Flanker brands are killing independent ISPs

Recently a relative of mine moved and needed internet access.  Having not shopped for residential internet service in a long time, I was shocked to see that Virgin, the Bell "flaker brand" was selling 50/10 VDSL service for $40/month with no install fees and a Wifi-enabled DSL modem included.  Yes, technically the service is $80 with a "$40 monthly discount for the first year", but Fido offers similarly priced plans, so a savvy consumer could easily switch after the first year and continue to pay $40/month for year two, then switch back to Virgin in year three.  Years ago it was a pain to switch ISPs as things like your email address were tied to their services, but in todays modern world where the home internet is just a dumb pipe the cost of switching is almost zero.  So for the purpose of this discussion I'm going to assume a savvy consumer who is looking to get the cheapest possible internet and doesn't mind the one year term.

Let's look at the cost for an independent ISP to offer the same service.  To do this, we refer to the Bell Canada tariff pages, specially the page for VDSL service as that is what Virgin is selling.  The wholesale cost for a 50/10 VDSL service is 23.79 with a 90.65 one-time service charge, assuming no inside wiring work is required.  But that's not the only charges - VDSL service requires what's called a "dry loop" to operate - basically a charge for the copper pair between the Bell equipment and the customers house.  The monthly dry loop charges vary depending on distance from Bell to the customer, starting from $4.25/month on the low end and going up to $22.10 on the high end with the average of the 6 possible rates (ignoring rate band G as I've never seen it in the real world) being $8.61.  On top of the monthly dryloop fee, there is an install fee of 30.68 for a single loop required for VDSL.  Unless the install is in a multi-dwelling unit, like an apartment, then the "Business" rate applies and the install fee jumps to $52.31.

So lets look at my relative.  The apartment building they are in qualifies as a rate band "B" building, meaning the monthly tariff is $6.10.  Since its a "multi-dwelling" unit, the install fee is $52.31.  So this makes the total monthly cost for a third party provider $23.79 + 6.10 ($29.89) and $142.96 in one-time install charges.  Even if you exclude the install fees, a $10.11  isn't the "gross margin" as it excludes all the other charges required to operate an ISP network.  In the case of VDSL service like this, that would include  the Aggregated High-Speed Service Provider Interface (AHSSPI) to Bell, the usage on the AHSSPI,  the cost of co-location to house their network gear and connect to Bell, the cost of the network gear itself, the cost of internet transit, and cost of staff to support sales and service of the product.  From industry experience I can tell you that all of those things cost an ISP more than $10.11 / month per subscriber, and you better hope they never call for support or your really in the red.

But wait!  There are more charges I forgot to include.  The Virgin plan includes a VDSL modem with built-in wifi.  Wholesale that's another at least another $50 in one-time costs if not more.  And they do what is called a "full install" - that is, they come to your home, install the modem, plug it in, and ensure the service is working before they leave.  A third-party ISP would need to send their own technician to achieve that level of service and with the costs of on-site techs that could easily be another $200 in one-time charges.  

So assuming a wholesale provider wanted to offer the same package as Virgin, that is a non-install fee, no modem fee special, it would cost them $29.89 / month + at least $200 in one-time fees, ignoring the cost of a full install and assuming the customer setup the equipment themselves.  Assuming the customer only stayed for a year, the amortized cost for the customer connection alone, without all the other costs of running an network would be $46.55 - more than Virgin is selling the service for retail.  In other words, there is no way for an independent ISP to compete with these "flanker" brands on price.

If I wanted to go with a third-party provider like Teksavvy, for example, the cost would be $69.95 with a $49.95 activation fee and the cost of a modem purchase / rental which is currently $59.95 or $4.95 a month for 12 months.  This is cheaper than the Virgin "standard rate" of $80 / month, and a decent deal compared to that, but when viewed against the promotional rate Teksavvy doesn't stand a chance.

How is Teksavvy supposed to compete with Virgin?  Over the course of the first year, the cost to the end-user is almost double.  The pre-tax total for service with Virgin would be $480.  With Teksavvy, it would be 889.35 + the DSL modem cost ($59.95) - $469.30 more than Virgin.  I'm all for supporting independent ISPs, but expecting a consumer to pay nearly double for the same service just to support competition is a non-starter.

Bell (and the other incumbents) justify these below wholesale prices because they are "promotional" rates.  But to me, a a year is a pretty long "promotion" for a service that has similarly priced comparable services in the market with a near zero cost of switching.  If it were a service with a high-cost of switching where one could expect the customer to stay long-term you might be able to justify a year long promo rate, but in reality what this is predatory pricing designed specifically to kill independent ISPs.  We need the CRTC and Competition Bureau to investigate these practices before it's too late.  Without a healthy and vibrant mix of indepennt ISPs Canadians will be at the mercy of the incumbents, and if that happens, we will all suffer the consequences of a full market duopoly.