A new proposal from the nation’s six largest telephone companies would double or triple Universal Service Fund (USF) fees on many telephone lines, extending them to wireless, broadband-based phones, cable TV “digital phone” products, and potentially even Internet accounts, providing billions from consumers for the companies proposing the plan.

Universal Service Fund reform has been a hot topic this year in Washington, as regulators attempt to reform a long-standing program designed to help keep rural landline telephone service affordable, subsidized with small charges levied on customer phone bills that range between $1-3 dollars, depending on the size of your community.

The original goals of the USF have largely been achieved, and with costs dropping to provide telephone service, and ancillary services like broadband DSL opening the door to new revenue streams, some rural phone companies don’t need the same level of support they received in earlier years.  As a result, USF funds have progressively been disbursed to an increasing number of projects that have little to do with rural phone service.  Several funding scandals over the past decade have underlined the need for USF reform, and FCC Chairman Julius Genachowski has been a strong advocate for directing an increasing amount of USF resources towards rural broadband deployment projects.

But now some of America’s largest phone companies want to establish their own vision for a future USF — one that preserves existing funding for rural phone service -and- levies new fees on ratepayers to support broadband expansion.

The ABC Plan's chief sponsors are AT&T...

America’s Broadband Connectivity Plan (ABC), proposed jointly by AT&T, Verizon, CenturyLink, Windstream, Frontier Communications and FairPoint Communications, departs markedly from Genachowski’s vision for a revised USF that would not increase the overall size of the Fund or its cost to consumers.

That’s why some ratepayer consumer groups and utility regulators have taken a dim view on the phone companies’ plan.

Colleen Harrell, assistant general counsel to the Kansas Corporation Commission says customers would find USF fees doubling, if not tripling on their home phone bills under ABC.  That could mean charges of $6 or more per month per phone line.

While the plan substantially benefits the companies that propose it, critics say ABC will do little to enhance service for ordinary consumers.  In fact, some language in the proposal could open the door for landline companies to discontinue universal landline service, a long time goal of AT&T.

In fact, protection for incumbent phone companies seems to be the highest priority in most of the ABC’s framework:

1. The proposal provides a right of first refusal to the incumbent phone company, meaning USF grant funds effectively start at the landline provider, and are theirs to accept or reject.  This has competitors howling, ranging from Wireless ISPs, mobile data providers, cable companies, and even fiber networks.  The ABC proposal ignores who can deliver the best broadband most efficiently at the lowest price, and is crafted instead to deliver the bulk of funding to the provider that has been around the longest: phone companies.
2. Provisions in the ABC Plan provide a convenient exit door for landline providers saddled with providing service to some of America’s most rural communities.  An escape clause allows “satellite service” to be provided to these rural households as a suitable alternative to traditional wired service, sponsored by an annual $300 million Advanced Mobility/Satellite Fund.  This, despite the fact consumer ratings for satellite providers are dismal and existing providers warn their services are often unsuitable for voice calls because of incredibly high latency rates.
3. Provisions in the ABC Plan adhere to a definition of acceptable broadband well within the range favored by telephone company DSL providers — 4Mbps.  Setting the bar much higher could force phone companies to invest in their networks to reduce the distance of copper wire between their offices and customer homes and businesses, allowing for faster speeds.  Instead, lowering the bar on broadband speeds assures today’s deteriorating rural landline network will make-do, leaving a rural/urban speed divide in the United States.
4. To “resolve” the issue of the increased fees and surcharges that could result from the plan’s adoption, it includes a subjective cap of $30 a month on residential basic landline home phone service (without calling features).  But since most ratepayers pay substantially less for basic home phone service, the maximum rate cap provides plenty of room for future rate increases.  Also, nothing precludes phone companies from raising other charges, or creating new “junk fees” to raise rates further, ignoring the “cap.”

...and Verizon

Rural states seem unimpressed with the phone companies’ proposal.  The Kansas Corporation Commission (KCC) called various provisions of the plan “a train wreck.”  Kansas is one of several states that developed their own state-based Universal Service Fund to help the state’s many rural agricultural areas receive acceptable telecommunications services.  Kansans initially paid one of the highest USF rates in the country when their state plan was enacted in 1996.  But Kansas phone companies used that money to modernize their networks, especially in rural communities — some of which now receive fiber-based phone service, and the rates have fallen dramatically as upgrade projects have been completed.  Today, most Kansans pay just $1.45 in USF fees to rural phone companies, while AT&T customers in larger Kansas towns and cities pay an average of $2.04.

If the ABC Plan is enacted as-is, Kansans will see phone bills spike as new USF fees are levied.  That’s because the federally-based USF Fund reform program would require today’s 6.18% state USF rate double or triple to sustain various programs within its scope.

And forget about the $30 ‘smoke and mirrors’ “rate cap”, according to the KCC:

[...] The ceiling will not preclude carriers from increasing the basic rate beyond $25 or $30 through higher state USF surcharges or higher local rates.  Multiple states including Kansas  have partially or totally deregulated basic local phone service rates, and the only component of retail  local service pricing that the FCC regulates is the federal Subscriber Line Charge.  Thus, a carrier may face no constraint whatsoever in increasing basic local rates to the point that total local rates are well above the illusory ceiling.

The state of Wyoming was also unimpressed with a one-size-fits-all national approach advocated primarily by big city phone companies AT&T and Verizon, the chief sponsors of the ABC Plan.

The Wyoming Public Service Commission filed comments effectively calling the ABC Plan boneheaded, because it ignores the plight of particularly rural states like Wyoming, chiefly served by smaller phone and cable companies that face challenges in the sparsely populated, mountainous state.

First among the Wyoming PSC’s complaints is that the plan ignores business realities in rural states.  No matter how much USF funding becomes available or what compensation schemes are enacted, dominant state phone companies like CenturyLink are unlikely to “invest in broadband infrastructure unless it is economically opportune to do so.”

The PSC points to the most likely outcomes if the ABC Plan is enacted:

• Phone companies not challenged by a broadband competitor will make due with their current copper wire wireline infrastructure the PSC says has been deteriorating for years.  The PSC fears broadband expansion funds will be used to improve that copper network in larger areas where cable competition exists, while the rest of the more-rural network gets ignored;
• In areas like larger towns or suburbs where phone companies suspect a cable (or other) competitor might eventually expand or launch service, USF funding could be spent to bolster the phone company’s existing DSL service to deter would-be competitors from entering the market;
• 

  We'll pass, too.

  The Wyoming PSC believes phone companies will spend broadband funds only where it would improve the phone company’s competitive position with respect to cable competitors.  Providers are unlikely to expand into currently-ignored rural areas for two reasons: lack of ongoing return on investment and support costs and the ABC Plan’s willingness to abandon rural America to satellite providers.  “We are familiar to a degree with satellite service at it presently exists in Wyoming markets, and we are not particularly enamored of the satellite solution,” the PSC writes.  But if adopted, no rural phone company would invest in DSL service expansion in areas that could be designated to receive federally-supported satellite service instead.

Wireless competitors are not happy with the ABC Plan because it ignores Wireless ISPs and sets ground rules that make them unlikely to ever win financial support.  Many also believe the ABC Plan picks technology winners and losers — namely telephone company provided DSL service as the big winner, and everyone else a loser.

The Fiber to the Home Council also heaped criticism on the ABC Plan for the low bar it sets — low enough for any phone company to meet — on broadband speeds.  The FTTH Council notes the ABC Plan would leave rural America on a broadband dirt road while urban America enjoys high-speed-rail-like service.

Coming Next… Who *Really* Supports the Phone Companies’ ABC Plan.

“We’ve been talking for some time that broadband for us is not just about customer growth… it’s about revenue growth.” — Anthony Thomas, Windstream’s Chief Financial Officer

For the first time in some time, Windstream reported revenue growth during the second quarter of 2011.  The independent landline telephone company that last week acquired Rochester-based PAETEC Corporation managed to win new revenue from its business services unit and equipment sales, even as it continues to lose core landline customers, who are disconnecting service in favor of cell phones or cable telephone products.

It added up to a measurable, but meager growth of 0.1 percent for the company year-over-year during the second quarter.

Like many traditional wireline phone companies, Windstream is betting the farm in their largely rural and suburban service areas on selling broadband and maintaining the allegiance of their business customers, challenged in larger cities by increasingly aggressive “Business Class” products from competing cable companies.

Windstream executives responded to questions from Wall Street bankers during their second quarter conference call held last Friday.

While several investment firms were happy to see Windstream manage some revenue growth, several zeroed in on the company’s increased capital expenditures.  Windstream reports the company will continue major investments in fiber and broadband services, but not primarily for their residential retail customers.  Instead, Windstream hopes to capitalize on the “high margin” business of selling fiber-based cell tower services, primarily to support forthcoming 4G deployments.

Windstream officials faced some hesitancy from Wall Street about the company’s spending during Friday’s conference call, particularly from Bank of America and Goldman Sachs.

Anthony Thomas, chief financial officer for Windstream, defended the investments.

“The most important part of fiber-to-the-tower projects are the initial investments. Those are very high-margin businesses,” Thomas said. “But you have be comfortable with the upfront capital and be patient at recognizing those are 6-to 12-month investment time horizons. But once you start bringing those revenues in, the actual cost of operating a tower is low.”

Wall Street also expressed concerns about consumer broadband traffic growth, but did not broach the subject of usage control measures like usage caps or metered billing.  Windstream acknowledged the growth, primarily from online video, and said it had well-equipped data centers to handle the traffic.

Windsteam’s Consumer Strategy: Bundle Customers & Keep Them Away from Cable TV

It's all about the bundle.

Online video may be an asset for Windstream, which is facing increasing challenges retaining landline customers and up-selling them other products like broadband.  That competition comes primarily from cable companies, who are targeting Windstream customers with invitations to cut their landline service and bring all of their telecommunications business to cable.

Traditional phone companies have a major weakness in their product bundle: video.  Independent phone companies, in particular, are usually reliant on satellite TV partners to support the television component of a traditional “triple play” bundle.  Windstream’s network is capable of telephone and slow speed broadband in most areas, but the company’s involvement in video is largely left to a third party satellite-TV provider.

Customers who do not want satellite TV service may be easily attracted to a local cable provider.  But as an increasing amount of video viewing is moving online, Windstream may find customers increasingly tolerant of doing their viewing online, reducing the importance of a video package.

Windstream’s strategies to keep customers:

• Sell customers on product bundles, now enhanced with online security/antivirus options and on-call technical support for computer-related technical issues;
• Pitch Windstream’s Lifetime Price Guarantee, which locks in a single price for basic services, good as long as you remain a customer;
• Challenge cable competitors head-on with its “Quitter Campaign,” which tries to convince cable customers to “quit cable” in favor of Windstream;
• Offer faster broadband speeds in limited areas to satisfy premium customer demand.

Windstream Tries to Convince Customers the Broadband Speeds It Doesn’t Offer Do Not Matter for Most

Windstream’s efforts at winning over new broadband customers have been waning as of late.  One of the primary issues Windstream faces is the cable industry’s effective portrayal of DSL as “yesterday’s” technology, incapable of delivering the broadband speeds consumers crave.

Instead of investing in improved broadband speeds for everyone, Windstream spends its time and efforts trying to convince most customers they don’t need the faster speeds being pitched by most cable companies in the first place.

Windstream tries to convince customers they can make do with less speed (as low as 1.5Mbps), and there is no difference in speed between different providers — both questionable assertions.  (4 minutes)

The COO says 3Mbps is Windstream's biggest seller -- their website says something else.

Windstream chief operating officer Brent Whittington says his customers “don’t want to pay for incremental speed,” but is expanding their capacity to offer somewhat faster speeds.

“We still see that long term as [an increased revenue opportunity] because we know the demand is going to be there,” Whittington told investors.  “As we’ve rolled it out currently, it’s largely to — from a marketing benefits standpoint to talk about our competitiveness relative to our cable competition, but [consumers] are largely buying at 3Mbps.”

Either Whittington is mistaken, or Windstream’s website is, because it promotes the company’s 6Mbps $44.99 option as its “top seller.”  Many of Windstream’s cable competitors charge less for almost twice the speed, which may be another reason why Windstream’s broadband signup numbers are lagging behind.

Finding More Revenue: Universal Service Fund Reform & Business Services

Among the most important components of Windstream’s strategy for future growth are reform efforts underway in Washington to overhaul the Universal Service Fund.  Rural, independent phone companies like Windstream have reaped the rewards of this subsidy for years in its rural service areas.  But now Washington wants to transform the program away from simply underwriting rural landline phone service and redirect revenues to enhancing broadband access in areas too unprofitable to service today.

Windstream sees the reform as a positive development.

“It focuses USF on high-cost areas,” said Windstream CEO Jeff Gardner. “If you were a customer in a rural area of Windstream versus a customer in a rural area of a small carrier, your subsidy would much be higher, and we would get very little USF for that going forward. In this proposal, USF is really targeted towards those high-cost areas, so we kind of deal with this issue that we refer to as the rural-rural divide.”

Gardner says USF reform will end disparity of access.

“All rural customers are going to have the opportunity to get broadband out to them under this plan,” he said. The more customers paying monthly service fees, the higher the company’s revenues, assuming nothing else changes.

While redirected subsidies may help rural broadband customers, Windstream’s capital investments in expanding their network are going primarily to benefit their business clients, not consumers.

“On the small business side, our service there is very superior to our cable competitors,” said Windstream’s chief financial officer Anthony Thomas. “We’ve made investments in our network to offer VDSL and higher-speed data services. That’s going to be directed predominately toward those small business customers.”

Whittington added most of the company’s efforts at deploying VDSL technology are focused on the company’s small business segment to bring faster speeds to commercial customers.  For consumers, Windstream’s efforts are targeted primarily at keeping up with usage demands.

“Like a lot of folks in the industry, we’ve definitely seen increases in network traffic really due to video consumption,” Whittington said. “No question Netflix and other related type services are driving some of that demand. We continue to invest in broadband transport like we have in years past. And the good thing with a lot of things we’ve been doing from just a network perspective like rolling out as I mentioned before, VDSL technology in our larger markets. That’s really all about fiber deployment, which helps solve some of those transport issues. So we feel like we’ve been in good shape there, but it’s certainly something we’ve been very focused on operationally so our broadband customers don’t see a degradation in the quality of their experience.”

Independent phone company Windstream this morning announced its intention to acquire business telecommunications provider PAETEC Holding Corp., in a transaction valued at nearly $2.3 billion.

“This transaction significantly advances our strategy to drive top-line revenue growth by expanding our focus on business and broadband services,” said Jeff Gardner, president and CEO of Windstream. “The combined company will have a nationwide network with a deep fiber footprint to offer enhanced capabilities in strategic growth areas, including IP-based services, data centers, cloud computing and managed services. Financially, we improve our growth profile and lower the payout ratio on our strong dividend, offering investors a unique combination of growth and yield.”

PAETEC, based in suburban Rochester, N.Y., has been a business telecommunications provider since 1998, and many of its founding employees joined the company from locally-based Rochester Telephone Corporation, its long distance subsidiary RCI, and a competing long distance competitor ACC — today all long-gone.

For residents of Rochester, the implications of the merger could literally leave a hole in the center of downtown, where construction of PAETEC’s pre-merger headquarters was just getting underway.  With the recent demolition of Midtown Plaza, what local residents today call “the big hole in the ground” could be there a long, long time if Windstream abandons construction plans.

In December, then-mayor Robert Duffy (now New York’s Lieutenant Governor) took PAETEC founder and CEO Arunas Chesonis at his word that the company’s new headquarters would be built in downtown Rochester — a project that would never have been started without substantial tax credits, loans and grants backed by New York taxpayers.

“More than three years ago, Arunas Chesonis called me on the phone and said if the City and State would demolish Midtown Plaza, he would build the corporate headquarters of PAETEC on that site,” said Mayor Duffy late last year. “Despite the worst economic downturn since the Great Depression and having endless options to locate his company, Arunas Chesonis stayed true to his word. The rebirth of downtown Rochester now has a key cornerstone to build on.”

Now those plans may be gone with the Windstream.

Midtown Plaza was demolished to make room for PAETEC's new downtown Rochester headquarters, a project which may now be up in the air. (Picture courtesy: YNN)

The all-stock deal is expected to close in six months, and Windstream hopes to capitalize on PAETEC’s extensive fiber network and data centers to bolster service to its own business customers.  The increased capacity would also deliver improved service for the company’s residential DSL customers with a more robust Internet backbone.

Windstream, based in Little Rock, Ark., has been transforming itself away from its roots as a residential landline provider into a business and broadband services company, and today’s deal is an extension of that.

The company expects to win at least $100 million in new synergies from the merger, based on reduced capital expenditures required to build out Windstream’s own network, and from reduced costs from being a larger volume player.

But Windstream is also well-known for other cost-savings, through massive job cuts at the firms it acquires.  Last June, hundreds of workers at Iowa Telecom learned that.  After Windstream’s acquisition of D&E Communications in Pennsylvania, nearly 80% of D&E’s employees were shown the door.

For nearly 5,000 PAETEC employees, almost 900 of which live and work in Rochester, updating resumes may have just become job number one.

That’s ironic for a company whose founder wrote his own book: It Isn’t Just Business, It’s Personal: How PAETEC Thrived When All the Big Telecoms Couldn’t.

The first chapter is called “Putting People First,” and explains how the management of PAETEC recognizes the value its employees bring to the company: “Success in business begins and ends with people: the people you hire, the ones you partner with, and the ones you serve as your customers.”

Employees this morning may be wondering if Windstream shares Chesonis’ philosophy.

On this morning’s conference call, Windstream executives spoke about efforts to identify and preserve talented members of PAETEC’s executive management team as part of the newly-expanded company.  They had nothing to say about rank and file employees.

WHAM-TV spoke with George Conboy of Brighton Securities about this morning’s merger announcement, and the major implications the deal will have on PAETEC’s home base — Rochester, N.Y.  (5 minutes)

The Faith Baptist Church was told to live with Windstream's slow speed DSL or pay Time Warner Cable a $20,000 installation fee.

Despite claims from some in the state legislature that restricting fiber optic broadband development in communities like Salisbury is good for consumers and businesses, an increasing number of both are telling reporters a different story.

Faith Baptist Church, in the aptly-named community of Faith, N.C., can’t wait to sign up for Salisbury’s community fiber network — Fibrant.  They believe in a faster broadband experience the local phone company cannot deliver.

Casey Mahoney, a church member, told the Salisbury Post the church wants to ditch its slow speed DSL service from Windstream and cannot afford the $20,000 installation fee Time Warner Cable wants to charge the congregation to extend its broadband service to the church building.

If some in the state legislature have their way, the church will have a long, perhaps infinite wait for a fiber optic future.  A large number of legislators in the Republican-controlled state Senate are leaning towards voting for a bill custom-written by and for the state’s largest cable company — Time Warner Cable.  The legislation would micromanage community-owned broadband networks right down to the streets they would be allowed to deliver service.  Those terms, perhaps unsurprisingly, would not apply to the state’s largest cable and phone companies.

H.129, moving towards a hearing in the Senate Finance Committee Wednesday, would cement today’s marketplace for years to come — a duopoly Mahoney thinks makes Time Warner Cable’s $20,000 installation fee feasible.

He told the Post, “When you only have one company available in an area, that’s when they can say, ‘It will cost you $20,000 — take it or leave it.’ ”

Not everyone supports the cable industry’s efforts to lock down competition from community-owned providers.  Several local officials who represent underserved communities across the state are upset the legislation is being railroaded through the legislature with almost no discussion.

Misenheimer

“I am disappointed that the General Assembly is giving consideration to taking this right away from us without a single conversation taking place,” Kannapolis Mayor Bob Misenheimer complained to Sen. Andrew Brock (R), who serves Davie and Rowan counties.

Misenheimer is particularly upset cable operators want the right to restrict the service areas Fibrant can serve, and not allow the fiber network to expand service into Kannapolis.  In fact, Brock’s office has received similar communications from the Faith town board and mayors from Rockwell, Landis, China Grove, Granite Quarry, Spencer, Cleveland, and Concord — all who want to be included in the Fibrant service area.

“Isn’t it simply amazing that Fibrant is being bashed as a failure-waiting-to-happen by the sponsors of this bill while mayors across two counties are absolutely clamoring to get the service to their residents,” said Stop the Cap! reader Andy Brown who lives near Landis.  “How can Marilyn Avila and Tom Apodaca have the slightest bit of credibility on this issue when you see town leaders literally falling all over each coveting a service that these legislative-Friends-of-Time-Warner-Cable have predicted is a certain failure?”

“I want Fibrant in Landis myself, if only for the competition,” Andy shares.  “You know, the kind of competition legislators are supposed to support.”

Andy describes efforts underway to distort the record on H.129 in hopes of whipping up consumer support for it.

“There are some silly stories being told attacking community networks like Fibrant on local media websites, including the ridiculous claim communities will be required to sign up for the service if it comes to town,” Andy reports.  “These come from some of the same people who also claim fiber optic cables suffer from rot problems, wireless broadband is faster than fiber optics, and that Fibrant is part of the Obama Administration’s plan to socialize the Internet.”

“If these people want Windstream DSL or are happy paying annual rate increases far beyond the rate of inflation year after year, don’t sign up for Fibrant — but don’t dictate away that option for me,” Andy said.  “The only ‘takeover of the Internet’ I see is by Time Warner and CenturyLink.”

Windstream, one of America’s largest independent phone companies, has reported lower profits in the fourth quarter, declining four percent year-over-year to $72.4 million.  Windstream’s core business continues to decline — losing another 36,000 landline customers during the quarter, as Americans continue to drop traditional telephone service.

But Windstream’s ongoing acquisitions, as structured, are helping boost revenues on the company’s balance sheet.  Windstream completed four acquisitions in 2010: the phone companies Iowa Telecom, Nuvox and Q-Comm Corp, and a data center operator, Hosted Solutions.

Although boosted revenue numbers can temporarily improve a company’s share price, investors are unlikely to ignore Windstream’s ongoing decline in profits for much longer.  Windstream officials expect revenue growth for 2011 to remain flat, or potentially edge up by 3 percent. But part of that revenue growth comes from $40 million in broadband stimulus funding the company expects to receive from the Obama Administration during the year.

Windstream's 2009 announced purchase of Iowa Telecom expanded Windstream's reach.

Windstream has made inroads in expanding broadband service in its largely rural service areas.  The company added 12,000 broadband customers during the quarter, mostly for its DSL product.

Windstream’s results show a growing disparity between its residential customers and its business services unit.  While growth on the residential side has been flat to anemic at best, the company is finding better results from its business customers.  The decision to acquire a data center is part of the company’s growing strategy towards those clients.  Windstream plans to spend a considerable amount of its capital during 2011 on improving its data hosting and wireless backhaul product lines to service these customers.

“We’ve made great strides in our business channel, which now represents roughly half of Windstream’s total revenue and importantly, these revenues are growing,” said Brent Whittington, chief operating officer at Windstream.

Windstream’s acquisition plans for 2011 appear cooler than in previous years as it attempts to reduce its leveraged debt.  Most of Windstream’s growth has been attributed to its aggressive mergers and acquisitions strategy.  The company, created in 2006 from Alltel’s landline division and Valor Telecom has grown into a national player, serving nearly 3.4 million customers in 23 states.  Among its larger acquisitions — CT Communications (2007), D&E Communications (2009), and Iowa Telecom (2010).

Despite the lower profits, Windstream’s dividend payout ratio was 57 percent for the year, and the company expects to pay between 52 percent and 59 percent of earnings for 2011.

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)