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Frontier Losses Accelerate In Traditional Phone Line Business; Asks Data Customers To Make Up The Difference

Phillip Dampier August 8, 2008 Frontier No Comments

Business is hardly booming in the traditional wired telephone line business these days, and Frontier Communications is no exception to that trend.   Internal documents obtained by Stop the Cap! illustrate that companies like Frontier are becoming more dependent than ever on data products and services to make up the difference.

Frontier’s admission of the struggles it faces in the traditional telephone business come in different flavors depending on their audience.   Stockholders learned of the challenges in a Securities and Exchange Commission filing made by the company  earlier this week:

Revenues from data and internet services such as high-speed internet continue to increase as a percentage of our total  revenues and revenues from services such as local line and access   charges (including federal and state subsidies) are decreasing as a percentage of our total revenues.   The decreasing revenue from historical sources, along with the potential for increasing operating costs, could cause our profitability and our cash generated by operations to decrease. (Frontier 10-Q Quarterly Report for period ending June 30, 2008)

Frontier employees  told Stop the Cap!  a more pessimistic view of the challenges  Frontier faced in the second quarter.   Many have told us of receiving messages from management that describe a $25 million shortfall.   In July alone, 39,000 Frontier customers disconnected telephone service with the company.   While offset by 22,000 new lines being connected across their national service territory, the net decrease still amounted to more than 11,000 lines, almost double what the company anticipated.

Frontier Communications is losing more traditional telephone line customers than it can add, as the company grows more reliant on profitable data products like DSL to make up the difference.

Frontier Communications is losing more traditional telephone line customers than it can add, as the company grows more reliant on profitable data products like DSL to make up the difference.

Maggie Wilderotter, chairwoman and CEO of Frontier Communications told employees that offsetting the decline in traditional telephone access line revenue was  more important than ever.   “They deliver key revenues and profits that help offset access line and government subsidy revenue losses,” she told employees.

These challenges are also well-publicized in Frontier’s filings with the Securities & Exchange Commission, which are intended for shareholder review.

As Stop the Cap! has argued, the demand for increased financial return on data services is part of the fuel firing the campaign to introduce bandwidth quotas, caps, and limits.   By reducing costs, which caps and quotas guarantee, companies can report higher returns to shareholders offsetting losses in other areas of the business.   They can also delay necessary investment in infrastructure to continue to meet the needs of their customers.  

Losses in the traditional access line business are particularly acute in Rochester, where competitor Time Warner has successfully nabbed a considerable number of residential customers away from Frontier with their Digital Phone  service.

Time Warner’s latest  quarterly reports show better than expected results  from their digital telephony products, while Frontier’s numbers have simply not been able to keep up.

Telecommunications companies are meeting the  increasing competition with rate cuts, bundling, and promotional offers than  often include term commitments to reduce “subscriber churn,” which refers to  the  percentage of subscribers cancelling service, usually to head to a competitor.   A great incentive to keep a customer from leaving is to hold a substantial $150-300 disconnect penalty over their head, sometimes in return for a greater discount on price.

Frontier has turned to product bundling and term commitments in an effort to retain customers.    Those taking a traditional telephone line bundle of unlimited local calling plus phone features also receive a small budget of long distance calling minutes, and have been shielded from rate increases the company has  charged customers who do not take a bundled package of service.

To resist Time-Warner’s bundled package bouquet  of video, telephone, and data, Frontier has been saddled with an inferior aging copper wire network.   That has meant the company has to compete with a DSL product  that cannot  ultimately compete with  the speeds being offered by Time Warner and other cable providers, and even worse,  they are stuck with  acting as a reseller for the Dish Network  satellite television service for video.

Frontier’s own numbers show the results.   Stop the Cap! learned that in Rochester, more people are now disconnecting Dish Network service than signing up.   The numbers are also not so great on the west coast.   Only in some smaller Frontier services areas in the east has the product been able to meet expectations.

Frontier’s own SEC filings tell the story of the risks Frontier faces in the coming year better than anyone else:

Competition in the telecommunications industry is intense and  increasing. We experience competition from many telecommunications service providers, including cable operators, wireless carriers, voice over internet protocol (VOIP) providers, long distance providers, competitive local exchange carriers, internet providers and other wireline carriers. We believe that as of June 30, 2008, approximately 58% of the households in our territories are able to be served VOIP service by cable operators. We also believe that competition will continue to intensify in 2008 and 2009 and may result in reduced revenues in those years. Our business   experienced erosion in access lines and switched access minutes in the first half of 2008 primarily as a result of competition. Competition in our markets may result in reduced revenues in 2008 and 2009.

The communications industry is undergoing significant changes.   The market is extremely competitive, resulting in lower prices. In addition, the slowing economic environment in 2008 may be impacting consumer behavior to reduce household expenditures by disconnecting wireline services.   These trends are likely to continue and result in a challenging revenue environment.   These factors could also result in more bankruptcies and, therefore, affect our ability to collect money owed to us by customers.

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