Windstream CEO Jeff Gardner told a cable news audience Tuesday that the rural phone company already supplies broadband to 100 percent of its service areas where the service is “economically feasible” to provide.  Any additional expansion will only come with the assistance of the federal government’s broadband stimulus program.

“We’re in 23 states — mostly rural markets, so broadband reach is incredibly important to us,” Gardner said on CNBC’s Fast Money program.  “We’re getting to 90 percent of our customers today; in fact, we’ve built out to every customer that’s economically feasible, so the broadband plan that has been announced by the administration is critical to us getting to that last 10 percent.”

In 2006, when Windstream was created from the spun-off landlines Alltel used to own, broadband and business customers represented 35 percent of Windstream’s revenue.  Today that number has jumped to 53 percent.

That’s not surprising to many telecom analysts who suggest broadband will be key to the survival of rural landline phone companies, especially those adjacent to larger communities where cell phone providers extend coverage.

Windstream has applied for $238 million in broadband stimulus money and claims it is in the best position to spend that money to extend broadband to its most rural customers.  It also has a captive customer base in many areas, where no cable competition exists and wireless service is spotty.

Gardner promotes the results of their de facto monopoly, noting that while Verizon and AT&T lose up to 11 percent of their landline customers each year in certain areas, Windstream has lost just three percent.

Still, many think landline phone companies are ultimately a dying business and a real bad investment.  Except Gardner admits the most important reason why people buy stock in his company is the huge dividend payout.

“Most importantly, what people buy our stock for is our dividend,” he said. “We pay $1 dividend — an 8.5 percent yield, so our cash flow is something our investors are always tuned into.”

One of the show hosts acknowledged the huge dividend, but suggested that may be troublesome down the road.

“The dividend is interesting, but it’s getting to the point of where it might be a little too interesting, if you know what I mean,” said Guy Adami.

Adami may be referring to the practice of paying out a larger dividend than a company earns in revenue, something that can rapidly spiral a company into bankruptcy.

Windstream CEO Jeff Gardner appeared on CNBC’s Fast Money program to talk up Windstream’s prospects for broadband, especially if the government delivers on the company’s request for $238 million in stimulus funds to extend service to its most rural customers.  (4 minutes)

Chama, New Mexico

Emergency officials trying to warn residents of Chama, New Mexico about the threat of potential flooding were stymied by widespread service outages from Windstream Communications, the area’s broadband and telephone service provider.

The loss of service even impacted cell phone companies, whose cell tower sites relied on Windstream to get cell phone traffic into the telephone network.

More than 30,000 customers lost long distance and Internet service in the Chana area, leaving a local radio station as the primary source for communications to and from officials and Chana residents.

Residents began calling KZRM Radio asking about the service outages, leaving one local DJ to shrug his shoulders, noting he didn’t know because he couldn’t call out either.

Windstream kept 911 service running by call forwarding incoming emergency calls to cell phones in Española, located on the other side of Rio Arriba County.

Information about the flooding ultimately traveled primarily by word of mouth.

Windstream blamed the outage on a power surge.

KOAT-TV in Albuquerque reports on the plight of 30,000 Chama residents left without cell, long distance, or Internet service during a potentially dangerous flood.  (2 minutes)

Get out your tiny violins.  Telephone and cable companies that have ignored your neighborhood for years are decrying attempts by the federal government to fund projects that would finally extend broadband service to rural America.  Companies ranging from tiny Eagle Communications in Kansas, to major regional telephone companies like FairPoint Communications and Windstream, are upset that new providers are on the way to deliver broadband service to bypassed homes or communities stuck in their broadband slow lane.

The Associated Press reports coast-to-coast complaints from incumbents who have refused to deliver service or force customers to accept 1-3Mbps speeds indefinitely.

From the Blue Ridge Mountains to the Great Plains, some local phone and cable companies fear they will have to compete with government-subsidized broadband systems, paid for largely with stimulus dollars. If these taxpayer-funded networks siphon off customers with lower prices, private companies warn that they could be less likely to upgrade their own lines, endangering jobs and undermining the goals of the stimulus plan.

That’s rich coming from some providers who threaten to refuse to upgrade lines they’ve never upgraded, endanger employees they’ve long since cut, and threaten their quest for monopoly profits serving rural Americans larger carriers are rapidly abandoning.

Anemic Broadband Is Not in Kansas Anymore

Rural Telephone's Exchange Map (click to enlarge)

Kansas-based Eagle Communications provides cable and wireless broadband service to more than a dozen small towns in the state.  For more populated areas, it’s cable broadband service.  For the rural parts of its service areas, Eagle relegates everyone to a slower speed, more expensive wireless network.

The company is upset to learn about additional expansion forthcoming from Rural Telephone Company, a cooperative which recently won a $101 million stimulus grant to construct a fiber optic system to expand service.  With the grant, the co-op phone company will move beyond its currently constrained DSL broadband network into areas even Eagle’s rural wireless signal won’t reach.

Rural Telephone Company says their broadband grant will provide service “in an area 99.5 percent unserved/underserved and provide a rural infrastructure required for economic stability, education and health care.”

Eagle says it’s unfair competition.

“It is extremely unfair that the government comes in and uses big government money to harm existing private businesses,” Gary Shorman, president of Eagle Communications, told the AP.  “This hurts our company.”

“It’s a little disappointing that companies that aren’t adequately serving these areas are trying to undercut those of us who are trying to step in and get the service where it’s needed,” says Lawrence Strickling, head of the National Telecommunications and Information Administration, the arm of the Commerce Department handing out much of the stimulus money.

The $101 million Kansas project, for instance, will bring connection speeds of up to 1 gigabit to businesses and up to 100 megabits to as many as 23,000 homes. While the network will cover the population center of Hays, where both Rural Telephone and Eagle Communications already offer broadband, that accounts for just eight of the 4,600 square miles to be reached. Much of the area has no broadband at all, says Larry Sevier, Rural Telephone’s chief executive.

The goal is to “close the digital divide between Hays and the outlying areas,” says Jonathan Adelstein, head of the Rural Utilities Service, which awarded the money.

Eagle Communications' Wireless Service Area - Central Region (click to enlarge)

For rural Kansans choosing between Eagle’s wireless service or Rural Telephone’s current maximum 1.5Mbps DSL service for those outside of the Hays city limits, the definition of “high speed service” maxes out at an anemic 3Mbps:

Eagle Communications Wireless Network Pricing – Hays, Kansas

• Eagle 256/256 $34.95 /per month
• Eagle 768/512 $37.95 /per month
• Eagle 1.0/384 $44.95 /per month
• Eagle 2/512 $54.95 /per month
• Eagle 3/512 $59.95 /per month

Rural Telephone Company Pricing for Outside the City Limits – Hays, Kansas

• Rural Telephone’s 1.5Mbps DSL — $29.95 per month
• Rural Telephone’s 512kbps DSL — $19.95 per month

Gone With the Windstream: Phone Company Says Broadband Stimulus Doesn’t Give a Damn About Their Georgia Business Model

Many of the projects seeking funding don’t actually want to get into the Internet Service Provider business, preferring to construct fiber-based networks available equally to all-comers at wholesale pricing.  Sure they’ll wire government buildings, schools, and libraries as a public service, but their real goal is to make available super high speed networks that incumbent providers haven’t, under the theory a rising tide lifts all boats.  They even invite existing ISP’s to hop on board, buying access to deliver improved service to their existing customers.

But because some providers don’t own or control the infrastructure outright, they’re not interested.

One such project is the North Georgia Network Cooperative, created from a consortium of private business advocates, a state university, and two power company co-ops.

North Georgia sees broadband as a major economic stimulant… if they actually had it.  Large parts of the region don’t, so the Cooperative applied for and won a $33.5 million NTIA grant to construct a 260-mile fiber ring running through 12 counties in the state.  The network will easily deliver connections upwards of 10Gbps for institutions and broadband speeds far faster than incumbent DSL provider Windstream currently provides across the region.

Windstream's biggest promotional push is for its 6Mbps DSL service

Windstream’s DSL packages look better than many other independent phone companies, at least based on their website.  Windstream offers 3, 6, and 12 Mbps DSL packages across northwestern Georgia,  but that doesn’t mean you can actually obtain service at those speeds.  Stop the Cap! reader Frederick, who tipped us off to this story, notes that he can’t obtain more than 1.5Mbps DSL service from his home in Dalton, Georgia because the phone lines in his area won’t support faster speeds.

“I’m actually less than a mile from my area’s central office, but because the phone lines in my area are deteriorated, they had to lock my speed in at 1.5Mbps — anything faster causes the modem to reset,” Frederick writes.  “Windstream does the same thing to my cousin in Lafayette, who was offered 6Mbps service but can only get 3Mbps in reality.”

Frederick says most people in the community don’t really care where the faster broadband comes from — just that it comes.

“If Windstream, who incidentally also applied for government money, could do it there would have never been a need to go around them in the first place,” he says. “Hell, the ironic part is the Cooperative will sell wholesale access to Windstream to use as it sees fit, but because Windstream doesn’t own it they’re pouting, refusing to participate.”

Windstream says it has already invested $5 million in network upgrades covering northern Georgia over the last three years and the Cooperative’s stimulus grant undermines the economics of that investment.  Michael Rhoda, Windstream’s vice president of government affairs told AP Windstream now has to share rural customers with a government-funded competitor.  Windstream wants that funding limited strictly to those areas where broadband service is uneconomic to provide.  To underline that point, the company has applied for $238 million in stimulus funding to reach the “last 11 percent” who don’t have broadband in Windstream’s service areas.

Maine’s Three Ring Binder Project Snaps Shut on FairPoint’s Monopoly Fingers

Maine's Three Ring Binder Project plans to serve most of Maine (click image for additional information)

More often than not, independent efforts to launch improved broadband service in a region come after years of dealing with an intransigent provider comfortable moving at a snail’s pace to improve service.  Financially-troubled FairPoint Communications has been struggling to meet Maine’s broadband needs since the company took over service from Verizon two years ago.  The state government, university, and smaller telecommunications companies decided they could do better — applying for, and winning a $25.4 million dollar grant to construct three fiber rings across the state.

FairPoint insists the project duplicates the company’s own efforts to improve connectivity in Maine and has appealed to lawmakers to stop the project.  But FairPoint recently called a truce when it reached a deal to charge users of the new network a usage fee, with FairPoint getting a large share of the proceeds to expand its own broadband efforts.

[FairPoint's financial problems have left the company] unable to bring broadband to wide swaths of rural Maine, says Dwight Allison, chief executive of Maine Fiber Co., which was created to build and operate the stimulus-funded network. The project, he says, represents a serious competitive threat to a company that “feels its monopoly is being attacked.”

Of course nothing precludes FairPoint from getting access to the new fiber network at the same wholesale pricing other providers will pay, but the company so far doesn’t seem interested.

Various talking points designed to derail the project are debunked by the Maine Fiber Company:

• Fiction: It’s government-run broadband.
• Fact: Three Ring Binder will be owned and operated by Maine Fiber Company, a private company based in Maine. MRC is unaffiliated with any telecom carrier to ensure fair and equal access to the system for all competitors.

• Fiction: This project will create unfair competition for private providers.
• Fact: MFC will be a wholesale provider of dark fiber, and its customers will be Internet Service providers, wireless carriers, and telephone companies. MFC will not provide “lit” service in competition with private broadband carriers. MFC is required to provide service on an open access and non-discriminatory basis. All carriers in Maine will be able to use the network to serve their customers in Maine, resulting in robust competition for the benefit of Maine consumers.

• Fiction: This project duplicates service FairPoint already provides.
• Fact: Prior to receiving a federal stimulus grant, the project was carefully reviewed by the National Telecommunications Information Agency (NTIA) of the US Department of Commerce to determine whether there was overlap with existing carriers. NTIA determined that TRB would substantially improve access to high-speed Internet access in rural Maine. If material duplication had been discovered, TRB would not have been funded. TRB will offer a mid-mile, dark fiber service that is fundamentally different from what currently exists in rural Maine. In fact, carriers seeking to obtain dark fiber service along the TRB route have routinely been denied access by incumbent fiber providers.

More than 36,000 Nebraska phone customers were left with blocked landline service, unable to reach 911 emergency services or many area business and government agencies after a switch failure resulted in “all circuits are busy” messages for hours on end.

Windstream’s service outage was unprecedented in Nebraska telephone history, lasting over 15 hours and impacting customers in at least 12 southeastern Nebraska counties.  Government agencies were forced to open emergency operations centers, police and fire officials asked people with emergencies to walk or drive to the nearest police station or firehouse, and some customers were left thinking the whole incident was a hacker April Fools Day attack on the telephone system.

The Nebraska Public Service Commission plans to hold hearings to investigate Windstream’s failure to maintain their network in good working order.  The Commission wants to know how the failure happened, why it took 15 hours to restore service, and what plans the company has to make sure it doesn’t happen again.

The Journal Star reported on what they’ve learned thus far about the outage:

Problems were worst in downtown Lincoln, including state and local government offices and the University of Nebraska-Lincoln. But they ultimately stretched to at least a dozen Southeast Nebraska counties.

Brad Hedrick, Windstream’s Nebraska vice president and general manager, said a number of operations and engineering technicians were doing a “root-cause analysis” Friday to try to find out what went wrong.

The outage came about 7 hours after Windstream updated the switch. But because the failure occurred so long after the update, Hedrick said, it’s unclear whether it played any role.

“We’re digging into all potential scenarios to make sure we didn’t overlook anything,” he said.

Windstream is not aware of a similar problem ever occurring before in its nationwide network, although Hedrick said he has heard of other companies having similar problems elsewhere.

Local emergency management officials said they had never experienced a service failure of similar magnitude.

“We’ve had, over the years, some minor outages, mostly geographical,” said Julie Righter, communications manager of Lancaster County’s 911 Center. “Nothing this widespread. This was multiple counties.

“It wasn’t just 911. It was every kind of phone.”

Righter said the 911 center was alerted to the problem by an alarm company employee.

“They called us and asked if we were able to call out, at which point our staff started making some test calls back and forth and we did discover we had problems.”

A complete wrap-up of the Windstream outage in Nebraska comes courtesy of KOLN-TV in Lincoln.  (16 minutes)

Included are interviews with three key players in the saga:

1. Commissioner Tim Schram – Public Service Commission
2. Brad Hedrick – Windstream Communications
3. Julie Righter – (Emergency) Communications Center

Windstream Communications customers in eastern Nebraska have spent much of today without access to emergency 911 services, and many were without their own landlines as well.  A switch failure in downtown Lincoln caused the outage impacting several counties starting at 7:45 Thursday morning.

Emergency services personnel were forced to rely on cell phones and amateur radio operators to process calls for emergency service, and several law enforcement personnel were staged in outage areas to assist with any calls for help.

Emergency dispatch centers were silent for much of today.  Those attempting to call 911 received a busy signal.

“You know there’s people out there that are going to need help at some point, there always is, and they’re unable to get that help,” Cass County dispatcher Deb Thiessen told KETV in Omaha.

“It’s very rare there’s an outage of this type,” said Cass County Chief Deputy Brad Lahm.

http://www.phillipdampier.com/video/KOLN-ABC Nebraska Windstream Suffers Major Outage 4-1-10.flv

KOLN-TV and NTV report on today’s major Windstream outage.  (5 minutes)

http://www.phillipdampier.com/video/KETV Omaha Windstream Failure No April Fools Joke 4-1-10.flv

KETV-TV in Omaha also covered the outage in their viewing area. (2 minutes)

Richardson County, Nebraska

Richardson County, Nebraska is classic rural Americana.  Fixed at the very southeastern tip of Nebraska, the county’s gently rolling countryside offers a break from the relentless flat prairies in nearby Kansas. Agriculture, cattle and hog farming are important to the local economy.  Large farms grow corn, alfalfa, and wheat, but the area’s 170 growing days also support a significant apple crop as well. Towns within the county range from the tiny Barada, population 28 up to the county seat — Falls City, population 4,671.

With a climate than can deliver temperatures well under zero in the winter and into the triple digits in the summer, tourism isn’t this part of Nebraska’s strength.  But its location, culture, and cost of living are for those who live there.

Originally founded in 1857, Falls City served as a major transit point for escaping slaves caught up in the Kansas-Nebraska Act controversy, one of the many disputes that eventually led to the Civil War.  Like most small towns of the time, growth came with the arrival of the railroads.  First, the Atchison & Nebraska Railroad in 1871 and then the Missouri Pacific in 1882.

The population peaked in 1950 at 6,200, but the town has held its own thanks to the self-sufficiency of its residents and local government.

Falls City is a unique community among thousands of small communities across the heartland and beyond.

The local economic development team promote Falls City’s possibilities as a strategic transit and shipping center.  Regionally, Richardson County is just an hour or two away from Kansas City, Missouri, Topeka, Kansas, and Omaha and Lincoln, Nebraska.  Centrally located, the area offers two day shipping possibilities to most points of the country.

The municipal government owns and operates the local water, gas, electric and waste treatment facilities, which charge rates lower than other communities in Nebraska.  Time Warner Cable’s Nebraska division offers service in most parts of town, and the local, family-owned Southeast Nebraska Communications (SNC) started providing phone service in Falls City, Rulo, Stella, Shubert, Verdon and Salem, as early as 1906.

SNC, which was founded by Edwin H. Towle, began with an attitude of innovation — providing the best, most modern service possible for southeastern Nebraska.  Simply providing “good enough for rural residents” service typical among larger providers was never a part of the company’s philosophy.  The company grew through its innovation, and today leverages all it can out of its copper cable network.  The spirit of innovation that began with Edwin continues today at SNC through family member Dorothy J. Towle, who serves as president of the company.

Towle and other company officials recognize the days of copper wire phone networks remaining relevant in today’s telecommunications marketplace are seriously numbered.

SNC made a decision remarkable for a phone company of its size — it was going to rewire Falls City for fiber optics, straight to the home, at no additional charge to residents and area businesses.

Last July, it stunned the community with the news southeastern Nebraska would have access at speeds cities ten times larger could only dream about.

SNC is investing between $8-10 million in the project, which will reach most city residents by its completion in 2011.  The company is constructing the network with capital improvement funds they’ve conservatively saved year after year, and believes it’s a great investment because of future revenue possibilities fiber optics can bring.  This isn’t a company that worries about pumping up stock prices, boosting dividend payouts, or lavishing executives with enormous pay and benefit packages.  SNC employees live and work in the community and want to enjoy the fruits of their labor.

Operations Manager Ray Joy told the Journal Star the new system will be capable of offering 1,000Mbps to a house.  Right now, SNC offers DSL service at 3-7Mbps.

The company is still working out precisely what speeds it will offer residential and business customers, but they will be far better than what is possible from aging copper wiring.  Best of all, it’s future proof, which SNC believes will save them plenty in the long run.  Upgrading fiber networks just takes a different type of laser — no rewiring required.

SNC first considered wireless technology to serve the community, but rejected it because of insufficient bandwidth capacity.  Fiber’s expandability the choice much easier for the company.

Of the 460 cities and villages in Nebraska, only 11 currently have fiber to the home, and Falls City will be the largest in the state.

Falls City Economic Development and Growth Enterprise, the local economic development team, hopes to promote Falls City’s fiber as perfect for new digital economy businesses, creating new high-paying jobs for area residents.

Current entrepreneurs who live in Falls City are already convinced.

SNC's Management and Employees

Karissa Watson, owner of Kissa’s Kreations, a Web and graphic design service, told the newspaper she is looking forward to the conversion.

“From what I understand, it will be 20 times faster, but I also think the quality will be better because it’s a dedicated versus a shared service,” she said.

Watson wants faster service in order to increase her efficiency.  Slower broadband speeds can cause long waits for businesses moving data back and forth.

Watson and other Falls City residents are being kept informed about the progress of the project in quarterly newsletters sent by the company.  A contracting firm, RVW, Inc. of Columbus, Nebraska is doing the work.  Their technicians are personally visiting every home and business owner before digging begins in a neighborhood, and remain available to address any concerns residents have after work is complete.

SNC markets themselves as locally owned and operated, which is why personal contact with customers is critically important to the company’s success.  Newsletters allude to their nearest competitor, Time Warner Cable, as not exactly being local.  SNC touts their local customer care office, staffed by area residents, local call centers that are answered by “real people,” and a service staff that can often respond to service outages on the same day.

“Unlike some companies, we don’t play games with low teaser rates that go up later,” sums up the company’s marketing attitude.

SNC’s fiber upgrade also could eventually protect them from Time Warner Cable’s relentless drive towards product bundling, which can cost the telephone company landline business.  The cable company can also beat SNC’s broadband speeds on the copper wire network.  With an upgrade, SNC could eventually offer customers a cable-TV alternative, taking the competition back to the nation’s second largest cable operator.

Although 75 percent of the six million Americans served by fiber-to-the-home projects are Verizon FiOS customers, there is considerable growth in fiber deployment among small mom and pop and municipally-owned phone companies.  That’s remarkable because they lack the economy of scale and financial resources larger telephone companies enjoy.  But those small phone companies aren’t caught up in debt, endless mergers and acquisitions, stock price games, and ludicrous compensation for a handful of executives.  For customers of Qwest, Frontier, Windstream, and CenturyLink, fiber remains an elusive dream.

The Journal Star covered several other phone companies with fiber projects in Nebraska:

Cambridge, in southwest Nebraska, also has FTTH technology to serve a population of just more than 1,000.

“We’re very excited,” said Cambridge Economic Development Director Adela Taylor, who called it the “infrastructure of the future.”

She said the fiber optic system was the initiative of the local telephone company, which has been very pro-active over the years in bringing the newest technology to the town. She noted that Cambridge was one of the first towns to have Internet service back in 1993, as a pilot project.

Three River Telco in Lynch is in the midst of a three-year project to install FTTH technology. The company serves about 1, 250 customers in Lynch, Verdel, Springview, Johnstown and Naper in north-central Nebraska.

General Manager Neil Classen said Three River received a $19 million federal loan from the Rural Utilities Service to replace its copper wire system with fiber optics. The company wanted to provide the latest services to customers, including transmitting television signals via Internet protocols.

Classen said the fiber optic system will provide customers with a more reliable communications system and a lot more bandwidth than the existing copper wire network. He said the price tag could be less because fiber optic technology has improved and become more cost-effective.

Fiber dreams are Gone With the Windstream

Windstream serves several Nebraska communities, and for those customers, the news is less exciting.  Windstream has limited itself to installing small amounts of fiber in new subdivisions.

Brad Hedrick, Windstream vice president of operations for Nebraska and Missouri, said installing fiber optics is an extremely expensive proposition and Windstream has no plans to connect every home and business as Falls City is doing.

But he told the newspaper if the federal government wants to kick in federal funds to help small communities convert, Windstream will consider it.

Windstream cannot deliver fiber to the home to their customers, despite $2.997 billion in revenues for 2009.  But a family-owned phone company in Falls City, a telephone company in Cambridge serving 1,000 residents, and Three River Telco in Lynch all can.

Winstream provides 3,000,000 access lines in 16 states, and is headquartered in Little Rock, Arkansas

Windstream Corporation has announced a massive 9.4 percent dividend, one of the largest among S&P 500 companies.  Big dividends are a trait common with independent phone companies that have used dividend payouts to fuel their stock value, making shares valuable to income investors.  Michael Nelson, a Soleil Securities analyst told Investors Business Daily Windstream’s preoccupation with mergers and acquisitions has been the primary reason the company has been growing, even as landlines continue to be a dying business.

“The CEO is embarking on a roll-up strategy of smaller disconnected companies; there are literally hundreds of them.”

He adds that CEO Jeff Gardner has a history of successfully executing a strategy of mergers and acquisitions while he was the chief financial officer of Alltel, the company from which Windstream spun off.

By growing a company through mergers and acquisitions, even as consumers disconnect their core product – landline phones, providers can still demonstrate growth to shareholders.  But once industry consolidation slows, any evidence of a decline in revenue is likely to prove punishing to the stock’s price.

Windstream’s latest acquisition, NuVox, Inc., is preparing for significant layoffs once the transaction closes in early February.  Most of NuVox’s senior management are rapidly departing the soon-to-be-merged company.

The rest of the company’s 1,700 employees are concerned about their future employment.  Some 700 workers at the company’s headquarters in Greenville, South Carolina are likely to bear the brunt of downsizing NuVox’s administrative functions.

Windstream COO Brent Whittington told the Charleston Regional Business Journal that the company’s headquarters building and many employees will be retained, at least at the outset.

“How much will we need going forward, I don’t know,” Whittington said.

Much of NuVox’s IT and customer service departments will remain in place, though some administrative functions in Greenville, such as accounting and human resources, could be lost, Whittington said.

“What that will mean for the ultimate headcount in Greenville, I don’t know right now,” he said.

Most prior mergers have resulted in significant job losses as a result of consolidation, in an effort to realize “cost savings.” The worst losses occur in offices dealing with administrative functions, often deemed redundant by the new owners.

For nearly 100 years, D&E Communications has served the people of eastern and central Pennsylvania from its headquarters in Lancaster.  But the company founded in 1911 by William F. Brossman, an area farmer and fertilizer distributor, never saw its centennial after being snapped up by Windstream Communications in a $333 million dollar deal.

What Brossman planted so long ago brings a bountiful crop of benefits for the top five former executives of D&E and the plowing under of 70 percent of D&E’s other employees, who are being shown the door between today and April 9th.

The Winners

Four high-ranking executives had provisions in their contracts with D&E that required the company to pay six-figure payments should the company be sold.   Thomas E. Morell, Albert H. Kramer, Stuart L. Kirkwood and Leonard J. Beurer are offered the stacks of cash as an incentive to get them to stay with the company, even as hundreds of others don’t get that choice.

Former D&E CEO James W. Morozzi gets a consolation prize of $942,000, not including benefits.

The Losers

D&E employees will be let go with considerably less (perhaps a cardboard box to hold their possessions as they are escorted from D&E buildings.)

Windstream filed papers months ago with the state Department of Labor and Industry detailing the slashing of D&E’s workforce, declaring most redundant and no longer needed, providing some of the “cost savings” that fuel these telecommunications deals.

For Lancaster County, as many as 270 of D&E’s 340 workers will be abandoned.  For eastern and central Pennsylvania as a whole, 500 jobs will be reduced to 200 or less in Ephrata and Birdsboro.  What made D&E “local” to Lancaster County and this part of Pennsylvania will be no more.  Local customer service and support call centers are also being eliminated — transferred to existing Windstream centers in Cornelia, Georgia and Charlotte, North Carolina.  Customers who have paid their D&E bills in person at the company’s Birdsboro office will have to make other arrangements — they are weeding out that service as well.

Windstream Corporation has agreed to acquire Newton, Iowa-based Iowa Telecom for $530 million in stock and cash, making it the fourth acquisition for the rural-focused Windstream in 2009.  It will also take on $600 million of Iowa Telecom’s debt as part of the transaction, which caused Standard & Poors to reduce Windstream’s credit rating to junk status – BB.

Like Frontier Communications, Windstream is engaged in aggressive expansion to stake out its position serving rural America.  The company has spent $1.3 billion on acquisitions in just the last six months, trying to keep up with other large independent providers like Frontier and CenturyLink.

“Our whole investment thesis was to grow scale in rural America,” Windstream Chief Executive Jeff Gardner told the Wall Street Journal. “I still think there’s a great deal of consolidation left with smaller players, where the pressure is the most obvious.”

Windstream, based in Little Rock, Arkansas, serves customers in 16 states, mostly in the midwest and south.  Iowa Telecom serves former GTE service areas in Iowa and Minnesota.

For employees in Newton, east of Des Moines, the purchase brings fear of significant job reductions.  Iowa Telecom has 800 employees, and comments by Windstream’s Gardner suggest downsizing is forthcoming.  Windstream expects $35 million in cost savings annually, and some of that will be achieved by dispensing with unneeded Iowa Telecom workers post-merger.  Windstream has only promised to maintain a call center in Iowa.

WHO-TV Des Moines reported Windstream’s buyout of Iowa Telecom was like “lightning striking twice” for Newton residents, leaving an economically-challenged community in fear. (11/25/09 – 2 minutes)

Iowa Telecom provides customers with a familiar bundle of services common among independent phone companies.  As well as providing traditional wired phone lines, Iowa Telecom markets Xstream DSL at speeds up to 15Mbps in some areas, and resells DISH Network satellite service for customers looking for a video option.

Lexcom's DSL price chart shows budget-busting prices for relatively slow DSL service

Windstream provides DSL service up to 12Mbps in some areas.

Before Iowa Telecom, Windstream’s earlier acquisitions included:

• D&E Communications of Pennsylvania — Windstream fetched the independent provider in a stock and cash transaction that added about 150,000 additional telephone lines to Windstream’s portfolio in Pennsylvania.
• Lexcom — Windstream picked up this Davidson County, North Carolina independent for $141 million.  Lexcom needs serious technology upgrades to improve service.
• NuVox — A Greenville, South Carolina-based business services provider.

Windstream has hinted they’re not done with acquisitions yet, fueling some speculation their next targets may be Consolidated Communications, which provides service in Illinois, Pennsylvania, and Texas or Alaska Communications Systems, another business service provider.

KCCI-TV Des Moines reported residents of Newton were “shocked” and “disturbed” about the Iowa Telecom buyout, because of potentially staggering layoffs to come after Windstream closes the deal.  (11/24/09 – 2 minutes)

Not everyone is singing the blues about Windstream’s buyout of Iowa Telecom.  Despite the transaction’s impact on Windstream’s credit rating, Wall Street has supported Windstream with a strong stock price, owing to the company’s relentless desire to deliver dividends to stockholders.

http://www.phillipdampier.com/video/CNBC Cramer on Windstream 12-7-09 1025.flv

CNBC’s Jim Cramer loves the “massive dividends” Windstream provides to stockholders.  But Cramer also issues some caveats, reminding viewers of FairPoint Communications, another former high-dividend stock… until it went bankrupt.  Cramer interviews Windstream CEO Jeff Gardner about the company and the future of independent phone companies in general.  (12/7/09 – 10 minutes)

http://www.phillipdampier.com/video/CNBC Windstream Profile NASDAQ 12-10-2009 222.flv

CNBC reports on Windstream’s move to the NASDAQ and interviews CEO Jeff Gardner about the future for the telecom industry in general.  (12/10/09 – 2 minutes)

Phillip "I Also Told You So" Dampier

This past spring Stop the Cap! started relentlessly documenting the tragic phone and broadband service that came as a result of a lousy phone deal for New Englanders.  Verizon, busily wiring its larger service areas for FiOS fiber to the home service, wanted out of Maine, New Hampshire, and Vermont.  In a uniquely wonderful deal (for them), they not only managed a clean break from too much regulatory red tape, but also sold off the entire operation down to the last cable, phone jack, and building absolutely tax-free to FairPoint Communications, a tiny independent phone company headquartered in North Carolina.

Since the sale, it has been one catastrophe after another:  broken phone and broadband service up to weeks at a time, incorrect billing amounting to hundreds of dollars and collection calls pestering customers for money they don’t owe, investigation after investigation, broken promise after broken promise.  Since we broke from the story back in June to cover some of the nonsense and ripoffs going on in Canada, things have not gotten that much better.  In fact, the company’s stock has since lost 95% of its value, is defending against accusations it manipulated a “test run” of a conversion program to guarantee success (right under the noses of independent observers), a major management shakeup, and now the very real chance the entire mess is headed to Bankruptcy Court.

One member of the International Brotherhood of Electrical Workers, who loudly and, it turns out, very accurately predicted the results of this ill-conceived venture, said FairPoint is now swirling in the bowl, flushing itself, and three states’ telecommunications needs, right down the toilet.

So at the same time Frontier Communications is trying to pick up what Verizon is throwing away this year, it’s very illustrative to continue this story, to educate our readers about what happens when consumers’ needs are totally ignored.  Just as much to blame are the state regulators who are now ironically among the loudest complainers.  As we’ve shown documenting this entire story, they’ve changed their tune dramatically.  Back in 2007, they couldn’t say enough wonderful things about how confident they were in FairPoint, and were certain everything would work out just fine.

It did for them because they are still there, conducting the investigation about how this whole mess got started.

The Nashua Telegraph has followed this sorry story since day one:

Unable to make its massive debt payments, FairPoint will have to file for bankruptcy by month’s end unless it can strike a deal with creditors.

The company is losing land-line customers – and thus, revenue – faster than anticipated. And the celebrated launch of a TV service to compete with cable – a move FairPoint said would bring in the extra income to compensate for the decline in land-line customers – has been put on hold.

“There’s no satisfaction in saying I told you so,” said Rand Wilson, communications coordinator for the two unions that represent most FairPoint workers, which organized a major public campaign in an effort to stop the sale.

“We have to try to provide the best possible service under the circumstances and work with regulators and states to find a way to create a viable company.”

So far, that means trying to fix FairPoint from within, or hope the rumors of a buyout by Windstream, another owner of formerly independent phone companies, turns out to be real. But like FairPoint and Frontier, Windstream itself has a business model running phone service in the areas the big boys don’t want. How much of an improvement that company would provide remains an open question.  Regardless, unless FairPoint works the kind of magic it has never performed for its New England customers, it’s probably only a matter of weeks before bankruptcy:

P.J. Louis, a telecom industry expert and author of 11 books on the various topics within the industry, recently wrote that he thinks it’s a realistic option for the company.

“The more and more I think about it, the more I am convinced that FairPoint needs to file,” Louis wrote in an analysis on the Gerson Lehman Group Web site. “Every horror story you hear just scares the heck out of me. Frankly, I am questioning management’s ability to see the company through this rough time.”