Frontier Leads Midsized Telco Charge To Bulk Up, Sharpen Wireline Focus

There's a consumer rationale to the midsized telco acquisitions, despite AT&T and Verizon scoring higher than CenturyLink and Frontier in most customer rankings issued by the American Customer Satisfaction Index, Consumer Reports and J.D. Power. It makes sense for CenturyLink and Frontier to be “specialists serving rural America” because “the Bells didn’t do a very good job,” said Mark Cooper, Consumer Federation of America research director. While Verizon and AT&T pursue wireless growth, Frontier remains committed to upgrading wireline networks and operations. In buying Qwest, CenturyLink has brought renewed emphasis to serving consumers, CenturyLink Senior Vice President John Jones said. (For more on the CenturyLink and FairPoint takeovers, see separate story 1508140028).

By approving midsized telco acquisitions, the FCC and state regulators seem to accept the wireline-focus thesis. But they often have imposed conditions intended to protect consumers and promote competition through broadband expansion, retail and wholesale performance standards, and other duties. The FCC also required AT&T to extend fiber to 12.5 million customer locations in its DirecTV buy (see 1507280043).

When it bought Verizon systems in 14 states in 2010, Frontier was required to meet FCC metrics for broadband deployment and operating support system (OSS) functions, and honor interconnection and wholesale arrangements. Frontier was required to offer 4/1 Mbps to 85 percent of in-region housing units by 2015. “That was an aggressive commitment because 38% of the households lacked any broadband access and 50% … did not have speeds greater than 3 Mbps,” Frontier CEO Daniel McCarthy told the FCC Tuesday. “We met that commitment, continued investing and today 83% of our customers across all of our markets have speeds of 6 Mbps or greater and we have extended broadband to over 1.2 million households.” He committed Frontier to providing 25/2-3 Mbps broadband to 750,000 households across its footprint by 2020, including in California, Florida and Texas, if the current deal is approved. This would be coordinated with Frontier’s drive to deliver 10/1 Mbps to 650,000 households and businesses by 2020, backed by $283 million in annual FCC Connect America Fund (CAF) subsidies, McCarthy said.

Progress in States

Officials in the 14 states where Frontier bought systems welcomed its wireline commitment, though some acknowledged they initially had concerns. “We were concerned they were biting off too much in tripling the size of their company,” said Brian Thomas, acting policy director of the Washington Utilities and Transportation Commission. But Frontier was “scrappy” and Verizon wanted out, he said. “It’s gone pretty darn well since Frontier took over.” He said Frontier had met WUTC investment and broadband deployment conditions and made OSS changes -- without “marked changes in outages or service quality” and with fewer complaints (dropping from 188 in 2009 to 83 last year). “Consumers have been better off under Frontier,” he said. “They’re not milking it. They’ve competed aggressively.”

The Illinois Commerce Commission removed conditions July 28 after finding Frontier had offered good service quality, converted billing OSS “virtually seamlessly” and invested over $211 million through 2013 (above a $40 million requirement) in delivering broadband to at least 155,000 consumers.

The Public Utilities Commission of Ohio (PUCO) imposed conditions on Frontier for broadband deployment, capital investment, basic phone rates, and wholesale performance and interconnection. Since then, other than Frontier’s failure to meet a customer service repair metric (one of four Ohio performance standards), there have been no significant problems, a PUCO spokesman said.

In West Virginia, Frontier said it had made some form of broadband available to 188,000 additional households since July 2010, pushing broadband availability to 90 percent in the former Verizon areas. Frontier made $453 million in capital expenditures (exceeding a $279 million state requirement), helping reduce network troubles by 41 percent and customer complaints by 70 percent, it said.

When Frontier acquired 12 small Verizon exchanges in California, only 4,200 of 17,700 households had broadband available, but now 14,700 do, Frontier told the FCC. More broadly, Frontier detailed its efforts to provide broadband to remote areas in various former Verizon states.

The 14-state Frontier-Verizon deal “turned out to be a positive,” said Debbie Goldman, telecom policy director of the Communications Workers of America, which had opposed the deal at the time and is currently locked in a contract dispute with Verizon. “It appears Frontier is committed to investing in landlines.”

Dispute, Glitches

But The Utility Rate Network (TURN) in California and two other consumer groups said Frontier was “disinvesting” in its network. “In each of the years 2011-2014, Frontier invested far less in its network than it depreciated,” TURN said in FCC comments, citing Frontier SEC filings. Frontier and Verizon disputed TURN’s criticism. “It would be irrational for Frontier to ‘disinvest’ in broadband,” they said. “TURN’s theory is premised on a mischaracterization of Frontier’s capital expenditures-to-depreciation ratio that fundamentally misunderstands the evolution of the communications industry, and particularly the [ILEC] business,” they said. “The ratio of capital investment to depreciation is a reflection of a shrinking legacy customer base that can be served more efficiently with more economic, modern equipment.”

Frontier did have problems in Connecticut, where it bought AT&T’s wireline systems in 2014. The transition “was really bumpy,” Connecticut Consumer Counsel Elin Swanson Katz said. “They admitted they had understaffed call centers and were unprepared," she said: "It led to a record number” of video, phone and Internet complaints of up to 9,000. Frontier reported about 3,000 customers lost service, she said. Frontier lost customers because people got tired of waiting for service to be restored or being put on hold, she said. The good news is “most of us who dealt with Frontier felt like they were pretty earnest in trying to address the problems quickly,” she said. Things settled down and complaints dropped off by December, “but the ones who were still around were really angry,” she said. Frontier “lost credibility and first impressions are important.”

The Connecticut transition “overall was successful and did not result in prolonged or systemic problem[s],” Frontier told the FCC. "The few issues that did arise were … largely attributable to the unique aspects of transitioning AT&T U-verse services.”

“Frontier has a strong track record of addressing service quality and reliability, public safety communications and customer satisfaction in the territories it acquired, including the 2010 Verizon territories,” the telco said in a statement to us. “Frontier has been successful in these areas because of its managerial and technical experience combined with the Company’s clear emphasis on and commitment to wireline networks and services.”

California Fight

Frontier has 4 million customers, including 2.3 million with broadband, and wants to buy Verizon wireline systems in California, Florida and Texas with 3.7 million voice connections, 2.2 million broadband (DSL and FiOS) connections, and 1.2 million FiOS video connections, the companies said in their FCC application. Frontier believes the transaction will “achieve substantial efficiencies, promote competition, and benefit customers.” Frontier projects about $700 million in annual cost savings by the third year after closing, mostly from administrative consolidation. The companies said the three-state transition from Verizon “is far simpler” than the previous 14-state transition. Not only are there fewer states, but Frontier now has much experience with “similar OSS and billing systems,” the telcos said. If the deal is approved before Dec. 31, Frontier expects to tap new CAF support in at least California and Texas.

The CWA believes the FCC should approve Frontier’s takeover because it “serves the public interest in good jobs, quality services, and broadband expansion,” Goldman told the FCC Aug. 4. “Frontier is also interested in taking CAF money, where one suspects Verizon is not. So that’s a positive for rural areas,” she told us.

There's a major state review in California, where Frontier will be taking over systems with 2 million customers, dwarfing its previous buy of Verizon systems in the state, said Ana Maria Johnson, a program supervisor in the California Public Utilities Commission's Office of Ratepayer Advocates. Under California law, ratepayers must receive at least half of the transaction's benefits there, she told us.

Frontier is likely to be a better provider than Verizon, but the existing network is in bad shape, said Regina Costa, TURN telecom policy director. “We’re not comfortable that Frontier knows what they’re acquiring,” she said, noting she had seen Verizon lines on the ground, lines tied together with rope and remote terminals with bags over them to keep out rain. “They let the network deteriorate,” she said. “The FCC just addressed de facto retirement -- that’s what this is.” But she said “California has lots of jurisdiction” to hold Verizon accountable: “You make them clean up their mess before they leave town.” She said Frontier also bears responsibility: “You can’t just buy the facilities and leave them in a sorry state.”

Costa cited broader ramifications if Frontier has to invest a lot in California: “What does that mean for the other states Frontier serves?” CAF support “is a drop in the bucket,” she said. TURN and others are concerned “Frontier continues to spread itself thinner and thinner” with its acquisitions, their comments said. "The [FCC] should carefully examine the proposed financing for this transaction, to provide assurances that Frontier’s aggressive acquisition strategy does not become part of a purchasing spree that ultimately runs out of ILEC operations to acquire, and leads to a dead-end in Frontier’s strategy for increasing cash flow.”

Frontier and Verizon dispute the criticisms. They said Verizon’s monthly trouble reports in California ranged from 0.8 to 1.7 per 100 lines, below a state standard of 6 per 100. “Verizon has also made, and continues to make, significant capital investments in its ILEC networks in California, Texas, and Florida,” they told the FCC. “Any claim that Verizon has failed to invest in its network in recent years is wrong in addition to being outside the scope of this proceeding. What is relevant -- and undisputed -- is that Frontier is committed to investing and providing high-quality wireline service in the areas it is acquiring.”

“The Verizon network in California is in very good condition,” a Verizon spokesman said in an emailed statement. “The items described by TURN, have been reviewed and proven to be aesthetic rather than service-affecting, as the monthly trouble report data indicates. Some cases involved incidents beyond Verizon’s control, including vehicle collisions with utility poles and vandalism which are addressed by the company in a timely manner. We do use temporary wraps (not bags) which are replaced with permanent enclosures. The temporary wraps that were seen on our tours of the network have been/are being replaced with permanent enclosures and for the most part were not service-affecting.”

Frontier also denied its future would be at risk. The deal would “strengthen Frontier’s already strong financial profile so that it can better provide high-quality services to consumers for the long term,” it told the FCC. Frontier said it's also tapping savings from the 2010 Verizon deal that exceeded the $500 million in operating savings it expected, and is on track to meet its operating savings of $200 million from the 2014 AT&T deal.

The ORA has proposed the CPUC impose conditions to require Verizon to pay for upgrading the network. It has also proposed Frontier be required to provide 25/3 Mbps broadband to 98 percent of its households and furnish VoIP customers with battery backup power at no charge, among other conditions. Johnson said the PUC could vote Dec. 3.

Business Plan Sustainability

Longer term, there are questions about the ability of Frontier and other wireline telcos to thrive. “Basically, their model is to pay high-dividends, and they’re buying cash flows,” CWA’s Goldman said. “But now that they’re in more competitive markets, is their business model sustainable?

Wired broadband is important but is increasingly becoming “an adjunct to wireless broadband,” CFA’s Cooper said. “The future is mobile broadband." Fiber deployment costs are high and the economics don’t work in many areas, he said. “The notion of bringing fiber to all those homes doesn’t make any sense. You’re going to get the fiber as close as you can, and then provision broadband as best you can, but you’re not going to pull fiber to the farmhouse.”

The problem for Frontier and CenturyLink is “they serve the empty quarter” with low population density, Cooper said. If they develop some sort of wireless play, they’ll stay major retailers, he said, but if not, they will increasingly become wholesalers in much of the market.