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Hawaii O-No: Spending to Revitalize Hawaii’s Telecom Infrastructure Panned by Wall Street

Spending money to earn more money is a fiscally sound principle of doing business, but short term investors often decry increased spending as harmful to the value of a company’s stock and dividend payout. That is why Hawaiian Telcom (HawTel) earns mixed reviews from Wall Street about the company’s aggressive infrastructure improvement project, a fiber to the neighborhood network that intends to bring television, phone, and faster broadband service to an increasing number of Hawaiians.

HawTel’s stock price has bounced up, down, up, and then down again as investors digest the company’s ongoing effort to reinvent itself as a 21st century telecom company.

The Old HawTel

HawTel’s fiber buildout began on the island of Oahu in 2011, eventually passing 27,400 homes on the island. At the end of 2011, 1,600 (6%) of those homes signed up for the service. That’s an acceptable number, especially for a service barely promoted. HawTel does not mention the television service on its primary website, and approaches potential customers one-on-one with in-person and targeted mail marketing.

At the end of the second quarter or 2012, HawTel TV had 6,400 subscribers. The company hopes to have an additional 50,000 homes enabled for its TV service by the end of 2012, with the goal of enabling 240,000 households across Hawaii over the next five years. HawTel hopes to eventually capture 30% of the Hawaiian market.

HawTel’s principal competitor is Oceanic Time Warner Cable, which provides traditional cable service across the Hawaiian Islands. HawTel had been at a substantial disadvantage competing with Time Warner’s television package and faster broadband service. But the fiber upgrades are allowing at least some customers to purchase speeds up to 50/10Mbps, slightly faster than what the cable operator offers.

Time Warner has taken note of the phone company’s re-emergence as a strong competitor, targeting Oahu with special promotional offers that lock customers in place with triple play discounts designed to make it inconvenient to switch providers.

The New HawTel

Unfortunately for HawTel, fiber upgrades do not come cheap, and the company’s earnings have taken a hit.

Capital expenditures totaled $41.2 million for the six-months ended June 30, 2012, up from $35.4 million for the six-month period a year ago due primarily to investments in broadband network infrastructure and expansion of video enabled households.

Hawaiian Telcom reported an 18 percent decline in second quarter earnings, which it blamed primarily on broadband network expansion.

The company also announced it lost another 6% of traditional landline customers during the second quarter, but that was offset by expansion in its broadband and television service. For HawTel, the solution to ending landline losses is to upgrade their network to compete with the types of communications services consumers are interested in buying today.

But those plans can and do conflict with at least some stock traders who are interested primarily in short term financial results. Spending can cut into profits, so some analysts downgrade stocks of companies spending the most, even if only to compete more effectively down the road.

So far, HawTel executives have not been discouraged carrying their network expansion plans forward. In July, Hawaiian Telcom announced it would acquire Wavecom Solutions Corporation’s local exchange carrier business in a stock purchase transaction valued at $13 million.

Wavecom’s undersea fiber network

The acquisition would give Hawaiian Telcom access to Wavecom’s fiber optic network connecting the main Hawaiian islands. Wavecom, formerly known as Pacific Lightnet, Inc., serves more than 1,700 customers across Hawaii.

In an application with the Federal Communications Commission, HawTel officials said access to Wavecom’s 400-mile undersea telecommunications cable network will permit the company to expand and enhance its broadband and television services beyond Oahu to other Hawaiian islands, and help position the company to effectively compete with Time Warner.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Hawaiian Telcom TV Tour.flv[/flv]

Watch a HawTel-produced video tour of the company’s new TV service.  (4 minutes)

Currently there are 2 comments on this Article:

  1. Ian L says:

    Looks like HawTel is pushing VDSL harder than AT&T is, which is a breath of fresh air for a company that not long ago was having issues staying afloat as a spinoff of Verizon.

    I’d certainly sign up for the 20/10 service (or maybe 30/10, or even 50/10) if it was offered here. That’s more upload speed than TWC provides even here in the continental US, and from my perspective upload speeds are what slow me down these days, not download speeds.

  2. Hurricane Ike says:

    I agree with Ian L’s comments (the upload bandwidth has been ignored too long and is also important). Too many of these ISPs have focused on the consumption angle (promoting download bandwidth as if people are animals feeding at the trough). Its become too asymmetrical, and need to be rebalanced. One of the original promises of the Internet was its democratizing potential, enabling sharing and collaboration among people worldwide. Sharing knowledge and data means people are also producers and need to UPLOAD.

    This is an excellent expansionist move by HawTel. The quarter to quarter clock watchers on Wall Street need to be patient (although let’s also remember that this high speed DSL capability is something HawTel has been talking about since about 2005 shortly after the Carlyle Group took it over. The good news about the Hawaii market is that Verizon no longer owns these pipes (it would likely be atrocious if Verizon had too much presence in Hawaii both landlines / fiber and wireless).

    Oceanic Time Warner has had it way too easy for too long as essentially a high speed ‘net monopoly in Hawaii. Just like Apple has started to bring parity into the marketplace v.s. Microsoft, its great to have some parity developing in this high speed ‘net marketplace across the state.

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