Canada is a victim of Internet Overcharging, with virtually every major provider limiting access to broadband, throttling speeds, and charging overlimit penalties for exceeding arbitrary limits. Now Cogeco, which itself engages in these schemes for its residential broadband service, has made a breakthrough of sorts.

Cogeco One Zone, available only to users of Apple’s iPhone and iPod Touch, provides 802.11g WiFi across the One Zone WiFi network for only $5CAD a month. One Zone, acquired last August from Toronto Hydro Telecom, operates within a six kilometre region in the downtown core of Toronto. Users discovering the service report it can achieve speeds of up to 7Mbps, and there are no data consumption limits or contracts.

Any iPhone/iPod Touch user who accesses the network within range will automatically be taken to a special sign-up page to begin service. Cogeco One Zone’s offer represents a major discount off the pricing being charged to other One Zone WiFi users:

1 Hour
60 minutes of continuous access
$4.99 + GST and PST

1 Day
24 hours of continuous access
$9.99 + GST and PST

1 Month
Continuous access to same date in following month
$29.00 + GST and PST

(All prices are in Canadian Dollars)

So why has Cogeco decided to practically give away the service?

“Our expectation is that users won’t be using it for downloading video and huge files … It’s just the nature of the device. It’s not likely they’ll be downloading gigabytes of information standing on the street,” Cogeco Data Services president Ian Collins told itWorldCanada.

One potential use Collins may not realize has been among Toronto residents who live and work within range of the network. For some of them, Cogeco One Zone is being used from work and home, and although it is unlikely to replace residential broadband accounts that connect with home computers, some users will give the network a real workout. Should customers figure out how to tether their iPhone WiFi connection to their home computer, effectively accessing the network from a home PC or laptop, that could become an entirely new challenge.

For Canadian iPhone owners, who already face higher prices for iPhone data plans (no “unlimited” plan exists in Canada as it does in the United States), the biggest savings may come from customers downgrading data plans for “phone-based” data, because they rely on the WiFi network instead. Most iPhone owners currently pay $30 per month for 1GB or $25 for 500MB. With unlimited access through WiFi, there are no worries about exceeding data allowances.

Knowledgeable iPod Touch owners could also turn their players into Voice Over IP telephone lines using Skype or Truphone, and effectively pay just a few dollars per month for unlimited long distance calling.

Frontier Communications CEO Maggie Wilderotter told attendees of the National Association of Regulatory Utility Commissioners committee on telecommunications that rural residents and small businesses deserve better broadband service than they currently receive, and there is a digital divide between rural and urban communities across America.

Wilderotter’s company, Frontier Communications, is the nation’s second largest independent telephone company, focusing on providing service in rural communities formerly served by mom and pop or community-owned telephone operations.

Frontier provides 90% of its customers with at least low speed DSL broadband service, which is available to the majority of the company’s 2.4 million customers.  Frontier’s basic DSL service provides around 1.5Mbps, although some customers closer to telephone company switch facilities can achieve speeds closer to 3Mbps.  Frontier also serves some urban areas, such as metropolitan Rochester, New York with a DSL product that in some instances can achieve close to 10Mbps.

Frontier’s rural DSL service is designed to reach residences and small businesses with what is often their only choice for broadband service, Wilderotter explained to the audience as part of her keynote speech.

The company’s efforts to “bridge the digital divide” have relied mostly on making due with existing copper wire telephone facilities, and attempting to provide service over extended distances, common in more rural communities.  Although customers have often been grateful for the opportunity of getting something beyond dial-up access or obscenely expensive satellite broadband, Frontier’s rural service is often expensive and slow.  The company has been successful in attracting customers with promotions, including a “free” Dell Netbook, in return for a $45 shipping/processing fee and a commitment by the customer to sign up for telephone and broadband service for a minimum two year service commitment.  The company also offers a video bundle promotion, providing DISH Network satellite television at a discount for the first year of service.

Frontier’s broadband division has been one of the company’s major bright spots, attracting subscriber growth even while the company continues to lose wired telephone line business to the competition.  That drives broadband development in Frontier service areas, although customers seeking “cutting edge” services with faster and more consistent speed will need to look elsewhere.

Wilderotter also addressed the need to find ways to serve the remaining 10% of customers who lack broadband service because they are in a remote location, too far away from the telephone switch office to provide reliable service.

She told the audience Frontier would aggressively seek broadband stimulus funding to help underwrite the costs of providing service to these customers.  But she also called for an overhaul to the Universal Service Fund, a fee charged on every telephone subscriber’s bill designed to subsidize telephone service in more rural communities where the cost of providing service for each customer can be dramatically higher.  Wilderotter proposes that the USF now devote some of its resources to funding broadband buildouts in the nation’s rural areas, instead of diverting large sums to large national phone companies that exploit loopholes, she says.

“Those who serve rural America need the funding that will allow us to continue to expand broadband service and capacity.”

Stop the Cap! has obtained new evidence outlining the scheduled implementation of Frontier’s new usage cap, its rationale, and how the company intends to convince customers that a usage cap is right for them.

New documents  made available exclusively to Stop the Cap! show a company relying on highly questionable, possibly manipulated data to argue for usage caps, at a time when many cap opponents have accused the broadband industry of fixing the facts around the narrative of  a need for metered Internet service.   The documents also raise new questions about whether company officials are using actual Frontier usage data, which we easily obtained from our own sources, or if they are simply telling a different version of reality to their employees.

The Implementation Plan

Despite the representations by Frontier customer service made to several readers of Stop the Cap!, there definitely is a 5GB usage cap, as published on the company’s website.   However, sources tell us the wording of the usage cap announcement may not have been completely vetted by company officials, and its appearance may have been premature.   The company has started to tweak the language on the page, perhaps in response to the predictable backlash, now adding language to tell customers they will not  be charged any overuse fees or face service interruption if they exceed the cap at this time.

Company officials are following a careful plan, the details of which we have obtained,  to roll out the usage cap in Frontier service areas,  starting with notification of the “problem of bandwidth usage” in a newsletter to be mailed to customers in September, stating Frontier’s position on the problems of bandwidth consumption and inviting a dialogue on the issue.

Company officials will also continue to  use the same flawed statistics published on their website to give customers a measure of what 5GB of usage constitutes.   No independent evidence backing up their claim of a bandwidth consumption problem, or the actual impact on Frontier’s network, or their resulting costs, will be provided to consumers.

With the ultimate outcome already pre-determined by company officials, the implementation of a 5GB cap is already underway across all of their residential DSL product lines (which vary according to speed provided).   Company officials will also conduct focus group testing and further marketing research in an effort to determine how to market the new service limitations, and convince customers that a 5GB  monthly cap is a reasonable and fair solution.

The company will also announce bandwidth measurement tools available to subscribers starting in 2009, so they can monitor just how rapidly they will exceed Frontier’s usage caps.

Customers exceeding 5GB per month will eventually be offered an option to consume more bandwidth at yet-to-be-determined rates, but there are questions as to whether an unlimited consumption plan will ever be available from Frontier.

The rationale for the cap, outlined in different documents  supplied to Stop the Cap!, varies according to who the document’s audience is.   Customer service personnel are being told the usage cap is a result of excessive bandwidth consumption.   But another document emphasizes the increased revenue potential a capped DSL product provides.

This raises new questions about whether the usage cap is truly intended to be a reasonable solution to their claims of a “broadband crisis,” or a financial rescue plan to enhance profits and offset substantial losses from their other divisions, particularly traditional telephone service.   Company officials draw direct lines between the  growing returns available from broadband services and how that revenue has become increasingly important to company profits as well as shareholder value and return in a difficult economic environment.

It’s a win-win for any company that can successfully increase profits, decrease investment in infrastructure, and convince customers that the resulting dramatic reduction in service represents a  positive change.

“The average customer uses less than 1.5GB per month”

Remarkably, Frontier has told employees that the average customer uses less than 1.5GB of usage per month. But Stop the Cap! has seen company data which suggests otherwise, and that raises questions as to whether company management is really aware of the actual usage profile of their customers, or if they are simply not disclosing the facts to employees now forced to defend their 5GB “solution.”

For instance, we have noted that in just one division, Elk Grove, California, more than 40% of customers already well-exceed 5GB of usage per month, often consuming more than 20GB of usage.   In other divisions, the numbers tell a story wildly different from what Frontier management is telling their employees.

We’ve also seen figures that illustrate the myth of the “bandwidth hog.”   While every division has stories of a handful of heavy users obviously running a torrent client or server 24 hours a day, which can consume hundreds of gigabytes of usage over a  month, there is absolutely no evidence those users represent a growing percentage of Frontier’s customers.   Additionally, Frontier’s existing acceptable use policies already provide avenues for the company to address those engaged in prohibited activities without punishing their entire customer base.

In fact, the company’s own research shows broadband usage growth increasing, but at a largely even rate, as customers begin to take advantage of new broadband-tailored services, such as streaming video.

It’s also notable Frontier has a partnership with Netflix to provide new customers with the benefits of a Netflix membership when signing up to a Frontier product bundle.   Ironically, Netflix is launching a new service to deliver video content to subscribers who use a home terminal sold by the company that connects to their broadband service.   Frontier customers attempting to use the service will exceed their usage cap just using the service a few times per month.

The overall Internet bandwidth growth pattern is comparable across many providers, and is not out of line with historical averages.   To be sure, the Internet is rapidly growing, but so are the resources to manage that growth.   Many costs, such as bandwidth, are actually declining, particularly for the industry’s largest players on a “per-gigabyte” basis.

Maggie Wilderotter, CEO of Frontier Communications, uses numbers that simply don’t add up:

Broadband usage consumption at Frontier in on track to increase by 100% year over year. It is important to note that close to 80% of our customers will NOT REACH the 5 Gb cap for several years.

Let’s do the math.   Using their own figures, which are disputed by their own internal numbers, let’s discover what “several years” equals in Frontier time:

Frontier’s Predicted Usage Trend

January 1, 2008   Customer utilizes 1.5GB usage
January 1, 2009   Customer utilizes 3GB usage
January 1, 2010   Customer utilizes 6GB usage

If you are a Frontier DSL customer in western New York, even relying on their numbers disclosed to employees, by the time you are finished raking your leaves in the fall of 2010, you will already be considered a “bandwidth hog” by Frontier, subject to overuse penalties.

We’re Doing This Because They’re Doing It

Prominent among Frontier’s reasons for implementing a bandwidth usage cap is that other companies are doing it.   As Stop the Cap! has observed, the lack of competition in many areas has allowed a duopoly of broadband providers to emerge, easily allowing for both companies to mirror rate increases and restrictions without fear of mass subscriber defection.

Frontier also complains it is forced to invest millions of dollars in their network and infrastructure as a result of Internet growth.   Their latest 10-Q SEC filing suggest a lower amount, but regardless, these kinds of investments have always been a factor in broadband services.   Independent research of bandwidth usage illustrate the trends are completely in line with well-predicted trends made several years ago without panic from bandwidth providers, and many of these costs also come from broadband subscriber growth, which Frontier itself trumpets as a success in its messages to employees.

The challenge Frontier faces is that it remains a small player in a narrowing field of large national providers.   Larger companies with more resources enjoy greater economy of scale in both equipment and bandwidth costs, and the ability to leverage multiple services (video, telephone, and very high speed data) over a high capacity fiber optic or hybrid fiber/coaxial network.   Those stuck with aging copper wire on telephone poles are at an immediate disadvantage.

Frontier recognizes these challenges, and has managed to find the financial resources to continue acquiring additional companies to incorporate into its portfolio, most recently including Commonwealth Telephone Enterprises,  Inc. ($1.1 billion), Global Valley Networks, Inc. and GVN Services through  a purchase from Country Road Communications,  LLC ($62 million).   It’s also attempting to build its own fiber-to-the-home network in limited areas, typically in new housing developments or apartment buildings.

As  Stop the Cap! will reveal in an exclusive report later this week, Frontier and other traditional wireline telephone companies are rapidly losing revenue from traditional telephone subscribers as they disconnect service, relying on their wireless phone or competing voice over IP telephone services.  Broadband remains a shining beacon in a sea of economic challenges the traditional telephone company industry faces. The push for profitability of this successful product line is becoming more critical than ever.   Limiting subscriber use enhances those profits.

Run The Clock Out On The Contract Customer

Frontier’s customer service representatives have been told to resist efforts by consumers with term contracts with the company to pursue their right to terminate service without incurring any early termination fees.   We have learned that customer service representatives have been instructed to tell customers trapped in multi-year DSL contracts that  Frontier is not currently enforcing a usage cap, so there is nothing for them to opt-out from.

But as Stop the Cap! has already reported, customers under contract have the right to exit that contract if the company unilaterally attempts to change the terms.   Frontier’s own marketing tells customers a “price protection agreement,” a feature of a term contract, protects them from price increases for the balance of the contract.   But with a 5GB usage cap, those exceeding the cap face significant penalties or overage fees for doing so beginning as early as next year.   Where’s the price protection?

Through an opt-out procedure the company includes in its terms and conditions, customers have 30 days to notify the company it does not accept the material change a 5GB usage cap represents to their contract.   After 30 days, continued use of the service constitutes acceptance of the new terms going forward under an existing contract.

Until Frontier guarantees in writing that a customer under contract will be exempted from any usage cap or corresponding overage fees for the balance of their contract, we continue to recommend the consumer cancel their contracts within the 30 day window that opened on July 23, 2008 when the company first published a notice to customers of the 5GB usage cap.

“We want to establish a dialogue with customers.”   OK, Here’s What We Have To Say

Although the company claims to want to take the time to engage in a dialogue with customers, their actions thus far have largely been in one direction.   In the material we were able to review, it’s clear the company has already determined exactly what steps it plans to take and has a timeline for doing so.   The only thing left is the focus group and market research to try and find a way to sell their customers on their plans and do damage control.

Stop the Cap! continues to urge Frontier, a secondary competitor in many markets, to reconsider their plans to implement this usage cap.   In addition to cannibalizing your own customer base, who will flee in greater numbers to competitors as consumers become educated about the impact of such caps, this kind of usage capped service at current pricing attracts regulatory review of the current state of broadband service in this country.

More importantly, this may well represent the biggest missed opportunity to deliver a marketing win for Frontier in the history of the company.   DSL has managed to survive against cable competition because it is willing to compete on price, even if it cannot always match the speeds that cable and fiber optic platforms can deliver.   To survive in this marketplace, being willing to deliver that lower price and more flexibility is the only way DSL can ultimately succeed in areas where a faster competitor is available.

A 5GB capped DSL service in metro Rochester against Road Runner guarantees the end of Frontier DSL as a meaningful player in that market, especially if Time-Warner capitalizes on the cap in their marketing, which is likely.   In areas where Verizon FiOS is rolling out service, Frontier employees should be updating their resumes and start looking for work elsewhere.   Your career path at Frontier ends where Verizon’s unlimited, extremely fast, and competitively priced fiber optic broadband network begins.

It’s not too late to make the right choice and plug into the reality of today’s broadband marketplace.  That’s our dialogue to you, with the sincere hope Frontier executives will pick up what we’re putting down before the last customer out the door switches off the lights.

Coming Up Tomorrow: How Frontier Competes With Time-Warner & Other Providers
Friday: Frontier’s Losses Accelerate in The Phone Line Business
And next week: Undoing the Damage; Becoming a More Effective Competitor & Customer Reaction to Frontier’s Bandwidth Cap Plans

With the imposition of a 5GB monthly cap across their nationwide service area, consumers might find it useful to break down the cost of what different broadband services charge for service per gigabyte, and what kinds of profits companies can expect to receive from those charges.   The average cost of traffic for most national broadband providers amounts to pennies per gigabyte transferred.   But what will you pay?

Frontier offers different pricing across several promotions, ranging from $19.99-$49.99.   The lower priced tiers correspond with service contracts that require multi-year commitments, with a substantial penalty for early cancellation.   They also charge a monthly modem rental fee (MRF) of $3.99.   In some areas this fee is levied even if you wish to use your own DSL modem.   Since this fee is universally imposed in many areas, its cost has been included in the price breakdown.   Excluded from the review are additional taxes, surcharges, and fees which are imposed by various taxing authorities but are outside of Frontier’s control.

Frontier High Speed Internet Cost Review
(per  GB downloaded,  5GB per month)

Your Monthly Price      Per GB     Frontier Pays Per GB
$49.99 + $3.99 MRF      $10.80            less than 10c
$39.99 + $3.99 MRF      $ 8.80            less than 10c
$29.99 + $3.99 MRF      $ 6.00            less than 10c
$19.99 + $3.99 MRF      $ 4.00            less than 10c

The cost for watching an average 4GB high definition DVD quality movie over Frontier DSL is $43.20.   One DVD will be all you get, because any more than that puts you over the limit.  With a growing number of Americans using the Internet to access multimedia content online, exceeding 5GB of usage per month is easier than ever.

Stop the Cap! challenges Frontier to make public their own study which sources have told us show up to 40% of their existing customers already exceed 20GB of usage per month using Frontier DSL.   How does the company justify calling nearly half of their loyal customers bandwidth piggies and abusers?

Since low usage customers represent enormous profits for broadband providers, as the above chart illustrates, kneecapping the average user and beheading the high bandwidth customer with a draconian limit on monthly usage allows Frontier to vastly expand profits.   As their own financial reports to shareholders illustrate, Frontier’s investment in their network does not come close to corresponding with the massive profit taking a 5GB usage cap allows.

Cherry pick the weekend e-mailer and occasional web browser, throw everyone else under the nearest bus, and  high five one another all the way to the bank.   That’s the Frontier way.

While the rest of the wired world gets ready to sit back and enjoy Olympics coverage from China, Americans are being told you can have the Olympics online, but you better not have metered broadband access.

When NBC partnered with TVTonic to provide NBC Olympics On The Go,  it had to specifically warn viewers with metered broadband access not to bother.   Streaming high quality video feeds can consume a significant amount of bandwidth, and can easily allow unassuming viewers to win the the gold in the Biggest Bandwidth Overlimit Fee competition.

Content providers are starting to wake up to the real threat of the imposition of usage caps across the United States, limiting cable and DSL broadband customers from accessing content that was developed specifically for the broadband platform.

TVTonic is just one of several online services that could effectively be shut out of doing business in the United States because of broadband usage caps.   The company provides access to over 100 broadband Internet TV feeds, many transmitted in “high definition” quality, all of which would bring viewers ever closer to hitting their monthly limit.

Other providers such as Hulu and Joost provide legal access to hundreds of TV series, movies and specials at no charge to viewers.   But with bandwidth usage caps, will you be willing to spend your limited bandwidth watching?

Suspiciously, the “bandwidth crisis” that the industry continues to blame for the imposition of unreasonable usage caps stops at the water’s edge.   Customers in Japan and Korea enjoy broadband connections often a hundred times faster than what is available in the United States, at much lower prices and no restrictive caps.   In fact, outside of North America, nobody has heard of a bandwidth crisis.

While many broadband providers continue to reap handsome profits from their broadband services, demands for higher shareholder returns and struggling quarterly results from their other product lines in a stagnant economy have led many to decide investing in a lobbying scare campaign is a better use of their money.   It’s easier to try and convince Americans they are the problem, and limit service accordingly.