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Frontier Gets Approval of Verizon Deal in California, South Carolina, and Nevada; Attacks Union Opposition in West Virginia

Phillip Dampier October 30, 2009 Editorial & Site News, Frontier, Public Policy & Gov't, Rural Broadband, Verizon 23 Comments
Charleston, West Virginia is just one of many cities potentially served by Frontier

Charleston, West Virginia is just one of many cities potentially served by Frontier

Frontier Communications has won approval from state utility commissions in California, South Carolina, and Nevada to take over telephone service currently provided by Verizon Communications.  The decisions were unanimous in all three votes by Commission members, and involve telephone service in several small communities in all three states.

Circles represent Verizon service areas transferred to Frontier in Nevada and California

Circles represent Verizon service areas transferred to Frontier in Nevada and California

Verizon’s castoffs serve a small percentage of customers, which made the transaction fly under the media radar in most cases.  In California, Verizon dumps customers in a small section on the northwest border with Oregon.  In Nevada, several small communities south of Reno are involved.  In South Carolina, Verizon drops scattered groups of customers in small clusters across the state.

These state regulatory approvals follow an October 27 announcement by Frontier that its shareholders have approved the transaction, which will result in Frontier owning Verizon’s wireline operations in all or parts of 14 states.

While the approval appeared pro forma in those three states, West Virginia is another matter.  Strong employee union and consumer group protests continue across the state, with many consumers concerned about the implications of Frontier controlling nearly all wired phone lines in the state.  The Communications Workers of America held a conference call with the media Wednesday to outline its opposition to the deal.

The CWA has been a vocal opponent of the deal, claiming it will risk West Virginia’s telecommunications future with a company without the financial capacity to provide the type of advanced services Verizon is providing in other states.  Kenneth Peres, an economist with the Communications Workers of America, said the deal was extremely risky for consumers, workers and the affected communities.

Peres pointed to the perfect record of three out of three failures for earlier Verizon spinoffs.  FairPoint Communications declared bankruptcy early this week after trying to take on the service needs of three New England states.

Peres told the Charleston Daily Mail that if the deal goes through, Frontier “will find it extremely difficult” to meet its $8 billion in debt obligations while simultaneously investing enough capital to maintain its physical plant, improve service quality, set up a new system in West Virginia, lease systems from Verizon in 13 other states, provide video service for the first time (in Indiana), and ensure adequate staffing “while paying out a lot more in dividends than it makes in profits.”

Frontier went on the attack Thursday, accusing the union of interfering just to grab concessions for itself.

Verizon service areas sold off to Frontier in South Carolina

Verizon service areas sold off to Frontier in South Carolina

Steve Crosby, Frontier spokesman, said, “They’re just throwing stuff up against the wall. They know this is a good transaction and they’re trying to extract their pound of flesh. They want more concessions. This is their opportunity to ask for more money for their union membership and more benefits. That’s what they want. Union membership across the country is declining. This is how they’re trying to extract as much as they can from either Frontier or Verizon.”

As for Frontier’s debt load, “This is actually a de-leveraging transaction,” Crosby said. “We’re taking on debt but we’re taking on a whole lot more revenue. We’re currently at a 3.8 times revenue-to-debt ratio, going down to 2.6. So we actually get better in terms of revenue to debt. And today we’re fine. We’re able to pay a nice dividend. The day the transaction closes, we are approaching investment-grade borrowings.

“Our board of directors made the decision to lower our dividend by 25 percent when the transaction closes to give us even more cash to invest in infrastructure and to give us even more financial flexibility,” Crosby said.

“Every time we have an argument we win and they bring up other stuff,” Crosby said. “They never bring up the de-leveraging because it undermines their argument. They never bring up the fact that we will reduce our dividend because it undermines their argument.

“We have said we will maintain employment levels for 18 months” after the transaction closes, Crosby said. Because of required regulatory approvals and other factors, the deal can’t close before April 2010.

“So you can figure that’s two years,” Crosby said. “Who nowadays has that kind of job security? I think we’re bending over backwards. I wish I had the pension plan, the job security the CWA has. They’re looking at extracting more from Verizon and Frontier.”

When asked by the newspaper why Frontier shareholders would approve a deal that was destined for failure, Peres told the newspaper:

Frontier’s business model is built on acquisitions. Frontier bought a portion of Global Crossing’s business which increased revenue and access lines “but that began to decline,” he said. “They bought Commonwealth Telephone but that’s flat-lining. What’s the next step? What were they going to do – improve infrastructure or go through the acquisitions route again?” Continuing with acquisitions “postpones the day of reckoning,” he said.

Commentary: Our Take

Crosby’s comments seem more suited for a talk show audience that hates unions.  Obviously the union does not think this is a good deal for West Virginia, and considering the track record of earlier Verizon deals, and the correct predictions from employee unions on their inevitable outcomes, they have every right to oppose the deal on its face.  Crosby apparently has time to address declining union membership, but not the much more relevant decline in the traditional phone company’s bread and butter business – landlines.  Frontier, like other phone companies, continues to see disconnect requests coming from coast to coast as customers dump the phone company for a cable digital phone product, Voice Over IP line, or rely on their cellphone.

West Virginia would be solidly Frontier territory if the state approves the sale

West Virginia would be solidly Frontier territory if the state approves the sale

Verizon recognizes their traditional business is a dying one, which is why they are in a hurry to diversify into competitive broadband and video services over their fiber optic FiOS network.  Where it doesn’t make economic sense (under their current business plan) for Verizon to deploy FiOS, decisions are being made about whether to keep those smaller phone operations within the Verizon family, or sell them off to companies like Frontier.  What Frontier acquires today from the standpoint of customers and revenues could represent the high water mark, and without offering robust options for a digital future, Frontier will likely continue to see customer erosion.

FairPoint acquired seemingly healthy Verizon companies serving the entire states of Maine, New Hampshire, and Vermont.  When their efforts to seamlessly combine Verizon’s legacy systems with FairPoint’s own systems failed, that along with an inability to properly service customers, caused a death spiral as customers dropped service, which led FairPoint straight into bankruptcy.

Frontier’s record of investment and service in western New York speaks for itself.  Time Warner Cable eats Frontier for lunch, with less expensive “digital phone” service, much faster and more reliable broadband, and a video package that Frontier doesn’t offer (reselling DISH Network is hardly the same as providing video service that doesn’t come from a third party company’s satellite dish nailed to the roof).  Frontier is ready and willing to stick with DSL service at speeds that are basically maxed out.  Time Warner Cable evidently doesn’t even consider Frontier a significant enough player to deploy upgrades in this area while they are in a hurry to provide them where Verizon FiOS is under construction.

When a company isn’t prepared to keep up with the rest of New York with fiber deployment to the home, the chances of that kind of service reaching West Virginia anytime soon are near zero.

But Frontier’s unique position as a specialist in “rural service” allows it to eke out an existence in areas where cable isn’t a big competitive threat, and where any broadband is better than no broadband at all, at least for now.  But without a plan for keeping up with the fast changing broadband world, customers happy with 3Mbps service today will despise the company for being stuck with those speeds later.  A lot of people in Rochester sure aren’t happy being stuck with Frontier DSL, and that nasty 5GB “reasonable use” language in the Acceptable Use Policy.

Crosby’s comments about CWA member job security, which he evidently envies, says more about the union’s commitment to its members than Frontier has to him.  Perhaps Crosby can quit his spokesman job and switch to a position that gets him CWA membership with a pension and job security.  Perhaps if the people of West Virginia say thanks, but no thanks, Frontier will be in a better economic state than it would be if this mega-deal collapses under the weight of debt and integration challenges.  Then Crosby can keep his job with the evidently lousy benefits.

Peres’ assumption that Frontier lives only through acquisitions isn’t the complete story.  Just like the myth sharks must constantly swim to survive, Frontier doesn’t constantly have to acquire to survive either.  It does have to concern itself with an ever-consolidating telephone line industry, where the smaller independent companies continue to be snapped up by a dwindling number of players.  If a Windstream or CenturyTel comes along with a great offer, Frontier itself may have a new name — Windstream or CenturyTel.

The economies of scale and cost savings are routinely cited by investors promoting consolidation.  It’s no surprise Frontier shareholders voted for the deal.  Bigger is often better for many investors, as long as the quarterly financials play to their interests.  Listening to Frontier investor conference calls, the Wall Street bankers, and the media that support them, are constantly concerned with keeping costs cut to the bone, customer defection limited, risk reasonable, and that dividend being paid.  They are satisfied with Frontier’s rural, less competitive market focus, even if the customers that end up served by them are not.

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Smith6612
Smith6612
14 years ago

Well, at least a small potion of the bait has been bitten. Let’s see how things turn out from here.

jr
jr
14 years ago

Night-watchmen helping the burglars once again

Ian L
14 years ago

Frontier offers 10/1 DSL in some areas. Verizon offers at most 7.1/768. Frontier uses ADSL2+. Verizon uses ADSL only. Frontier actually cares about grooming their copper infrastructure. Verizon doesn’t. All that said, why not let the acquisition go forward, with a stipulation that, if Frontier should go bankrupt, its network (in WV and maybe other places) goes directly to the cities it serves? Then those cities can decide how to continue service (sell to Windstream or CenturyLink, build a cooperative or keep their network running alone). You can still do a fair amount with copper, though nobody in the US… Read more »

Tim
Tim
14 years ago

Copper is dead pretty much and these remaining bell companies are clinging onto it even though the ship is sinking fast. Looks like Verizon is the only one who is getting it. AT&T will soon, and I mean very soon, pony up for FTTH because it won’t last long with what they have now, Uverse. As more and more cable areas move to DOCSIS 3 and offer speeds beyond what AT&T can give ya, they are going to be in the same boat AGAIN as they were with DSL service. People want a more immersive experience on the Internet than… Read more »

Ian L
14 years ago
Reply to  Tim

@phillip sorry to hear that Frontier’s experience is subpar from someone who actually uses it. That said I’m not quite sure how government regulation and money would translate into an efficiently-run last-mile fiber network for all. Also, if Monticello, WI (a town of 10,000) can start up a fiber network and cooperatives with fewer customers than that can start rolling out fiber of their own accord, maybe the model isn’t as broken as you’d think. Also, where’s the “three for three” argument coming from? Maybe I’m forgetting someone, but we’re looking at two for two at the moment. Maybe a… Read more »

Tim
Tim
14 years ago
Reply to  Ian L

Ok, and here would be my response to your response as Devil’s Advocate. Look at the Internet just a decade ago compared to now. Look at how much it has grown and how many new services have popped up like Netflix movie streaming. Now, look at it a decade from now and see what could happen. Do we want to be on antiquated copper or fiber by then? Because if we stick with copper, it will only slow innovation and we will further slip behind the world in internet speeds and prices. Back in the day, MS and Intel didn’t… Read more »

Ian L
14 years ago
Reply to  Tim

You definitely have a point, however what you’re asking for is a bunch of cooperatives rather than publicly traded companies, at least in most cases. The ROI just isn’t there for switching to fiber in rural areas.

Also, for the record, Netflix streaming works just fine over a 3 Mbit connection, so long as it’s reliable.

Tim
Tim
14 years ago
Reply to  Ian L

What Netflix streams only SD movies right? 3Mb might be able to handle that ok but what about the future and offering HD 720p or 1080p with multichannel surround? Your 3Mb connection wouldn’t get it. Eventually, probably in 5-7 years, DVD’s and SD video, will go by the wayside just like VHS did back in the day. So we either not upgrade our networks, and keep falling behind the rest of the world, or we do and watch new technologies emerge from it.

Smith6612
Smith6612
14 years ago
Reply to  Tim

I know that Netflix does stream in Standard Definition. The thing is, with 720p video that you’ll find on sites like YouTube, it does look pretty good as a change. It still doesn’t look as sharp or as good as it would normally look on a 7Mbps 720p stream, as those streams are encoded for 3Mbps connections. Now, for the most part my Frontier line which tests at 3200kbps download, it gives just enough bandwidth to slip by without buffering, however if I take a few seconds and load up a web page, the video will buffer due to a… Read more »

Tim
Tim
14 years ago
Reply to  Smith6612

Youtube 720p video? I don’t think so. I always compare any 720p source to what I get over the air. Uverse I think allocates 6Mb/sec for HD 720p/1080i. Over the air, it is 19.39Mb/sec from what I understand. I can tell a difference. Cable HD is even worse. I see artifacts all the time on my mothers TV from her cable connection. I have watched Youtube HD video and it sure as hell isn’t HD. HD, the word or tag, has been thrown around so much it is almost a cliche now. I saw lossless music being called HD which… Read more »

Smith6612
Smith6612
14 years ago
Reply to  Tim

Of course. Off-the-air/FiOS TV at this moment is pretty much the best way to compare 720p sources. Would some of my 10Mbps 720p video work for that comparison? It looks pretty good being encoded in the x264 format and close to the original quality.

Ron Dafoe
Ron Dafoe
14 years ago
Reply to  Tim

Netflix can stream HD movies to the XBOX 360 and has for a while now.

I think I read somewhere that when Netflix camoe out with the Xbox360 stremaing they added a ton of new people and their streaming side was being taxed.

I stream at least 2 movies a week through my xbox360. I also end up streaming at least 1 TV show a week.

Tim
Tim
14 years ago
Reply to  Ron Dafoe

@Smith6612 Yea 10Mb/sec is a pretty good rate. I watch some 720p movies that are 4.37GB in size that are 5.5Mb/sec bit rate encoded in MKV and DTS 5.1 Audio. Some 720p video I have downloaded is double that. However straight off the air stuff, for a 42 minute show, I have seen files around 4GB or 14Mb/sec. I download x264, just h.264/mpeg4 avc, too and it is good also. You might get away with watching video at a lower bit rate if you watched it on a small monitor or tv. I usually send the video to my 50″… Read more »

Smith6612
Smith6612
14 years ago
Reply to  Tim

I have noticed that with my 10Mbps video if I get scenes where it’s very dark it’ll start to block up a lot. I’m not sure if that’s due to the way the codec is, VirtualDUB or the settings I have in it, but I’ll probably experiment with that the next time I export a video.

Tim
Tim
14 years ago
Reply to  Ron Dafoe

@Smith6612 “I have noticed that with my 10Mbps video if I get scenes where it’s very dark it’ll start to block up a lot. I’m not sure if that’s due to the way the codec is, VirtualDUB or the settings I have in it, but I’ll probably experiment with that the next time I export a video.” It is due to compression. Satellite TV suffers from it too. It is just one of things that you get from over compression of the video. Think about it, the original HD video might require 1Gb/sec bandwidth uncompressed. Then you take something like… Read more »

Smith6612
Smith6612
14 years ago
Reply to  Tim

Ah. I was wondering about that. For the most part I never really noticed such things taking place on my satellite TV service, unless it’s something like a sports game but the blocking clears up almost immediately or even then is very faint. Also, when I encode it, it doesn’t lead me to think it’s compression initially as when it does block up, it really only happens in a corner of the image and will disappear whenever a color change takes place (where the sharpness immediately comes back too) and then if I come across more dark scenes, it doesn’t… Read more »

Tim
Tim
14 years ago
Reply to  Tim

@Smith6612 Watched parts of the video and it is hard to tell if the anomalies are due to the video compression or the game itself, like graphics settings sort of low or off like Anti-Aliasing. I notice blocking issues at the beginning with blacks. Also, at 6:30, looks like Aliasing. Also, some parts, like in the aircraft look grainy, Quantisation Noise. http://www.doc.ic.ac.uk/~nd/surprise_96/journal/vol4/sab/report.html Look at part 6. Also, another thing to consider is monitor resolution. My monitor is at a resolution of 1920x1200x32, 2,304,000 pixels compared to 921,600, 2.5 x more pixels. If the video is shot at a lower resolution… Read more »

Smith6612
Smith6612
14 years ago
Reply to  Tim

@Tim: My monitors do run at 2560×1600 (max my video cards will go) so things can get pretty big if I were to record at that resolution. That particular game video I recorded at 1280×720-30 since that is what YouTube will take. I had the game’s Anti-Aliasing turned half-way up as well. As for what is going on in the plane, that’s typically always been like that. It might be an issue with the texture quality being poor in some parts of he game (the game was stressful to hardware back then as it was). But I can see what… Read more »

Ron Dafoe
Ron Dafoe
14 years ago
Reply to  Ian L

I am trying to figure out exactly what your trying to say here. My take is that providers should be upgrading to fiber, wether people want it or not. They can sit on that for years to come, just liek they did (and are doing) for RR.

To me, there is no argument against laying fiber except for unwilling to make the investment in your network.

Smith6612
Smith6612
14 years ago
Reply to  Ian L

Frontier does offer 10Mbps/1Mbps service. For the most part, that is if they can provision the modem high enough without killing things. The reason why you won’t see a full 10/1 is due to limitations in the G.DMT mode (you can only provision it so high before ADSL2+ is needed, and G.DMT is basically good for 10-12Mbps download, 1Mbps upload sync rates). Also, add in the fact that Frontier is using an ATM network (ATM is clunky! Adds quite a bit of overhead really. Packet over Ethernet would be more efficient if possible on DSL) which is why you’ll also… Read more »

Ian L
14 years ago
Reply to  Smith6612

Last I checked G.DMT (ADSL non-2 non-plus) goes up to 8/1, not 10/1 or 12/1. SDSL2 is more like 12/1 but sync rates != transfer rates thanks to ATM, which is the only transport mode ADSLx can use (VDSL doesn’t need ATM but ADSL does). Also, where have you seen ADSL2+ provisioned Verizon modems? They’re certainly not selling ADSL2+ tiers speed-wise. As to AdrenaLine, if there aren’t any remotes nearby that’s what you use. Embarq might be using them and I know CenturyTel does. As for overprovisioning, Frontier can do it if they want; Embarq overprovisions on all their plans… Read more »

Smith6612
Smith6612
14 years ago
Reply to  Ian L

Ah. I’ve always had the feeling that G.DMT only goes up to 8/1. It’s something I will have to look into still.

I’ve seen ADSL2+ provisioned modems throughout. Verizon of course doesn’t sell ADSL2+ packages as they’re busy selling FiOS. Here’s an example of a Verizon modem syncing using ADSL2+ at a post I just replied to a few minutes ago.

http://www.dslreports.com/forum/r23274583-connectivity-westall-327W-IP-changing-randomly-a-few-times-a

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