For the first time, an entire first world nation is threatened with being dumped into a broadband backwater by abusive practices from commercial Internet providers across Canada.

Usage caps with draconian limits, expensive overlimit fees, slow speeds, traffic “shaping” and overpriced monthly subscription fees have caused Canadian broadband to deteriorate rapidly in world rankings.  As measured by price per megabyte — how much one pays for speed — Canada ranks 28th out of 30 countries that make up the Organization for Economic Co-operation and Development (OECD), ahead of only Mexico and Poland.

Canada’s disastrous decline from one of the world’s leaders in broadband service to today’s bottom of the barrel status in certain categories can be blamed on one thing: the nation’s commercial Internet providers.  The OECD report gives declining marks nearly across the board for Canada’s broadband marketplace.

“This reflects poorly on Canada’s advancement in the information economy,” said University of Ottawa internet law professor Michael Geist. “Canada remains woefully uncompetitive … We’re getting a poor deal.”

In fact, competition in Canada continues to decline, with dominant providers typically limited to the local telephone company and cable operator, who are engaged in a competition to leverage higher profits from broadband at the expense of network investment and increased penetration.  Canadians now pay more for less than most industrialized nations because operators have increased rates while imposing miserly usage caps, bandwidth throttling, and stopped the competitive speed and price wars that were a hallmark of broadband competition in Canada 5-10 years ago.

Most Canadians now face a monthly broadband bill averaging $45.65 U.S. per month before taxes/fees.  That’s more than $15 higher than the average fee paid by Americans.  Canadians also belong to the dubious club of just four nations where virtually all providers impose paltry usage caps averaging 60GB per month (Belgium, Australia and New Zealand are the others).

Canadians are still enthusiastic about obtaining broadband access — they’re just angry with the limited choices they have, the lack of solid penetration in many rural areas, and the despised usage caps.

Providers claim they are investing in improving service, but independent observers disagree.  Canada holds the distinction of being one of the few industrialized nations with almost no fiber deployment to residential homes.  When providers cap, throttle, and tier, they artificially control the traffic growth on their networks, taking pressure off the need to keep up with demand, despite high profits.

In the past year, many of these providers also began imposing draconian caps and limits on their wholesale accounts, forcing independent ISP’s to increase rates and impose usage caps at levels that make many independent providers uncompetitive.

The OECD report specifically calls out usage capped broadband, warning it may begin to negatively impact the Canadian economy and the nation’s competitiveness.

“This may become an economic disadvantage in countries with relatively low bit caps, particularly as more high-bandwidth applications appear,” the report said.

Many Canadians have been jealous about the expansion of online video and other applications south of the border, but presently denied to them.  The Canadian Broadcasting Corporation warns they may have to wait forever, because usage caps may have permanently eliminated the prospects of online video on a mass scale throughout the country.

Many of the country’s largest ISPs recently did away with unlimited download offerings in favour of consumption-based models, where users are billed extra if they exceed a given cap. The move, they say, is being made in order to cope with ever-growing internet usage and capacity problems, which are requiring continual reinvestment in their networks.

Industry observers, however, say the change is a potential threat to downloadable video services, such as those offered by Microsoft Corp. over Xbox Live and Apple Inc. through iTunes, which are still in their infancies both in the United States and Canada. The market’s growth will depend on users buying and downloading plenty of content from these providers — something they won’t do if they’re constrained by caps because they will effectively end up paying twice for the same product, according to analysts.

“We’ve still got a fair bit of progress to make before it becomes an issue,” says Kaan Yigit, president of consulting firm Solutions Research Group. “But does it make the potential economics less attractive to people planning to offer such services? Probably.”

Canadian ISPs deny their consumption caps limit online video growth.

“If you want to download movies, you can download a mess of them,” Bell (Canada) spokesman Mark Langton says.

File sizes offered by Apple and Microsoft differ from Bell’s appraisal, however. A one-hour television episode offered over iTunes, which users can keep indefinitely and transfer to their iPod or Apple TV set-top box, is about 500 MB. A user with a 60 GB download cap could therefore download 120 episodes if they did not use their internet connection for anything else. The movies announced on Thursday are slightly larger, at about 1 GB each.

Movies over Xbox Live are even bigger, with standard films coming in at about 2 GB and high-definition versions generally topping 5 GB. Users could thus download only about 10 to 12 HD movies before running into their cap.

If the constraints are a threat to video download services, the providers aren’t publicly saying so themselves. Microsoft officials could not be reached for comment while a spokesman for Apple declined to weigh in on the issue.

“Apple doesn’t comment on industry developments/topics,” said spokesman Simon Atkins in an e-mail.

Amazon.com also declined to say whether it would extend its movie rental service to Canada.

Joshua Danovitz, general manager and vice-president international for Tivo, said the issue of download limits differs in each country. In the United States and Asia, where bandwidth pipes are generally “fat,” users have no constraints while other countries — including Canada — are restricting users to various degrees. The issue is going to come to a head soon as more legal content is piped to the living room through an internet connection.

“As that becomes an expected way to get content legally that you pay for, then the companies that provide the broadband have to respond in a way that is consumer friendly and doesn’t alienate them and push them to other service providers,” Danovitz said.

Canadian consumer organizations note Canadian broadband providers often have a vested interest in the programming, and keeping people from accessing it online.  Both Rogers and Bell, two of the country’s largest broadband providers, earn revenue from selling cable and satellite subscribers video programming packages.

“The issue that many of them are starting to confront from an increasingly angry public is that they are charging a certain amount for bandwidth and then making it very difficult for people to use that bandwidth,” says Michael Geist an internet and e-commerce law professor at University of Ottawa. “They’re trying to have their cake and eat it, too.”

L’union des consommateurs, a consumer advocacy group in Quebec, last year filed a class action against Montreal-based cable company Vidéotron Ltée for imposing download limits last summer.

Charles Tanguay, spokesman for the group, said the lawsuit centers on Vidéotron allegedly violating contracts it had signed with customers that promised unlimited downloading. A clause in those contracts that allows Vidéotron to change its rates whenever it wants should be voided because it effectively lets the company circumvent the rest of the contract.

“We figure that on unlimited plans, capping it is a major change, and it cannot be done even if the clause says the opposite,” he says. “We want to force them to respect their signature.”

Canada’s experiences are likely a foreshadow of the great battle to come in the larger U.S. broadband marketplace, where providers are experimenting to see if they can get away with a Canadian-style business model.

“Service providers are also content providers. There will be a fight for technological control of content,” he says. “It’s very concerning. It’s a very big issue, and it concerns net neutrality.”