Robert Cyran, writing for BreakingViews, is concerned about the profit capacity of telephone and cable companies in the coming years.

Noting that wired, high speed services often account for more than half the revenue of providers, anything that challenges those margins could provoke hostile reaction from Wall Street, dissatisfied with diminishing returns.

Cyran specifically calls out Frontier Communications, FairPoint Communications, and Qwest for not having wireless (mobile phone) divisions and for their high level of debt.

He’s also been absorbing Sanford Bernstein’s views on the telecommunications industry, which typically guarantees Verizon fiber-to-the-home cost bashing.  And yes, it’s in there:

True, in urban areas where Verizon and AT&T are laying optical fibre, their fixed-line businesses are doing relatively well. Customers like super-fast internet connections, and the companies can pump bundles of services such as voice and television through it. But in rural areas, fibre is prohibitively expensive to lay, and customers without high-speed service options have more reason to rely solely on a mobile phone.

Verizon and AT&T won’t escape unharmed. Verizon is spending about $4,000 per customer to lay fibre.

Verizon is spending money on fiber service that customers like and are generating healthy revenues, but the fiber optics “harms” Verizon.  At least the bashing is consistent.

Cyran claims cable’s biggest problem is that margins for their broadband divisions have been slowly dropping.  Should customers defect en masse to competitors, things could get bad fast:

And when businesses like these with high fixed costs see customers defect, margins can contract quickly and even go negative.

One way to guarantee mass defections is to try to gouge consumers with Internet Overcharging schemes.  In markets where equivalent levels of service are available, customers have the option of leaving the Overcharger behind for a more customer-friendly option.  Unfortunately, not every market has equivalent competitors.

Cyran’s predictions for the future?  Big troubles for Frontier, FairPoint, and Qwest who he predicts will see ongoing declines in their cash flow and increasing difficulty in paying back their debts.  The companies will also struggle with the limitations of aging copper infrastructure to provide advanced class services (high speed broadband, video, and telephone) customers increasingly expect.  In larger communities, many customers will leave for competitors who can provide those services (in these cases that means the cable company).  In rural communities, customers will increasingly rely on cell phones as their only telephone line.

Fairpoint’s stock has fallen about 70% over the last 12 months and Hawaiian Telecom, which Carlyle bought in 2005, filed for bankruptcy at the end of last year. Yet Quest and Frontier’s stocks both still trade at more than 10 times estimated 2010 earnings. Since there’s little chance customer defections from wired telecom businesses such as theirs will stop, their stocks could have much further to fall.

Stop the Cap! reader Bob, who gave Frontier Communications another shot for his broadband needs, finally threw in the towel and went back to Time Warner Cable when he got his current bill.  B0b was happy enough with his DSL service, despite the nagging sense DSL is really losing the speed race, with an increasingly growing gap between the fastest speed Frontier can offer vs. Time Warner Cable’s Road Runner service.  But the final straw came in this month’s bill.  It was messed up, and it turned out Frontier’s DSL was more expensive than Time Warner’s Road Runner, once taxes and fees were counted.

A Frontier Billing Mystery Sherlock Holmes Couldn't Solve

Welcome to my world.  I’m still dealing with billing nightmares prompted from my own test run of Frontier’s DSL “High Speed Internet Max” product, which wasn’t “High Speed” (maximum speed here was 3.1Mbps) and “Max” in giving me headaches because of the need to make repeated calls to the company to straighten out service and billing problems, which still aren’t fixed.

Frontier just sent its employees another one of those taunt-0-gram e-mails at Time Warner Cable’s expense, telling employees:

Time Warner continues to execute a seriously customer-unfriendly strategy for managing the pressure they feel from their customers’ usage of broadband services.

More proof that Time Warner is just focused on how to add PRICE INCREASES to their High-Speed services; Frontier’s focus has never wavered – we ADD VALUE for our customers.

I actually agree with most of that, and would be on board except for the Excedrin-size headache created by Frontier’s customer service in DeLand, Florida.  They’re confused about their own products and services and are prone to making lots of mistakes processing orders and requests.

Before taking shots at TWC, let’s get one’s own house in order first.

… Continue Reading

Verizon’s decision to exit several smaller communities across the country and hand operations over to Frontier isn’t threatening Comcast, one of the predominate cable providers in some of the larger communities Verizon is abandoning in Washington, Oregon, and Indiana.  Some of the impacted communities, particularly Fort Wayne, were being prepared for Verizon FiOS before this week’s announcement.  While Verizon and Frontier have agreed to continue building out the fiber to the home projects already underway, the cable operators serving these communities are likely to exploit the molasses slow transfer from one phone company to the other.

Comcast is busily deploying DOCSIS 3 in their service areas, and even with Verizon FiOS, cable operators with upgraded networks can readily compete for broadband business in any of their markets.

As Verizon rapidly loses interest in the markets it will be leaving, the slow transition can be part of a publicity campaign by the cable operator to convince customers to abandon the phone company, because ‘they’ve abandoned you.”

Donna Jaegers, a senior research analyst at D.A. Davidson & Company told Multichannel News, “Verizon has no real incentive to continue to invest more capital in these markets.”

“In that one-year window, the cable competitors have an easy sales pitch,” she said. “They can say, ‘Hey look, Verizon is already neglecting you — and for the next year they’ll have even more reason to neglect you.’ ”

Cable operators completing upgrades to their networks as a normal cost of doing business make competing with changes in a market a snap.  Some companies recognize the benefits of DOCSIS 3 and have upgraded without running a “pledge drive” to beg for money to do it.  Others have not.

The Communications Workers of America and the International Brotherhood of Electrical Workers, two unions representing employees at Verizon and Frontier, are skeptical about the benefits of Frontier acquiring telephone lines from Verizon.

In a joint statement, the two unions suggest the debt load from the deal will mean less money for broadband service deployment, not more.

The sale would move 4.8 million lines serving residential and business customers in 14 states to Frontier. The deal calls for Frontier to take on $3.3 billion in debt; Verizon gets that amount in debt relief. That leaves Frontier saddled with debt that will lessen the potential amount available for investment in high speed broadband deployment.

Similar tax-free transactions by Verizon, especially those involving the Reverse Morris Trust tax provisions, haven’t worked out so well, especially for consumers in New England now served by FairPoint Communications.

Having your local phone company disappear and get replaced by another provider isn’t an everyday occurrence for most people.  Customers are concerned about the impact of Verizon leaving their area, to be replaced by Frontier, an unfamiliar company for most parts of the country.  We have the video.

Let’s begin in Fort Wayne, Indiana, where WANE-TV interviews one worried local businessman already dissatisfied with what Verizon was charging, and wonder what surprises Frontier will bring: