Up for a Challenge

You might be surprised as I was to learn that Bell Canada was offering its customers cell phone service as early as the 1970’s. You probably wouldn’t be surprised, however, to hear that back then Bell was giving itself an unfair advantage to get a leg up on the competition.

Forty some years ago, the equipment for “Mobile Telephone Service” (MTS) was bulky and required a car with a generously sized trunk to be considered “mobile.” Since the setup was cumbersome and the service expensive, the market consisted mainly of “important, impatient, busy people in business, professions or government.”[1] Cell phones didn’t hit the mass market in Canada until much later (the 90’s), and smartphones only entered the mainstream after the release of the iPhone in 2007.

In the seventies, subscribers could either lease their phones directly from Bell, or they could purchase them from third-party suppliers (either way, you paid Bell for airtime). A competitive retail industry sprouted up that sought to meet the growing consumer demand for quality cellular equipment. These competitors, including a company called Challenge Communications, not only sold mobile phones with innovative new features, but also maintained them for their customers. And they were popular. In 1977, of 1,588 Bell mobile subscribers in the Toronto-Hamilton area, the vast majority (1,264) preferred to use the products offered by companies like Challenge, perhaps because it offered “faster and more personalized customer service” than did Bell.

The folks at Bell weren’t too happy about this situation. Back then it was part of a vertically integrated corporation that didn’t just sell airtime; Bell had a subsidiary that manufactured and sold the phones themselves. Competitors like Challenge were cutting into Bell’s bottom line! Not satisfied with only collecting by-the-minute airtime fees, Bell felt entitled to the “reap the benefits” that came along with monopolizing the sale and maintenance of customer equipment as well.

So the executives at Bell hatched a plan to protect their manufacturing operation: they would introduce a “new” service called automated mobile telephone service (AMTS). There were really only two features of the AMTS service that distinguished it from the older MTS – calls wouldn’t require an operator, and customers wouldn’t be allowed to purchase their equipment from competitors.

This would have effectively driven the competition out of business – as customers switched to the new automated service, they would be forced to buy their equipment from Bell. Bell even added insult to injury by preventing Challenge from acquiring the new equipment from suppliers (like Motorola’s Canadian branch) in the first place, before they got permission from the CRTC to turn on the AMTS switch.

The aptly named Challenge Communications didn’t take Bell’s actions lying down. It brought a case before the CRTC, arguing that Bell, by refusing to allow third-party AMTS phones on its network, was giving itself an undue preference, and therefore unjustly discriminated against its competition. Challenge argued that this was in contravention of the Railway Act (in particular, section 321(2)), the law that governed telecommunications companies at the time. Bell responded by arguing that it “quite understandably desires to reap the benefits of this new offering,” and that, by offering a new service, Bell was acting “under the law in a perfectly legitimate manner.”[2]

The Commission rejected this argument, based on its determination that the prohibition against undue preference and discrimination “applies to discrimination within a single service, or as between different services” and that “the term discrimination refers to differential treatment by the company of different persons who are under substantially similar conditions.”[3]  Noting that Challenge had described the two services in question as “variants of a single service that is evolving over time on the basis of improvements suggested by different users and suppliers,” the CRTC found that evidence submitted by Bell “fell far short of establishing that AMTS was a new and distinct service.”[4]

Challenge won the case. Costs were awarded – to the tune of $250,000 1977 dollars – and Bell was forced to allow subscribers to use third party equipment, preserving the competitive market. But, perhaps most important, the Challenge case set two important precedents. First, the prohibition against undue preference was henceforth interpreted to include an unfair advantage that a company gives itself (as opposed to one bestowed upon a class of customers), and second, the CRTC would from then on take a broad, zero-tolerance approach to cases of undue preference.

Peter Grant has written of the Challenge case that “the use of subsection 321(2) of the Railway Act turned out to be the key to the introduction of competition in the telecommunications industry in Canada over the next fifteen years. Its current equivalent, subsection 27(2) of the 1993 Telecommunications Act, is one of the most important provisions of that legislation.”[5] Grant goes on to note that “the idea of using an ‘undue preference’ provision to address competition policy later morphed into the broadcasting sector. Starting in the 1990’s, the CRTC applied the notion of prohibiting undue preference in its regulations, license conditions and exemption orders applicable to broadcasters, cable and satellite distributors and even Internet sites.”[6]

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[1] Comments of Mr. Sheldon M. Kideckel from Telecom Decision CRTC 77-16, “Challenge Communications Ltd. v. Bell Canada”, page 4.

[2] Telecom Decision CRTC 77-16, page 15.

[3] ibid, p 17

[4] ibid, p 27

[5] Grant, Peter S., Changing Channels: Confessions of a Communications Lawyer, page 104.

[6] ibid.

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