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.)

TDS Telecom, the Madison, Wisc. independent telephone company serving about 1 million landline customers in rural and suburban communities in 30 states, is losing 5.5 percent of those customers every year, as consumers increasingly drop their landline telephone service.

In second quarter financial results reported to investors this week, TDS noted it is increasingly dependent on selling DSL broadband and managed data services to stabilize long term revenues and minimize line losses.  Like many independent phone companies, TDS’ largely rural service areas offer the opportunity of delivering broadband service to areas unserved by cable broadband, and unlikely to find robust cell phone or wireless data coverage.

Vicki Villacrez, TDS’ chief financial officer, reports the phone company now has a 60 percent penetration rate for residential landline customers taking DSL service.

TDS is losing more than 5% of their landline customers a year, which limits potential growth.

“High speed data subscribers grew 6% year-on-year.” Villacrez said. “We continue to attract healthy levels of new customers and they are taking higher speed. Over 80% of our data subscribers are taking speeds of three megabits or greater and 16% are taking greater than 10 megabit speeds.”

Because TDS customers are migrating to faster speeds, where available, the company’s average revenue per subscriber has remained stable at $37 per month.  That comes from a combination of the higher prices some customers pay for better service minus line losses, customer defections and retention offers delivering discounts to those threatening to switch providers.

TDS is also adopting similar strategies other phone companies are trying to hang onto customers: marketing their own triple play package of voice, broadband, and television service.  Like most smaller phone companies, TDS delivers voice and data over their existing copper wire network and relies on a resale arrangement with DISH Network to provide satellite television.

About 26 percent of TDS customers are enrolled in the company’s triple play package, up 2,700 customers in the quarter.

But the company’s cost control measures also signal TDS’ unwillingness to invest noticeably in expanding their DSL footprint to additional customers, or dramatically improve their existing network.  The company admits it plans to limit investment in new residential customers, and consolidated cash expenses were down 2.1% for the period, reflecting reduced spending.

Where is TDS willing to invest?  In data center assets and future acquisition opportunities.  TDS intends to broaden its presence in managed hosting and will continue to explore mergers and acquisition opportunities with other small, independent phone companies.

In the fall of 2009, South Carolina’s Budget and Control Board approved a fire-sale deal that leased out 95 percent of the state’s public wireless broadband spectrum to two private companies in a 30-year contract valued at $143 million, with the promise South Carolina would enjoy better broadband as a result.

Two years later, South Carolina’s broadband standing has been called “a Corridor of Shame” according to one provider that is trying to expand service while Clearwire and DigitalBridge — the contract winners, sit on their respective hands.

Both companies secured access to the statewide Educational Broadband Service spectrum they get to control with near-exclusivity for less than $5 million annually — around $1 a year for every South Carolinian that could eventually be served with improved broadband.  But nobody is getting service from either provider, indefinitely.

Columbia’s Free-Times notes neither company has concrete plans to bring broadband to anyone in South Carolina.  Clearwire, now in financial trouble, provides no service in the state and DigitalBridge refused to comment for the newspaper’s story.  Free-Times reporter Corey Hutchins could not find anyone able to provide any definitive information about either company’s short or long-term plans to hold up their end of the bargain.

Khush Tata, chief information officer for the S.C. Technical College System suspects one might not even exist.  So long as these two companies maintain a lock on the spectrum, nobody else can deliver the wireless service either.

“I haven’t seen any big cohesive strategy since [the leasing] at all,” Tata told the newspaper. “I think that it’s still based on market and business viability for each provider so they’re sort of on their own. Each provider, they invest based on their return on investment, which is good for their business, but as a state there isn’t any overall planning or approach — and I think the leasing of spectrum provided the largest overall strategy opportunity, which is a pity that it hasn’t panned out yet.”

Don’t tell that to industry-connected Connected Nation, whose South Carolina chapter claims the state is doing better than most providing broadband service.  The group has published maps, based entirely on data provided by the state’s phone and cable companies, that suggest most residents not only get the service, but have a choice in providers.

“That’s just plain bull,” says Stop the Cap! reader Jeff Lodge, who lives outside of Columbia.  Not only does the local cable company pass him by, but there is no DSL either.  He relies on an unlimited wireless data plan from AT&T and does most of his web browsing during breaks at work.

No Plans

“I live in a community of 22,000 people and only those along the main streets in this community have access to broadband,” he says. “The cable company doesn’t go far off the beaten path, and the here-and-there DSL some get is dreadful.”

Even Connect South Carolina acknowledges broadband speeds in the state are often woefully behind others in the region.  Many well-populated census tracts have no wired broadband at all.

With the pervasive lack of broadband, incumbent providers have been heavily lobbying the state to keep others off their spartan turf — pushing for the same type of legislation effectively banning community broadband networks that North Carolina passed earlier this year.

“It’s Time Warner Cable and AT&T… again, that are behind most of this effort, and those two companies treat South Carolina like a forgotten bastard child now,” Lodge says. “Can you imagine the arrogance of big cable and phone companies to keep competition away even when they, themselves, won’t compete?”

No Comment

One company trying to make a difference: GlobalCo and their partner On-Time-Communications.  A review of the under-developed website of the latter suggests neither entity is well-positioned or backed to deliver broadband without significant financial assistance.  But at least they recognize the problem.

“In South Carolina there’s 10 counties that made [the FCC’s report on broadband unavailability] and the majority of them come out of what’s commonly referred to as the ‘Corridor of Shame’,” Ronnie Wyche, GlobalCo’s vice president of sales told Free-Times.

None of this comes as a surprise to Brett Bursey, director of the South Carolina Progressive Network, who opposed the spectrum sell-off.

“The bargain basement lease of the nation’s only statewide broadband system was a theft from, and insult to, the taxpayers who built and own the system,” Bursey told the paper. “The system is not being developed by the companies who won the lease and the Legislature is ideologically opposed to public ownership.”

The Federal Communications Commission today released MEASURING BROADBAND AMERICA, the first nationwide performance study of residential wireline broadband service in the United States.  The study examined service offerings from 13 of the largest wireline broadband providers using automated, direct measurements of broadband performance delivered to the homes of thousands of volunteers during March 2011.

Among the key findings:

Providers are being more honest about their advertised speeds: Actual speeds are moving closer to the speeds promised by those providers.  Back in 2009, the FCC found a greater disparity between advertised and delivered speeds.  But the Commission also found that certain providers are more likely to deliver than others, and certain broadband technologies are simply more reliable and consistent.

Fiber-to-the-Home service was the runaway winner, consistently delivering even better speeds than advertised (114%).  Cable broadband delivered 93% of advertised speeds, while DSL only managed to deliver 82 percent of what providers promise.  Fiber broadband speeds are consistent, with just a 0.4 percent decline in speeds during peak usage periods.

Cable companies are still overselling their networks.  The FCC found during peak usage periods (7-11pm), 7.3 percent of cable-based services suffered from speed decreases — generally a sign a provider has piled too many customers onto an overburdened network.  One clear clue of overselling: the FCC found upload speeds largely unaffected.

DSL has capacity and speed issues.  DSL also experienced speed drops, with 5.5 percent of customers witnessing significant speed deterioration, which could come from an overshared D-SLAM, where multiple DSL customers connect with equipment that relays their traffic back to the central office, or from insufficient connectivity to the Internet backbone.

Some providers are much better than others.  The FCC found some remarkable variability in the performance of different ISPs.  Let’s break several down:

• Verizon’s FiOS was the clear winner among the major providers tested, winning top performance marks across the board.  Few providers came close;
• Comcast had the most consistently reliable speeds among cable broadband providers.  Cox beat them at times, but only during hours when few customers were using their network;
• AT&T U-verse was competitive with most cable broadband packages, but is already being outclassed by cable companies offering DOCSIS 3-based premium speed tiers;
• Cablevision has a seriously oversold broadband network.  Their results were disastrous, scoring the worst of all providers for consistent service during peak usage periods.  Their performance was simply unacceptable, incapable of delivering barely more than half of promised speeds during the 10pm-12am window.
• It was strictly middle-of-the-road performance for Time Warner Cable, Insight, and CenturyLink.  They aren’t bad, but they could be better.
• Mediacom continued its tradition of being a mediocre cable provider, delivering consistently below-average results for their customers during peak usage periods.  They are not performing necessary upgrades to keep up with user demand.
• Most major DSL providers — AT&T, Frontier, and Qwest — promise little and deliver as much.  Their ho-hum advertised speeds combined with unimpressive scores for time of day performance variability should make all of these the consumers’ last choice for broadband service if other options are available.

Some conclusions the FCC wants consumers to ponder:

1. For basic web-browsing and Voice-Over-IP, any provider should be adequate.  Shop on price. Consumers should not overspend for faster tiers of service they will simply not benefit from all that much.  Web pages loaded at similar speeds regardless of the speed tier chosen.
2. Video streaming benefits from consistent speeds and network reliability.  Fiber and cable broadband usually deliver faster speeds that can ensure reliable high quality video streaming.  DSL may or may not be able to keep up with our HD video future.
3. Temporary speed-boost technology provided by some cable operators is a useful gimmick.  It can help render web pages and complete small file downloads faster.  It can’t beat fiber’s consistently faster speeds, but can deliver a noticeable improvement over DSL.

More than 78,000 consumers volunteered to participate in the study and a total of approximately 9,000 consumers were selected as potential participants and were supplied with specially configured routers. The data in the report is based on a statistically selected subset of those consumers—approximately 6,800 individuals—and the measurements taken in their homes during March 2011. The participants in the volunteer consumer panel were recruited with the goal of covering ISPs within the U.S. across all broadband technologies, although only results from three major technologies—DSL, cable, and fiber-to-the-home—are reflected in the report.

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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