INDU Committee Report

The extent of corporate concentration in Canada is unparalleled in any of the western liberal democracies. There are extreme consequences for journalists, for employment, for readers and for democracy. [Gail Lem, 52:10:35]

Competition issues are generic. The same analytical tools can be applied in all markets. The same analytical issues arise in all markets. In my opinion, it is not necessary to have an industry-specific competition policy. [Donald McFetridge, 44:9:05]

Some observers find the Committee’s study of a specific industry ¾ in the present case, the newspaper industry ¾ somewhat incongruous in the context of a study of the Competition Act, an Act of general application. The current study was conceived in June 1999, far in advance of the recent announcements by both Hollinger and Thomson of their anticipated newspaper divestitures. Over the past three decades, the trend toward greater concentration of ownership has been of increasing concern to many Canadians. In the interim between the Committee’s conception of the study and the study itself, the newspaper industry has experienced something of an upheaval. While the announcements by Thomson and Hollinger appear to be "shifting the ground," the ultimate result of those decisions will remain unclear, until at least such time as prospective buyers come forward. Of course, the acquisition of those papers by a single entity could lead to even greater competitive concerns. As such, the Committee believes that such potential "groundshifts" and issues of newspaper concentration will continue to resurface as significant concerns for Canadians. Moreover, as a result of the rapid and widespread development of electronic media in the past decade, the nature of the debate has changed significantly since the 1970s or 1980s. For these reasons, in the context of its study of the Competition Act, the Committee has taken the opportunity to explore the interface between competition law and the newspaper business.

A clear understanding of this interface is often obscured by what many see as special considerations unique to the newspaper industry. While at one level it is possible to talk about newspapers as a business like any other, it is equally important to recognize the unique role of the daily paper to millions of Canadians, who rely on it to form opinions on the issues of the day. It is this dual perception of the newspaper industry that makes for the uneasy relationship between that industry and principles of competition law as they have evolved in Canada over the last century.

A Diversity of Views and Ownership Concentration

Concentration in the newspaper industry is not a new concern. As one witness explained, the issue has been addressed before:

In early 1980, there was a massive sell-off of newspapers … [This], however, did not produce greater diversity of ownership. On the contrary, it produced yet more concentration so that instead of three chains what we got was two larger chains. The after event response from the government was the appointment of a Royal Commission, which reached the obvious conclusion that the concentration of Canada’s press, which was already uniquely high for a democratic country, would become greater still unless Parliament took preventative action. [Tom Kent, 54:15:35]

The government of the day failed to take decisive action "and the inevitable followed." However, Mr. Kent notes "with Mr. Black’s … troubles and Thomson’s changed business strategy there is a new opportunity for some deconcentration" [Tom Kent, 54:15:35].

Mr. Kent was not alone in expressing his concerns about concentration, which were echoed in some detail by other witnesses:

[In] 1970 … independent daily newspapers controlled 40% of English language newspaper circulation and 50% of French language newspaper circulation. Today independent newspapers represent less than 4% of English language daily circulation with one chain, Conrad Black’s Hollinger, controlling 45.4%. This means that almost half of the readers of daily newspapers in Canada get their information from the same source. Three other large chains ¾ Quebecor, Torstar Corp. and Thompson ¾ control the remaining 50% of English language circulation. In the French language market the situation is similar with Quebecor controlling almost 45% of daily circulation. At the regional level, the level of monopoly ownership is simply appalling. In four provinces, one owner controls the entire daily newspaper industry ¾ the Irving family in New Brunswick, and Hollinger in Prince Edward Island, Newfoundland and Saskatchewan. [Gail Lem, Communication, Energy and Paperworks Union of Canada, 52:10:40]

The impacts of concentration are most acute outside major urban centres:

At the local level, the situation is similar. In the major metropolitan market of Toronto, there are four English-language dailies, which makes Toronto one of the most aggressive news cities in North America. In Montreal there are three French-language dailies and one English daily. But leave those major centres and you have only a handful of cities where there’s actually competition. Outside of those seven or eight cities, the major newspaper chains have simply eliminated the competition. They’ve bought each other out or closed newspapers. [Gail Lem, 52:10:40]

One obvious consequence of increasing concentration is a smaller job market for journalists: "When large chains buy up newspapers, and especially when they buy up a large quantity at a time, the first thing that typically happens is that journalists lose jobs" [Gail Lem, 52:10:40]. There is more at stake, however, than the loss of jobs for journalists. The quality and quantity of news that reaches the public may also be harmed:

If you talk to a journalist you will uncover a quiet fear about the state of journalism in Canada and about the quality and integrity of their craft. … Journalists talk about a shocking narrowing of the journalistic agenda. The range of material that is deemed newsworthy has declined and the resources for investigative journalism have virtually disappeared. [Gail Lem, 52:10:35]

Editorial control is most obvious where journalists are fired, of course; but the impact may be more systemic:

Chiefs usually claim that they don’t abuse their power; they don’t interfere in news and opinion … In a day-to-day sense that’s largely true. The chiefs are too busy. But they do choose the people who do manage. In fact, within a chain, the type’s set. It may allow a little licensed dissent by a columnist or two, but essentially one viewpoint rules throughout papers. I think no one would accuse Mr. Black of being any less than ideological master of his papers, not any less so than was the Canadian who did become Lord Beaverbrook. [Tom Kent, 54:15:40]

Moreover, the phenomenon is not limited to national newspapers:

The growth of chains has extended to the community newspaper level. This is something that is not talked about that much, but the fact of the matter is that when you look at community papers you see again Hollinger or a subsidiaries of Hollinger and other chains with large market shares. [Gail Lem, 52:10:40]

Competition Bureau and Newspapers

The evidence presented to the Committee revealed two fundamentally different views on how newspapers should be perceived. On the one hand, journalists contend that:

The news media is not a business just like any other. Its product is a powerful one that influences political, social and economic policy. This fact remains true despite efforts in recent years of media owners and newspaper publishers to distance themselves from it, perhaps to justify the pursuit of profit at the expense of quality journalism. [Gail Lem, 52:10:35]

By contrast, M. Gaston Jorré, head of the Mergers Branch with the Competition Bureau, emphasizes the uniformity of the Bureau’s approach to industry analysis; that approach does not differ when the business is newspapers:

The Act is one of general application, so the basic principles and the basic approach we use with newspapers are the same as with any other industry. When you have a proposed merger of any size, it’s going to be notifiable to us. The key test for us is going to be whether you have a substantial lessening of competition. [Gaston Jorré, 43:11:10]

The Bureau’s analysis is essentially an economic one, focusing on advertising. Newspapers, like television, are primarily a vehicle for advertising, since this is where the great preponderance of their revenues are generated. From a business perspective, the key product of a newspaper is an audience for advertisers; the newspaper’s number one client is not, as might be supposed, the newspaper reader but rather the advertiser. Accordingly, the key issue that the Bureau must address is how would a proposed transaction affect the advertising rates that the papers can charge? To answer this question means knowing the market.

In broad terms, there are two kinds of advertising: "image" or "national" advertising aims at promoting brand preference and targets a non-regional audience. Common examples (taking the Globe and Mail as an example) would include recurring advertisements placed by companies like Harry Rosen menswear or Dell Computers. The second type of advertising aims at promoting retail sales and is likely to target a local audience by advertising a specific sale in a specific store at a specific location. Thus, it is clear that the market for newspaper advertising may be local or national, depending on the product, or more accurately, depending on the advertiser’s target customer.

The extent to which a proposed transaction will affect the rates that the papers can charge to advertisers will largely depend on the paper’s market power. But market power is not simply a question of how many newspapers, for example Le Droit might sell as compared to the Journal de Montréal. Other factors will influence this analysis, including the availability of substitutes. If the local paper raises its rates, an advertiser may switch to another medium ¾ to television, radio, billboards, flyers or the Internet. Whether one medium can be substituted for another depends in large measure on what the switch will cost the advertiser. "Cost" in this sense is assessed broadly, encompassing more than just the additional expense of the new medium, but also how effectively the new medium will allow the firm to target its customers. A drop in sales as a result of switching would also be factored into a firm’s "switching costs." Of course, costs might also be favourably affected by the switch ¾ a dealer in used cars, for example, might find profit by switching from the Ottawa Citizen to the Auto Trader. However, an electronics retailer might not have such available substitutes. Demographic studies indicate that certain audiences tend to prefer certain media. People with university education, for instance, are more likely to read the Globe and Mail or the National Post than the Sun. Other demographic groups may rely on magazines, television, the Internet or radio as their source of information. For example, market studies indicate that the Sun is the paper of choice for males between the ages of 18-25 with a high-school education. Accordingly, an advertiser aiming its product at that demographic may have very limited substitutes, even in a seemingly competitive market such as Toronto, a city with four major dailies.

This brief illustration makes clear that competitive analysis of news media is very complex. What also becomes clear is that the Bureau conducts its analysis based on quantifiable phenomena, for example: how much must the price rise before switching occurs? This is where problems arise when the Competition Act is applied to issues of editorial content. How do you attach a price to editorial diversity? How do you express as a number how public opinion is affected by a change of management of a newspaper?

Objectives of the Competition Act

The objectives of the Competition Act, as set out in section 1, are:

Maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices.

The current Commissioner and his predecessors have consistently maintained that the Bureau’s mandate does not extend to consideration of issues of editorial diversity. The point is made by a Bureau official:

If you have a change of ownership that may have various effects on editorial policy or other things, but that’s not going to change the nature of that local competitive market. You had one newspaper before and you’ll have one after. You will of course have an issue if, for example, you had two newspapers in a market and the owner of one were to try to purchase the other. Therefore as such the editorial content or the editorial orientation of a paper is not something that we look at in competition policy terms. [Gaston Jorré, 43:11:05]

While the statement is undeniably correct, it is, at the same time, necessary to recognize that increasing concentration of ownership does, at the very least, give rise to legitimate concerns about editorial diversity. The question is: What can competition policy do about it?

The few witnesses appearing before the Committee in general agreed with the conclusion reached by the Kent Commission in 1981 that the current competition laws may not be the best way to regulate newspaper ownership:

The Campaign supports the Kent Commission’s recommendation that separate legislation governing newspapers be enacted that set out limits on ownership as well as mechanisms to ensure greater diversity of ownership by Canadians. [David Robinson, Campaign for Press and Broadcasting Freedom, 53:15:45]

In the absence of industry-specific initiatives, however, witnesses suggested that certain changes to the Competition Act would allow the Bureau to respond to the issues. The most frequent suggestion was that the objectives of the Act be expanded.

Drawing upon existing legislation ¾ the mergers and monopolies legislation in Britain ¾ we could put into the Competition Act an amendment that granted the Competition Bureau the authority to consider the impact that proposed mergers and acquisitions on the newspaper industry not just on the business competition, which is competition for advertisers, but also on editorial diversity … [David Robinson, 53:15:50]

And

When considering whether a proposed merger in the newspaper industry prevents or lessens competition, the Competition Bureau should consider the public interest as well as commercial interests. I know this would be an unusual departure. It would mean considering the impact on the diversity of sources of news and information available to the Canadian public from these newspapers. [Gail Lem, 52:10:55]

A further suggestion was to expand the scope of the Bureau’s review to consider the impact of a proposed acquisition on labour markets:

When assessing proposed mergers and acquisitions in newspaper interests, the Competition Bureau has thus far focused only on the competition for advertising, but there’s also a need to look at the competition in the labour market. That is when you have one employer, there’s not much competition if you become unemployed and are looking for other employers to work for. [David Robinson, 53:15:50]

And

It’s a departure but one under the current climate that we think would be an important departure. When considering whether a proposed merger in the newspaper industry prevents or lessens competition, the Competition Bureau should, in the interests of a free and fair press, consider the impact on jobs and newsroom resources. [Gail Lem, 52:10:55]

Commentators recognized that implementing these recommendations would have far-reaching effects and would involve substantially rethinking conventional ideas about competition:

What I’m suggesting … is that … competition is a fundamental good of our kind of society. … In terms of the means of production and the whole economic system, competition is very important. Fine, but there are special situations ¾ and there may be others besides the media … where the important competition is not of the "means of sale," so to speak, the advertising, the means of financing, but the competition is in terms of what this medium does for people’s thoughts and minds and opportunities to have views on public affairs and so on, the very guts of democracy. [Tom Kent, 54:16:45]

Mr. Kent’s views, and those of other witnesses, aim at expanding the objectives of the Competition Act to take into account in its analysis what has come to be called "social capital":

Let’s be a community of communities. It’s very important in this country that we get as much strength as possible in our diverse communities … The Competition Act is an instrument ready to hand that could be used here and now, quickly ¾ with what really, I would say, is quite a minor modification, broadening to take advantage of a window of opportunity to get back to more diversity. I stress that what I’m talking about there is, above all, community. It’s the importance of community ownership, ownership in the community rather than ownership … by big, remote corporations … [Tom Kent, 54:16:45]

Finally, Mr. Kent warned the Committee of the consequences of failing to act.

Twenty years ago I thought in media it would have to be some separate legislation but now you have an opportunity where it could be done through the Competition Act. If it isn’t done through the Competition Act, then what will happen now is what happened in 1980, that is to say, these papers will be sold to other major corporations, and there won’t be any improvement in competition and diversity. [Tom Kent, 54:16:45]

Two Approaches

Expanding the objectives of competition law to include "social capital" considerations might be accomplished in two ways: (1) through direct amendments to the Act itself, creating a "carve-out" for newspapers; or (2) giving final approval to the Minister of Canadian Heritage to allow or disallow a merger or acquisition according to criteria different from those in the Act.

The first approach would require amending the existing Act in order to create industry-specific provisions for newspapers. This approach poses serious conceptual difficulties, however. A recurring theme heard throughout the Committee’s study of the Act has been a strong emphasis on the "framework" character of the legislation, that is to say on its application to industry generally. Overwhelmingly, witnesses underscored the importance of preserving the general application of the Act and viewed a possible move towards creating special provisions for any industry, even one as culturally important as newspapers, as a step in the wrong direction.

A second difficulty with this approach would be its impact on the Bureau’s analysis, which as noted above, is an economic one, requiring ¾ to the greatest degree possible ¾ quantification of market behaviour. Predicting the behaviour of markets, even using the most sophisticated analytical models, is far from an exact science. Clearly, "social" questions, such as how a given newspaper contributes to solidarity of the community or how it promotes political pluralism, are, by their very nature, unquantifiable:

The public’s interest in vigorous competition among newspapers is not one that can be quantified in a dollar and cents terms. It has to do with the number and quality of independent voices finding expression. [David Robinson, 53:15:55]

In essence, there are simply no analytical models for expressing social concepts in an objective and meaningful way. Ultimately, to challenge a proposed transaction, the Commissioner must be able to provide compelling and objective analysis detailing the expected impact of the deal on markets. Expanding the objectives of the Act to take account of such considerations would require Canada to make a complete paradigm shift, away from the analytical approach currently used by antitrust authorities the world over, towards a more holistic model relying not on economics, but on the disciplines of psychology, sociology and political science.

Another option would be a hybrid model that incorporated traditional antitrust analysis along with "holistic analysis." This route would also pose difficulties. Which of the two factors would be given greater weight? The economic or the social? How would the Tribunal gauge the merit of the parties’ arguments on the social impact of the transaction?

Finally, it is important to recognize that expanding the objectives of the Act would create a very real risk of compromising the original objectives. Lawson Hunter, a former Director of the Bureau, speaks "about the dangers of going too far":

As a law of general application … it is a very blunt instrument. Because of that it is a very discretionary instrument and so it gives enormous power in the hands of the regulators … I think you need to bear that in mind when you think about the powers and process that you’re adding on to that position. [Lawson Hunter, 46:9:25]

With this single blunt instrument, the Commissioner is given the task of fulfilling and balancing the Act’s objectives. Occasionally, these objectives collide ¾ for example, in some instances it may not be possible to "promote efficiency" while at the same time ensuring that "small and medium-sized enterprises have an equitable opportunity to participate." Given the difficulty of reconciling even the current objectives of the Act, it is suggested that expanding these objectives would turn the Act from a blunt instrument of economic policy into a blunt instrument of economic and social policy and would ultimately fail to address either objective effectively.

The second approach ¾ creating special provisions in another statutes ¾ would have the advantage of preserving the integrity of the current Act. At least two models for this approach exist in current legislation. The first, in section 47 of the Canada Transportation Act, permits the Governor in Council "on the recommendation of the Minister and the minister responsible for the Bureau of Competition Policy," by order, to take any steps, or direct the Agency to take any steps, that the Governor in Council considers essential to stabilize the national transportation system …" In order to invoke the section, the Governor in Council must be of the opinion that: (a) an extraordinary disruption to the effective continued operation of the national transportation system, other than a labour disruption, exists or is imminent; (b) failure to act under this section would be contrary to the interests of users and operators of the national transportation system; and (c) there are no other provisions in that Act or in any other Act of Parliament that are sufficient and appropriate to remedy the situation and counter the actual or anticipated damage caused by the disruption. The critical section 47(7) states that "anything done under the authority of this section prevails over the Competition Act." By this section, the Commissioner’s power of review might be suspended by order of Governor in Council. Similarly, with the necessary legislative changes, the Minister of Canadian Heritage might have the power to suspend the Commissioner’s review of a proposed transaction.

A variation on this theme finds precedent in section 224 of the Bank Act, whereby the Minister of Finance is required to consent to mergers. The Minister of Canadian Heritage could similarly be given the "final say" to approve or deny a proposed transaction in respect of newspapers.

Both of these models pose difficulties owing to the perception of conflict of interest. The role of the press is commonly understood as being the "watchdog" of democracy and thus adversarial to government in order to ensure public accountability in elected representatives. Investing a minister of the Crown with the authority to intervene so significantly in the business dealings of newspapers would be likely be perceived as political interference.

Foreign Ownership Restrictions

Owing to foreign ownership restrictions, newspapers in Canada are not an open market:

Ownership restrictions in Canada … undoubtedly contribute to the concentration. Whenever you have ownership restriction in an industry, whether it’s newspapers, whether it’s telecommunications or broadcasting, etc., you’re likely to have fewer players in the market than if you have unrestricted access. [Konrad von Finckenstein, 43:10:10]

In June 1999, the authority to review foreign investments in cultural industries was transferred from the Minister of Industry to the Minister of Canadian Heritage. Newspapers are a cultural good, so foreign investment in them is subject to review by the Minister of Canadian Heritage. In the case of books, another cultural good, there are separate regulations in the Investment Canada Act that limit foreign ownership. Firms in the book industry ¾ publishers, wholesalers and retailers ¾ must be Canadian controlled, both legally (50% plus one of outstanding share capital) and de facto. There are, however, no such limits in the Investment Canada Act with respect to foreign ownership of newspapers.

There are, however, effective limits to ownership, and these come into play through the Income Tax Act. Under section 19 of that Act, the deductibility of costs of advertising in newspapers is limited to advertising in a newspaper that is at least three-quarters owned by Canadians. This requirement imposes an effective limit of 25% on foreign ownership.

Under NAFTA (which refers back to the terms set out in the FTA) this limit could not be relaxed without changing the thrust of NAFTA with respect to Canada’s ability to protect its cultural industries. Making section 19 of the Income Tax Act more restrictive (such as by increasing the required ownership of newspapers by Canadians to more than 75% for the advertising expense to be an eligible expense for tax purposes) could lead to a challenge by the U.S. under NAFTA.

The tax code treatment that is based on ownership residence obviously erects a barrier to entry to any foreign firm wanting a higher stake in a Canadian newspaper. Some investors, for example, might want a controlling investment or none at all.

The solution of removing barriers to foreign ownership did not, however, meet with enthusiasm:

Publishers in the U.S. have been lobbying quite hard for a change in the Income Tax Act … The fact of the matter is that … opening up the industry to foreign ownership is not an answer to this dilemma. Exchanging a Canadian-owned chain for an American one does nothing to improve the situation but could put the cultural fabric of Canada, which I think we all recognize is already under siege, further at risk … [Gail Lem, 52:10:50]

Mr. Kent viewed foreign ownership as preferable to large corporate ownership:

American takeover … indeed … could be the lesser evil, if the only alternative is domination by a new Canadian media giant. But it would be a poor second to restoring the diversified Canadian ownership that there used to be … I would certainly agree that to have some foreign ownership could be preferable to everything falling into the hands of one great big corporation just because it was Canadian. [Tom Kent, 54:15:45]

Still, with the current restrictions in place, the question ¾ particularly since the Thomson and Hollinger announcements ¾ remains the same: Who is going to buy the papers? According to one witness:

The fact that too many Canadian newspapers are in too few hands does not mean that there are a lack of interested buyers, it simply means that big, wealthy, and powerful chains have muscled their way into ownership and influence. This did not happen because no one was interested in owning profitable newspapers. It occurred because there was no effective legislation to prevent it. [Gail Lem, 52:10:50]

One suggested solution would be to take steps necessary to reverse the influence of the chains:

To ensure that newspapers are affordable to interests other than the large conglomerates and to open up ownership to other than the large chains, the Competition Bureau should consider requiring the vendor to offer the newspapers for sale on an individual rather than a group basis. [Gail Lem, 52:10:55]

Not all witnesses agreed with this assessment, however. "There is a practical problem. With Thomson and Hollinger papers on the market together, demand is likely to be weak in relation to supply" [Tom Kent, 54:15:45].

As an alternative to directly prescribing who might own or bid for a newspaper, it was suggested that tax incentives might be restructured:

The government should look at the idea of coming up with some incentives or means to encourage local ownership. We do believe that media properties are different from other businesses and that there is a public interest as opposed to just the financial and competitive interest. … It could be done perhaps through various tax incentives or others that would encourage local ownership as opposed to chain wide ownership. [Mike Bocking, Communication, Energy and Paperworkers Union of Canada, 52:11:35]

Mr. Kent agreed that, with the right incentives in place, new buyers could be found or created:

I think there are quite a lot of people who, on the sort of terms I’ve suggested and with a powerful tax incentive, would be very anxious to purchase the papers as a group and not necessarily even individuals in that sense. They could be credit unions, labour funds, all sorts of things, purchasing shares in the local paper. The desire to have the local paper is something that has been rekindled. [Tom Kent, 54:15:50]

Other Proposals

Given the apparent difficulty of reconciling the two approaches to newspaper industry analysis, witnesses suggested other means for ensuring accountability and diversity of ownership. One alternative focused, for example, on the membership of newspaper editorial boards:

One idea that comes up quite often is the idea that instead of just the management of the newspaper, there should be a provision that editorial boards include a representative from among the journalists and a representative from the community so that the newspaper is responsive to needs other than just the management of the newspaper. [Gail Lem, 52:11:40]

Another suggested variation on this theme would be to establish "a publicly accountable body, which could investigate complaints, report publicly on findings, order redress, and so on" [Gail Lem, 52:11:40].

Given the importance of avoiding the appearance of political interference, an amended Competition Act would remain Mr. Kent’s preference.

I would be very worried if the process that I’m suggesting, or any process of any other kind that I’m suggesting, were not sort of a due process through the Competition Tribunal rather than by a straightforward ministerial decision, because there would be no avoidance of certainly the appearance or suspicion that dislike of Mr. Black or dislike of somebody … would influence the decision. That clearly is not what we want. The strength of the Competition Act from this point of view … is that there is a process, a quasi-judicial process. It’s very important to have that kind of process if we’re dealing with the media. So if we could use it, that would be far simpler than setting up an entirely new process. [Tom Kent, 54:16:30]

Having considered the issues in light of the testimony received to date, the Committee does not endorse the principle of creating special provisions with respect to the newspaper industry in the current Competition Act. While recognizing that there are legitimate concerns with respect to increasing concentration of ownership in the media, it is the Committee’s view that the Competition Act is not the appropriate instrument to assess those concerns and provide remedies. The Committee therefore finds that:

16. The Government of Canada, through the Department of Canadian Heritage and other departments, continue to discuss and consider, in consultation with stakeholders, issues of diversity of ownership in the newspaper industry and other information media.