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Order CRTC 2001-221
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Ottawa, 15 March 2001
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Disputed issues submitted by the Contribution Collection
Mechanism (CCM) Implementation Working Groups
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Reference: 8638-C12-45/00 |
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The Commission, among other things, considers that for CCM purposes:
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- the term Canadian non-telecommunications revenues should be
calculated based on the definition of "telecommunications
service" found in section 23 of the Act; for this purpose,
services that are incidental to the business of providing
telecommunications services are services that have to date, been
treated as telecommunications services by the Commission as well as
any service that the Commission may find to be a section 23
"incidental" service;
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- the wireless handset subsidy should not be deducted in the
calculation of contribution-eligible revenue;
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- the term bundling generally refers to a situation where one rate
covers a number of products and/or services;
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- where one or more contribution-eligible services are offered at
a discount dependent on the use or purchase of one or more
non-contribution-eligible services, which are priced above the
stand-alone price, the excess over the stand-alone price for each of
the non-contribution-eligible services would be subject to
contribution; and
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- the Sale or Rental of Terminal equipment is defined as revenue
generated by the transfer of title or specifically contracted use of
any network addressable equipment, which is intended for use in
conjunction with the provision of a telecommunication service.
Equipment providing telecommunication services are items such as
client premises routers, PBXs, handsets, stand-alone earth station
equipment or other satellite-based end-user equipment and
jointly-used teleport facilities. Ancillary services, including
equipment installation, site preparation, programming, maintenance,
customer training, engineering, design, technical support and related
financing charges, are also considered a component of "Terminal
Equipment Revenues" pursuant to Decision 2000-745
requirements.
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1. |
Following the issuance of Decision CRTC 2000-745,
Changes to the contribution regime, dated 30 November 2000,
five working groups were established to assist in the implementation
details of the changes to the contribution regime. All parties in the
proceeding leading to Decision 2000-745,
and all telecommunications service providers (TSPs) known to the
Commission, were invited to participate in the working groups. A
Co-ordination Committee, chaired by Commission staff, was also created to
co-ordinate the work to be done by the working groups.
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2. |
The Revenue Consistency Working Group was to define some of the terms
used in Decision 2000-745
and related documentation to ensure that revenues are reported by TSPs in
a manner consistent with the directives in Decision 2000-745.
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3. |
The Bundling and Other Exemptions Working Group was to address the
opportunity provided to the industry in paragraph 116 of Decision 2000-745
whereby the Commission was prepared to consider a workable and reasonable
proposal to eliminate non-contribution-eligible revenues from bundled
services and address any other exemptions proposed by the industry.
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4. |
At a joint meeting of the Co-ordination Committee and CRTC
Interconnection Steering Committee (CISC) held on 20 February 2001,
reports from the Revenue Consistency and the Bundling and Other
Exemptions Working Groups describing disputed issues that arose among the
members of the working groups were reviewed and referred to the
Commission for resolution.
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5. |
In a letter dated 21 February 2001 from Commission staff, all TSPs and
participants in the process leading to Decision 2000-745
were advised of the issues in dispute before the Commission and that,
consistent with the process established in a letter dated
9 February 2001, comments with respect to the disputed issues
could be filed with the Commission by 27 February 2001. Parties were
also advised that all documents previously submitted to the Co-ordination
Committee with respect to each dispute would form part of the record of
the dispute to be considered by the Commission.
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Calculation of the contribution-eligible revenues for the purpose of
Decision 2000-745
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6. |
In Decision 2000-745,
the Commission required TSPs to contribute a certain percentage of their
contribution-eligible revenues to a fund to subsidize primary exchange
residential service in high-cost serving areas. The contribution-eligible
revenues of a TSP are calculated according to the following formula:
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Total operating revenue |
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Less |
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i) non-Canadian revenues and |
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ii) Canadian non-telecommunications service revenues |
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equals |
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Total Canadian telecommunications service revenues |
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Less |
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iii) allowable deductions (e.g. inter-carrier payments, terminal
equipment revenues) |
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equals |
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Total contribution-eligible revenues. |
7. |
The Revenue Consistency Group was charged with defining the terms in
the above formula to ensure that all TSPs report their telecommunications
services revenues in a manner consistent with the directives of Decision 2000-745.
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Dispute – Definition of telecommunications services for the purpose
of the revenue-based contribution regime
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8. |
A dispute arose among the group members concerning the basis upon
which Canadian non-telecommunications service revenues should be
calculated. The dispute relates to how to define "telecommunications
services" for the purpose of determining the amount of
non-telecommunications service revenues of a TSP.
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9. |
AOL Canada Inc., Bell Canada on behalf of itself, Aliant Telecom Inc.,
and MTS Communications Inc. (collectively Bell et al.), the Canadian
Wireless Telecommunications Association (CWTA), Teleglobe Canada, TELUS
Communications Inc. (TELUS), and Vidéotron Communications inc. on behalf
of Vidéotron (1988) ltée, Vidéotron Télécom (1988) ltée and
Vidéotron ltée (collectively Vidéotron) filed submissions in support
of defining "telecommunications services" based on the
definition in section 2 of the Telecommunications Act (the Act)
which reads as follows:
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A service provided by means of telecommunications facilities and
includes the provision in whole or in part of telecommunications
facilities and any related equipment, by sale lease or otherwise. |
10. |
AT&T Canada, Call-Net Enterprises Ltd., GT Group Telecom
Services Corp. (Group Telecom), the Public Interest Advocacy Centre
(PIAC), and Rogers Wireless Inc. on behalf of itself, Rogers Cablesystems
Ltd., and Rogers Communications Inc. (collectively "Rogers")
supported the use of the broader definition contained in section 23 of
the Act. For the purpose of parts III and IV of the Act, section 23
includes as a "telecommunications service" those services that
fall within section 2 of the Act as well as "any service incidental
to the business of providing telecommunications services." (The
latter services are hereinafter referred to as section 23
"incidental" services).
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11. |
The Commission notes that certain parties challenged its jurisdiction
to require a TSP to contribute an amount that is calculated, in part,
based on its revenues earned from section 23 "incidental"
services or any non-basic telecommunications services. Other parties
stated that section 23 of the Act requires that the Commission use the
definition contained therein when implementing its powers under section
46.5 of the Act, given that section 46.5 is in part III of the Act.
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12. |
The Commission notes that section 46.5 of the Act empowers the
Commission to require a TSP to contribute to a fund "subject to any
conditions that the Commission may set." The Commission's powers
under section 46.5 to direct TSPs to contribute to a fund includes the
power to determine the size of the fund and the amount of money each TSP
must contribute to the fund. Section 46.5 of the Act does not dictate the
methodology to be used by the Commission in calculating the size of the
fund or the amount each TSP must contribute. In Decision 2000-745,
the Commission determined that the amount of money each TSP must
contribute would be calculated as a percentage of the TSP's Canadian
telecommunications service revenues (CTSR), less certain allowable
deductions. The Commission is satisfied that it has the necessary powers
to establish this methodology for calculating the amount of money each
TSP must contribute to the fund and to implement it in the manner set
out below.
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13. |
In Decision 2000-745,
the Commission did not limit CTSR to revenues from those
telecommunications services defined in section 2 of the Act. In fact,
local service has traditionally been subsidized implicitly in part by
enhanced services and section 23 "incidental" services. In
Decision 2000-745,
a fixed annual implicit contribution target was set at $60 per network
access service (NAS) per year for each incumbent local exchange carrier
(ILEC) for determining the annual total subsidy requirement.
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14. |
In Decision 2000-745,
the Commission intended that contribution apply to the broadest possible
range of telecommunications services. As the Commission stated at
paragraph 87:
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"…applying contribution against the broadest possible range
of telecommunications services would spread the contribution burden
across various sectors of the marketplace. This approach would be
competitively equitable, result in a lower revenue-percentage charge
being applied to each service, and be more administratively efficient
by eliminating the need for a detailed review and classification of all
telecommunications services."
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15. |
In the Commission's view, it is in the public interest, and consistent
with the policy objectives in section 7 of the Act, to require TSPs to
contribute to the fund an amount calculated with reference to their
revenues from Canadian telecommunications services, as the term is
defined in section 23 of the Act, less certain allowable deductions.
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16. |
The Commission considers that it would be inconsistent with the regime
established in Decision 2000-745
to allow a general exclusion for revenues from all section 23
"incidental" services from CTSR. However, in accordance with
the approach set out in Decision 2000-745
at paragraph 93(c), if TSPs wish to deduct revenues from specific types
of section 23 "incidental" services in the calculation of the
CTSR, such requests to the Commission should be developed through the CCM
implementation working groups that have been established.
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17. |
Accordingly, the Commission clarifies that, for the purpose of
calculating contribution-eligible revenues in accordance with Decision 2000-745,
Canadian non-telecommunications revenues should be calculated based on
the definition of "telecommunications service" in section 23 of
the Act. For the purpose of this calculation, services "incidental
to the business of providing telecommunications services" are those
services that the Commission has to date treated as telecommunications
services as well as any other service that the Commission may determine
to fall within the scope of section 23 of the Act.
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18. |
The Commission expects the Revenue Consistency Group to submit, within
10 days of the date of this order, a proposed definition of the term
"non-telecommunications service revenues" taking into account
the Commission's determination in this order.
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Dispute on the treatment of the handset subsidy in the calculation of
the contribution-eligible revenues and the definition of terminal
equipment
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19. |
In paragraph 91b) of Decision 2000-745,
the Commission concluded that revenues generated from the sale or rental
of terminal equipment are not contribution-eligible. Specifically, these
revenues are deductible from a TSP's CTSR in the calculation of its
contribution-eligible revenues.
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20. |
As part of the definition of terminal equipment revenues, CWTA
proposed that the full cost of handsets, rather than revenues associated
with their sale, be deductible. The difference between the price and cost
of a handset is referred to as a handset subsidy which is recovered, over
time, from revenues associated with other wireless services. CWTA
submitted that wireless carriers have priced handsets below cost for 20
years in order to promote wireless service penetration. Further, wireless
penetration in Canada is still below 30% and therefore the handset
subsidy concept remains a key pricing consideration in the continued
growth and development of the Canadian wireless market.
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21. |
On 27 February 2001, comments on this issue were filed by AOL, Bell et
al., CWTA, Group Telecom, PIAC, Rogers Wireless Inc., Saskatchewan
Telecommunications Inc., TELUS and Vidéotron.
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22. |
The majority of parties who commented were in favour of including the
wireless handset subsidy as terminal revenue, whereas SaskTel, PIAC and
Vidéotron opposed this proposal.
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23. |
Bell et al. argued that the handset subsidy component of the usage
revenue is revenue that is generated because of the sale of the terminal
and should therefore not be contribution-eligible. The company submitted
that to prevent wireless service providers from fully deducting terminal
equipment revenues, while wireline service terminal revenues are fully
deductible, would be contrary to the principle of competitive equity
stated throughout Decision 2000-745.
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24. |
SaskTel argued that denying CWTA's proposal will result in fairness
between industry segments, as well as equal treatment of all wireless
service providers, as it pertains to each TSP's contribution payment to
the national subsidy pool.
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25. |
SaskTel noted that the subsidized handset is now increasingly being
marketed without any commitment by the customer to maintain a minimum
duration of service. The company expressed concerns that, due to lack of
customer commitment, recovery of this subsidy, through subsequent
contribution-eligible monthly revenues, may not materialize.
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26. |
PIAC and Vidéotron argued that the handset subsidy is a marketing
strategy and a cost of doing business and should not be included in
terminal revenues. Vidéotron added that the subsidy is not the result of
a regulatory or policy decision.
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27. |
PIAC and other parties submitted that any rule that permits a discount
to reflect a terminal equipment subsidy would be open to abuse, resulting
in contribution avoidance.
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28. |
All parties agreed that, in the event that CWTA's proposal were
adopted, all terminal subsidies should be treated in the same fashion, in
order to ensure fairness and technical neutrality to all market
participants under the new contribution mechanism.
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29. |
Bell submitted that the Commission should not be giving consideration
to subsidies that arise in limited cases where special deals are being
given to special customers in anticipation of revenues from other
business.
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30. |
Group Telecom contended that terminal equipment subsidies are not
unique to the wireless industry and noted that, as the wireline industry
introduces digital and IP-based handsets into a fiercely competitive
marketplace, it is facing the same obstacle incurred by the wireless
industry. New sets will have to be heavily discounted to achieve market
penetration and the subsidy will be recovered from general service
revenues.
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31. |
SaskTel submitted that terminal subsidies should be handled in
accordance with the process defined in bundling so that similar
situations would receive consistent treatment and the methodology would
be consistently applied by all service providers, ensuring gaming
opportunities are eliminated.
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32. |
Many parties expressed concerns regarding the added administrative
complexity and onerous auditing requirements that would result from
treating all terminal subsidies as terminal revenues.
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33. |
CWTA argued that the concept of the handset subsidy is unique to the
wireless industry and that its objective is to promote wireless service
development, not to stimulate the sale of wireless handsets. CWTA also
submitted that the handset subsidy is not bundled with any specific
product or service. CWTA submitted that it is fair and appropriate to
allow the deduction of the handset subsidy from other wireless service
revenues.
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34. |
CWTA submitted that the provincial government of Saskatchewan, along
with several other provinces, does not assess provincial sales tax on the
full cost of the handset because the full cost of the handset is
ultimately recuperated from the customer through the sales of taxable
telecommunications services. CWTA contended that this treatment is
consistent with its proposal to include the full cost of handsets in the
terminal equipment deduction.
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35. |
CWTA submitted that a failure to account for the full cost of handset
subsidies would introduce biases against the wireless industry. Denying
the subsidy as a terminal revenue deduction could force wireless carriers
to dramatically increase the prices of handsets, resulting in a serious
dampening effect on the growth of the wireless industry. In addition,
this position is opposed to the spirit of the Commission's general
approach, to leave rates, terms and conditions for the provision of
services to be disciplined by competitive markets and therefore, would
not constitute good public policy. Further, Canada would be
disadvantaged, vis-à-vis the United States, as U.S. wireless service
penetration would continue to grow, while Canadian penetration would
begin to stagnate.
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36. |
The Commission considers that the adoption of a pricing model,
including the use of a subsidy, for the purpose, among other things, of
increasing the penetration of particular services or increasing market
share is essentially a marketing strategy and a cost of doing business.
In this regard, the Commission notes that the revenue charge, instituted
in Decision 2000-745,
is intended to be applied to the companies' revenues, not costs, and that
only non-contribution-eligible revenues should be deductible in the
calculation of contribution-eligible revenues. Further, as no data was
provided during the process, there is uncertainty as to whether wireless
providers recover the entire subsidy. For example, where a customer is
not contractually obligated to continue with the service provider for a
period of time, the handset subsidy may not be recovered, resulting in a
further reduction to contribution-eligible revenues. The Commission
considers that in such cases the wireless carriers would have undue
advantage over other TSPs.
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37. |
The Commission is not convinced that, if they are not permitted a
deduction for the subsidy, wireless providers would be forced to abandon
the subsidy and drastically increase the cost of handsets to customers,
as argued by the CWTA. During the transition year, the Commission notes
that the revenue percentage charge is 4.5% of contribution-eligible
revenues and, in the following year, it is likely that this rate will
drop considerably.
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38. |
The Commission notes parties' arguments, regarding fairness and
technical neutrality, with respect to the payment of contribution by all
TSPs. The Commission considers that allowing a deduction for wireless
handset subsidies only would be unduly discriminatory against other TSPs.
On the other hand, allowing all terminal subsidies to be treated as a
reduction in the calculation of the contribution-eligible revenues would
be inconsistent with the Commission's objective to apply contribution
against the broadest possible range of telecommunications services.
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39. |
The Commission also acknowledges the concerns regarding administrative
complexity, onerous auditing requirements and the opportunity for
contribution avoidance, were the Commission to approve all terminal
subsidies as terminal equipment revenues.
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40. |
In light of the above, the Commission concludes that the wireless
handset subsidy should not be deducted, as part of terminal equipment
revenue, in the calculation of contribution-eligible revenue.
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41. |
With respect to the wording of the definition for terminal equipment,
the Commission considers it appropriate to adopt the original definition
that was agreed to by the majority of parties during the CISC process and
deny both CWTA's and SaskTel's proposed definitions. In addition, the
Commission considers that the words "or other satellite-based
end-user equipment" should be substituted for the word 'satellite'
to more specifically define satellite terminal equipment.
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42. |
The Commission approves the following definition: The Sale or Rental
of Terminal equipment is defined as revenue generated by the transfer of
title or specifically contracted use of any network addressable
equipment, which is intended for use in conjunction with the provision of
a telecommunications service. Equipment providing telecommunications
services are items such as client premises routers, PBXs, handsets,
stand-alone earth station equipment or other satellite-based end-user
equipment and jointly-used teleport facilities. Ancillary services,
including equipment installation, site preparation, programming,
maintenance, customer training, engineering, design, technical support
and related financing charges, are also considered a component of
"Terminal Equipment Revenues" pursuant to Decision 2000-745
requirements.
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Dispute - Definition of a bundle
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43. |
In Decision 2000-745,
the Commission determined that, in situations where contribution-eligible
and non-contribution-eligible services are bundled, revenues from the
entire bundle would be contribution-eligible.
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44. |
Paragraph 115 of Decision 2000-745
states: |
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Given the difficulties described above and the broad definition of
contribution-eligible revenues, the Commission determines that: |
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a) all revenues from an entire bundle will be
considered contribution-eligible if any of the revenues included in the
bundle are contribution-eligible; and |
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b) if a contribution-eligible service is being
offered for free with the purchase of another service(s), all of the
revenues will be considered contribution-eligible, regardless of the
classification of the individual services. |
45. |
The Commission indicated, in paragraph 116 of the Decision, that it
would be prepared to consider a proposal, based upon general industry
consensus, for the elimination of non-contribution-eligible revenues from
bundles.
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46. |
The Bundling and Other Exemptions group filed a consensus document
with the Commission outlining the proposed methodology for eliminating
non-contribution-eligible revenues from bundles. However, the group was
unable to agree on the definition of bundles to which this treatment
would be applicable. This is the source of the dispute, which was filed
with the Commission for consideration.
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47. |
AOL, AT&T Canada Global Network Services Corp., AT&T Canada
Enterprises, AT&T Canada, Bell et al., Bell Mobility, the Canadian
Cable Television Association (CCTA), the CWTA, Cogeco Cable Systems Inc.,
EastLink Limited, Québec-Téléphone, Group Telecom, Microcell
Telecommunications Inc., Norigen Communications Inc., Primus Canada,
Rogers, TELUS, and Vidéotron, supported the adoption of a narrow
definition of bundles as follows:
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The term bundling generally refers to a situation where one rate
covers a number of products and/or services. (hereinafter referred to
as the narrow definition).
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48. |
This definition covers situations where two or more services are
offered at a single price and the revenue streams of the individual
services are not easily identifiable. All parties agreed that the
bundling rules would apply in these situations. |
49. |
C1.com Inc., PIAC and SaskTel supported a broader definition of
bundles as follows:
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Bundling refers to any situation where the price of one good or
service is in any way dependent on the use or purchase of another good
or service. (hereinafter referred to as the "broad"
definition).
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50. |
The primary distinction that was made between the narrow definition
and the broad definition of bundles relates to situations where discounts
are offered if a customer purchases or subscribes to one or more
services. The companies in support of the narrow definition submitted
that these situations are "packages" rather than bundles. As
the revenue streams of each service are known in the case of packages, it
was submitted that the application of the bundling rules would be
inappropriate.
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51. |
The Commission recognized in Decision 2000-745,
that bundling of services is a common marketing practice, which makes it
difficult to ascertain contribution-eligible services under a
revenue-based contribution regime. The concerns expressed by some
industry participants regarding contribution avoidance and competitive
equity reflect the concerns and difficulties recognized by the Commission
in the decision.
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52. |
The Commission notes that it has addressed the issue of joint
marketing and bundling with respect to the ILECs in previous decisions.
These decisions generally dealt with anti-competitive concerns in
situations where ILECs offered monopoly and competitive services in a
bundle. The Commission considers that the definitions of bundles in these
previous decisions were developed to deal with specific concerns
regarding ILECs. Given that the revenue-based contribution regime applies
to all telecommunications service providers, the Commission considers
that it is not appropriate to extend these broad definitions to the
determination of contribution-eligible revenues.
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53. |
The revenue-based contribution regime was adopted, over other proposed
mechanisms, as it was determined that it best promotes fairness,
competitive equity, technological neutrality, pricing flexibility,
sustainability, ratepayer equity and economic efficiency.
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54. |
While the Commission is concerned with potential contribution
avoidance, it is not convinced that this would be the primary reason for
choosing one marketing strategy over another. The Commission considers
that imputing revenues for discounted services, where those revenues may
not exist, would be contrary to the intent of the revenue-based
contribution mechanism. That is, the revenue-based mechanism was chosen
as the most appropriate mechanism as revenues are identifiable,
verifiable and measurable. As well, the basic premise that those
companies who earn more revenues are required to pay more contribution
would be violated if imputed revenues were used.
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55. |
The Commission also acknowledges the concerns over the increase in
administrative complexity of adopting the broad definition.
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56. |
Therefore, the Commission considers that the most appropriate
definition of a bundle for the purposes of determining
contribution-eligible revenues is the narrow definition. However, in
order to address the potential for contribution avoidance, the Commission
considers it necessary and appropriate to address the following
situation, which on its face indicates to the Commission an intention to
minimize contribution revenues. The Commission requires that, in
situations where a non-contribution-eligible service in a
"package" is priced in excess of its stand-alone price and a
contribution-eligible service is priced at a discount, the excess over
the stand-alone price of the non-contribution-eligible service be subject
to contribution.
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57. |
Therefore, the Commission clarifies that the definition of a bundle
for the purposes of Decision 2000-745
is as follows:
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The term bundling generally refers to a situation where one rate
covers a number of products and/or services.
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58. |
In these situations, the bundling rules apply as contained in the
consensus document approved by the Commission in Order CRTC 2001-220. |
59. |
The bundling rules contained in the consensus document would not apply
to "packages" where there are separate, identifiable prices for
each service element. For "package" situations where one or
more contribution-eligible services are offered at a discount that is
dependent on the use or purchase of one or more non-contribution-eligible
services, which are priced above the stand-alone price, the excess over
the stand-alone price for each of the non-contribution-eligible services
would be subject to contribution.
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60. |
The Commission will closely monitor the use of "bundling"
and "packaging" in the marketing practices of the industry. If
there is any evidence that the marketing practices of the TSPs contravene
the spirit of Decision 2000-745,
the Commission will review its determinations with respect to the
definition of "bundling" and of the process to eliminate
non-contribution-eligible revenues from a bundle. |
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Secretary General
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This document is available in alternative format upon request and
may also be examined at the following Internet site: http://www.crtc.gc.ca |