Telecom companies are cutting investment in their networks despite promises by Republican members of the FCC that repeal of net neutrality would inspire increased investment.

Charter, Comcast, AT&T, and Verizon have surprised Wall Street with dramatic cutbacks in spending and investment in their networks, with one provider admitting improving profit margins are now a bigger priority.

As a result, Wall Street analysts are revising down capital expenditure (Capex) estimates in reports to their investor clients.

“Comcast and Charter missed [third quarter] expectations for Capex and guided 2019 lower than previously planned,” reported Nomura in a note to investors. “We have lowered our combined 2019 Capex forecast for Comcast and Charter from $14.6 billion to $14.2 billion.”

AT&T’s drop in network spending was the most dramatic among the country’s top telecom companies. AT&T has declared an end to fiber broadband expansion and slashed spending forecasts from the $23 billion the company spent this year to as little as $20 billion next year, despite claiming it would dramatically expand its 5G service to over two dozen cities over the next 12 months.

In a recent conference call with investors, AT&T CEO Randall Stephenson said “now it’s time to reap the rewards of what we’ve been doing [and] begin to reward to shareholders these investments that we’ve been making over the last few years.”

Over the next three years, AT&T will pay shareholders $45 billion in dividends and spend $30 billion on buying back shares of AT&T stock to retire debt racked up buying Time Warner (Entertainment). In fact, AT&T will devote 50-75% of its free cash flow exclusively on retiring shares of AT&T stock, which is expected to benefit shareholders.

Verizon reported spending $4.4 billion in the third quarter on network upgrades, approximately $100 million less than expected. That is a concern because Verizon is trying to expand its costly 5G network, but is not devoting the investment dollars required to make such an upgrade happen without cutting investments elsewhere in the company. Verizon has told Wall Street analysts to expect stable Capex spending of $17-18 billion annually for 2019-2021. That will either mean Verizon’s 5G expansion will be modest or the phone company will have to slash investments in other areas, such as wireline, fiber to the home, or business services.

Many analysts expect 5G will be a top spending priority for AT&T and Verizon over the next several years, leaving little room in budgets for upkeep of the company’s legacy landline networks or its other products. Charter and Comcast have effectively stopped spending on large upgrade projects, also as part of improved profit-taking.

The spending realities are in direct conflict with the promises made by Republican members of the FCC. Trump-picked FCC Chairman Ajit Pai repeatedly claimed that banishing net neutrality would lead to significant increases in investment by the nation’s top telecom companies. In fact, the opposite has happened.

Gov. Newsom

California’s efforts to address the state’s ongoing rural broadband problems made little headway in 2019, as Democratic Gov. Gavin Newsom in the past week vetoed (or allowed to expire) the only two broadband measures surviving the treacherous journey through the California legislature.

Assembly Bill 1212 would have made rural broadband a priority for Caltrans — California’s Department of Transportation and the Department of Water Resources, including broadband on recommended lists of projects for funding consideration by two of the state’s largest pension investment funds: the California Public Employees Retirement System and the California State Teachers Retirement System. Current state law only allows pension boards to invest in in-state infrastructure projects that meet certain fiduciary responsibilities. By expanding investment projects to include telecommunications, funding from two major pension funds might have been unlocked and made available to future rural internet projects.

Assembly Bill 417, also known as the Agriculture and Rural Prosperity Act, included several measures targeting rural farming. Two passages in the bill would have included broadband expansion as a new priority for the California Department of Food and Agriculture (DFA):

Due to the central role of agriculture in rural California, it is necessary to achieve a detailed understanding of the economic value that agriculture brings to rural communities and to identify opportunities to improve agricultural productivity, including by increasing broadband access, advancing agricultural innovation, technology, and education, and supporting a well-trained, productive rural workforce, to benefit rural communities.

[…] Making recommendations to the secretary on actions to further the development of rural agricultural economies, including, but not limited to, increasing broadband access, providing technical, resource, and regulatory compliance assistance, advancing agricultural innovation and technology, establishing programs for education and workforce development, and evaluating recreation and tourism opportunities.

Several other proposed measures, including AB 1409 which would have created a fund for providing wireless hotspots for students and Wi-Fi service on school buses was killed last spring behind closed doors in the California Assembly’s Appropriations Committee. The annual attempt by AT&T and other telecom companies to write their own laws to deregulate themselves (this time AB 1366), was suddenly pulled from committee consideration by its author back in September.

That the two mild measures made it through the legislature to the governor’s desk was not surprising considering the sheer number of minor bills that pile up on Newsom’s desk. But for both to suffer quiet deaths through veto or expiration despite almost no public opposition speaks to the power of Sacramento insider politics.

Newsom’s explanation for killing AB 1212 was hardly compelling, as he explained he felt the measure was “unnecessary” because “existing law already encourages public retirement systems to invest in state infrastructure.” But that explanation ignores decades of state government bureaucracy, where agencies zealously guard their funding and protect their own existing project priorities to the hilt. AB 417 would have expanded the mission of the DFA, something the governor argued should only be done in the state budget and only within the specific context of the broader mission of the department, whatever that means. The head of the DFA was likely thrilled anyway.

Telecom consultant Steve Blum notes Caltrans and other state agencies were unlikely to ever consider rural broadband a funding priority, unless it was intended for their own use. Blum also believes the most likely suspects responsible for convincing the governor to kill both bills were the heads of the departments themselves.

“The simplest explanation for Newsom’s vetoes is that Caltrans, DWR and/or DFA staff asked him to do it, because those are jobs they don’t want to do,” Blum wrote on his blog. “That sort of opposition was why a Caltrans dig once policy bill was watered down in 2016.”

Blum believes the state’s largest phone companies will benefit the most from the outcome of the 2019 legislative session.

“Newsom’s vetoes bolster AT&T’s and Frontier’s rural monopoly business model, which redlines poorer and less densely populated communities and leaves them with low speed DSL service, if they’re lucky enough to get anything at all,” he wrote.

The loss of AB 1212 and 417 won’t change much for Californians waiting for rural broadband. Neither measure would have led to any immediate improvement in internet access in the less populated areas of the state. But the measures would have set a foundation to bring two more state agencies into the fight to tackle rural broadband issues.

Ultimately, just as in other states, a large amount of money will have to be found to wire those still without internet access. Governments and regulators can either make rural internet expansion a contingency of future merger deals or other business-government transactions or find suitable funding to subsidize the cost of internet expansion by for-profit companies, rural co-ops, or local governments willing to tackle the problem on the local level.

AT&T customers in Portland, Ore. discovered their cell phone bills increased this summer because the wireless company decided to pass along the costs of Portland’s Clean Energy Tax to its customers. Except AT&T is exempt from paying the tax, but wants customers to pay to recoup costs the phone company is not paying.

Portland’s Revenue Bureau told Willamette Week it classifies cell phone providers as utilities, and they are exempt from the tax.

Scott Karter, a manager in the Revenue Bureau, said it was up to AT&T to decide if it will refund customers for the charges it has collected since August.

“The code does not specifically address amounts that might be over-collected from customers,” Karter said.

AT&T had no comment.

AT&T will sell its operations in Puerto Rico and the U.S. Virgin Islands to John Malone’s Liberty Latin America, Ltd., setting up a virtual market monopoly for Liberty, which already owns cable operator Liberty Cablevision of Puerto Rico.

Liberty Latin America has agreed to pay $1.95 billion in cash to acquire 1.1 million AT&T cellular, landline, and internet customers in both U.S. territories.

AT&T intends to use the proceeds of the sale to reduce debt and allow the company to lay the foundation to buy back more of its own shares, pleasing investors. AT&T had originally sought up to $3 billion for the Caribbean networks, partly acquired from a 2009 acquisition of Centennial Communications, which cost AT&T less than $1 billion.

Analysts say the low selling price shows AT&T is feeling pressure from activist investor Elliott Management, which has been pushing AT&T to divest non-core assets. The selling price was also impacted by the distressed state of AT&T’s infrastructure and customer base, impacted by Hurricane Maria in 2017, which damaged both the Virgin Islands and Puerto Rico and displaced hundreds of thousands of residents.

Liberty already has a major presence in Puerto Rico through its cable system — Puerto Rico’s largest pay television and broadband provider. Cable tycoon John Malone will effectively control Puerto Rico’s largest wireless phone and cable company. Claro, Puerto Rico’s landline provider, will be its chief competitor.

The two companies said they expect the deal to close within six to nine months.

Frontier Communications is preparing a detailed plan for bondholders explaining how the company hopes to cut its $17 billion in debt before it faces the possibility of bankruptcy.

The Wall Street Journal reports Frontier is ready to begin formal negotiations with those holding its debt to create a new payback plan before it faces the first of several repayment deadlines for bonds running into the billions, starting in 2022. But the strategy is risky because if any of the company’s major bondholders disagree, it could put Frontier on a fast track to Chapter 11 bankruptcy reorganization.

Frontier’s debt problems are a consequence of its decision to expand its wireline footprint through acquisitions of castoff copper landline networks being sold primarily by Verizon Communications and AT&T. Critics have repeatedly called out Frontier for bungling network transitions with extended service outages, billing problems, and other customer service-related failures that left customers and some state regulators frustrated and alienated. The company is still facing regulatory review in states like Connecticut, where it failed to properly manage a customer cutover from AT&T’s systems to its own, and in Utah, West Virginia, California, and Florida where similar cutovers from Verizon Communications left more than a few customers without service and months of billing problems.

As a result, Frontier lost many of the customers it acquired, with many unwilling to consider doing business with the phone company ever again.

Although Frontier’s latest acquisitions of Verizon landline customers in California, Texas, and Florida included large Verizon FiOS fiber to the home territories, Frontier customers continue to disconnect service at a greater pace than the phone company’s chief cable competitors — Comcast and Charter Spectrum. Customer defections are even worse in large sections of Frontier’s stagnant “legacy” markets — service areas that have been managed by Frontier or its predecessor Citizens Communications for decades. That is because almost all of those legacy markets are still serviced by decades-old copper wire networks, many capable only of providing low speed DSL internet access.

Frontier’s large debt load is cited as the principal reason the company cannot embark on upgrade efforts to replace existing copper wiring with optical fiber. In fact, virtually all of Frontier’s fiber service areas have been acquired from AT&T or Verizon. Frontier executives have attempted to placate shareholders by promising to aggressively manage costs. But promises of dramatic savings have proved elusive and frequent media reports have emerged covering extensive service outages, poor network maintenance, ongoing billing and customer service issues, and inadequate staffing to address a growing number of service outages and problems. In several states, repeated 911 outages have triggered regulator investigations with the prospect of stiff fines.

Three Frontier insiders have privately shared their insights with Stop the Cap! about ongoing frustrations with the company and the most recent developments.

“Upper management has no comprehension that in many of our markets, customers have choices and they abandon us when all we can sell is DSL service at speeds often less than 12 Mbps,” one senior regional executive told us. “Our retention efforts are so poor these days, representatives are not really expected to rescue accounts because in most cases there is no legitimate reason to do business with us. In some states where there are high mandated surcharges, we cost more than our cable competitors.”

Another mid-level executive in one of Frontier’s largest legacy markets — Rochester, N.Y., said morale is low and a growing number of colleagues believe the days to bankruptcy are short.

Frontier Communications debt load.

“Our loyal customers are literally dying off, as their adult children disconnect decades-old landline accounts,” said an executive who wished to remain anonymous because they were not authorized to speak with the media. “The customer numbers have been ugly for a long time and are getting worse. Our recently retired customers who have had DSL and voice service with us since the 1990s are disconnecting because some have gone with Spectrum and others are moving out of the area. Some of these customers hate Spectrum and won’t do business with them no matter the price, but we are losing their business anyway when they move out of state.”

The Rochester executive noted Frontier has an impossible job trying to sell its internet and voice products against Charter Spectrum.

“Their offers are $40 a month for 100 Mbps internet and $10 for unlimited local and long-distance calls,” the executive noted. “Ours costs nearly $30 just for the phone line after taxes and fees, and how can you sell someone DSL that delivers less than 6 Mbps to many parts of a market still served by copper trunk lines to a central office several miles away? They also find out they have to lease our modem at an additional fee and there are other fees in the contract many customers have learned to look for. Answer: you can’t.”

A Frontier executive in Ohio shared a similar story.

“We hold our own in our rural markets where we can offer a customer better than dial-up internet, and our service is very good if you live in an area where we expanded broadband thanks to FCC subsidies. Some of these new areas are even served by fiber,” the executive explained. “The problem with this is fewer people live in rural areas and these places cost a lot more to maintain when we dispatch service crews or have to run new cable. For Frontier to be truly successful, we have to get better internet service into our larger older markets, but that means pulling copper off poles and putting up fiber and there is just no interest from the higher ups to spend the money to do this. So instead the company bought new territories to keep revenue numbers up, but we are also quickly losing many of those customers to cable too. I really don’t know what we will do when wireless companies offer 5G internet.”

Some Frontier bondholders recognize Frontier must reduce its debt to have the financial resources to expand fiber service. Others want the company to shed its legacy copper service areas (while keeping FiOS/U-verse enabled markets) either to regional companies willing to invest in upgrades or to hedge funds that would likely ring whatever remaining value still exists out of these abandoned service areas. Some suspect these hedge funds would also load up the spinoff companies with even greater debt to facilitate dividend payouts and other investor-friendly rewards.

It will be up to state and federal regulators to protect Frontier’s customers as the two emerging groups of conflicting bondholders angle to protect their investments, perhaps at the risk of reliable phone and internet service.

The Wall Street Journal:

One, including Elliott Management and Franklin Resources, pushed for an exchange of their bonds at a discount to their face value for new secured debt that would be paid before unsecured debt in a potential bankruptcy.

Still, bondholders including GoldenTree Asset Management have warned the company against doing such a swap since 2018, arguing it violated the terms of their bonds.

The company this week reached out to Houlihan Lokey, which represents a group of bondholders that includes GoldenTree—as well as JPMorgan Chase & Co., Oaktree Capital Management and Brigade Capital Management—to sign up to view a confidential restructuring proposal, a person familiar with the matter said. That group has yet to gather enough holders to form a majority, people familiar with the matter said.