make a finding of undue preference) under s.27(2) of the Act that would justify mandating seamless roaming143. CNOC respectfully submits that there is enough evidence on the record of this proceeding to make such a determination.

221. While Industry Canada determined in its latest review of the Conditions of Licence144 that seamless roaming should not be mandated, it notably encouraged seamless hand-off to be negotiated between parties145. As already demonstrated in this submission and on the record of the TNC 2013-685 proceeding, the overwhelming bargaining power of the incumbents makes fair negotiated rates and terms – including those that apply to seamless roaming – an impossibility.

222. New entrants have repeatedly underscored the importance of seamless roaming to their wireless businesses. For example, Videotron has stated that seamless roaming must be available to allow a truly competitive market, as illustrated by the following quote:

“L’incapacité pour un nouvel entrant d’offrir la transition d’appel transparente à ses clients affecte de façon très négative sa réputation commerciale. Cela se comprend facilement lorsqu’on sait que sans transition d’appel transparente, un appel en cours est interrompu dès qu’un utilisateur quitte la zone de couverture de son opérateur. Et s’il y a une chose que les utilisateurs de services sans fil mobiles détestent tout particulièrement, ce sont justement les appels interrompus…”146

223. Similarly, EastLink declares: “There is no reason acceptable under the Act that the incumbents would support seamless hand-offs with themselves and the US-based carriers but not Canadian service providers. The incumbents are simply using it as a tactic to artificially limit the quality of new entrant service providers’ access to their networks.”147

142 Globalive Wireless Management Corp., operating as WIND Mobile – Part VII application regarding roaming on Rogers Communications Partnership’s wireless network, Telecom Decision CRTC 2011-360, 3 June 2011. 143 Ibid. at para 27. 144 Supra note 76, para 38. 145 Supra note 71, para 44. 146 Videotron intervention dated 29 January 2014 in TNC 2013-685 proceeding, para 54. 147 EastLink intervention dated 29 January 2014 in TNC 2013-685 proceeding, para 17. 78

224. Consequently, CNOC requests that the Commission order that seamless roaming be a mandated feature of tariffed roaming services to the full extent that the feature is available on the network of the roaming provider. Given that this feature constitutes one ancillary aspect of wholesale roaming, it also shares the status of essential service that is ascribed to wholesale roaming services generally.

4.7 Tariffed Tower and Site Sharing Services Are Required

225. As suggested in Section 2.6.3.1, CNOC is of the view that that a mandated tariffed service for access to shared antenna towers and sites is necessary. The rates for these services should be based on Phase II costs plus a reasonable mark-up as well.

226. Since unlike MNOs, MVNOs would not require access to incumbent towers, CNOC’s proposed MVNO model would also provide a complementary benefit of allowing more efficient use of antenna tower capacity and spectrum. This is because MVNOs will utilize unused capacity on existing incumbent MNO networks. This benefit is particularly significant given the importance of municipal aesthetics and the prevention of wasteful duplication of infrastructure148.

4.8 Regulatory Considerations

4.8.1 Equality of Inputs

227. CNOC further submits that the Commission should adopt all proposed remedies, including the MVNO model, pure roaming and tower and site sharing on an Equality of Inputs (“EOI”) basis. CNOC strongly advocated for EOI regulation in the proceeding initiated by TNC 2013-551149. The many compelling reasons for applying EOI to wireline are equally applicable and relevant in the wireless context. Briefly stated, EOI requirements can be summarized as follows:

148 The federal government has in fact recently announced changes to cell tower placement rules to address some of these concerns; See Government of Canada (2014) “Harper Government Making Changes to Cell Tower Placement Rules” available at: http://news.gc.ca/web/article-en.do?nid=813809 149 See s.1.2.2 of CNOC’s intervention dated 31 January 2014 in the proceeding initiated by TNC 2013-551. 79

“When a carrier that has control of an essential facility plans to offer a retail product or service using those facilities, it must offer the product or service on a wholesale basis to both third party competitors and to their own retail operations based on equality with respect to:

. Service offerings; . Timescales; . Terms and conditions (including price and service levels); . Use of systems and processes; and, . Commercial information about such products and services”150

228. EOI for wholesale roaming services would provide a much greater level of certainty to both incumbents and competitors, and would lead to more productive and efficient facility investments by entrants.

229. To reap the full benefits of a functional EOI regime, systemic oversight tools should be developed and applied with rigour by the regulator. These tools typically include mechanisms for compliance monitoring (based on a set of pre-determined key performance indicators); service level agreements; service level guarantees; transparent reporting; legal commitments by incumbent carriers; and appropriate incentives for adherence to the principles of EOI151. The Nordicity EOI Report that CNOC filed in the wireline wholesale proceeding has been included in this submission as Attachment “B” to provide additional information on EOI principles, oversight tools and international experiences with EOI regulation.

4.8.2 The Commission’s Jurisdiction to Order an MVNO Interconnection Remedy

230. The Commission should reject any argument from opposing parties that the CRTC lacks jurisdiction to order the kind of remedies that CNOC describes in this submission. Ordering the wholesale services sought by CNOC would not impinge upon the jurisdiction of Industry Canada over roaming requirements or conditions of licence for cellular, PCS, or AWS licensees. In fact,

150 Ibid. 151 Id. at para 6. 80

Industry Canada has explicitly stated the very opposite in its Revised Frameworks for Mandatory Roaming and Antenna Tower and Site Sharing152 , when noting:

“166. A number of respondents suggested that Industry Canada or the CRTC be directly involved in arbitration and rate setting, arguing that rates are unreasonable and that the arbitration process is costly, lengthy and cumbersome. Other respondents called for no changes in this regard, stating that rates and terms should be set commercially based on market forces.

167. The CRTC has the authority to set rates and conditions for the provision of telecommunications services within the jurisdiction of the Telecommunications Act. Therefore, the CRTC may consider applications relating to rates and terms for matters such as roaming and tower sharing.”153

152 Supra note 71. 153 Supra note 71, at paras 166-167. 81

5.0 THE DETERMINATIONS SOUGHT ARE CONSISTENT WITH THE TELECOMMUNICATIONS POLICY OBJECTIVES AND POLICY DIRECTION

5.1 The Determinations Sought in this Submission Promote the Telecommunications Policy Objectives

231. Without the determinations that are sought in this submission, incumbents will continue to enjoy unfettered market power in all mobile wireless product and geographic markets. This situation has and would continue to contravene s.27(2) of the Act and cause further undue lessening of competition in the provision of retail wireless services. Roaming and tower and site sharing rates paid by competitors to incumbents would continue to be excessive and therefore not just and reasonable. The determinations that are sought through this submission are consistent with subsection 47(a) of the Act and, by fostering greater competition, enhance the pursuit of a number of telecommunications policy objectives set out in section 7 of the Act.

232. More specifically, CNOC’s submission meets the following section 7 objectives:

• (a) To facilitate the orderly development throughout Canada of a telecommunications system that serves to safeguard, enrich and strengthen the social and economic fabric of Canada and its regions - This objective is furthered by CNOC’s proposed remedies which strive to improve the quality of Canada’s wireless services in terms of price, coverage, speed and reliability by introducing rigorous competition. Moreover, CNOC’s proposed remedies are modeled upon a ladder of investment framework that is aimed at encouraging efficient investment in telecommunications facilities.

• (b) To render reliable and affordable telecommunications services of high quality accessible to Canadians in both urban and rural areas in all regions of Canada - The determinations sought by CNOC are meant to place checks upon the market power of incumbents throughout Canada and introduce meaningful competition from entrants in both urban and rural areas.

• (c) To enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications - As illustrated in Part 2.0 of this intervention, Canada is a poor performer in wireless markets at the international level. CNOC’s recommendations seek to improve Canada’s ranking in all international rankings, notably including retail pricing of wireless services. In CNOC’s view, the introduction of mandated wholesale services in a segment that has experienced market failure will surely also enhance efficiency and competitiveness nationally as well.

• (f) To foster increased reliance on market forces for the provision of telecommunications services and to ensure that regulation, where required, is efficient and effective - The determinations sought will efficiently address market failures so that market forces can operate within the mobile wireless environment and provide Canadian consumers with the benefits of competition.

• (g) To stimulate research and development in Canada in the field of telecommunications and to encourage innovation in the provision of telecommunications services - As previously noted, the remedies sought by CNOC seek to correct market failures and remove barriers to entry so that entrants can compete more effectively in Canada`s wireless market. In doing so, entrants will embark upon a ladder of investment that will lead to increased research, development and innovation.

• (h) To respond to the economic and social requirements of users of telecommunications services - Canadians demand reasonably priced, high quality mobile wireless services. Only a competitive market that is devoid of high barriers to entry and impediments caused by the exercise of incumbent market power can satisfy this demand.

5.2 The Determinations Sought in this Submission Are Consistent with the Policy Direction

233. The effect of the determinations sought in this submission will, pursuant to subsection 47(b) of the Act, be consistent with the requirements set out in the Policy Direction.

234. More specifically, CNOC’s submission meets the following requirements of the Policy Direction:

• (a) Relying on market forces to the maximum extent feasible as the means of achieving the telecommunications policy objectives154- In this case, by addressing market failures with proportionate regulatory intervention so that market forces are no longer encumbered by the influence of market power from large incumbent firms.

• (b) When relying on regulation, using measures that are efficient and proportionate to their purpose and that interfere with the operation of competitive market forces to the minimum extent necessary to meet the policy objectives155 - As suggested above, the regulatory intervention sought by this submission is recommended because it is the surest and least intrusive regulatory means of introducing competition in Canada’s mobile wireless market(s).

• (c) Ensuring that economic regulatory measures employed by the Commission do not deter economically efficient entry (in this case by independent ISPs)156 - In fact, the recommended economic regulatory measures are designed to remove daunting barriers and facilitate entry.

• (d) That non-economic regulatory measures are enforced in a symmetrical and competitively neutral manner157 - All of the non-economic aspects of CNOC’s proposed regulatory measures, such as for example, the application of EOI principles to the

154 Subsection 1(a)(i) of the Policy Direction. 155 Id., at paragraph 1(a)(ii). 156 Id., at paragraph 1(b)(ii). 157 Id., at paragraph 1(b)(iii). 84

proposed wholesale services, are, by definition, framed in a symmetrical and competitively neutral manner.

• (f) For the Commission to use only tariff approval mechanisms that are as minimally intrusive and as minimally onerous as possible158; As previously noted, the regulatory intervention sought by this submission is recommended because it is the surest and least intrusive regulatory means of introducing competition in Canada’s wireless market(s)

158 Id., at paragraph 1(c)(i). 85

6.0 CONCLUSION AND REQUEST TO APPEAR AT HEARING

235. By way of this intervention CNOC has demonstrated that the state of competition in Canada’s mobile wireless market is tenuous, at best. This market is highly concentrated and is characterized by inflated prices which have led to corresponding supernormal profits for large incumbent firms. Furthermore, the state of competition is restricted by significant barriers to entry that include: advantages enjoyed by incumbents with respect to spectrum acquisition, unregulated domestic roaming, unregulated antenna tower and site sharing, vertical integration and service bundling, access to new technologies at relatively low cost and risk, and coordinated interactions.

236. Under these conditions, the Commission has but one choice for disciplining the market power of the incumbents: order tariffed services for vital wholesale services that are required by competitors to compete in the retail wireless market.

6.1 Relief Sought

237. CNOC requests four things of the Commission:

i. To mandate access to national and regional wholesale tariffed Full MVNO services on terms and conditions that are consistent with EOI principles.

ii. To mandate access to national and regional wholesale tariffed roaming services on terms and conditions that are consistent with EOI principles.

iii. To mandate access to national and regional wholesale tariffed services for shared access to antenna tower and sites on terms and conditions that are consistent with EOI principles.

iv. To order that seamless roaming be a mandated feature of wholesale roaming services to the full extent that the feature is available on the network of the roaming provider.

238. CNOC also asks the Commission to provide the detailed relief described through this intervention in order to give effect to the broader areas of relief just cited, but those details will not be repeated here.

6.2 Request to Appear

239. Finally, pursuant to paragraph 23 of TNC 2014-76, CNOC is advising the Commission that it wishes to appear at the public hearing by stating: “I wish to appear at the public hearing”. This proceeding is crucial to the future of retail competition in the provision of wireless telecommunications services in Canada. CNOC is the largest association of competitive telecommunications service providers and, as such, its members have a direct interest in this proceeding. Given this direct interest and CNOC’s willingness to participate vigorously and responsibly in this proceeding, CNOC submits that its appearance at the public hearing would be of assistance to the Commission, and is, therefore, in the public interest.

APPENDIX

A Market Share

The tables below show the evolution of the three national incumbents (Bell Group159, TCC and Rogers), “new entrants”160 and “other”161 operators’ subscriber market share from 2008-2012, by province. All of this information (with the exception of the % Change column, that was calculated by CNOC) was sourced from the CMR monitoring reports from 2009-2012.

Table 6: Bell Group Subscriber Market Share, by province, 2008-2012 % Province 2008 2009 2010 2011 2012 Change BC 13 16 17 17 18 38% Alberta 18 21 22 22 23 28% Sask. 1 7 4 8 10 900% Man. 1 5 3 6 5 400% Ont. 28 32 30 28 28 0% QC 37 39 37 34 33 -11% NB 64 64 61 59 58 -9% NS 66 64 62 63 54 -18% PEI 57 57 56 53 58 2% Nfld. and 79 77 76 73 73 -8% Labrador North162 - 95 90 84 90 -5%

159 “Bell Group” includes Bell Canada, Northwestel Mobility, Bell Mobility, Télébec, NorthernTel, SkyTerra, Virgin, and Latitude Wireless. 160 “New entrants” refers to the new wireless entities that acquired spectrum in Industry Canada’s 2008 AWS spectrum auction. 161 “Other” includes MTS Allstream, SaskTel, and smaller WSPs 162 “North” includes Yukon, the Northwest Territories, and Nunavut. 88

Figure 17: Bell Group Subscriber Market Share, by province, 2008-2012

100 90 80 70 60 50 40 30 20 10 0 Bell 2008 Bell 2009 Bell 2010 Bell 2011 Bell 2012