THE COMPEllTION TRIBUNAL IN THE MATI'.ml OF an Application by the Director of Investigation and Research under sections 77 and 79 of the ComperitionAa RS. 1985 c. C-34» as amended BETWEEN: THE DIRECTOR OF INVESTIGATION AND RESEARCH COMPETITION TRIBUNAL - and -TRIBUNAL DE LA CONCURRENCE File No. --c.t- '1 4/~ . TELE-DIRECT (PUBUCATIONS) INC., No£vctossie1 V Jt. _~ • TELE-DIRECT (SERVlCE'S) INC. et R I ,,,,. Exhibit No - 7~ No. ·· la pitl!cef - and-Filet. , fi.L,u.,. te/tJS 1 , /~OS" Deposee le ,,.( 1 . 1 " Registrar ~~ Greffier ANGLO-CANADIAN TELEPHONE COMPANY, NDAP-TMP WORLDWIDE LTD., DIRECTORY ADVERTISING CONSULTANTS LIMITED AND muNDER BAY TELEPHONE
lnte.rVenors
AFFIDAVIT OF :MICHAEL TREBILCOCK FILED JN REBUTTAL
I, Michael Trebilcock, of the City of Toronto, in the Province of Ontari<>, MAKE OAl'R AND SAY AS FOLLOWS~,
1. I have .reviewed the opinion of Professor M:argaret Slade dated August 15, 1995, to be filed with the Competition Tribunal on beh3lf of the Director of Investigation and
No. CT-94/3 C8MNmlOll ,_. .. llllUNAI. DE LA COtKU1RE11C1 , , R AU• 29 1995 Mg AOUT U I ---UGl: -ollAI -- A -W1$f1A llt r----f OTTAWA, ONT. AppliC31tt Respondents
- 2 -Research of the Co:mpetiti.on Policy Bureau, with respect to the Directorys tying ailegations in the above proceedings. I offer the following c.omme.ats.
2. I note at pages I and 2 of her opinion that Professor Slade accepts that space and advettis.ing services (mcluding selling effort) are inputs or intermecUate products that go into the production of directory advertising. However, having acknowledged this, she then fails in any way to relate the intemal production of these inputs to the theory of the firm or theories of vertical integr.ation. As I emphasize in my affidavit, vertical integration is pervasive in modem economies. In-house production of complementary inputs to a final product necessarily entail excluding the possibility of external or :independertt sappliers providing the inputs produced within the finn. If this constitutes an anti.--competitive form of tying for purposes of s. 77 of the Competition Aa, the potential for anti-competitive tying allegations is practically limitless in modem economies.
3. Ai page 7 of her opinion, Professor S1ade indicates that she plans to cliscnss whether advertising space and advertising services can be provided sepai:ately or must be fumished as a package. As I emphasize in, my opinion, this is to ask the wrong question. I do not deny that technically t.be inputs can be separated - as indeed they presently are with respect to COilllllissionable accounts - but the question is not whether technically they can be ~~ separated but whether it is efficient to contract out or to produce these inputs intemaily.
Professor Slade implicitly acknowledges that this is the appropriate question when she states (at p.10) that "the decision concerning sepa:rat.eness mu& ultimately depend on economic
common sense. For example, it would be inefficient to treat left and right shoes as ~ products" (even though technically they could be separated). However, nowhere in her opinion d<:>es Professor Slade address the comparable issue in the present proceedings of whether internal production or out-soarcing of these inputs for various classes of advertiser accounts is more efficient.
4. Professor Slade argues in the present context that advertiser clients should be able to decide whether to use an independent selling agent or not {pages 12 and 13). At page 8, Professor Slade :further claims that it is standard for the advertislllg industry and the media to view the service and space functions as separate, dt:i:Dg the example of television stations that sell time (or pay a commission) to any accredited advertising agency. While this may be true of television stations, for many other reWling functions the selling function is routinely provided internally. For example, as I state in my affidavit at paI3.gI3ph 37, major retailing chains like Eatons, Simpsons, The Bay, and Wal.mart routinely organize their selling functions internally by providing display space and sales staff. This is also obvioasly true of local new car dealerships and many other retailers. It is also true for a Ja.rge :range of display advertising in daily and weekly newspapers where commissions are not paid on most retail advertising. For example, the Toronto Star bas an explicit policy of not paying commissions on retail advertising (see para. b of sample rate card attache.d herero as ~ ~
Exh:J.oit .. A .. ). No one suggests that it should be a matter of objection either by consumers or
pote.ntial sales intermediaries that customers are unable to hire independent sales intermediaries or that the latter in tam cannot demand a sale's commission from these
-4-businesses for successful referrals. In fact, TeleDirect does choose to contract-{)Ut the provision of a variety of its input.s, including advertising selling and service functions for commissionable accounts, printing of its directories, and delivery of its directories. The explanation for when it does or does not find it appropriate to contract-<mt the provision of various inpms resides in a range of efficiency considerations which Professor Slade does not a~. and cannot be explained by crude attempts to claim that Tele-Direct is attempting to monopolize its input markets, which even assuming marlcet power in its output maikets, makes no business or economic sense.
5. In developing her argument that space and services are two separate products, Professor Slade relies on a number of factors (at page 9). First, she rightly states that Tele-Direct pays commissions on some accounts, thus entailing a separation of space from services. However, the fact that space and services have been separated in some cases does not imply that it is efficient to separate them in all cases. For example, it appears to be common ground that small advertiser accounts can only be efficiently serviced through an internal sales force and that independent advertising agencies have neither the ability nor desire to service such accounts. Thus, there is no alternative but to provide space and seivices on a bundled basis for such accounts. In my earlier opinion, I also adduce reasons for why it is efficient to provide space and services on a bundled basis for larger local \~
accounts but not for large national accounts. In all cases, space and services could be
technically separated, but as I have emphasized, this is not the relevant question. Professor Slade also argues that Tele-Direct organizes its company into divisions and that there are two
-5-Vire-Presidents in charge of sales and publishing respectively and thus the two :functions are separate.cl within Tele-Direct's own organiz.ation. This point does not refute the proposition that space and services have been vertically integrated within a single organi7.ation, with a hie:ra:rchy of decisionmalcing that ensures integrated production functions, whatever o:rganizationaJ. subdivisions may prove convenient for day-krday operations. Professor Slade also claims that Tele-Direct has c:reated an arms-length subsidiary, Tele-Direct (Media), which is a CMR specializing in provicting advertising services for advertisers with commissionable accounts, which she cWm.s again recogniz.es the separability of space and sexvices. Again, I reemphasize the point that technical separability is not the issue, but :rather whether it is efficient to integrate space and advertising services for some set of accounts and not others. Professor Slade also claims that Tele-Direct's subsidiary, NTD7 provided advertising services in the U.S. market, but did not publish a U.S. directory, hence again suggesting the separability of space and advertising services. She does not acknowledge, however, that NTD operated in the U.S. market as an exclusive selling agency. an arrangement I refer to in my earlier opinion, which, as with the arrangements adopted by Tele-Direct in canada, precludes independent advertising agencies from servicing selected advertisers and which bas recently been upheld ms imilar circumstances to the present case by the U.S. Court of Appeals for the Fourth Circuit in l]1ompson Everett Inc. v. National Cable Advertisin~ L.P. (June 27th, 1995). Fmally, she cla.ims that the separation \ of space and advertising services is common in the advertising industry, and it is standard for
other media to pay commissions to accredited agencies. While this may be the case with
-6-some media, such as television, as noted above it is not true of other media such as daily and weekly newspapers.
6. At pages 10 and 11, Professor Slade claims that Tele-Direct ~ses market power in the provision of space, which is an essential input into directory advertising, and that by tying the provision of services to the purchase of space it has effectively extended its maiket power in the provision of space to the provision of advertising services, hence preventing independent advertising agencies from expanding their presence in the advertising services marlret. This view implicitly reflects an adoption of the leverage theory of ty:ing, discussed in pa:rag:raph 31 of my opinion. Profesror Slade, however, at no point acknowledges the extensive critiques of this theory, which point out that it is generally not pos.si'ble for a fum, even assmning marlret power with respect to one product, to exploit profitably this marlret power a second time with respect to a complementary product.
7. At page 17, Professor Slade acknowledges that, with respect to the fust remedy proposed by the Director for the alleged tying of advertising space and advertising services, i.e. unbundling of advertising space and advertising services by charging separate prices for these inputs, it will be difficult to establish marginal costs for these differeot inputs and therefore continuing regulatory oversight will pro'bably be zequired. I address this issue \
in paragraphs 14 and 15 of my opinion and note there that these difficulties persuaded the
U .K. Office of Fair Trading in its investigation of Yellow Pages advertising that unbundling was simply not a viable option - a view that was shared by most of the witnesses that
-7-appeared before it. However, Professor Slade fails to recogoiz.e that the alternative remedy proposed by the Director- general commissiooability of all advertising accounts - raises exactly the same issues of eootimring regulatory oversight in ftdng the commission rares - an issue that I address in paragraphs 16 and 23 of my opinion.
8. Profe&10r Slade claims at pages 5 and 11 that profits of TeJe..Direct are high perllaps in the range of 38 to 40 percent of total assets • and that this is symptomatic of nmket power in the directory market. Measuring profimbility by reference to return on assets in any service indnstty is totally inappropriate. For example, most independent advertising agencies, inclnding intervenors in these proceedings, are lilrely to be found to possess market power by this measure, as would many other service :firms such as law and accounting firms, that own very few assets. I note in this respect that Professor Richa:rd Schwindt in a separate opinion filed on bebalf of the Director does not invoke this measure of profitability as an indicia of market power. However~ it should be emphasized that in my view the economic implications of the alleged "tying" of inputs in this case is independent of the question of whether Tele--Direct possesses marlret power in the directory advertising market (the output market). Bven if it does, my opinion sets out reasons as to why it would be :rational for Tele--Direct to employ exclusively an efficiency calcuhls in deciding whether or not to intemally integrate the production of inputs~into the production of directory \ advertising.
- 8 -9. While Professor Slade argues at pages 12 and 15 of her opinion that Tele-Direct's alle&ed practice of tying impedes the entry of new directory advertising agencies and mhibits the expansion of existing agencies, thus in her view substantially lessening competition in terms of s. 77 of the OJmpetirion A.a, she also acknowledges at p.12 that entry into the advertising services marl.c.et is potentially easy and economies of scale are relatively unimportant. Accepting as a logical fuct that all fO!Dls of vertical integration foreclose a portion of the input market to independent suppliers, the question to be posed for the pmpose of competition policy is not whether the number of independent suppliers is fewer with vertical integration than without (it obviously is), but whether vertical integration prodnces inefficiencies in the provision of directory advertising services. However, there are many organizations active in providing the same kinds of sexvices that Professor Slade views as directory advertising services, including the sales staffs of independent directories, specialized advertising agencies, consultants, general advertising agencies, and in-house advertising agencies (see pages 8 and 9 of her opinion). There is no evidence of scale economies that would render ineffective the efforts of these various providen of directory advertising services to compete efficiently in the provision of non-integrated directory advertising services even if they re:maiD foreclosed from providing advertising services related to the current range of Tele-Direct's vertic.ally integrated advertising functions.
10. Professor Slade completely fails to address in her opuoon the critical fact that almost all Yellow Pages Directory publishers, w bet.her telco-affiliated or independent, organize their selling functions in a similar way to Tele-Direct, Le. through heavy reliance
- 9 on an internal sales force, eve:n where the directory publishers are very small and ma.nife.stly possess no marlret power in the directoiy space marlret (see paragraph 27 of my opinion). Any aml--QJDlpetitive theory of tying in this case that cannot explain the vertical integration of advertising se:rv.ices by directozy publishers that manifestly lack market power is critically deficient. Indoed, this fact is fatal to any attempt to argue that the internalization of .selling functions is a manifestation of an effort by a firm with market power to leverage its marlret power from the space market to the advertising services market.
11. I make this affidavit pursuant to Ruk 47(2) of the Competition Tribunal Rules. SWORN BEFORE ME at the City of ) Toronto in the Municipality of ) Metrop0litan Toronto this 25th ) day of August, 1995 ) A Commissioner for Taking Affidavits ~MlllCf' ....... A~'-.,. flflOYINcE OF. ONTARIO,~ a~. ........ Elr:c*es July "1. 1998.
EXHIBIT •Aa .> iii1 ? 1 ttl«•RM t•l-i 11=1: ~ 1995 ADVERTISING INCENTIVE PlAN FOR
3 days - Sunday to Friday or Saturday Life section only $3.46 per line, per day Here's how the 3-Day Frequency Plan works: • You will receive 3 insertions within a 7-day span. On Saturday (Life section only) • Your maximum ad size is 980 agate lines. • The contents of each ad may · change; however, the size must be consistent. • Your line rate will be $3.46 per line per day (based on 3 insertions) • This plan is limited to retail advertisers. This special line rate is actually 32o/o ($1 .62) less than the lowest weekday contract rate in The Toronto Star and 28% ($1.36) less than the lowest Sunday contract rate. Please note: All t~rms and conditions detailed on oor retail rate card apply. Rates effective June 1, 1995.
Each week, The Toronto Star reaches your consumers more successfully than the competition RfACH OF TORONTO ADULTS: .. 2 WEEKDAY + l WEEKEND PAPER 64% 43% I ' i 21% I ! 1 • Toronto St.11'. O Toronto Sun • 2 Mon..Fri. ;z Mon.-Fri. 2 Mon.-Fri. + l Sat. f"IPe1' ... l Sun. paper ·Gl...o 1b Seat·. paper l ~NAOb.lnl<~ ·I · - · REACH OF TORONTO ADULTS:-· · l WEEKDAY+ THE WEEKEND' PAPERS l . - - .. - - - .. ' - . - .. _... . -. ... .. ~"'-- ---- ··- - ! 62% I :.: . ·.;;'": 40% 21% • l Mon.-Fri. 01~.-Fri . • Clobe-... 5.ll +SaL z Mon. . .fri. • Sun.~ • Sun. Sun . .1~~
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Terms and Conditions a.) Accounts are payable when.rendered. Accounts are coosidered past due if payment is not made by ttle 20th of the month following bilfing. Payments in foreign currency must be made at 'the prevailing Canadian rate of ex.chan~. The Publisher will reqUire prepayment from Advertising agencies who indicate ttiat their Client{s) ls responsible for payment of the adVertisement or any kind of payment disclaimer is used or implied on Advertising insertion orders. b.} Rates QIJOted are for retail adveliising only. The Publisher reserves the right to classify all ~~ advertisements. No agency commissions are paid on retail ad't'e~. ) c.} The Publisher may increase advertising rates at any time and all contracts are accepted subject to this condition. The advertiser may cancel any contract without short rate penally on notice with1T115 days after higher rates are made effective by the Publisher. d.) If publication of The Toronto Staris restricted or curtaffed in any way, rates quoted here or in any contract and the size or location of any advertiSement shall be subject to mo<frfication without notice by the Publisher. e.) The Publisher reserves the right to revise. reject, djscontinue or omtt any advertisement. or to cancel any advertising contract, for reasons satisfactory to the Publisher Without notice an<! without penalty to either party. f.} tf an error is made by The Tor onto Star which in its judgement materially affects ttJe value of an advertisement. a corrected advertisement will be inserted once upon demand without further charge. ·Make good" insertions will not be grante1j on minor errors which in the Publisher's judgement do not lessen 1he value of the whole advertisement g.) The liability of the Publisher for damage arising out o1 errors in advertisements is limited to the amount paid for the space actually occupied by the portion o1 the actvertiSement in which 1f'le error occurred, whether such error is due to 1he negligence at the Publisher's employees or othetwtse. The liability of the Publisher for damage arising out of non-insertion of any advertisement is Hmited to the amount received by the Publisher for such advertisement The advertiser agrees to indemnify the Publisner for any tosses or costs incurred by the Publisher as a result of publishing any advertisement which is libelous or misleading or otherwise subjects the Publisher to liability.
b.) The Publisher accepts no responsibility for loss of profit or consequential damages arising from the exercise of its rights set out in paragraph (e.). non-insertiOn of any advertisement or anr error made in any advertisement whether such error is due to the negttgence of1he Publfsher's employees or otherwise. L) Advertisers will be charge<:! for space occupied from cut-off rule to cut-<>ff rule. not exceeding space ordered. J.) All materials produced by the Publisher will remain the property of the Publisher. The Publisher wm not be responsible for the return of materials supplied by the advertiser unless return def'JYery instructions are raceived when the a~ement is placed. le.) The printing of key codes used to track coupon redemption is not guaranteed. L) lhe Publisher may insert the worn ·advertisement'' or "advt" above or below any copy. m.) Coritracts must be signed in order' to obtain cootract discounts. Open rates wiU be charged in absence of a contract. No contract wm be accepted for a period longer than one year. Contingent orders will not be accepted. n.) Press limitations. or other caLtSeS beyond its control, may require the Publisherto !Imitthe availability of color. insert distribution and other special cJassffications on selected occasions during the year. o.) Deadlines may vary depeooent on prirrtmg schedules. p.J The Publisher will not know1ng!y piiblish any advertisement which is illegal, misleading or offensive to its readers. Member of': • Canadian Daily Newspaper Association • Newspaper Marketing Bureau e Audit Bureau Of Circulations eA dvertising Advisory Board • Advertising Standards Council