The Decibel - Unscrambling Canada’s wireless industry post Rogers-Shaw merger

Episode Date: April 4, 2023

About two years after the merger was proposed, Rogers and Shaw are becoming one company. To ensure that this deal doesn’t hurt Canadians, Industry Minister Francois-Philippe Champagne put a number of conditions on the companies involved. But are they enough?Jennifer Quaid is an expert in competition law in Canada. She’s an Associate Professor and Vice-Dean of Research of the Civil Law Section at the University of Ottawa’s Faculty of Law. She explains what these deals mean for telecom competition in Canada.Questions? Comments? Ideas? E-mail us at [e-mail]

Indeed, the message I hear from Canadians everywhere I go is the same. We pay way too much for telecom services and we want more options, full stop. This is how Industry Minister François-Philippe Champagne began his announcement that he had approved the merger of two of Canada's big telecom companies, Rogers and Shaw. With Rogers selling Shaw's wireless company, Freedom Mobile, to Quebec company Videotron, the hope is that this deal will create another national cell phone provider. So let me repeat, these contracts with Canadians will be made public and we will ensure that they are a buy-to and I will be like a hawk on behalf of Canadians to make sure that this is happening. But will this $20 billion merger really increase competition between companies? And will it lead to lower cell phone bills?

Jennifer Quaid is an expert in competition law in Canada. She's an associate professor and vice dean of research of the civil law section at the University of Ottawa's Faculty of Law. She'll help us understand these deals and what they mean for telecom competition in Canada. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Jennifer, thank you so much for being here today. Thank you, Minika, for the invitation. So with the approval of the Rogers-Shaw merger and the sale of Freedom Mobile to Videotron, the federal government put in place a number of conditions.

There's actually 21 conditions in these contracts. These are essentially rules made by the government to try to make sure that this is all in the interest of Canadians. The conditions range from making Videotron promise to provide lower cell phone bills, to making Rogers commit to creating jobs in Western Canada. So, Jennifer, what's your initial read of these rules? Like, will they actually make the cell phone market more competitive? Well, I think that that's the billion dollar question. On the surface, you read these conditions and they do, you know, sound very precise and demanding. What I worry about is, like almost all lawyers, is that the wording is capable of interpretation. And contract law is, you know, an area where a lot depends on the words that are used. Something that I think we'll have to watch is that something like commercial reality,

things that happen and that kind of thing, they will change. And so I think the further out we get from the time when the contract is agreed to, you know, the harder it's going to be to really hold things to how they were in 2023. I mean, most people who are familiar with business and the difficulty of forecasting know that the past doesn't necessarily tell you much about the present and that you have to be careful about using the past to sort of control the present and the future. So I am worried about that. I think that these conditions sound good on paper. I really wonder whether they're going to be enforceable once you get

two, three years out. Okay. And we should just establish with these deals in place, it's not necessarily all parts of Canada that are theoretically going to be seeing an increase in competition between cell phone companies, which should eventually end up meaning less expensive cell phone bills. Which parts of Canada are we talking about here? Well, clearly the target and what was the subject of the hearing before the competition tribunal were really focused on wireless consumers, so consumer customers in Alberta and British Columbia. Those were the sort of target markets where there was, from the competition bureau's perspective, potential competition problems. So if you want to, you know, really get down into the weeds and say,

you know, what was this case about? That was really the target of the debate. Now, I think the average Canadian consumer may think that, well, it's not just British Columbia and Alberta. I also paid bills that are too high or whatever. But that wasn't really what was at issue in terms of the kinds of things that were objections to the deal. And that's partly because, you know, Shaw is mostly based in Western Canada. I mean, there are places like obviously in Quebec where Vidioton already exists, where, you know, they're kind of going to be the reference point for the rest of the country. And I think that one of the questions people need to ask is, you know, Quebecers do pay lower prices right now. Do they necessarily think that, you know, that's as good as it gets?

Maybe they would like lower prices, too. And one observation that was made to me by a telecom expert is that the Ottawa region in particular, which is where I live, actually will have fewer competitors because we are right on a border region where we had access to Vidioton, but we also had Rogers and Shaw. So, you know, it's not actually true that everyone has more players all of a sudden. Now, that's a small market. Let's say it's not everywhere like that. But you could think that other border regions of Quebec might have had the benefit of this reality already. But yeah, I think that the hopes vis-a-vis impact on prices are probably well beyond what the debate was really about legally and financially with respect to this particular deal. And I worry that people are going to be disappointed.

Okay. And maybe we can just very quickly here, Jennifer, get kind of the lay of the land in terms of actual cell phone carriers in Canada, because we know we have just a few options here. Just really briefly, can you just kind of lay out the four big players and kind of how big they are in relation to each other? Well, so the big players are Rogers, Bell, Tellis, and then Shaw was the fourth. And what you have is a combination of number one and number four. You know, typically, you know, that's starting to get pretty small. I think something that has been observed in many parts of the world, actually, is that there's always seems to be that marginal last competitor of the sort of bigger competitors, because there are also smaller competitors in Canada, too. And they tend to struggle because they don't have the infrastructure that they're reliant on the big players to use the infrastructure, and then they just offer the service, right? So they don't own the cables, they don't own the towers, they kind of rent access, if you will. I'm simplifying grossly.

It's actually a pretty complicated setup. But in other parts of the world, they also have this conversation of like, really the market would be big enough, let's say in Canada, for three and a half players. So it's really three is too small and four is kind of a stretch. I mean, you see that in airlines too, right? We really should have more than one, but it's kind of like one and a half, not two. And, you know, some of that is going to be a function of the nature of the Canadian market. But this is not the first time we've tried to build a successful fourth player. And it just seems like every time somehow there are not enough breadcrumbs left for that big fourth player. So what about Videotron?

Could it maybe fill the gap here? We'll see whether Videotron's approach is going to be different. I mean, the thing that is bothering a lot of telecom competitors is that Videotron is relying on some pretty good deals in terms of how it accesses Rogers infrastructure in order to make this fly. And the question is going to be, well, what happens, you know, later? And I've read some pretty cheeky commentary that says, you know, Rogers is trying to spin this as a great deal for Rogers and a great deal for competition. And somehow those two pieces don't necessarily mesh. And they got some pretty hard questions from investors on that, sort of said, yeah, you're really happy that you're creating a competitor who's going to chew into your market share. And yet you're telling us this is a great deal for us. So,

you know, clearly, we haven't seen the full picture play out. But that's sort of the reality of telecom in Canada is a concentrated group who are very much larger. And then you have these kind of smaller players on the edges. You brought up infrastructure there. And I think that that's an interesting point. So let's stick on that for a moment, because the situation that we're talking about is not just about cell phone bills, because conditions of these deals are also about infrastructure. Like Rogers has committed to building out 5G and high speed internet infrastructure. Will building out infrastructure help competition in Canada?

Yeah, well, that is not a straightforward answer. And part of the reason for that is that telecom, unlike, let's say, groceries or some other, you know, area of the economy that's not directly regulated in the way that telecom is, the way that that infrastructure is made accessible and the conditions it has to meet are controlled by the CRTC in the sense that they set the rules. You know, telecommunications is a heavily regulated sector for a number of good reasons. And then, you know, people can quibble about whether there are things that go beyond what's necessary. But, I mean, infrastructure is part of that bigger picture. It's like we want Canada to stay competitive in terms of the quality and the range of its telecom, right? That's part of our economic landscape. And we need those services for businesses,

you know, across sectors to be competitive. Part of the issue is that if Rogers builds infrastructure, they own it, they can rent it out to smaller players, but they still own it, right? That's right. Yeah. And I mean, this is something that has been talked about before, but I guess there is not an appetite to say that somehow this should be a, you know, a publicly owned kind of set of infrastructure. There isn't really any appetite for that. What the government does do, though, is it divvies out access to the most valuable piece, which is spectrum.

And, you know, that's kind of the lever that they hold. That's essentially kind of airwaves in a way of thinking about it, right? Think of it as kind of like a natural resource in that, you know, they want to make sure that people who have it use it. Don't just hoard it, for example, and not use it. And they want to keep tabs on exactly who has how much. And part of that was originally to try and encourage a fourth competitor, but those previous efforts haven't really panned out. So we'll see if it changes this time around. But for sure, infrastructure is an important piece of this puzzle. And because it's privately held, and then you have to sort of figure out how to make sure that access can be provided to foster competition, that requires rules and regulations that then,

you know, need to be keep up. And I think that is one of the biggest criticisms that comes out of this whole Roger Shaw deal is it sort of cast an unfavorable light on the state of telecom regulation and how it hasn't kept pace. We'll be back in a minute. So we've been talking about these conditions, Jennifer, but I'm wondering about how enforceable these conditions will actually be. The government is supposed to do this enforcing, and we saw Minister Champagne get challenged on this during his press conference on Fridayiday we have a little clip of that so so let's listen to that who is going to monitor and enforce any conditions on this deal how well listen i'm a lawyer and it's a contract so i know how to

read contract and enforce them and hold on for a minute hold on and it's subject to arbitration and you know what i don't i would not mess with the regulator. It's never a good thing. Not only do you have a contract with condition, but on top of that, just think about the penalty. Jennifer, do you think that the government will actually be able to enforce these contracts? He's probably a very sharp lawyer, and certainly it seems like he had perhaps a direct hand in how some of these things were laid out. I worry that, yes, it's a contract. Of course it's a contract. And yes, you can enforce a contract. It's being enforced through arbitration, which I think is interesting because what that means is that any circumstance where there's a dispute, it's going to be out of public view. And that's why arbitration is so popular with businesses, because they can take their fights outside, off stage, if you will, and no one can watch. And then you'll have a decision. So the Rogers

contract is actually governed by Ontario law, and the Vidioton contract is governed by Quebec law. And although you could say, in general, you know, for the most part, many aspects of contract law are similar, there are differences. And I wonder, you know, how those differences might play out if there were ever a dispute because they've used almost identical language in both contracts. But in terms of the enforceability, here's the rub. We've just seen time and again undertakings of this kind given by businesses, probably in good faith. Let's assume good faith across the board. We'll keep our head office here. We'll maintain jobs. We'll do this. And then something happens in the economy, in the financial position of the company. And they come back and they say, we're really sorry, we just can't keep our promises.

And, you know, you can't hold us to them because we'll go under or we'll move or we'll do this. I mean, there are financial penalties attached to these conditions, right? They would have to pay fines if they don't do that. But you're saying that's not necessarily incentive enough. Well, OK, I'm going to provide a fact scenario that doesn't seem very likely right now. But, you know, weirder things have happened, right? If Rogers or Vidioton says, look, particularly might be the case of Vidioton, we just can't make this work financially. This doesn't make economic sense to continue with this deal. And then the response is, oh, and you're going to pay a lot more money. Yeah, okay. In theory, you can say, yes, you're going to pay whatever it is, $25 million or $100 million in Roger's case for each year. But if you're already

in financial difficulty, how are you going to get that money? You won't, right? And one of the paradoxes is that some of these obligations are you shall spend money on X and the penalty is you'll pay us other money. If they say, well, we can't spend the money on X, how are you going to get the fine? I think that there's a lot of faith that you can recover the amounts and that, you know, financial viability isn't part of the conversation. And I guess I do a lot of work in corporate accountability. And I can tell you, this is a constant sticking point is that when the moment comes with the big stick, it's like, oh, but, you know, we don't have the money or we can't or it would be so mean because then we would lay off all these nice Canadian workers. And, you know, so you can see where the conversation is going. I'm not saying that's what they're going to do. But what I'm saying is that the actual ability of the government to say,

you know, we don't care, we're going to demand payment, it doesn't happen in the abstract. It happens in the real world with real money, where there are real operations and real jobs at stake. And you can't just sort of say, oh, yeah, hand over the money. It's just not that simple. Jennifer, let's back up here and look at competition and how competition is managed in Canada more broadly. The Competition Bureau of Canada tried to stop the merger between Rogers and Shaw. They were unsuccessful, obviously.

But broadly speaking, what is the Competition Bureau and what does it do? So the Competition Bureau is an agency. It's intended to be an independent law enforcement agency. You know, it has an enforcement piece, but it also has like a public, you know, kind of public information education piece. But the piece that was obviously very visible in Roger Shaw is their enforcement side. In mergers, they actually have a fairly big role because we have a kind of two-streamed merger system. The first part, which is what most of merger law is, is where deals over a certain size and involving parties of certain size have to notify their deal. So that's called notification. And at that point, the Bureau takes a look at it. And in most cases, they don't have any problems with it. I should stress that the purpose of notification is for the Bureau to identify potential problems and to try and seek corrective measures or solutions, ideally, consensually by going back and forth with the

parties before the deal is finalized. And when we say problems, we mean like decreasing competition in Canada? Like, would that be flagged as a problem? Okay. So on behalf of the public, essentially, then it would be working on behalf of Canadians. Yeah, yeah, yeah, absolutely. The Bureau is a public interest oriented agency. That's their mandate is to protect competition.

The Competition Act will say competition is good because it produces good things. And so the job of the Competition Bureau is to make sure that we have as much competition as possible. Now, competition doesn't necessarily mean the sort of pure neoclassical view of competition, which is like a free-for-all with no government regulation. That's not what it means. It just means, do we have a situation where prices, quality, choice are determined by the competitive rivalry among firms, as opposed to one firm being so dominant or a group of firms being so dominant that they actually don't care what people think because they can just raise their prices without paying attention to the

reactions of the market. Okay, so how effective has the Competition Bureau actually been at convincing the tribunal to block mergers? Is this something that happens frequently? Infrequently, very infrequently. So the second part of our merger enforcement, after notification, you know, the Bureau takes a look at most deals, finds there's not a problem or is able to work them out. But in a very small number of cases, and so far there's really only like less than 10, right, have actually been fully contested. What that means is that they will apply to the Competition Tribunal and say, this merger causes competition problems that are big enough that we want you to do something about

it. So you can't just complain about a deal being anti-competitive. There has to actually be some way to fix it. Otherwise, you can't go to the tribunal. Okay. And if it's infrequently that the Competition Bureau actually steps in and does something, I mean, is this a body that's necessary? I guess I just wonder about that if it's not actually making any changes here. Well, so we have to be careful here. A lot of work is done in notification. Like, officers look at this stuff. Like, that's most of their work, right? They're looking at these deals. They're trying to figure out whether there are problems. They're negotiating with the other side to say, look, we think there are problems here and here. Sometimes they have to coordinate with other agencies in other parts of the world, like the U.S. or Europe, Australia.

And they work together on these mega deals to make sure that, you know, whatever the agencies are asking for kind of makes sense overall. So, no, they're doing lots and lots of work behind the scenes. They just don't end up in court a lot. But I think one of the, let's say, one of the problems with that, in quotation marks, if I put it that way, is that compared, for example, to U.S. antitrust enforcement officials, they just don't get the same experience fighting these fights. And it means that when they do happen, they're really high stakes and they just don't have necessarily as many opportunities to fine tune their approaches, to test out theories. And so just because there aren't as many cases in Canada, is that why?

They don't fight as many of the cases. Some have said, and certainly the commissioner has been very, very vocal about this, that the law, the way it is drafted, and certainly the way the courts have interpreted the law has made the threshold and the kind of evidence that you need to bring really, really demanding and substantial. We're talking like armies of experts. What happens in antitrust analysis, it becomes very detailed and very kind of narrow, and you kind of lose the sight of the forest. You're focused on the trees. And that's what makes the decisions of the tribunal, I think, pretty mystifying to the general public

because they just don't understand how they got there. Okay. Just very lastly here, Jennifer, we've talked about how difficult it is for a fourth wireless carrier to take root in Canada. We talked about that a bit earlier. And I want to come back to this because it seems like it's a big part

of why prices are what they are in Canada for cell phone bills. So what can be done to create more competition in the telecom sector? The issues in the particularly telecom but wireless markets have more to do with how telecom is organized than with competition law. We can debate whether the tribunal made the right decision and whether they interpreted the act correctly. But ultimately, this is an industry where it does require big investments. You are using this valuable resource that is spectrum. And we do acknowledge that telecom service is basically something that is essential to modern

life. In that context, we do have to have rules around it. The question is, how do you get those rules to work so that you still encourage that rivalry that you need to go after customers? And I just don't think we have it set up right. And maybe it's impossible. I don't know. Maybe we're always going to have big players and then small players who are feeding off the infrastructure. But perhaps the regulator has to be involved in changing how it's done right now. And I know that they want to do that. But I think that a lot of it has to do with in changing how it's done right now. And I know that they want to

do that. But I think that a lot of it has to do with how telecom is regulated and less to do with the competition side. As I said, foreign competition is out there. I think that that can be explored, but I wouldn't just say, oh, foreign competition will answer all your problems. I don't think it's that simple. Jennifer, thank you so much for taking the time to explain this today. Thank you, Manika. It was really fun. That's it for today. I'm Manika Raman-Wellms.

Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrian Chung is our senior producer and Angela Pachenza is our executive editor. Thanks so much for listening and I'll talk to you tomorrow.