Phillip "Doesn't Worship Wall Street" Dampier

Bray Cary, president and CEO of a group of West Virginia television stations enjoying advertising revenue from Frontier Communications, was back on his Decision Makers program to allow an opposing viewpoint to the puff piece interview he held earlier with Frontier’s Ken Arndt, Frontier’s Southeast region chief.  This time, he invited Ron Collins, vice-president of the Communications Workers of America to give the CWA side.  Cary’s Tea-‘N-Cookies Breakfast Club With Ken this was not.  Cary decided to play hardball with Collins, leaving no viewer in doubt where Cary stood on the question of Frontier’s proposed purchase of West Virginia’s phone lines from Verizon.

Unfortunately, Collins was not completely prepared to rebut Cary’s pro-Wall Street, pro-deal propaganda and looked ill at ease at times during the interview.  We’re not, and Cary’s “facts” deserve some investigation.  After all, how hard should it be to rebut a guy who believes Wall Street and the banks have all the right answers for West Virginians’ phone service?

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Right from the outset, Cary wants to play “devil’s advocate” with Collins, asking why in the world the CWA is opposed to this deal.  That was a major departure from his cheerleading session with Arndt.

Bray Cary, Host of Decision Makers

“I’ve looked at this […] their stock has been extremely stable.  Wall Street appears to be signaling their financial viability is okay.  Why is the stock market not reacting negatively?  If it’s good for stockholders, how can it be bad for their financial stability.  Stockholders want financial stability,” Cary said in a series of statements about the deal, including mentioning a Moody’s report on the deal.

The Moody’s report Cary talks about is for shareholders who will reap the rewards or suffer the losses based on the success or failure of the deal.  Moody doesn’t rate the deal’s impact on consumers who have to live with the results.  What’s good for Wall Street is not necessarily what’s best for customers.

“What you don’t have is anyone in the financial community suggesting this is a bad financial deal,” Cary said December 13th.

Wrong.  Almost a week earlier, on December 7th, D.A. Davidson, a respected Wall Street analyst said the opposite.  In a story published in Barron’s: “Frontier Communications’ Shares Not Wired for Success,” the analyst firm argued the regional telecom’s acquisition of Verizon’s rural lines will be… wait for it… bad for the stock.

Cary’s claim that Wall Street is concerned with the long term viability of companies belies the growing reality that much of the investment culture in America has a long term obsession with short term results.  Your company is only as good as your last quarter’s financial earnings statement, and several bad ones in a row are usually enough to bring a recommendation to dump shares.  Frontier has kept its stock value stable largely as a result of their steady dividend payment.  Collins claims Frontier has gone beyond reason, paying 125% of earnings in dividends.  That may make the stock a popular choice for income investors, but is also eerily familiar.

FairPoint Communications also enjoyed a healthy stock price because of its high dividend payout.  Wall Street only got concerned when they thought that deal might not go through.  Morgan Stanley issued a report in 2007 suggesting the deal between FairPoint and Verizon to take control of landline customers in Vermont, New Hampshire, and Maine, was itself helping to prop up the stock’s value.  We saw how far that got FairPoint when the company declared bankruptcy a few months ago.

Ron Collins, CWA's vice president

Indeed, smaller independent phone companies commonly use high dividends to remain attractive to investors and stay viable in a tough market.  Windstream is another such company and even CNBC’s Jim Cramer gave due diligence to the fact high dividends and stock value by themselves don’t necessarily predict the company’s long term success or failure.

Make no mistake, Frontier has sold this deal to investors based on dividend payouts, claimed cost savings, and a safe bet that any broadband in rural America will earn them increased revenue, especially where consumers have no other place to go for service.

Frontier will take on massive additional debt to finance the deal, but on paper it actually appears to reduce their debt ratio.  That’s because when you add millions of new customers, the debt doesn’t look so big next to the increased revenue those additional customers will bring, assuming they stay with Frontier.  Should Frontier’s performance underwhelm customers, they’ll drop service if they can.  If mobile phone networks do a better job of reaching these rural customers, many will drop landline service anyway.  When wireless broadband service becomes a more realistic option, customers might toss Frontier’s slow speed DSL overboard.

AT&T and Verizon have read the writing on the wall — an ongoing decline in landline service and the eventual death of the kind of service Frontier is providing its customers on its legacy network.  Would you be better off with a company that recognizes the truth about the future of wired basic phone service, or the one that wants to buy up obsolete networks and hang on until the last customer leaves?

Cary’s concern starts and stops with shareholder value, not the individual long term needs of consumers across West Virginia.

“All of the bankers and all of Wall Street are saying financially this is a good deal financially for Frontier,” Cary argued.

“Good for Wall Street, bad for West Virginia,” Collins replied.

“Well, see I disagree… that has been a myth put out there, and the reason we don’t have any jobs in this state is companies don’t want to come here just because of that mentality.  People need to make money.  You look at where companies are flourishing, the workers flourish when they do,” Cary said.

Really.  Then why are several of these telecommunications companies awash in revenue also continuing to reduce their workforce in their relentless effort to obtain “cost savings.”  Someone is making money, just not the average employee.  Every state has pro-business acolytes claiming businesses don’t want to come to their state because of regulation and a hostile business climate, even those with the fewest regulations, lowest taxes, and little protection for employees and consumers.

Cary does make one valid point: Verizon wants out of West Virginia and refuses to invest a dime in the state as it looks for a quick exit.  Instead the company has diverted resources from serving smaller states’ phone service needs into its larger city FiOS fiber to the home system where it believes it can reap more revenue.  Whether that disinvestment should be permitted in the first place is a question that needs to be asked.

Verizon is a regulated utility that is required to meet certain performance standards, and the company’s long history of operations under that framework, under which it profited handsomely, does require consideration.  But the state can also provide additional incentives to make it more attractive for Verizon to commit more resources in the state, ranging from tax credits, public-private investment, rewards for performance and service improvements, etc.  It can also find someone else to provide the service, or let local communities band together into cooperatives to run their own networks, should customers find that could deliver better service.

At the very minimum, Frontier should he held to strict conditions that require a fiscally responsible transaction for ratepayers, not just for shareholders and management.  Verizon’s workforce, already cut to the bone, should not bear the brunt of “cost savings” either, both now and into the future.  If Frontier wants to deliver broadband, they should commit to offering 21st century speed (not the 1-3Mbps service typical for their smaller service areas) without their draconian 5GB usage limit in their Acceptable Use Policy.

Cary doesn’t concern himself with those kinds of details, but consumers and small businesses in his state sure do.

Cary wants more jobs and more earnings for West Virginia.  In the changing digital economy, high speed broadband isn’t an option — it’s a necessity.  Verizon has a proven track record of being able to provide 21st century broadband — Frontier does not (sorry, 1-3Mbps DSL is more 1999, not 2010).

Cary makes an astonishing statement in the third segment of the interview which makes me question his ability to grasp the reality-based community most Americans live in today.

“I have great faith in the banking system in America, in Wall Street, to evaluate these things.”

That stunned Collins, who asked, “even after the 2008 crash?”

Cary seems to think “everything is back to normal.”  Unfortunately, after the bailouts and big lobbying dollars being spent in Washington to preserve the status quo as much as possible, everything is back to normal… for Wall Street and the banks.  The rest of the country, including West Virginia, is another matter.

FairPoint's Stock Price from 2007, when it announced the deal with Verizon, to late 2009 when the company declared bankruptcy. By late 2008/early 2009, what seemed like a great deal for investors was apparently not, as the panicked rushed for the exits.

I’ll put my trust in the wisdom of West Virginians who want good service and reasonable prices.  If Cary wants to read from the Good Book of the “paragons of virtue” like AIG, Bear-Stearns and Goldman Sachs, let him sell his TV stations to help finance the bailouts.  Remember that when we went through this before with Hawaii Telecom and FairPoint Communications, the cheerleading session on Wall Street lasted only as long as the quarterly balance sheets looked good.  At the first sign of trouble, they bailed on the stock and both companies ended up in bankruptcy.

For them, it represented just another roll of the dice in the giant financial casino we call Wall Street.

For the rural residents of states like West Virginia who ultimately have to live with the results, this is their phone and broadband service we are talking about.  Before all bets are placed and the dice are thrown, isn’t it worth considering them?

Keyser, West Virginia

Frontier Communications’ West Virginia roadshow continued this week as company officials continue to sell the company’s plan to take over telephone service from Verizon across much of the state.  But have they stretched the truth to sell state officials on the deal?

Paul Espinosa, general manager of Frontier, told a West Virginia newspaper the company “prides ourselves in taking good care of our customers,” claiming 95 percent of their current residential customers have broadband Internet.

“In some areas it’s DSL. In other markets we do offer fiber,” he told the Mineral Daily News-Tribune in Keyser.

Keyser, a community of just over 5,000, considers broadband high on its list of concerns.  They want it, but they also want to know it is the kind of broadband that will keep Mineral County competitive, particularly for small businesses that depend on it to reach customers.  The county created a Communications Infrastructure Council (CIC) to review broadband communications options considered vital to the community’s economic development.

Rick Welch, who serves on the CIC,  said the economic future of Mineral County depends upon high speed or fiber-optic Internet and not DSL, or Internet service which utilizes existing telephone lines.

Verizon West Virginia has bypassed the state for FiOS development, which provides a fiber-optic connection to the home, claiming the infrastructure costs are too high at today’s prices to satisfy Return On Investment requirements.  Frontier has never had an ambitious broadband agenda centered on fiber optics.

Frontier traditionally offers 1-3Mbps DSL service in most of the smaller communities they serve.  Frontier’s claim that they are currently providing customers in “other markets” with fiber broadband brings these questions:

• Exactly where?
• Under what terms?
• Is this true fiber-to-the-home service, or simply fiber connected central offices?
• Are advanced levels of service are provided to these fiber customers, or are the plans, terms, and speeds identical to traditional DSL plans?

If the deal goes through, Frontier would assume ownership of pre-existing Verizon FiOS deployments, but those were proposed and planned by Verizon, not Frontier.

“DSL will not bring anything to Mineral County as far as economic development is concerned,” he said, noting that high technology businesses require far faster speeds than DSL traditionally provides.

A Verizon representative tasked with trying to sell the deal that gets the company out of the West Virginia’s phone business said that something is better than nothing.

“To hear you say that DSL is not the future is troubling,” Verizon’s John Golden said. “If you are without broadband, DSL would be the future.”

The Mineral County Commission was unimpressed with Golden’s statement.  Commission president Wayne Spiggle told the News-Tribune a lot of businesses and those who work from home would not consider coming to Mineral County when they discovered only low speed DSL service available, commonplace more than a decade ago in other areas. Spiggle said real broadband service was essential to attract the kind of businesses Mineral County needs to succeed.

“Our mission and responsibility to Mineral County is to create an entrepreneurial garden, and high-speed broadband is essential to that,” he said.

The Communications Workers of America are also been fighting to warn state and local officials about the gamble West Virginia will take with Frontier Communications.  Considering the last three deals resulted in bankruptcy for all three, it’s a risk the CWA doesn’t think is worth taking.

“Frontier will wind up taking on at least $3.4 billion in debt from Verizon,” said John Johnston, speaking on behalf of the CWA. “Frontier has said they’ll expand broadband, but will they? With $3.4 billion in debt, that’s a lot of money,” he said.

Chuck Fouts, who serves as local CWA president said bankruptcy brings job losses.  “If you go bankrupt, the first thing that goes is people,” he said.

The union says the state should join their efforts to force Verizon to “do what they said they were going to do” and provide a plan to upgrade the state’s telecommunications system to fiber optics.

As it stands, Verizon sees higher returns from cherry-picking more urban areas for its FiOS service, and isn’t willing to provide the kind of universal service throughout its service areas that phone companies have traditionally provided for decades.

“How can Frontier provide the fiber they claim to offer in “other markets” when Verizon’s deeper pockets have thus far been turned out empty for residents in West Virginia?” asks Stop the Cap! reader Hyatt.

Investment firm D.A. Davidson downgraded Frontier’s stock last week, reporting they felt the deal would be bad for Frontier shareholders.

Moving the stock rating back to “underperform,” the firm was skeptical Frontier would be able to pull off the cost-savings it promised as part of the deal.  They also anticipated Frontier will have to finance as much as $3.3 billion of the debt (at 8-9%) it will take on as part of the transaction.  Perhaps more revealing is their prediction that Verizon shareholders who receive distributed shares of Frontier stock will likely dump them as fast as possible, remembering earlier Verizon deals that quickly led to falling stock prices and eventual bankruptcy.  D.A. Davidson warned potential Frontier investors to “at least move to the sidelines” during the anticipated grand sell-off, moving back into the stock only when it bottoms-out.

Byron L. Harris heads the Consumer Advocate Division of the West Virginia Public Service Commission

Strong opposition to the proposed spinoff of Verizon service in West Virginia to Frontier Communications erupted Monday as the state Public Service Commission (PUC) published a flurry of written testimony filed with the state agency.

Some of the strongest criticism of the deal came from the state’s Consumer Advocate (CAD), an independent division of the PSC that represents residential utility customers.  Division director Byron Harris testified the deal carried “too many risks” for the state, and suggested Frontier failed to do its homework before considering the implications of the deal for nearly the entire state’s telephone system.  Harris added residents faced higher phone bills, early termination fees, little improvement in service, and was highly skeptical of Frontier’s promises to expand broadband service in the state, suggesting the company will not be in a financial position to offer acceptable “plain old telephone service,” much less broadband.

Harris testimony called on the Commission to reject the deal:

The proposed transaction poses too many risks for retail telephone customers in West Virginia from both a financial and an operational standpoint. The proposed transaction also poses too many risks for Verizon-WV’s wholesale customers and, ultimately, the tens of thousands of West Virginians served by these entities.

In his testimony on behalf of the CAD, Mr. Roycroft [one of two expert consultants hired to analyze the proposed sale] explains the operational difficulties that Frontier will face in assimilating the Spinco properties and operating systems. As Mr. Roycroft makes clear, the operational difficulties associated with a transaction as large as the one proposed are exacerbated by the fact that the proposed transaction – from an operational standpoint – actually involves two mergers in one:

1. The acquisition of the legacy Bell Atlantic network and OSS in West Virginia, and
2. The acquisition of the old GTE network and systems in 13 other states.

Mr. Roycroft details the multitude of risks that the proposed transaction presents for retail and wholesale telephone customers in West Virginia. Not only do customers face service and service quality risks, but they also face the risk of higher rates and/or other adverse terms and conditions of service such as early termination fees.

Mr. Hill points out, in his testimony, the many unrealistically optimistic financial projections Frontier makes in support of the proposed transaction. As Mr. Hill points out, Frontier’s projections rely too much on financial information that has been provided by the seller, Verizon, without independently verifying Verizon’s numbers. Frontier’s projections similarly rely on a number of assumptions about reducing access line loss, cutting operating expenses and capital expenditures, and realizing merger savings that would require Frontier to substantially reverse recent trends.

The fallout from the proposed merger not going well obviously affects retail and wholesale customers currently served by Verizon-WV and Frontier-WV as well. As discussed below, and in Mr. Roycroft’s testimony, Verizon-WV’s customers already have experienced sharp declines in their service quality, which is the predictable result of years of falling investment in the company’s telephone plant and workforce in West Virginia, as Verizon has focused its attention on other markets in other states and other service offerings, such as wireless service and video/Internet/telephone service provided via its FiOS offering (which is not offered in West Virginia).

The financial and operational risks associated with the proposed transaction jeopardize the combined company’s ability to maintain even current service quality in Verizon-WV’s service territory, let alone follow through on Verizon-WV’s obligation to improve that service quality going forward under the Plan.

Although the CAD obviously is (and has for some time been) concerned with the poor service quality currently provided to customers by Verizon-WV, the CAD believes that service is likely to get even worse under Frontier’s ownership. The proposed transaction will result in a post-closing Frontier that will not have the financial resources to be able to improve service quality for “plain old telephone service” – as voice-grade traditional telephone service is often called – in Verizon-WV’s service territory, much less to deploy broadband to the extent suggested in Frontier’s direct testimony.

Harris likened the deal to Frontier buying a used car from Verizon without knowing what’s under the hood.

“Frontier has essentially agreed to purchase a used car without first having the car examined by a mechanic. Without a thorough investigation of Verizon-WV’s plant, Frontier has no way of knowing whether its buying a pre-owned car that has had regular oil changes and proper tune-ups, or whether it is buying a clunker with a new paint job and a blown transmission. If Verizon-WV’s network has not been properly maintained (as the evidence seems to suggest), just like a car that hasn’t been properly maintained, getting it back to serviceable condition will be a very expensive proposition,” Harris testified.

Harris gave five specific reasons why the deal was bad for West Virginia:

First, Frontier has not done any in-depth analysis of the quality of the Spinco facilities that it is acquiring. This lack of analysis is disturbing on its face, as it would seem to be a fundamental area of inquiry for any prospective buyer. But the importance of this lack of meaningful review is magnified in West Virginia by the fact that Frontier knows, or reasonably should know, that Verizon-WV’s outside plant facilities in West Virginia are not in good shape. The Commission is well aware of the significant decline in service that Verizon- WV’s customers have experienced over the last several years. This decline is documented in the public record (in both the informal complaint records maintained by the Commission’s Staff, and in the record in proceedings related to Verizon-WV’s service quality docketed in the last few years). That record should have triggered a much more searching analysis by Frontier. This lack of analysis also impacts the overly optimistic assumptions that Frontier has used in its financial analysis of the transaction.

Second, Frontier’s overly optimistic financial projections increase the risk that the post-merger company will not be able to remedy Verizon-WV’s current poor service quality or to provide its promised broadband deployment. Verizon is obviously a larger and more financially sound company than Frontier. For a company such as Frontier which historically pays out greater dividends than its net income, the risk that the optimistic financial projections will not transpire is magnified.

Third, as of October 14, 2009, Frontier still had not determined how it will handle the additional call center volumes that will occur when the company acquires access lines in West Virginia.  Obviously, the proposed transaction would adversely affect the public if it is approved without a concrete plan to handle service calls from current Verizon-WV customers.

Fourth, similarly, no concrete plan has been put forth by Verizon for serving customers in West Virginia who are currently served out of central offices in Maryland. Again, the proposed transaction would adversely affect the public if it is approved without a concrete plan to serve Verizon-WV customers who are currently served from central offices in Maryland.

Fifth, current Verizon-WV retail customers face the prospect of increased rates and/or early termination fees as a result of having their current package or bundle service migrated to a similar package or bundle offered by Frontier. In discovery, Frontier has to date refused to identify the packages that will be offered to replace current Verizon-WV packages or to state at what price the packages will be offered to such customers. Verizon- WV customers with bundles that include Verizon broadband service also appear to likely face significant early termination fees of at least $120 if they elect not to transition or migrate to Frontier’s service after closing. This likelihood appears even greater when the companies’ obtuse response on this subject is considered. When the CAD asked whether Verizon-WV customers who elected not to remain with Frontier post-closing, would be charged any early termination fees, the companies merely stated that they will “honor the terms of their contracts with customers.” Obviously, “honoring” the terms of a contract that includes an early termination fee could very well mean enforcing that provision of the service agreement.

Hundreds of New York state residents were unfairly charged early termination fees that eventually brought Frontier to the attention of the New York Attorney General’s office, which obtained relief in the form of full refunds for affected New York residents.

Ironically, even though Verizon may seek to exit West Virginia’s landline telephone business, the company will continue to exist as a competitive player in the state — through Verizon Wireless, its mobile telephone division.  Verizon Wireless sent letters to customers urging them to terminate their home phone lines.  That will spell additional competition for Frontier Communications, as Stephen Hill testified, on behalf of the Consumer Advocate Division:

“Simplify your life and your budget by cutting the cord on your home phone today.”  It is reasonable to believe that such a letter coming from the company that had been a customer’s land-line phone service provider urging them to end that type of service and return to their former provider’s wireless service, would have an impact on Frontier’s ability to maintain that customer. The presentations to Frontier’s board of directors regarding the merger do not discuss potential competition from Verizon.

Perhaps the more troubling aspect of Verizon as a formidable competitor, however, is that, under the current post-merger plan, Verizon will continue to operate the billing and back-office functions of most of the local exchange operations sold to Frontier. Under such circumstances, Verizon becomes both a business partner and a competitor of Frontier-a situation that would put Verizon in an even greater competitive position than it would be otherwise (Le., if it weren’t also leasing operating systems to Frontier). Therefore, it is quite possible that, due to competition-in which Verizon is likely to play an important role-the reduction in the rate of revenue decline forecast for the future may not be realized. Instead, the rate of access line loss may accelerate from historical conditions, making the fbture financial picture for a combined Frontier/Spinco more tenuous than now forecast.

Strong opposition also came from other providers, some of whom who may be affected by the sale through wholesale agreements currently in place with Verizon, as well as from the Communications Workers of America (CWA).

Susan Baldwin, who served as Director of Telecommunications for the Massachusetts Dept. of Public Utilities, submitted testimony on behalf of CWA.  In her testimony she stated, “If the transaction goes awry, consumers will bear the consequences….Even if the transaction does not go awry, it will adversely affect consumers because Frontier’s financial constraints will prevent it from investing in the WV telecommunications infrastructure.” Baldwin strongly urged rejection of the proposed deal.

David Armentrout, on behalf of FiberNet stated, “Frontier lacks the requisite resources, experience, and incentive to comply with wholesale obligations it will take on …in West Virginia.”

Some companies waived their right to file direct testimony but asserted their right, along with the parties who did file today, to file rebuttal testimony in December.

Coming up… The truth about Frontier’s DSL products, network capacity, and why their 5GB Acceptable Use Limit is part of official testimony calling on the Public Service Commission of West Virginia to just say no to Frontier Communications.

Bray Cary, Host of Decision Makers

A network of West Virginia television stations spent 20 minutes this past Sunday airing a puff piece that could have been a video press release straight out of Frontier’s public relations department.  Decision Makers, a self-described “agenda setting” public affairs program ostensibly puts important people on the “hot seat” to answer “tough questions about where West Virginia is heading and how it will get there.”

Hardball this was not. Host Bray Cary, who also happens to serve as president and CEO of the television station group, presided over a one-sided softball tournament for Ken Arndt, Frontier’s new Southeast region chief in a 20 minute interview where the hardest question was likely posed off camera – ‘where would you like to do lunch?’

Decision Makers is seen across West Virginia on Cary’s statewide network of television stations — WOWK in Charleston-Huntington, WBOY in Clarksburg-Morgantown, WTRF in Wheeling and WVNS in Beckley-Bluefield.

The appearance of Arndt on the program comes the same week Frontier reportedly committed to purchasing significant advertising time on the stations, leading a Stop the Cap! reader who informed us about the program to ponder whether this Fluff-Fest was part of the ad deal.

Viewers on the public comment section for the show were unimpressed.

“I can’t believe Mr. Cary didn’t ask the Frontier guy any hard questions. It was like a 20 minute commercial for Frontier, is that what you get for buying advertising with the station,” asked one.  “I believe that we would all like to hear and understand Frontier’s direct response to challenging questions from an involved, and knowledgeable speaker. We need to hear more then a branding speech,” said another.

The interview was loaded with misleading and occasionally false statements, often coming from the program host, who served as presiding cheerleader.  You can watch the program’s two segments, and then take a look at our reality check (and if an all-consumer volunteer website can manage this, why can’t Mr. Cary?)

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Now that you’ve watched, let’s review the misleading statements, some made by Arndt, some by the host:

“You guys are serving 35% of West Virginia – that’s a third of the phones.”

Frontier may serve 35% of the landmass of West Virginia, but not 35% of the population, which is a very important distinction.  Verizon has the overwhelming majority of customers in the state, not the tw0-thirds this statement suggests.

“I guess the only guys fighting you all right now are the Communications Workers of America union workers.”

Ken Arndt - Frontier Communications

That, along with other dismissive comments made by Cary represent just how biased his interview was.  In many communities, citizens, businesses, utility commission staff, and yes – company workers are fighting this deal, because it’s bad news for every community facing a Frontier takeover.  Of course, Cary doesn’t have anyone on his program to refute his guest (or him for that matter.)

“From a timelime perspective, and we’re actually finishing our [broadband expansion] engineering plan right now — by December 15th, my expectation is within the first 18 months we will make a substantial increase raising that 60% (of Verizon broadband penetration) exponentially and making a large investment and bringing in the individuals — the engineering and construction talent to be able to get it done as quickly as possible.”

Frontier anticipates cutting $500 million in costs per year if the deal consummates, according to Bloomberg News. Job cuts at both Frontier and Verizon will create some of that savings, according to Maggie Wilderotter, Frontier’s CEO.  Customer service and field-technician jobs won’t be eliminated, she claims, but with a need for that level of cost savings, combined with the enormous debt Frontier will assume, where the resources to accomplish this expansion will come from is not explained.

Frontier’s broadband expansion targets so-called “middle-mile” expansion.  That was precisely what was done in Rochester.  Fiber optics are used to connect various central offices and some remote network extenders (known as DSLAMs) to try and extend DSL service into more distant areas further away from the central office.  DSL speed is highly dependent on distance.  The further away you get, the lower the speed you can obtain.  Frontier plans to install limited amounts of fiber linking their offices in hopes of providing DSL service in areas that do not have access to it currently.  Unfortunately, every indication is that Frontier’s DSL in most parts of West Virginia will provide a maximum of 3Mbps, if you’re lucky.  In communities like Rochester, DSL service is marketed at 10Mbps, but as I’ve experienced myself, that speed really turned out to be 3.1Mbps living less than one-half mile from the city line.

To many consumers, hearing talk about fiber optics may leave the impression they’ll have this type of connection in their home or business.  That’s highly unlikely.  Frontier fiber serves their own internal network.  Verizon FiOS serves you directly on a fiber optic cable.

‘In West Virginia in 2007 Frontier lost 2.7% of our access lines.  In Verizon’s footprint they lost 6.7%.  In 2008, Frontier’s lost just 2% while Verizon increased [their loss] to over 8%.  Frontier has put together unique packages that continually add value to landlines.  It’s through [Frontier’s] packaging, providing unique services and unique technologies [that the company limits losses].’

Frontier is in the enviable position of focusing on rural markets long bypassed by the phone company’s biggest threats: cable and wireless competition.  Verizon is not.  The real reason for the dramatic difference in line loss is that Frontier customers often have no other choices for telecommunications services.  In West Virginia, cable does not serve many rural communities, so there is no “digital phone” competition to worry about.  Mobile phones in the most mountainous regions of the state can offer problematic service if it’s the only phone you have.  Verizon, which does face relentless cable television competition, pays the price in greater line loss.  Rural West Virginia has a much higher population of elderly residents, who are usually the least likely to drop traditional phone service.  In fact, no state has a higher population of the rural elderly except Florida.

These factors afford Frontier more protection from line loss, not the so-called “unique services and unique technologies” the company only speaks about generally.

Arndt also responds to a question about Frontier’s plans for fiber and other forms of “telco-TV” such as that provided by Verizon FiOS.  After noting the company does plan to move forward on an extremely limited basis by finishing FiOS projects already under construction, Arndt signals Frontier believes its status as a simple reseller of DISH satellite service somehow provides a superior solution to telephone company provided television.

Not really.

Who needs Frontier to sign up for DISH?  Customers can sign up directly themselves.  The advantage of “telco TV” really comes from the construction of the network to support it.  Both AT&T and Verizon have built television-ready networks which not only compete with cable, but also give their customers more and better broadband choices that Frontier cannot and will not offer consumers.  Frontier tries to valiantly spin its copper cable future by saying satellite television offers a better service, but in reality, being a DISH Network reseller hardly is in the same class as FiOS or U-verse.

Residents in the affected areas need to consider whether they are tying themselves to a company that believes copper wire slow speed DSL is good enough for now and into the indefinite future, has no plans to directly compete with cable and other providers in delivering a wired telephone company cable service, will not build FiOS-like fiber optic networks in areas that one day could have been wired by Verizon, and will live with a company content with delivering “ubiquity” of service across all of its service areas, which in reality means large communities will suffer with lowest common denominator service, and rural communities will be lucky to get “good enough for you” broadband.

Arndt’s comments about fiber connectivity in selected portions of their service area refer mostly to multi-dwelling units and new housing developments where service was provided more cost effectively through a shared fiber connection.  That’s not FiOS either.

Color us unexcited about the prospect of Frontier’s ‘unique cable television via broadband service’ Arndt hints at.  That is almost certainly the new DISH set top box that can connect to your Frontier DSL service to stream on-demand television shows.  With Frontier’s 5GB Acceptable Use Policy for broadband, don’t expect to watch too much if and when they enforce the limit.

Among the most shameful segments of the 20 minute video press release Cary presides over is in the second half, when he asks and answers his own questions, spun in Frontier’s direction, about their ability to digest Verizon’s operations that dramatically dwarf Frontier’s current size and scope.  He’s even done “his research,” which suspiciously appears to be surfing through Frontier’s own talking points from their website and public relations efforts.  As far as Cary is concerned, Wall Street says they “like” the deal, and opposition to it is “a lot of noise.”

Arndt responds that the opposition to the deal comes because of FairPoint Communications, which he says failed because of the complexities of integrating their billing systems.  As Stop the Cap! readers already know, FairPoint’s troubles went well beyond computer integration problems.  Arndt’s reasoning is akin to saying New Orleans drowned in Hurricane Katrina because a storm sewer up the street was clogged.  More than 20 news reports on this site alone document the entire sordid story.  On every level, FairPoint failed New England for a range of reasons:

1. The enormous debt FairPoint was saddled with made it difficult for the company to spend the money necessary to maintain and grow their network and survive an economic downturn.  Frontier will also take on enormous debt during a challenging economy and claims it will spend millions to expand broadband service into rural areas where fewer potential customers mean a longer Return On Investment;
2. FairPoint’s acquisition of Verizon New England involved more customers than FairPoint served nationwide before the buyout.  The exact same thing is true of Frontier in this deal;
3. FairPoint’s earlier acquisitions were small, independent phone companies run with limited bureaucracy.  Verizon, and its predecessor Bell System businesses, have done things their own way for decades, making theoretical transitions doable on paper and chaotic in reality.  The exact same scenario exists with Frontier’s purchase of Verizon service areas;
4. Poor service, unresponsive and overwhelmed customer service centers, insufficient investment, and broken promises plagued FairPoint’s New England adventure from day one.  Frontier risks repeating FairPoint’s mistakes, putting customers with no other options for telecommunications service at serious risk.

Cary doesn’t have the insight or the interest in digging down into Arndt’s claims.  Maybe he forgot.  As far as Cary is concerned, everyone in West Virginia should just get familiar with the Frontier name.

Of course, actual consumers aren’t invited on Decision Makers.  Nor are any groups opposed to the deal.  But West Virginians and others can be “decision makers” and choose a different path for their telecommunications future.  They can get on the phone and call their state representatives and tell them to oppose the deal.  They can also contact the state utility commission and file their own comments telling them this deal isn’t worth the risk — three bankruptcies out of three earlier deals.

Even when playing this kind of softball, three strikes should mean you are out.

Charleston, West Virginia is just one of many cities potentially served by Frontier

Frontier Communications has won approval from state utility commissions in California, South Carolina, and Nevada to take over telephone service currently provided by Verizon Communications.  The decisions were unanimous in all three votes by Commission members, and involve telephone service in several small communities in all three states.

Circles represent Verizon service areas transferred to Frontier in Nevada and California

Verizon’s castoffs serve a small percentage of customers, which made the transaction fly under the media radar in most cases.  In California, Verizon dumps customers in a small section on the northwest border with Oregon.  In Nevada, several small communities south of Reno are involved.  In South Carolina, Verizon drops scattered groups of customers in small clusters across the state.

These state regulatory approvals follow an October 27 announcement by Frontier that its shareholders have approved the transaction, which will result in Frontier owning Verizon’s wireline operations in all or parts of 14 states.

While the approval appeared pro forma in those three states, West Virginia is another matter.  Strong employee union and consumer group protests continue across the state, with many consumers concerned about the implications of Frontier controlling nearly all wired phone lines in the state.  The Communications Workers of America held a conference call with the media Wednesday to outline its opposition to the deal.

The CWA has been a vocal opponent of the deal, claiming it will risk West Virginia’s telecommunications future with a company without the financial capacity to provide the type of advanced services Verizon is providing in other states.  Kenneth Peres, an economist with the Communications Workers of America, said the deal was extremely risky for consumers, workers and the affected communities.

Peres pointed to the perfect record of three out of three failures for earlier Verizon spinoffs.  FairPoint Communications declared bankruptcy early this week after trying to take on the service needs of three New England states.

Peres told the Charleston Daily Mail that if the deal goes through, Frontier “will find it extremely difficult” to meet its $8 billion in debt obligations while simultaneously investing enough capital to maintain its physical plant, improve service quality, set up a new system in West Virginia, lease systems from Verizon in 13 other states, provide video service for the first time (in Indiana), and ensure adequate staffing “while paying out a lot more in dividends than it makes in profits.”

Frontier went on the attack Thursday, accusing the union of interfering just to grab concessions for itself.

Verizon service areas sold off to Frontier in South Carolina

Steve Crosby, Frontier spokesman, said, “They’re just throwing stuff up against the wall. They know this is a good transaction and they’re trying to extract their pound of flesh. They want more concessions. This is their opportunity to ask for more money for their union membership and more benefits. That’s what they want. Union membership across the country is declining. This is how they’re trying to extract as much as they can from either Frontier or Verizon.”

As for Frontier’s debt load, “This is actually a de-leveraging transaction,” Crosby said. “We’re taking on debt but we’re taking on a whole lot more revenue. We’re currently at a 3.8 times revenue-to-debt ratio, going down to 2.6. So we actually get better in terms of revenue to debt. And today we’re fine. We’re able to pay a nice dividend. The day the transaction closes, we are approaching investment-grade borrowings.

“Our board of directors made the decision to lower our dividend by 25 percent when the transaction closes to give us even more cash to invest in infrastructure and to give us even more financial flexibility,” Crosby said.

“Every time we have an argument we win and they bring up other stuff,” Crosby said. “They never bring up the de-leveraging because it undermines their argument. They never bring up the fact that we will reduce our dividend because it undermines their argument.

“We have said we will maintain employment levels for 18 months” after the transaction closes, Crosby said. Because of required regulatory approvals and other factors, the deal can’t close before April 2010.

“So you can figure that’s two years,” Crosby said. “Who nowadays has that kind of job security? I think we’re bending over backwards. I wish I had the pension plan, the job security the CWA has. They’re looking at extracting more from Verizon and Frontier.”

When asked by the newspaper why Frontier shareholders would approve a deal that was destined for failure, Peres told the newspaper:

Frontier’s business model is built on acquisitions. Frontier bought a portion of Global Crossing’s business which increased revenue and access lines “but that began to decline,” he said. “They bought Commonwealth Telephone but that’s flat-lining. What’s the next step? What were they going to do – improve infrastructure or go through the acquisitions route again?” Continuing with acquisitions “postpones the day of reckoning,” he said.

Commentary: Our Take

Crosby’s comments seem more suited for a talk show audience that hates unions.  Obviously the union does not think this is a good deal for West Virginia, and considering the track record of earlier Verizon deals, and the correct predictions from employee unions on their inevitable outcomes, they have every right to oppose the deal on its face.  Crosby apparently has time to address declining union membership, but not the much more relevant decline in the traditional phone company’s bread and butter business – landlines.  Frontier, like other phone companies, continues to see disconnect requests coming from coast to coast as customers dump the phone company for a cable digital phone product, Voice Over IP line, or rely on their cellphone.

West Virginia would be solidly Frontier territory if the state approves the sale

Verizon recognizes their traditional business is a dying one, which is why they are in a hurry to diversify into competitive broadband and video services over their fiber optic FiOS network.  Where it doesn’t make economic sense (under their current business plan) for Verizon to deploy FiOS, decisions are being made about whether to keep those smaller phone operations within the Verizon family, or sell them off to companies like Frontier.  What Frontier acquires today from the standpoint of customers and revenues could represent the high water mark, and without offering robust options for a digital future, Frontier will likely continue to see customer erosion.

FairPoint acquired seemingly healthy Verizon companies serving the entire states of Maine, New Hampshire, and Vermont.  When their efforts to seamlessly combine Verizon’s legacy systems with FairPoint’s own systems failed, that along with an inability to properly service customers, caused a death spiral as customers dropped service, which led FairPoint straight into bankruptcy.

Frontier’s record of investment and service in western New York speaks for itself.  Time Warner Cable eats Frontier for lunch, with less expensive “digital phone” service, much faster and more reliable broadband, and a video package that Frontier doesn’t offer (reselling DISH Network is hardly the same as providing video service that doesn’t come from a third party company’s satellite dish nailed to the roof).  Frontier is ready and willing to stick with DSL service at speeds that are basically maxed out.  Time Warner Cable evidently doesn’t even consider Frontier a significant enough player to deploy upgrades in this area while they are in a hurry to provide them where Verizon FiOS is under construction.

When a company isn’t prepared to keep up with the rest of New York with fiber deployment to the home, the chances of that kind of service reaching West Virginia anytime soon are near zero.

But Frontier’s unique position as a specialist in “rural service” allows it to eke out an existence in areas where cable isn’t a big competitive threat, and where any broadband is better than no broadband at all, at least for now.  But without a plan for keeping up with the fast changing broadband world, customers happy with 3Mbps service today will despise the company for being stuck with those speeds later.  A lot of people in Rochester sure aren’t happy being stuck with Frontier DSL, and that nasty 5GB “reasonable use” language in the Acceptable Use Policy.

Crosby’s comments about CWA member job security, which he evidently envies, says more about the union’s commitment to its members than Frontier has to him.  Perhaps Crosby can quit his spokesman job and switch to a position that gets him CWA membership with a pension and job security.  Perhaps if the people of West Virginia say thanks, but no thanks, Frontier will be in a better economic state than it would be if this mega-deal collapses under the weight of debt and integration challenges.  Then Crosby can keep his job with the evidently lousy benefits.

Peres’ assumption that Frontier lives only through acquisitions isn’t the complete story.  Just like the myth sharks must constantly swim to survive, Frontier doesn’t constantly have to acquire to survive either.  It does have to concern itself with an ever-consolidating telephone line industry, where the smaller independent companies continue to be snapped up by a dwindling number of players.  If a Windstream or CenturyTel comes along with a great offer, Frontier itself may have a new name — Windstream or CenturyTel.

The economies of scale and cost savings are routinely cited by investors promoting consolidation.  It’s no surprise Frontier shareholders voted for the deal.  Bigger is often better for many investors, as long as the quarterly financials play to their interests.  Listening to Frontier investor conference calls, the Wall Street bankers, and the media that support them, are constantly concerned with keeping costs cut to the bone, customer defection limited, risk reasonable, and that dividend being paid.  They are satisfied with Frontier’s rural, less competitive market focus, even if the customers that end up served by them are not.