FCC Chairman Julius Genachowski

Federal Communications Commission Chairman Julius Genachowski is expected to unveil Monday a proposal to formalize Net Neutrality protections as part of FCC policy governing broadband providers.

Genachowski is expected to make a formal announcement as part of his appearance at the Brookings Institution, according to a series of leaks Friday afternoon.

The FCC chairman is expected to introduce Net Neutrality as the fifth spoke in a wheel of principles governing broadband service in the United States.  The “Four Principles” of broadband service in the United States was developed to set guidelines providers would follow in return for a hands-off regulatory approach by the Commission.:

1. To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to access the lawful Internet content of their choice.
2. To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to run applications and use services of their choice, subject to the needs of law enforcement.
3. To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to connect their choice of legal devices that do not harm the network.
4. To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to competition among network providers, application and service providers, and content providers.
5. To encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet, consumers are entitled to open access to content without interference or discrimination by broadband providers.

The fifth principle would become part of formal FCC policy, which should provide assurances that Net Neutrality will be enforced by the Commission staff.

The establishment of Net Neutrality protection would fulfill one of the promises made by President Barack Obama during his presidential run in 2008.  The Obama Administration has consistently advocated Net Neutrality as a core tenet of American broadband service.

Genachowski is expected to underline the seriousness of his proposal by including wireless providers in the definition.  That would subject mobile broadband providers to the same rules wired providers face, an important distinction that could put a stop to wireless phone companies acting as gatekeepers to block third party software applications designed to bypass those companies’ networks and calling plans.  iPhone owners in particular have been subjected to restrictions on the types of software and services they are allowed to use on their phones used on the AT&T network.

Consumer advocates are widely anticipated to applaud the FCC’s action, but some remain concerned that an FCC rulemaking by itself does not provide the robust protection federal law would provide, particularly if an administration in power appoints FCC Commissioners uninterested in enforcing it.  A bill has been introduced in the House of Representatives to make Net Neutrality the law, not just an FCC policy.  Passing the legislation provides even stronger guarantees that Net Neutrality principles will be respected.

The move by Genachowski to move forward on formalized Net Neutrality protection now may have come after the Commission watched a federal court throw out other informal FCC policies as unconstitutional.  Comcast has a pending lawsuit against the FCC after the Commission ordered Comcast to stop interfering with peer-to-peer traffic on its broadband network.  Comcast objected to the FCC involvement and feels the Commission exceeded its authority.  Should a judge agree, in the absence of a more formalized FCC rulemaking, Comcast would be free to resume throttling the speed of certain traffic on its broadband service.

An FCC rulemaking could provide ammunition to Net Neutrality critics that passage of a federal law would be redundant and unnecessary.

Net Neutrality critics argue that broadband networks should be free to manage the traffic on their service as they see fit, suggesting the goal of providers is to provide a consistent level of broadband service to all of their customers.  They suggest consumers that find network traffic policies too onerous would take their business elsewhere, discouraging provider excess.

But advocates for Net Neutrality argue the industry can leverage an undercompetitive marketplace to throttle and restrict traffic — reducing the traffic load on and the need for upgrades. In the absence of robust competition, other providers would could follow suit.  Net Neutrality advocates are also concerned broadband providers may attempt to monetize premium levels of service for content creators.  In return for a fee, content providers would be assured of enhanced speeds and performance in reaching that ISP’s customers, while those who don’t pay find themselves on a broadband “slow lane” that could make them uncompetitive.

Genachowski’s proposal is likely to permit broadband networks sufficient flexibility to do some network management, such as blocking denial of service, spam, and virus attacks, but not allow providers to prioritize traffic based on fees.

Professor Rodney Tiffen

The Sydney Morning Herald ran a piece Friday morning that had absolutely nothing nice to say about the former leadership of Telstra, Australia’s “Private Telecom Monopoly.”

Sol Trujillo was the George W. Bush of telecommunications. For both, the American way was the only way. Being the biggest meant you did not have to do diplomacy, and both were better at starting wars than finishing them. Both used patronage and punishment to ensure a like-minded leadership group that made worse decisions more harmoniously.

Australians remain unimpressed with the tumbleweeds that routinely blow across the Land Down Under’s broadband superhighway — the result of a combination of failed government leadership, special-interest dominated public policies which put the interests of private companies ahead of their own citizens, and the predictable emergence of greedy telecommunications providers delivering the least possible service at the highest possible price for millions of Australians.

Rodney Tiffen, professor of government at the University of Sydney, calls out a succession of Australian governments which have repeatedly dropped the broadband ball, and have left the country with comparatively overpriced service with ludicrous Internet Overcharging schemes that punish citizens with usage caps, outrageous reductions in their broadband speeds or, worse, overlimit fees and penalties:

Australian consumers suffered particularly from the stringent caps placed on downloads and the high expense of exceeding the cap. While in nine of the countries no explicit caps were placed on broadband subscriptions, Australia was one of only four countries (with New Zealand, Canada and Belgium) where all survey offers included caps, and among these four was by far the most expensive when the caps were exceeded – an average of 11 cents per megabyte compared with 1 cent for the others.

Tiffen rejects the argument that Australians have to pay more because Australia has low population density.

“It should also be remembered Australia has a higher percentage of people living in large cities (defined as those with more than three-quarters of a million people) than any of the other countries (measured by the Organization for Economic Co-operation and Development),” Tiffen writes.

The key policy issue Tiffen identifies is: what is a natural monopoly and when does competition produce more dynamism and responsiveness to consumers? Since telecommunications reform came on to the public agenda about two decades ago, there had been a bipartisan failure to address this central question.

Tiffen wants Australia to recognize the mistakes America made dealing with its cable television industry — “replete with cases where a company controlling the delivery platform has favoured its own company’s channels over its competitors.”

“Indeed a private monopoly at a key gate-keeping point often leads to less competition in services than there would be with a publicly owned or regulated infrastructure,” Tiffen argues.

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.

Your Money = Their Money

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.

Viewers may have to stick with TV to watch the Olympics for free.

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.

TVTonic's warning to broadband users to not use the service if they are using a broadband provider with usage caps.

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.