FCC Commissioner Mignon Clyburn

At least one FCC commissioner remains unconvinced that Verizon Wireless’ recent decision to double the fee consumers pay for service cancellation is justified.  Virtually every carrier offering discounts on handsets and other equipment tie those savings to a two year service contract, with a stinging early termination fee (ETF) if one decides to leave before the contract is up.

Commissioner Mignon Clyburn released a public statement Wednesday questioning Verizon’s logic in their explanation that doubling the cancel fee from $175 to $350 helped defray costs ranging from network expansion and marketing to paying to keep the lights on in Verizon Wireless retail stores.  Clyburn called Verizon’s answers unsatisfying at best, alarming at worst.

“I am concerned about what appears to be a shifting and tenuous rationale for ETFs. No longer is the claim that ETFs are tied solely to the true cost of the wireless device; rather, they are now also used to foot the bill for ‘advertising costs, commissions for sales personnel, and store costs.’ Consumers already pay high monthly fees for voice and data designed to cover the costs of doing business. So when they are assessed excessive penalties, especially when they are near the end of their contract term, it is hard for me to believe that the public interest is being well served,” Clyburn wrote in a public statement.

Verizon also continues to get heat over mysterious fees appearing on some Verizon Wireless customer bills.  As Stop the Cap! reported back in September, consumers with basic service plans occasionally find $1.99 “data charges” on their monthly bills, and several have obtained refunds from the carrier after pointing out they do not use data features on their phones.

The mystery was suggested solved when a purported, unnamed Verizon Wireless employee engaged in some whistleblowing at The New York Times:

“The phone is designed in such a way that you can almost never avoid getting $1.99 charge on the bill. Around the OK button on a typical flip phone are the up, down, left, right arrows. If you open the flip and accidentally press the up arrow key, you see that the phone starts to connect to the web. So you hit END right away. Well, too late. You will be charged $1.99 for that 0.02 kilobytes of data. NOT COOL. I’ve had phones for years, and I sometimes do that mistake to this day, as I’m sure you have. Legal, yes; ethical, NO.

“Every month, the 87 million customers will accidentally hit that key a few times a month! That’s over $300 million per month in data revenue off a simple mistake!

“Our marketing, billing, and technical departments are all aware of this. But they have failed to do anything about it—and why? Because if you get 87 million customers to pay $1.99, why stop this revenue? Customer Service might credit you if you call and complain, but this practice is just not right.

“Now, you can ask to have this feature blocked. But even then, if you one of those buttons by accident, your phone transmits data; you get a message that you cannot use the service because it’s blocked–BUT you just used 0.06 kilobytes of data to get that message, so you are now charged $1.99 again!

“They have started training us reps that too many data blocks are being put on accounts now; they’re actually making us take classes called Alternatives to Data Blocks. They do not want all the blocks, because 40% of Verizon’s revenue now comes from data use. I just know there are millions of people out there that don’t even notice this $1.99 on the bill.”

Verizon's new termination fee appears random and capricious, some company critics charge.

Verizon Wireless denies it charges consumers for accidental web usage that lands on their mobile phone home page, which they claim is exempt from charges.  But Clyburn isn’t buying that explanation either.

“I am also alarmed by the fact that many consumers have been charged phantom fees for inadvertently pressing a key on their phones thereby launching Verizon Wireless’s mobile Internet service. The company asserted in its response to the Bureau that it ‘does not charge users when the browser is launched,’ but recent press reports and consumer complaints strongly suggest otherwise,” Clyburn writes.

“These issues cannot be ignored. Wireless communications are an essential part of our lives, linking us to our places of business, our communities, and our loved ones. The bottom line is that wireless companies can truly earn their desired long-term commitments from consumers by focusing primarily on developing innovative products, maintaining affordable prices, and providing excellent customer service. I look forward to exploring this issue in greater depth with my colleagues in the New Year,” she adds.

Verizon Wireless is also the only carrier that has not responded to a campaign by a Times columnist to let customers get rid of the airtime-wasting 15 seconds of voicemail instructions people wait through when trying to leave messages, something the wireless industry admits is there precisely to use up airtime and maximize revenue.

Clyburn joined the Commission this year, appointed by incoming President Barack Obama.  Her father James is the third-ranking Democrat in the House behind House Speaker Nancy Pelosi and Majority Leader Steny Hoyer.

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/WIVB Buffalo Best and Worst Cell Providers 12-7-09.flv[/flv]

WIVB-TV Buffalo reviewed Consumer Reports’ findings regarding the nation’s best and worst cell phone providers.  Despite Verizon’s controversial fees, it remains top-rated by the magazine’s readers. (12/7/09 – 2 minutes)

Verizon Wireless has defended their decision to double the early cancellation fee (ETF) for consumers purchasing “smartphones” and netbooks from the wireless carrier.  In a letter from Kathleen Grillo, Senior Vice President of Federal Regulatory Affairs, Verizon claims the new $350 fee is justified and actually benefits consumers by providing them with a substantial discount on the cost of the equipment they might not otherwise be able to afford.

“The higher [cancel fee] associated with Advanced Devices (click link to see a list of impacted equipment) reflects the higher costs associated with offering those devices to consumers at attractive prices, the costs and risks of investing in the broadband network to support these devices, and other costs and risks,” Grillo wrote as part of a 77-page submission to the Federal Communications Commission, which demanded an explanation for the price increase.

Grillo claims Verizon’s fees are actually good for consumers:

Verizon Wireless’ term contracts with ETFs promote consumer choice and broadband deployment. This pricing structure enables Verizon Wireless to offer wireless devices at a substantial discount from their full retail price. By reducing up-front costs to consumers, this pricing lowers the barriers to consumers to obtaining mobile broadband devices. It thus enables many more consumers, including those of more limited means, access to a range of exciting, state of the art broadband services and capabilities. The company’s pricing structure therefore promotes the national goal of fostering the greater adoption and use of mobile broadband services. At the same time, consumers are protected by Verizon Wireless’ detailed disclosure practices described in this response, by the Worry Free Guarantee, which allows customers to terminate within 30 days of activation without an ETF, and by the monthly reduction in the ETF amount.

Grillo claims Verizon customers can also purchase a phone at the retail price and avoid a service contract.  Verizon Wireless, for example, charges contract customers $199.99 for the Motorola Droid.  But customers who do not want a contract can purchase the phone from Verizon for $559.99.

In North America, most major cell phone companies subsidize the cost of wireless handsets and make up the difference over the life of a typical two-year service contract.  Cell phone companies claim consumers benefit from the arrangement because they are able to acquire a new phone every two years at a substantial discount.  Some consumer advocates and members of Congress disagree, suggesting carriers more than earn back the cost of the subsidized phone over the life of the contract.  Although customers purchasing a retail-priced phone don’t have to worry about a two year contract, they pay artificially higher prices for service plans designed to recoup the costs from those who did take discounted phones.  The result is a strong incentive to commit to a contract and take the phone, since you will essentially be paying for it anyway.

The Government Accountability Office found early termination fees to be among the top four consumer complaints filed with the FCC about wireless carriers.  Sen. Amy Klobuchar (D-Minnesota) re-introduced legislation December 3rd to try and limit early termination fees.

Senator Amy Klobuchar

“Changing your wireless provider shouldn’t break the bank,” Klobuchar said in a Dec. 3 statement. “Forcing consumers to pay outrageous fees bearing little to no relation to the cost of their handset devices is anti-consumer and anti-competitive.”

The Cell Phone Early Termination Fee, Transparency and Fairness Act would prevent wireless carriers from charging an ETF that is higher than the discount on the cell phone that the company offers consumers for entering into a multi-year contract. For example, if a wireless consumer enters into a two-year contract and receives a $150 discount with the contract, the ETF cannot exceed $150.

The legislation would also require wireless carriers to prorate their ETFs for consumers who leave their contracts early so that the ETF for a two-year contract would be reduced by half after one year and to zero by the end of the contract term. In addition, the bill would mandate that wireless carriers would provide “clear and conspicuous disclosure” of the ETF at the time of purchase.

Co-sponsoring the bill with Klobuchar are Sens. Russ Feingold, Jim Webb and Mark Begich.

[flv]http://www.phillipdampier.com/video/CNBC Amy Klobuchar ETF Fees 9-13-07.mp4[/flv]

Back in 2007, Sen. Klobuchar introduced nearly identical legislation to deal with mobile phone providers charging high termination fees.  CNBC ran this debate between Klobuchar and the cell phone trade association.  Klobuchar found herself in a 2-against-1 debate when the CNBC anchor defended the wireless industry.  (9/13/07 – 5 minutes)

AT&T Mobility has been sending out their blogger team to try and clean up the damage from CEO Ralph de la Vega’s not-too-subtle hint that the days of unlimited iPhone data plans are numbered:

Unfortunately, there has been a lot of misinformation, rumor and pure speculation floating out there during the last day on this topic.

[…]

We carry more smartphone data traffic than any other U.S. provider, with traffic growing 5,000 percent over the past three years. As a result, we are working aggressively and investing heavily in our network to support this tremendous growth. Our $17 – $18 billion CapEx spend for 2009 includes:

• Nearly doubling the wireless spectrum serving 3G customers in hundreds of markets across the country, using high-quality 850 MHz spectrum.  This additional spectrum expands overall network capacity and improves in-building reception.
• Adding about 2,000 new cell sites, expanding service to new cities and improving coverage in other areas.
• Adding about 100,000 new backhaul connections, which add critical capacity between cell sites and the global IP backbone network.  We’re doubling the number of fiber-served cell sites this year.
• Enabling widespread access to our Wi-Fi network – the largest in the country with more than 20,000 hotspots in all 50 states – allowing them to take advantage of the best available AT&T mobile broadband connection.
• Rolling out even faster 3G speeds with deployment of HSPA 7.2 technology, with availability in six markets planned by the end of the year.
• Preparing for field trials of next generation, LTE wireless networks next year, with deployment planning to begin in 2011.  This schedule aligns with industry expectations for when a wide variety of compatible 4G wireless devices should be available.

We have seen very positive results from our efforts thus far.  In one of the most common measures of reliability – dropped calls – AT&T’s national performance is within two-tenths of 1 percent of the highest score among major providers as measured by an independent firm, with only 1.32 percent of calls dropped nationally.

Ralph de la Vega

AT&T’s blogger team says it isn’t true that de la Vega is definitively saying he’s “capping” services.

But de la Vega never said in his original statements that he was advocating “capping” service.  He said, “there’s got to be some sort of a pricing scheme that addresses … usage.”  Scheme is right.  That’s code language for consumption or usage-based billing, something the blogger team doesn’t rule out.  A strict usage cap simply says a customer cannot exceed a specified amount.  Most consumption billing schemes monetize data consumption, not with a true pay-for-use system that bills by the megabyte, but rather a fixed monthly price with an allowance and overlimit penalties for exceeding it.  AT&T already uses consumption-based billing for its prepaid and postpaid mobile broadband plans, so extending it to the iPhone isn’t exactly novel.

The iPhone customer has been treated as a profit engine by AT&T since the phone was first introduced.  Compelling customers to purchase a mandatory data plan that was originally priced at $20 and was raised to $30 was the price iPhone customers had to pay for bragging rights.  Should AT&T impose consumption billing, that price may go much higher.

AT&T must believe iPhone users are willing to pay that price or dramatically cut usage.  Either way, AT&T milks the very last nickle out of its exclusivity arrangement that some industry observers believe will expire in the early summer of 2010.  When that happens, AT&T must be quietly pondering what customers will do once they can buy an iPhone from other carriers.

Leafing through January’s issue of Consumer Reports, I find one possible answer in the magazine’s annual survey of America’s best and worst cell phone providers (subscription required for detailed results).  More than 50,000 subscribers rated their wireless carrier, and AT&T turned in dismal ratings, usually ending up at the bottom except in some cities where Sprint achieved that dubious honor.  AT&T’s problems, reported in cities from coast to coast:

• No service where service should exist
• All circuits busy
• Dropped calls
• Static

Results have been so poor, the magazine recommended that those affected should call AT&T and demand credit.  Many customers have gotten at least three months’ worth of service credits valued at more than $200 for doing so.

Logical conclusion: customers love the iPhone but hate the network it is tied to.  With de la Vega’s recent data usage temper tantrum, it’s just one more reason to be annoyed with AT&T.

For customers who entertain the notion of owning an iPhone, but simply refuse to leave their current provider to obtain it, that’s nearly $3,000 left on the table over the life of a two-year contract.  That should concern both Apple and AT&T.  For Apple, it means potentially losing new iPhone customers to impr0ved competing phones, such as those running Google’s Android operating system.  For AT&T, once the Berlin Wall of exclusivity falls and two year contracts expire, years of consumer frustration with their network could lead to a stampede for the exits.

Some Frontier Communications customers in western New York have been receiving notification that effective October 15th, the rental price of the ADSL modem Frontier provides customers increased $3.00 per month, from $3.99 to $6.99 per month.

Customers on a “price protection agreement” should not have seen this rental fee increase.  If you have, please let us know in the comments.

Frontier’s modem rental fee can often be avoided if you purchase your own DSL modem, assuming its compatible with Frontier’s system, and have them provision it for service.  Several of these modems appear regularly on eBay, sold by customers who ended up owning them after their term contracts ended with other providers.

One of the problems with Frontier’s DSL service is that the “out the door” price is significantly higher after taxes, fees, surcharges, and modem rental costs are factored.

Always insist on obtaining a total price, including all taxes and fees, before committing yourself to any ISP, particularly if a long term contract is involved.

Frontier vs. Time Warner. Frontier vs. Comcast. Frontier vs. NPG Cable. Across 24 states, passing nearly 3,000,000 households, some in America’s smallest towns and others in large cities, Frontier Communications is engaged in a battle of survival in an increasingly competitive American telecommunications marketplace.

In this series examining Frontier Communications, today’s report investigates the competitive realities of a hotly competitive telecommunications industry, becoming more concentrated by the day.    How does Frontier intend to survive and grow, and is it realistic to assume it can in an environment that demands major investments in the delivery of high quality video, low-priced telephone service, and reliable broadband that may be beyond its reach?   Yesterday, we saw how Frontier is attempting to control expenses with the plan to implement a 5GB usage cap on its broadband customers.   Today, we take a look at how Frontier attempts to maintain its market share and deal with customer defections.   Tomorrow, we take a closer look at how quickly Frontier’s telephone line business is losing ground to its competitors.

Frontier’s Background At A Glance

NPG Cable's Rate Card & Channel Lineup In Bullhead City, Arizona. How much of a competitive threat is a cable company without a spellchecker?

Frontier Communications, formerly Citizens Communications, primarily runs originally independent telephone companies in rural and exurban areas bypassed by the former Bell System. The company’s most significant presence is in the 585 area code, home to Rochester, New York. But from Elk Grove, California and Bullhead City, Arizona eastward to the AuSable Valley in central New York to Bluefield, West Virginia, a significant number of Frontier customers are also in some of America’s  small towns and cities.

The size of a community where Frontier operates is often indicative of how much competition the company faces.  Some of Frontier’s most difficult challenges can be found in the  Rochester, N.Y. metropolitan area, numbering nearly 1,000,000 people, where a well entrenched Time Warner has made deep inroads into Frontier’s telephone access line business, eats Frontier for breakfast in the video delivery business, and has been a dominant player in the broadband marketplace since Road Runner arrived  in 1998.

In more rural communities, Frontier often has it much easier,  free from  cable competition  in some  areas, or  competing with a small independent cable company that may be relying on its own aging infrastructure and cannot afford to engage in price and service wars. Where Frontier stands as the lone player or only faces token competition from a small cable company, consumers will likely find  lower speed broadband at higher-than-average prices.

The Threat From Big Cable

Comcast's Product Bundles Threaten Frontier In Many of Their Service Territories

The cable television industry’s entry into telephone service  is among the biggest threats Frontier faces in maintaining their traditional primary revenue source: residential and business wired telephone lines.

Deploying  voice over IP technology, Comcast and Time Warner, the nation’s largest cable operators, have made significant inroads into Frontier’s telephone business where they compete.   Now, even smaller players in the cable industry are prepared to offer voice over IP service to customers.

Joining cable at the table are  mobile telephone companies like Verizon Wireless, Sprint, and AT&T which are also eroding Frontier’s  phone line business  as more people in America  rely exclusively on their mobile phone for telephone service.

How Cable Companies Pick Off Frontier’s Customers

Product Bundling & Discounting: The most important component of cable’s strategy against Frontier is cable’s product bundle, combining a voice over IP telephone line, a cable television package, and a high speed data product. Usually marketed as a “triple play” or “all the best” package, consumers are offered discounts based on the number of components of a package they combine. The more components, the greater the discount.

The product bundle offered by the cable industry has a competitive advantage because cable companies almost always have a more advanced network to deliver these products. Throughout the 1990s, most cable systems spent millions rebuilding their systems to accommodate increasing bandwidth requirements.   The result is a considerably larger pipeline used to deliver data, video, and telephone services.

Frontier’s network is considerably more dated, largely dependent on copper wire strung on telephone poles. While the company has made significant investments in their own  network, including some fiber optics,  in the end, they still rely on the same copper wire infrastructure the industry has used for nearly 100 years to connect to your home or office.

AT&T's U-verse service can deliver the goods over copper wire, but you need deep pockets to develop and deploy this technology. Are Frontier's deep enough?

Although this copper network is suitable for traditional telephone service, and can usually deliver a respectable data service over DSL, the video component has been sorely lacking. While AT&T is testing its U-verse video-over-copper technology in limited markets, Frontier is stuck  reselling Dish Network, the  smaller player in the satellite television marketplace.

Many consumers are resistant to satellite dishes of any size attached to their homes, and the cable industry’s response to Frontier has been the same as to DirecTV and Dish Network themselves: ugly satellite  dishes that suffer from rain/snow fade, require expensive service calls and maintenance, and a limitation on the number of TV sets you can hook up.   Also, no local channels in many areas.   In the end, most people who were even slightly uncomfortable with satellite-delivered TV elected to just stick with what they already had: cable television.

Results of the Dish Network partnership continue to be underwhelming. Sources tell Stop the Cap! the satellite service only succeeds in areas where there is no cable competitor, the customer was already a Dish Network subscriber independent of Frontier, or the incumbent cable company is hampered by a limited channel lineup, no HD channels, or exceptionally bad service. In Rochester, Frontier is actually losing more Dish Network customers than it is adding, and growth is  anemic in many other Frontier regions as well.

Frontier’s inability to provide a comparable quality television service is a critical defect in their competition with cable.

Claiming Inferior Product Quality:  The cable industry wasted no time attacking Frontier’s DSL product, accusing it of not performing consistently. Uneven telephone line quality, distance from the telephone company central office, and signal ingress (when interference or crosstalk gets into wiring and degrades the signal) can all dramatically slow a DSL customer’s  broadband speeds. The cable industry’s marketing often pillories DSL service because of its inability to offer anything close to a speed guarantee, and the fact  it is often slower than cable’s competing product no matter how good your line is.

In areas where a large cable competitor exists, traditionally  that cable operator will have the fastest speed broadband package to sell to customers in that market. This forces Frontier to compete on price.   In return for a significant discount, Frontier  usually locks customers into multi-year service agreements which discourage its customers from  switching to a competitor.   Unfortunately, the company’s inferior product bundle and  long term contract commitments have made it difficult to convince cable customers to switch to Frontier,  particularly if it means taking their video package from Dish Network.

Lampooning Questionable Marketing Practices: In Rochester, Time Warner’s marketing people have had no trouble finding new ways to attack Frontier in its advertising.   While Frontier may be able to pull off some of their hidden extra charges, long term contracts, and restrictive service policies in more rural communities, most of those practices meet strong criticism in Time Warner’s advertising.

Among the more common refrains in Time Warner ads  dismissing Frontier’s DSL  product include:

• Charging a “modem rental fee” as part of Frontier’s DSL service, even if you can supply your own DSL modem.

• Locking customers into a term commitment contract (often lasting several years) for DSL service that offers lower speeds than Time Warner’s Road Runner service and charging a substantial early termination fee for those dissatisfied with their broadband experience.

• Charging for ancillary support services like Frontier’s “Peace of Mind” that Time Warner claims to offer at no charge.

The latest decision to impose a 5GB usage cap on customers is marketing gold for the cable companies competing with Frontier, perhaps only tempered  by the fact they are also studying whether to apply their own usage caps.

Relentless Marketing: One of the fringe benefits of owning your own video distribution network is the ability to pepper your existing customers with near-constant advertising promoting your own products while denigrating the competition. Cable customers can see an average of three product promotion spots every hour from their cable company trying to convince them to upgrade, attempting to bolster customer loyalty, or simply slashing and burning whatever the telephone company or satellite dish company is offering. Frontier has  a limited ability to counter this.

In areas of significant competition, the battle usually rages in your mailbox, with  a relentless flood of  promotional postcards and mailers, as well as ad buys on local television/radio stations and local newspapers. But cable retains an important advantage because of their ability to insert advertising into basic cable channels, usually at no cost to them.   Frontier doesn’t own their video distribution network – they are reselling someone else’s.

Frontier’s Battle Plan

Welcome to DeLand, Florida: Home of Frontier's Customer Care Center

Frontier’s plan to compete with cable includes  their own marketing by mailbox, and sponsoring local community events and charities to leverage free media and consumer exposure to the company brand to nurture positive feelings  about the company.

The company also places a high priority on attempting to position themselves as “local” players in the market – a company made up of local employees who customers supposedly will interact with on a daily basis. Unfortunately for them, most customers will likely only interact with one of their customer care call centers such as the one  in DeLand, Florida which is localism IF you live, work and play in DeLand.

Frontier also maintains call centers in Henrietta, New York and Burnsville, Minnesota which are designed to replace what used to be local customer service call centers in more than a dozen  Frontier areas.   Some 500 people were hired to answer phones in DeLand for Frontier.   This begs the question how many people lost those jobs in the various local communities where Frontier operates.

Call center employees are on Frontier’s competitive front line, trying to  maintain customer loyalty, convince customers to upgrade their service packages, and above all, remain with Frontier and don’t cancel anything.

They need to maintain the battle, because cable competitors continue to erode their residential business. The company’s deactivations of high speed data services and the ongoing loss of telephone lines are considerably above the company’s own estimates.

One significant bright spot Frontier has maintained is delivering commercial broadband to businesses.

Frontier has a significant advantage in many offices, business parks, and other industrial areas bypassed by their cable competitors. Installation costs to wire a building with coaxial cable often run into the tens of thousands of dollars, an expense borne by the company, the landlord, or a combination of the two. But every business has telephone service, which usually guarantees potential access to DSL service from Frontier. Small and medium sized businesses have become loyal Frontier commercial customers because of low installation costs and a reasonable pricing plan that is typically far more cost effective than what cable is offering. Cable modem commercial access pricing models are usually tailored to a range of product speeds at prices that, when compared with what Frontier can offer, are not competitive.

Frontier’s ability to effectively compete against cable will, in the end, come down to the company’s ability to invest in their network and be able to match what is on offer from the cable operator, and new competitors yet to emerge.    Some former Baby Bell telephone companies like AT&T are investing enormous sums to leverage their existing network (their U-verse product) or starting over from scratch (Verizon’s fiber optic cable to the home FIOS project).

To date, Frontier’s status as a smaller player has meant their investments in these efforts pale in comparison to their larger brethren.   They include experimenting with deploying fiber optic cable to new housing developments and selected mass density buildings (apartments, offices) in Rochester, building community wi-fi networks to create a new market for wireless Internet access, and other investments in their network distribution system.   If they cannot invest enough, fast enough, to keep up, they will become ripe for a merger with a larger player in the market or get wiped out by the competition.

In the meantime,  to quote company chairwoman and CEO Maggie Wilderotter, Frontier intends to “stay the course” for the rest of the year.

We’ll have to wait and see if that’s good enough.