Losing customers.

A year after Frontier Communications assumed control of Verizon’s assets in the Pacific Northwest, customers are fleeing the company’s inherited fiber-to-the-home service FiOS, after announcing a massive (since suspended, except in Indiana) 46 percent rate hike for the television portion of the service.  A new $500 installation fee has kept all but the bravest from considering replacing customers who have left for Comcast and various satellite TV providers.

Frontier’s second-quarter financial results revealed the company has lost at least 14,000 out of 112,000 FiOS TV customers in the region (and in the Fort Wayne, Ind. market, where the service is also available.)

Early reaction to the original rate hike announcement started customers shopping for another provider — mostly Comcast, which competes in all three states where Frontier FiOS operates.  Even after the rate hike was suspended in some markets, intense marketing activity by Frontier to drive customers towards its partnership with satellite provider DirecTV managed to convince at least some of those customers to pull the plug on fiber in return for a free year of satellite TV, although an even larger number presumably switched to the cable competition.

D.A. Davidson, a financial consulting firm, told The Oregonian the message was clear.

“They would love to get rid of the FiOS TV customers,” Donna Jaegers, who follows Frontier, told the newspaper. “They’re programming costs are very high compared to the rates that they charge.”

Jaegers said Frontier Communications completely botched their efforts to transition customers away from FiOS TV towards satellite, because most of those departing headed for the cable competition, attracted by promotional offers and convenient billing.

Many others simply don’t want a satellite dish on their roof, and are confounded about Frontier’s message that satellite TV is somehow better than fiber-to-the-home service.

Frontier admits its FiOS service is now underutilized, but claims it will continue to provide the service where it already exists.

Wilderotter

Frontier Claims Its DSL Service is Better Than Cable Broadband

Frontier’s general business plan is to provide DSL service in rural areas where it faces little or no competition, and most of Frontier’s investment has been to upgrade Verizon’s landline network to sustain 1-3Mbps DSL service, for which it routinely charges the same (or more) for standalone broadband service that its cable competitors charge for much faster speeds.

But Frontier Communications CEO Maggie Wilderotter says their DSL service is better than the cable competition.

“A key differentiator between our network and cable competition is that you consistently get the speed you pay for,” Wilderotter told investors on a conference call. “There’s no sharing at the local level. High demand for bandwidth-intensive applications like video are putting pressure on all wired networks. To that end, we want to make sure that we have more than enough capacity to satisfy the expectations of our customers. We’re spending capital in all parts of the network with specific emphasis in the middle mile, which will enable us to consistently deliver a quality customer experience for our customers of today and tomorrow.”

Frontier Communications CEO Maggie Wilderotter defends anemic broadband additions during the 2nd quarter of 2011 and tries to convince investors DSL service is better than the cable competition. August 3, 2011. (4 minutes)
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Netflix Traffic Represents 25% of Frontier’s Broadband Traffic; Online Video — 50%

Wilderotter admitted Frontier’s broadband network is overcongested in many regions, which she partly blamed for the company’s anemic addition of new broadband customers.

She noted Netflix, which has itself consistently rated Frontier the worst wired broadband provider in the country for being able to deliver consistent, high quality access to their streaming service, represents one-quarter of all capacity usage of Frontier’s broadband network.

“Video is about 50 percent,” Wilderotter added.  In an investor conference call, she explained network congestion in more detail:

“In [the second quarter], we had many areas with unacceptable levels of network congestion, which negatively impacted our growth in net high-speed additions.” Wilderotter said. “We believe all of the major congestion issues will be fixed by the end of [the third quarter], and that will enable us to drive higher growth and net broadband activation in [former Verizon service areas.]”

“What we decided to do is to go for fixing the middle mile, which is the [central office] to the […] neighborhood and to expand that capability by 100-fold. And then also, expand from the [central office] out to the Internet and make sure that we have huge capacity to deliver and receive capability to our customers. So when we sell 6 meg, 10 meg, 25 meg, 50 meg, the customer gets what we sell them and that was extremely important for us.”

“So what we did is in the areas where we saw the congestion increase based upon usage increases, and we’ve built new households. We’ve held off on marketing to a lot of those new households until we fixed the congestion problem because we didn’t want to exacerbate what we had already. We’ve shifted capital in terms of the mix of how we’ve spent capital to fix this problem. I’d say we’re probably 75% of the way there in fixing congestion. This quarter is another big quarter for us to get all of the major issues out of the network, which will allow us in the back end of this quarter through the fourth quarter, to really start pushing the penetration levels where we’ve built new households in the areas that have been affected by congestion.”

Frontier Introduces Line Bonded DSL — Two Connections Can Improve DSL Speeds

Frontier Faster? Frontier announces line bonded DSL.

Frontier Communications also announced the introduction of Frontier Second Connect, a DSL line bonding product that delivers two physical connections to a single household.  Line bonding allows for improved broadband speeds.

“Second Connect gives our customers two exclusive connections in one household, and we’re the only provider in every market that can do that,” Wilderotter claimed.

In more urban markets, Frontier’s DSL speeds are woefully behind those available from most cable competitors.  Frontier has begun upgrading some of their legacy service areas and retiring older equipment in an effort to improve the quality of service.

“The real initiatives that we have underway are called middle mile, interoffice facilities, as well as some of the more aged equipment that’s in the network,” said Dan McCarthy, Frontier’s chief operating officer. “So as we go through, there’s about 600 projects that are underway today that will improve both the speed and capability.”

“We’ve inherited markets that there has not been upgrades to capacity in these markets for many years and fixes to the networks, plus the elements as the DSLAMs, even the DSLAMs themselves are old,” Wilderotter said. “So we’re replacing network elements in the neighborhood. We’re splitting them and moving customers to other network elements to make sure that they have a good experience.”

Frontier executives answer a question from a Wall Street banker about DSL speeds and congestion problems on Frontier’s broadband network. A detailed technical discussion ensues as the company tells investors it is redirecting some capital to fixing Frontier’s overcongested network. August 3, 2011. (5 minutes)
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Frontier Still Losing More than 8% Of Its Landline Customers Every Year

Despite broadband rollouts and incremental improvements, more than eight percent of Frontier’s landline customers disconnect service permanently every year.  Frontier called that disconnect rate an improvement over its line losses last year, which exceeded 11 percent in some areas.

“Total line losses improved to an 8.6% year-over-year decline, our lowest level since taking ownership when the pro forma loss rate was 9.7%,” reported Wilderotter. “We also improved [the] loss rate [in former Verizon service areas to] 10.1% compared to 11.4% in Q2 2010.”

Most of Frontier’s departing customers are switching to cable providers and/or cell phone service.

(Update 8-23-2011: We are now told in many areas, Frontier’s Second Connect service is not actually a bonded DSL product, but rather a “dry loop” second DSL line that carries the same speed as your primary line.  Presumably, household members can divide up who uses which DSL circuit for Internet access.  The charge for Second Connect in ex-Verizon service areas is $14.99 per month plus a second mandatory monthly modem rental fee of $6.99. If the web link does not work, it means the service is not available in your service area.)

Leap Wireless is trying to save face on less-than-impressive second quarter financial results showing the company is losing its mobile broadband customers who are increasingly weary of Cricket’s price increases and speed throttles.

The company lost at least 132,000 broadband customers since the first quarter, mostly due to price increases, reduced usage allowances and “network management” practices, which reduce speeds to near dial-up for customers who are deemed to be “using too much.”

“On broadband, we tightened our focus to more profitable customers while shedding less profitable ones,” said Leap Wireless CEO Douglas Hutcheson.

Internet Overcharging Facts of Life: What 'Network Management' tools are really used for. (Courtesy: Cricket's Second Quarter Results Investor Presentation)

Cricket recently announced increased pricing on their usage limited plans: $45/month for 2.5GB, $55/month for 5GB, or $65/month for 7.5GB.

With a less-than-robust regional 3G network and higher pricing, broadband customers have decided to take their business elsewhere, despite the company’s recently announced expanded data roaming agreement with Sprint.

Cricket acknowledges their “increased network management initiatives” are partly to blame for the loss, but the company also says increased prices for mobile broadband devices, which used to be available for free after rebate, are also responsible.  Cricket’s least expensive mobile broadband modem now runs just under $90.

Company officials told investors the losses “were expected,” and that the company has been trying to make up the difference with higher value smartphone data plans.  Mobile broadband customers tend to consume more data than smartphone users, so the company’s emphasis on smartphone data users, who use less, will deliver increased revenue at a reduced cost.

Cricket’s CEO explains the company’s renewed focus on keeping highly-profitable mobile broadband customers while effectively getting rid of “heavy users” who have been targeted with aggressive speed throttling over the past year, and now face higher prices for lower usage allowances. Also explored: Cricket’s future 4G LTE network buildout.  August 3, 2011.  (4 minutes)
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Cricket's declining mobile broadband business

In fact, the company’s presentation to investors credits network management tools for driving away “higher usage customers,” allowing Cricket to reap the benefit of “improved revenue yield per gigabyte.”  In short, that means Cricket profits handsomely from data plans they hope customers will only occasionally use.

One of Cricket’s biggest product priorities this year is pitching its Muve Music service, bundled into an all-inclusive $55 wireless prepaid phone plan.  It gives Muve phone customers unlimited access to an enormous downloadable music library accessed on the phone.  Since the service does not allow customers to transfer the music to other devices, record companies are happy to participate.

The biggest downside for some is that the Muve phone becomes your music player — a phone many customers consider a work in progress.  Some critics have labeled the service a “total fail” because of sound quality and DRM restrictions. But since the service is already bundled into the wireless plan at no additional cost, more than 100,000 customers are using it, downloading at least 130 million songs since it was first introduced in January.

Muve Music is another way Cricket is trying to differentiate itself from other wireless providers, and the company may try to expand the Muve Music service to much-more-profitable smartphones in the near future. Cricket hopes to begin selling no-contract smartphones at prices below $100 by Christmas.

Cricket executives answer questions from Wall Street about how the company intends to deal with a decline in mobile broadband customers, and explains their use of network speed throttles. Cricket plans to “follow industry trends” and experiment with “session-based” throttles sometime next year. These allow customers to pay an extra charge to temporarily remove the speed throttle when they need additional bandwidth. It’s just one more source of lucrative revenue from conjured up network management schemes.  August 3, 2011.  (4 minutes)
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Cricket is also planning further expansion of its ‘welfare wireless’ plan — a Universal Service Fund-backed home phone replacement for customers receiving public assistance.  The Lifeline USF subsidy is designed to provide affordable home telephone service to the most income-challenged among us.  Many landline providers charge around $1 a month for the service (before fees), and then charge for every call made.

Cricket’s implementation of this subsidy could draw some controversy because it delivers a $13.50 monthly discount off -any- of their rate plans.  That means qualified customers could pay just over $40 a month for a high end smartphone service plan, subsidized by every telephone ratepayer in the country.

Cricket also plans to launch LTE 4G service starting in early 2012.

Cricket plans to introduce 4G LTE service in 2012.

Despite the loss of more than 128,000 video subscribers, Time Warner Cable more than made up the difference with rate increases on equipment, programming, and broadband to score a 23 percent increase in earnings in the second quarter of 2011.  For the period of April-June, Time Warner earned a profit of $420 million, nearly $80 million more than the same quarter last year.

Cable Television

Time Warner CEO Glenn Britt continued to blame the loss of video subscribers on the housing crisis and economy, suggesting the cable operator’s prices have gotten too high for some customers to handle, and they’ve disconnected cable television service as a result.  Britt also continues to downplay the impact of online video allowing for consumer cord-cutting, suggesting instead that increased competition from phone companies and satellite providers are creating a problem online video isn’t.

As a result, Time Warner is refocusing its efforts on marketing packages to three segments it particularly wants to attract — the very well-to-do, the Latino community, and the income-challenged.

Time Warner officials noted that many of their customers have continued to pare back their packages to cushion against the company’s rate increases.  For the last few years, consumers have cut premium movie channels and extra tier add-ons.  Now customers are targeting Time Warner’s DVR service as a route to a lower cable bill.  Many are returning their DVR boxes to save money, or are not keeping the service as a promotion expires.  Time Warner often bundles DVR service into new customer promotions for no additional charge.

For these income-challenged consumers, Time Warner is promising to develop new packages of services at reduced prices.  That likely means the expansion of the company’s “budget tier” — a package of selected basic cable networks, excluding expensive sports programming, currently testing in two markets for around $50 a month.

But the company is also reporting success with its wealthier customers, many who are adopting Time Warner’s super premium Signature Home service, from which the company collects an average of $220 per month per customer.  Time Warner is also ramping up promotion of its cable services to Spanish-speaking audiences in the Latino community — customers it may have under-served in the past.

The company also reported declines in video-on-demand revenue, principally adult pornography pay-per-view content consumers are now watching on the Internet for free.

Broadband

Among the brightest stars for Time Warner Cable continues to be broadband service, which is increasingly important… and profitable for the nation’s second largest cable operator.  With “pricing strength,” Time Warner has successfully adopted a series of rate increases for Road Runner service, increasing revenues along the way.  The company also reports success with its DOCSIS 3 rollouts, now reaching 60 percent of its cable subscribers.  CEO Britt says the cable company expects to complete DOCSIS 3 upgrades nationwide by the end of 2012.  A noticeable percentage of customers are upgrading to premium-priced, faster speed tiers as a result.

Despite the investment in DOCSIS 3, Time Warner Cable continues to slash the amount of capital it is investing in its network.  So far this year, capital expenditures are down 7.4 percent to $1.36 billion.  Chief Operating Officer Rob Marcus predicts Time Warner will spend no more than $3 billion on its systems in 2011, despite plans to continue broadband upgrades and convert their cable systems to all-digital operations.  So far this year, Time Warner has earned over $2.2 billion from its broadband division alone, up 9 percent from last year.  The company attributes most of that growth to rate increases and customers upgrading their service.

Other facts:

• Time Warner’s wireless mobile broadband has failed to spark much interest from consumers, perhaps because they realize it comes from Clearwire, a company Time Warner CEO Glenn Britt seemed unimpressed with in today’s conference call.  He made a point of telling investors the cable company is under no obligation to invest anything else in the venture;
• Time Warner Cable is taking a new interest in Wi-Fi, deploying networks in New York and Los Angeles, in the hope the company can boost interest in a “quad-play” of cable, phone, Internet, and wireless broadband/Wi-Fi that consumers have taken a pass on thus far;
• The company’s new super data center in Charlotte, N.C., will provide a national “head-end” for IPTV video, currently supplied from a facility in Denver.  This will principally benefit iPad users using the company’s app to stream online video.  The company hopes to eliminate regional and local distribution efforts as a cost-savings measure, consolidating national distribution through Colorado and North Carolina;
• The company’s next version of TWCable TV — the aforementioned iPad app, is due out in a few weeks and will include text searching for individual shows.  Whether it corrects the ludicrous inability for the app to consistently stream video is another question;
• Competition for new customers has been responsible for a number of disconnects.  One satellite provider is pitching Time Warner customers on a $30 a month video package that includes the NFL Sunday Ticket for free.  Verizon FiOS has increased its marketing of Time Warner customers, offering its own triple-play package for $99 a month.  AT&T U-verse has their own triple play packages as low as $89 a month, with a substantial mail-in rebate offer good for over $100.  But Britt warns the lack of change in the “average revenue per subscriber”-numbers from competitors probably means consumers are paying substantially more thanks to fine print-surcharges and fees;
• Time Warner is still trying to sign agreements for its TV Everywhere project, particularly for HBO Go, but the terms are evidently still not acceptable to the cable company.

Our earlier coverage, seen below, covers Britt’s remarkable comments about usage-based pricing.  He was certainly off the usual industry playbook today, even going as far as telling investors what we knew all along: bandwidth costs bear almost no relationship to the prices charged for broadband service.  That’s one we’ll tuck away and remember.

Time Warner Cable CEO Glenn Britt highlights the results from the second quarter, covering cable-TV, broadband, and other products. July 28, 2011. (6 minutes)
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Another remarkable admission from Time Warner CEO Glenn Britt came at the end of today’s investor conference call.  In response to claims by some cable companies of incremental bandwidth costs running 40-50 cents per gigabyte (a number we strongly dispute at Stop the Cap! for being at least ten times too high), Britt made the debate over bandwidth costs moot by saying they really don’t have anything to do with how Time Warner Cable prices its broadband service.

“I think that the conversation about usage based pricing should not be tied to a conversation about costs,” Britt said.  “This is not a rate of return regulated monopoly industry like AT&T was before 1984.  We have a lot of different products, a lot of different offerings and we’re aiming at different segments and different combinations and the pricing will relate to that.  This is not a strict cost-base thing so those facts are interesting but not terribly relevant to pricing.”

That clears that up quite nicely.  We’ll be sure to remember that should the cable company revisit its customers with another Internet Overcharging scheme blamed on bandwidth hogs.

Time Warner Cable CEO Glenn Britt is asked what Time Warner Cable is paying for bandwidth costs. Britt said the question is largely irrelevant, because those costs have almost nothing to do with how the company prices its broadband service. July 28, 2011. (1 minute)
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Britt

On this morning’s conference call for investors, Wall Street continued to pound Time Warner Cable CEO Glenn Britt about when the company would introduce an Internet Overcharging scheme for broadband customers in the form of so-called “usage based billing.”

This quarter, the pressure came from Deutsche Bank’s Doug Mitchelson, who used the occasion to remind Britt he called usage pricing “inevitable” and wanted to know when the company was going to get the ball rolling on the pricing scheme.

Britt was unprepared to answer, other than to make comparisons about his “inevitable” remark with wireless carriers, who have said the same thing about the end of unlimited use plans in wireless, a different technology.

After following Britt’s public statements for more than two years about this subject, we detected a moderating view.  Britt told investors he believes “there should remain an unlimited plan for those who want to buy that,” and suggested Time Warner Cable might not be interested in applying usage pricing on every level of its broadband service.  That could be good news, so long as Britt doesn’t believe the price of “unlimited” should be the $150 a month the company proposed in 2009.

“We’re more focused on affordability and lower income people who might be light users and might seek to pay less because they use less,” Britt said. “That’s a much better context than the usual ‘oh those people using all the bandwidth’ and caps and all that stuff.”

Britt added he doesn’t anticipate having caps across the board.

Mitchelson explained in a follow-up question why Wall Street is interested in the adoption of usage pricing – an increase in “ARPU growth” — the average revenue earned from each broadband customer in the form of more expensive usage plans.

Britt acknowledges what Stop the Cap! has predicted all along — ARPU growth can be realized instead from subscribers upgrading to faster speed tiers, which carry higher costs.  Britt told Mitchelson he, and other investors, can get the ARPU growth they crave by looking at those numbers instead of earnings from usage based pricing.

How long before Wall Street demands both speed-related ARPU growth and extra earnings from usage pricing is an open question, but Britt’s latest remarks represent a significant shift in attitude about pricing broadband, potentially because the company has a new found appreciation for the limited capability of customers to keep opening their wallets to pay higher and higher cable bills.  That was clearly in evidence as the company tried to explain another quarter of declining cable TV customers, many forced out of the service because of its high cost.

Time Warner Cable CEO Glenn Britt answers a question about usage-based pricing from Deutsche Bank’s Doug Mitchelson, just one of a parade of Wall Street banks pushing broadband providers to adopt Internet Overcharging to increase profits. July 28, 2011. (2 minutes)
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