Spending priorities: mergers & acquisitions, not upgrades.

Since 2012, two of the country’s largest phone companies spent enough money — $281.4 billion — to wire at least three-quarters of the  nation with fiber-to-the-home service and deliver vastly improved rural internet access to the rest of the country. Instead of doing that, AT&T and Verizon used the money to buy their competitors and content creators including AOL and Yahoo.

A 2017 Deloitte Consulting analysis estimates the United States will need between $130 and $150 billion in investment over the next 5–7 years to upgrade at least 75% of homes and businesses to fiber to the home service, with the remaining 25% serviced by technologies including 5G that are capable of delivering broadband speeds greater than the federal minimum standard of 25/3 Mbps.

AT&T could almost deliver the country a major broadband upgrade all by itself, having spent $138 billion on mergers and acquisitions in the past six years. Verizon could have easily handled the entire cost, but instead spent its $143.4 billion on business deals, including $130 billion to buy out former Verizon Wireless partner Vodafone. Among independent phone companies, things look equally bad. Frontier Communications is saddled with so much debt after acquiring former AT&T customers in Connecticut and Verizon customers in more than a dozen states, it has been forced to suspend its shareholder dividend and has been only able to make token investments in network upgrades for its mostly copper wire infrastructure in its original “legacy” service areas and a mixture of copper and fiber in acquired service areas. Both CenturyLink and Windstream have refocused many of their business activities on the commercial services marketplace, including the sale of hosting, business IT services, and cloud server networks.

More recently, both AT&T and Verizon have raced into content company acquisitions, buying up AOL, Yahoo, and Time Warner to offer their respective customers additional content. The phone companies are diversifying their business interests away from simply offering phone lines and internet access. At the same time, many of these acquisitions are depleting resources that could be spent on critical network upgrades.

The article in Light Reading claims the telecom industry’s traditional financial model of borrowing money to build networks and upgrade others is broken, because telecom companies now prefer to spend money acquiring other companies instead. Although AT&T has, in recent years, been more aggressive than Verizon in deploying fiber to home service, both companies have resisted committing large amounts of capital to a territory-wide fiber buildout, preferring to spend smaller sums to incrementally upgrade their networks in selected areas over the next decade. But the merger and acquisition teams at both companies are far less cautious, given the go ahead to pay handsomely for companies that often have little to do with providing telephone or internet service.

Light Reading reports AT&T’s debt climbed from $59 billion in 2010 to $126 billion at the end of 2017. Verizon’s debt increased from $45 billion to $114 billion. But those acquisitions have done little to attract new customers. Both companies’ operating cash flows have barely budged — $39 billion annually at AT&T (up from $35 billion) and Verizon’s actually declined from $33 billion in 2010 to $25 billion in 2017.

Mergers and Acquisitions (2011-2018)

AT&T

• 2012: AT&T buys $1.93 billion worth of spectrum from Qualcomm.
• 2013: AT&T buys Leap Wireless (Cricket) for $1.2 billion.
• 2014: AT&T pays $49 billion for the DirectTV, issuing $17.5 billion in debt in April.
• 2015: AT&T buys out assets from bankrupt Mexican wireless business of NII Holdings for around $1.875 billion.
• 2018: AT&T pays $207 million to acquire FiberTower.
• 2018: AT&T is cleared to merge with Time Warner in a deal valued at more than $84 billion.

Verizon

• 2011: Verizon acquires Terremark for $1.4 billion.
• 2014: Verizon buys out Vodafone’s 45 percent stake in Verizon Wireless, valued at $130 billion, with a mixture of stock and debt.
• 2015: Verizon buys AOL for a deal valued around $4.4 billion.
• 2017: Verizon acquires Yahoo Internet assets for $4.5 billion.
• 2017: Verizon buys spectrum holder Straight Path Communications for $3.1 billion roughly double rival AT&T’s offer, to build up 5G spectrum and footprint.

The more debt (and debt payments) that pile up at the two companies, the less money will be available to spend on fiber upgrades. In fact, there is evidence these companies are hoping to further cut costs in their core landline network operations. Some regulators have noticed. Verizon was forced to make a deal with New York regulators requiring the company to spend millions replacing failing copper-based facilities and upgrade them to fiber and remove or replace tens of thousands of deteriorated utility poles. Verizon faced similar action in Pennsylvania.

AT&T has spent millions lobbying the federal government to permanently decommission rural America’s landline network and replace it with a wireless alternative, while also working to replace the current regulated telephone network with deregulated alternatives like internet and Voice over IP phone service.

Wall Street analysts have occasionally questioned or at least expressed surprise over some of the phone companies’ odd acquisitions:

• Verizon acquired Terremark to beef up its cloud-based and server-hosting businesses. But shortly after acquiring the company, Verizon began replacing top management, sometimes repeatedly, and ultimately divested itself of its data center portfolio, including Terremark, just five years later.
• AT&T bought DirecTV to help it reduce wholesale TV programming expenses for its U-verse TV subscribers. But DirecTV has lost more than one million satellite TV customers since AT&T acquired it in 2014, despite new marketing efforts to convince would-be U-verse TV customers to choose DirecTV instead.
• Verizon saw value in web brands that were major players more than 18 years ago but are mostly afterthoughts today. The company spent almost $9 billion to acquire Yahoo and AOL, and their low quality content portfolios, which rely heavily on clickbait headlines, advertiser-sponsored content, and articles designed to maximize mouse clicks to boost the number of ads you see.

“The telcos are trying to diversify into content when they should instead be focused on their core business — building networks and charging for value-added technology,” said Scott Raynovich, founder and principal analyst at Futuriom. “It’s clear they see content as part of the value-add but customers so far don’t seem to be reacting that way. It’s clear they are allergic to paying higher prices for bundled content.”

AT&T and Verizon’s customers are not clamoring for more content deals. When surveyed, most want better internet service at more affordable prices.

As gigabit internet becomes more common across the United States, some ISPs are seeking a speed advantage by offering even faster speeds to residential and business customers. On Tuesday, Nokia announced Frontier Communications and Rochester, N.Y.-based Greenlight Networks would be upgrading their fiber networks to the company’s XGS-PON solution, which can handle 10 Gbps upload and download speeds.

“Next Generation PON technologies such as XGS-PON are increasingly being deployed as demand for ultra-broadband applications and services continue to grow,” said Julie Kunstler, principal analyst at Ovum, in a statement. “Providing operators with the ability to use the same passive and active plants, XGS-PON solutions like Nokia’s can be quickly deployed and used to capture 10Gbps service opportunities that help operators to improve the return on their existing fiber network investments.”

Many existing fiber networks currently rely on GPON (gigabit passive optical network) technology — which allows one fiber in a bundle of fibers to service multiple homes and businesses. GPON networks are typically capable of download speeds of 2.488 Gbps and shared upstream speeds of 1.244 Gbps. Many ISPs using GPON technology typically offer fast download speeds, but often slower upload speeds.

Next generation XGS-PON allows up to 10 Gbps in both directions over existing fiber networks. In fact, the technology is future proof, allowing operators to immediately upgrade to faster speeds and later move towards Full TWDM-PON, an even more robust technology, without expensive network upgrades.

Most providers are leveraging XGS-PON technology to deliver symmetrical broadband — same upload and download speeds — to residential customers and to expand network capacity to avoid congestion. XPS-PON technology also supports faster-than-gigabit speeds than can be attractive to commercial customers.

Frontier intends to deploy Nokia’s technology in ex-Verizon markets in California, Texas, and Florida, beginning in Dallas-Fort Worth. It will allow Frontier to beef up its FiOS network and market stronger broadband products to Texas businesses. In Rochester, Greenlight will use the technology to upgrade its fiber service, which competes locally with Frontier DSL and Charter/Spectrum. Spectrum recently introduced gigabit download speed in Rochester. Greenlight can now expand beyond its 1 Gbps offering, but more importantly, increase its maximum upload speed beyond 100 Mbps.

“Greenlight is constantly looking at ways we can deliver new services that fit every customer need. We pride ourselves on offering the fastest internet speeds available in the markets we serve and Nokia’s XGS-PON technology will play a critical part in our ability to deliver these services to our customers,” said Greenlight CEO Mark Murphy. “With Nokia’s next-generation PON fiber solution we will be able to deliver the latest technologies, applications, products and services quickly and reliably to our customers and ensure they have access to the ultra-broadband speeds and capacity they require now and in the future.”

Nokia points out its XGS-PON technology may also be very attractive to wireless companies considering deploying 5G services. Extensive fiber assets available in area neighborhoods will be crucial for the success of millimeter wave 5G technology, which relies on small cells placed around neighborhoods and fed by fiber optics.

The next standard for cable broadband is due around 2025.

Just as the cable industry is widely introducing gigabit download speed supported by DOCSIS 3.1 technology, cable engineers are working on a way to boost upload and download speeds to as high as 60 Gbps (60,000 Mbps) starting as soon as 2025.

According to a new article in Light Reading, DOCSIS 4.0 (or DOCSIS.Next) represents a transformational leap of cable broadband technology. Jeff Finklestein, Cox Communications’ executive director of advanced technology, claims the next major broadband update will be able to use at least 3 GHz of RF spectrum available on existing coaxial cable for high-speed internet. That is more than twice the 1.2 GHz that being used by some cable systems for today’s DOCSIS 3.1 (and the 1.8 GHz that will be needed to support DOCSIS 3.1 FD, which will allow operators to dramatically boost upload speeds by 2020.)

Designed for the next decade, DOCSIS 4.0 will support 30/30 Gbps speed (or 60/60 Gbps if an operator is willing to dedicate up to 6 GHz for broadband). Today’s coaxial cable networks can use up to 10 GHz of RF spectrum in all, with some compromises and allowances to deal with possible signal ingress and other types of interference.

By the time DOCSIS 4.0 arrives, many cable operators will not mind delivering the majority of their available spectrum to broadband, because most are expected to eventually deliver a single broadband stream that collectively supports IPTV, digital phone, and broadband service.

Finklestein

To make the next generation of cable broadband possible, cable systems will likely need to reduce the amount of copper coaxial cable in their networks and push fiber optics deeper into neighborhoods. The more optical fiber the better — the technology is not hampered by coaxial cable’s limitations and degradation.

Engineers are also likely to shift away from DOCSIS 3.1’s orthogonal frequency division multiplexing (OFDM) modulation and use advanced wave form technology instead.

While engineers are excited about the project, some suspect DOCSIS 4.0 may be a tougher sell for cable industry executives, asked to invest in another transformational broadband upgrade less than ten years after DOCSIS 3.1 was introduced. Many cable operators using older cable network plants will have to spend millions on overhauls and upgrades, and there is some question about whether that kind of additional investment in a Hybrid Fiber Coax (HFC) network platform makes sense. Altice certainly does not believe so, and in 2016 elected to scrap Cablevision/Optimum’s HFC network and replace it with fiber to the home service.

As cable companies push fiber deeper into their networks, the cost of taking fiber the rest of the way to customer homes and businesses is coming down as well.

The cable industry has generally dismissed fiber to the home service as an extravagant and expensive technology to deploy, arguing cable’s HFC networks can deliver the broadband speeds that are commercially in demand today, while working on upgrades like DOCSIS 4.0 to meet consumer and business demands tomorrow, without the cost of tearing up streets to lay optical fiber.

Connecticut’s telecommunications regulator has effectively banned public broadband in the state, ruling that municipalities cannot use their reserved space on utility poles if it means competing with the state’s dominant telecom companies — Comcast, Altice, and Frontier Communications.

The ruling by Connecticut’s Public Utilities Regulatory Authority (PURA) is a death-blow for municipalities seeking to build gigabit fiber networks to offer residents the broadband speeds and services that incumbent phone and cable companies either refuse to provide or offer at unaffordable prices.

Among the petitioners appealing to PURA to protect them from competition is Frontier Communications, which owns a large number of utility poles across the state acquired from AT&T. The company was unhappy that municipalities were planning to use reserved space on state utility poles to construct fiber to the home networks that are generally superior to what Frontier offers consumers and businesses in the state. Other providers, like Frontier, said little about the early 1900s Connecticut statute that guarantees municipalities “right of use space” on poles until it became clear some communities were planning to threaten their monopoly/duopoly profits.

The law was originally written to deal with the dynamic telecommunications marketplace that was common in the U.S. during the late 1800s and early 1900s. Utility pole owners were confronted with a myriad of companies selling telegraph and telephone service — all seeking a place on increasingly crowded poles. Local governments could have been crowded out, were it not for the “Act Concerning the Use of Telegraph and Telephone Poles,” approved on July 19, 1905. It was one sentence long:

Every town, city, or borough shall have the right to occupy and use for municipal purposes, without payment therefor, the top gain of every pole now or hereafter erected by any telephone or telegraph company within the limits of any such town, city, or borough.

The law stood as written until 2013, when the legislature clarified exactly who could benefit from the use of “municipal gain.” Where the original law effectively protected reserved pole space for “municipal” use, the language was broadened in 2013 to read “for any purpose.”

Observers said the law was modified because of ongoing disputes with pole owners relating to planned municipal broadband projects. Frontier, in particular, has sought restrictive pole attachment agreements with communities trying to build out their broadband networks. In addition to accusations of foot-dragging over issues like “make ready” — when existing pole users move wiring closer together to make room for new providers, Frontier has tried to impose restrictive language on communities that would permanently restrict their ability to offer service. The most common restriction is to compel towns to agree to use their pole space exclusively “for government use,” which would restrict third-party providers hired to manage a community’s municipal broadband service.

PURA’s decision surprised many, because it completely ignored the 2013 language changes and relied instead on its perception of a conflict between state and federal laws. PURA ruled “municipal gain” establishes “preferential access” for towns and communities, and could be in conflict with the federal Communications Act, which mandates “non-discriminatory access” to utility poles, and prohibits local governments from blocking companies from providing telecommunications services.

“Providing municipal entities free access to the communications gain for the purpose of offering competitive telecommunications services … appears to be inconsistent with these principals and other aspects of federal law,” the decision reads.

In the early 20th century, vibrant competition meant a lot of utility poles were crowded with wires.

Except communities are not seeking to block providers looking to offer broadband service. These communities are seeking to become a provider. Pole attachment controversies typically relate to unreasonable limits on access to poles and allegations of price gouging pole attachment fees, not “preferential access.”

The end effect of PURA’s ruling: communities can use their pole space for government or institutional purposes only, such as building closed fiber networks available only in public buildings like libraries, schools, town halls, and police and fire departments. It also means any community seeking to build a fiber broadband network serving homes and businesses will either have to pay market rates for pole space, give up on the project, or place all the project’s wiring exclusively underground — a potentially costly alternative to aerial cable and one likely to cost taxpayers millions.

“We are very disappointed in the decision,” Consumer Counsel Elin Katz told Hartford Business. Katz is a strong supporter of municipal broadband. “It ignores the plain language of the statute, and by deciding that [municipal gain] cannot be used by our cities and towns to provide broadband to those affected by the digital divide, denies our municipalities a tool provided by the legislature for just that purpose.”

Frontier and the state’s cable and wireless companies, however, are delighted PURA has come to their rescue, calling its decision “fully consistent with the law.”

“Frontier Communications continues to support efforts to expand broadband access in Connecticut,” said spokesman Andy Malinowski. “PURA reached the correct result. This decision helps ensure the continuation of robust broadband competition in our state.”

The New England Cable & Telecommunications Association (NECTA), the cable industry’s regional lobbying group in the region, was also happy to see an end to unchecked municipal broadband growth and the competition it will bring.

“Our members, who pay millions of dollars annually to rent space on utility poles, offer competitive broadband services with speeds ranging up to 1 gigabit-per-second for residential Connecticut customers, in addition to offering speeds up to 10 gigabits for business customers,” noted NECTA CEO Paul Cianelli.

Other supporters of PURA’s decision include the wireless industry lobbying group CTIA and the Communications Workers of America — unionized employees at Frontier Communications who fear their jobs may be at risk if a municipal provider gives Connecticut customers an additional option for broadband service.

PURA’s decision leaves little room for municipal broadband expansion efforts that have been underway in the state for a decade. Most projects that cannot afford to pay for space on utility poles or the cost to switch to underground cable burial will probably not survive unless a court overturns the regulator’s decision or the state legislature clarifies state law in a way that makes PURA’s current interpretation untenable.

A number of groups are considering suing PURA to overturn its decision, noting the regulator completely ignored the very clear and understandable 2013 language that allows municipalities to use their allotted space on utility poles “for any purpose.” That purpose includes giving the state’s telecom duopoly some competition.

CenturyLink is ready to capitulate in its competitive war with the cable industry, conceding its residential broadband business is a money loser that will no longer get broad-based upgrades and investment under the management of incoming CEO Jeff Storey, who will refocus CenturyLink on its larger business/enterprise customers.

The independent phone company has sent strong signals it is going to focus only on residential customers that are cheapest and easiest to reach, promising to fund broadband urban and suburban upgrades only where costs are low and the chances of a significant return is high. In rural areas, CenturyLink will depend heavily on capital made available by the FCC’s Connect America Fund when choosing areas worthy of upgrades.

“We’ll focus more on return on investment, which includes rural capital from the CAF II program,” said Sunit Patel, CFO of CenturyLink.

Patel, along with CenturyLink’s incoming CEO, originally worked for Level 3 Communications, a business and enterprise internet company acquired by CenturyLink in 2016. Now top Level 3 executives, at the behest of Wall Street and shareholders, are gradually taking over the top management positions of CenturyLink, pushing out current CEO Glen Post III with an early retirement this spring. With Post leaving, there is clear evidence CenturyLink is embarking on a transformation away from low return residential phone and broadband service and towards the kind of high profit business and enterprise connectivity Level 3 has provided for years.

Wall Street increasingly sees CenturyLink’s residential business as costing the company a lot of money for network upgrades that simply don’t deliver shareholder expectations of return on that investment, especially as the cable industry continues to aggressively deploy faster speed service to its customers.

In the fourth quarter of 2017, CenturyLink lost another 105,000 broadband subscribers, bringing internet subscriber numbers down to around 5.7 million nationwide. That represents a 4.8% reduction year over year, despite repeated promises of upgrades to stem those customer losses.

Last November, Post blamed those losses on customers served by CenturyLink’s legacy copper/DSL service areas where speeds and performance are lowest.

Soon to be CenturyLink Ex-CEO and President Glen F. Post

“We saw a much higher than expected loss of customers at the 20 Mbps and below speeds in a lot of the markets where we have that,” Post said during a late fall earnings call, according to a Seeking Alpha earnings transcript. “We had a much higher loss there. I think a couple of reasons, first of all, you see cable rolling out more with more aggressive offers, higher speeds and just the demand for bandwidth in those markets.”

Last fall, Post emphasized his broad-based residential and commercial broadband upgrade transformation plan to stop those losses. Post committed CenturyLink would provide 90% of homes with at least 40 Mbps, 70% of homes and businesses with 100 Mbps and over 20% with 1 Gbps or higher no later than 2020.

That was before activist shareholders and Wall Street joined forces to successfully push CenturyLink’s board to replace Post with business-oriented Level 3 CEO Jeff Storey. CenturyLink stock had been down by about one-third of its value over the last nine months, which only aggravated investors to push harder for dramatic management changes at the phone company. Activists argued CenturyLink shouldn’t be devoting much attention to its legacy businesses. In their eyes, only “strategic/success” businesses are worthy of investment, and those include commercial and enterprise broadband, metro ethernet, and cloud/backup services. The revenue eating “legacy” businesses, namely residential landline and DSL service, represent a drain on profits and threaten the company’s shareholder dividend. About two-thirds of CenturyLink customers are commercial enterprises.

(Blue) CenturyLink (Orange) Level 3

On March 6, 2018 the company announced Post’s retirement effective the day of its annual shareholder meeting in May. Post had originally planned to leave at the end of 2018, but some shareholders were unwilling to wait that long.

Strategic changes in CenturyLink’s future were previewed at the Morgan Stanley Technology, Media & Telecom conference earlier this month, where Patel outlined the company’s new vision.

“On the consumer side, the focus will be on enabling higher broadband speeds,” Patel said, but added a caution. “We won’t be spending capital on 5-20 Mbps connections, but rather on 100 Mbps and higher speeds. In urban areas we want to make sure we’re spending the capital where the returns make sense so focusing on multi-dwelling units make more sense in urban areas.”

Since the company is now going to target upgrades only in areas that “make more sense,” Post’s goal of better broadband for all by 2020 seem doomed

Another key piece of evidence is the retirement of CenturyLink executive Duane Ring, who announced he is leaving after 34 years despite a recent promotion. Ring, who led CenturyLink’s 12-state midwest region, was also behind much of CenturyLink’s residential broadband enhancement effort, including the 2005 launch of Prism TV — CenturyLink’s cable-TV alternative, as well as deploying gigabit speed services in several midwestern states. In 2016, he oversaw the deployment of 500 Mbps service for multi-dwelling units in 44 Platteville, Wisc. buildings that included nearly 800 apartments.

Broadband industry analyst Dave Burstein already sees the writing on the wall.

“Their fiber and G.fast plans, modest already, have been cut,” he noted. “They simply aren’t competitive with cable, which by 2020 will have a gigabit to 90% [of customers]. I look at the network and say if they don’t cut the dividend, trouble is near. Depreciation was $3 billion more than capex the last three years. Dividends were higher than income.”

As cable broadband speeds increase and customers defect from CenturyLink, few may choose to come back, making investments in broadband upgrades even more questionable.

“The rumor is they will virtually abandon much of the wireline network,” Burstein noted. “They will temporarily draw cash out to upgrade where they have better prospects,” referring to areas Patel identified as worthy targets for upgrades.