“If you are a voice copper customer and you call in [with] trouble on your line, when we go out to repair that we are actually moving you to the FiOS product. We are not repairing the copper anymore.” — Fran Shammo, Verizon’s executive vice-president and chief financial officer

Verizon has declared the end of the copper wire phone line, at least in areas where the company’s companion fiber optic network FiOS is available. Fran Shammo, chief financial officer of Verizon Communications spoke about the death of the copper-based landline and the company’s strategic plans for its wired and wireless networks in the coming quarter at Oppenheimer’s 15th Annual Technology, Internet & Communications Conference last Wednesday.

Verizon’s quiet and involuntary switch-out to fiber service is part of the company’s grander marketing effort to push customers towards upgrading service.

“The benefit we are getting […]  if you are a voice customer and we move you to [fiber] we now can upsell you to the Internet,” Shammo explained. “If you come over as a voice and DSL customer and we move you to FiOS, you now are a candidate for the video product. So there is an upsell which is definitely a benefit to this.”

Verizon earlier announced it would no longer sell standalone DSL service to customers, and has stopped selling copper-based DSL products in areas where Verizon FiOS is available. It even discourages customers from considering standalone FiOS broadband, with a budget-busting price of $64.99 for stand-alone 15/5Mbps service with a two-year contract or $69.99 on a month-to-month basis. Verizon offers considerably better value when customers sign up for multiple FiOS services.

Scrap heap

Verizon says the reliability of fiber makes maintaining older copper wire networks pointless.

“The bigger benefit is we are transforming the cost structure of our copper business because the copper fails two to three times more than fiber, which means we have two to three more times we have a tech and a truck rolling out to that copper connection. So we are eliminating that,” Frammo said.

Frammo added decreasing repair and maintenance expenses will help improve profit margins for the company.

Both CEO Lowell McAdam and Frammo have made profit margins a much higher priority for Verizon Communications than ever before.

“If you look at the [landline] side of the business, […] we have made a shift that said we are going to focus more on the profitability of FiOS this year. And that is important for us to do, because we need to generate the cash flow so that we can reinvest in those platforms,” Frammo said. “But I think as an industry as a whole you are seeing a different focus now, that it is more on returns, it is more on profitability. Can that continue? Sure. Obviously, you might have your blips here and there based on how fast something grows in one quarter versus another, but if you look at Verizon Wireless and you look at Verizon we are expanding our margins.”

Frammo addressed several key plans Verizon has for both its wired and wireless businesses, and what political priorities the company has for the rest of the year:

Verizon Wireless’ 4G LTE Network is a Platform for Profits

Shammo told investors Verizon’s 4G LTE platform is now available to 76 percent of its customers in 337 markets. LTE, Shammo said, delivers not only the speed customers want but reduced operating costs for the cell phone provider. But Shammo said that will not bring reduced prices for customers — Verizon intends to use its LTE network as a platform for increasing profitability.

“When you take that network and you overlay our shared plan with that and now others are following with that shared plan, the entire industry from a shared perspective has a lot of room for growth because when you think about that network and the speed it provides, and then you take all these devices and you think about the number of tablets that have been sold in the United States that are not connected to a wireless network, you now enable people to connect those devices much easier.

“So when you think about that speed and that price plan that pools those data minutes, the growth profile here is really good for the industry and very, very good for Verizon Wireless because we think we have a strategic lead here.

“We are going to have to wait to see what the usage profile of this is. But can we expand our data, our data pricing? Of course we can, so you just add in more tiers. But that is part of where we think the future is going because when you think about the speeds and the video capability of LTE we do project out that that usage is going to continue to substantially increase which then folks will buy up.

“So it is going to be very, very easy for people to attach devices to just go beyond what we know today as a smartphone, a dongle, or a tablet. Now take it to your car, now take it inside your home for remote medical monitoring or whatever else that can happen in that house. Those can also now be attached to that price plan and everything can run off of that network.”

Frammo also hinted Verizon Wireless may be prepared to bring back an old concept from the days of long distance dialing — peak and off-peak data usage rates. Use Verizon’s network during peak usage periods and the company could charge a premium. But its LTE 4G platform also allows it to offer reduced rates when the network is being used less.

Shammo

Killing Off Your Phone Subsidy One Dollar at a Time

Shammo said Verizon Wireless is moving forward (along with other carriers) to gradually reduce equipment subsidies customers get when they upgrade their phones at contract renewal time. Verizon earlier discontinued customer loyalty discounts like its “New Every Two” plan and has stopped offering early upgrade incentives. Now the company is eliminating subsidies for some customers altogether and won’t offer them on several different types of devices.

“The industry has done a lot around trying to reform the upgrade policies and implement upgrade fees to try to strengthen the financial capability of that subsidy on a smartphone,” Shammo said. “We have also taken the track of not subsidizing tablets, less subsidy on dongles. It really is now all around the attachment of those devices into those price plans.”

Shammo added as competitors reduce subsidies, Verizon can continue to bring them down further over time. Shammo said that will improve the company’s margins.

Verizon Prepaid vs. Contract (Postpaid) Customers: “The religious belief is you can’t do anything that is going to deteriorate the postpaid base.”

Despite the company’s improved margins and declining costs from its 4G LTE platform, Frammo said Verizon has no plans to reduce prepaid pricing, because it could erode revenue from customers on two year contracts who might consider switching to a no-contract, prepaid plan.

“Obviously we are a postpaid carrier so anything we do — the religious belief is you can’t do anything that is going to deteriorate the postpaid base,” Frammo said. “I think people are willing to pay a slight premium to get on [Verizon’s] most reliable network and what we are finding is people are coming to that network. I think at this point we are very, very satisfied with where the prepaid market is. We are a premium to that prepaid market and, based on our growth trajectory right now, we are very comfortable with that price point.”

Verizon’s Political Priority for 2012: Where is our corporate tax cut?

While Shammo would not answer a question about which presidential candidate he feels would best serve Verizon’s interests if elected, Shammo made it clear the company is terrified of a so-called “tax cliff” — the expiration of the Bush-era tax cuts and a capital gains tax increase that would raise taxes on the wealthiest corporations from the current 15 percent to up to 25 percent — still lower than the tax rate paid by many middle class workers.

“Whoever is elected needs to deal with that tax cliff because that tax cliff could be detrimental to the economic performance of the U.S.,” Shammo said. “Then on a longer-term we definitely need corporate tax reform in the United States. We are not competitive with the rest of the world and I think everyone understands that. That is going to be harder to achieve, but I think that Washington understands that there needs to be some change within the corporate tax structure.”

Cablevision: Don't Call Us

By the time Hurricane Irene reached upstate New York and New England, it was a tropical storm some say was over-hyped from the outset, but don’t tell that to utility companies facing weeks of service restorations that will leave some of their customers offline until October.

The worst damage to infrastructure was done in this region, with utility poles swept away in flood waters right along with the homes they used to serve.  Telephone and cable companies in several parts of the region cannot even begin to restore service until higher-priority electric service is brought back.  Besides, you can’t use a broadband connection if your power has been out for a week plus.

Those addicted to their online connection are making due in parking lots and other Wi-Fi hotspots where service prevailed over Irene.  Wireless connectivity from cell phone companies is also getting a workout, assuming customers are aware of usage caps and limitations which could make September’s bill much higher than expected.

Stop the Cap! has learned some DSL service restoration appointments in upstate New York, Massachusetts, Vermont, and New Hampshire are now extending into October, although companies suggest outside work may resolve problems.  Customers with the worst luck face a lengthy wait for the replacement of utility poles, new utility lines to be strung across them, and replacement of individual lines connected from the pole to individual homes.

Some FairPoint Communications customers are finding Irene did a real number on their DSL service even if power outages were limited.

In southwestern New Hampshire, Robert Mitchell was presented with a unique error page on his computer after the lights came back on:

“…we are improving the security of your broadband connection. As such, you have been redirected to the FairPoint Communications broadband service page to install a security update.”

That was a fine idea, except its implementation left customers like Mitchell with the most secure broadband connection around, resistant to all malware and viruses — namely, by not having any connection at all.

My annoyance only increased when I realized that FairPoint may have provided a link to download the security update software, but they were not going to make the process of accessing that software easy.

“Your Web browser (Firefox) and Operating System (Mac) are not compatible with the DSL Security improvement process…please re-open this page on a Windows XP, Vista or Windows 7 PC using Internet Explorer,” the message continued.

Bully for me, I have two Macs in the office. Time to call technical support? Nope, sorry. Both of my phone lines use Vonage, a VoIP service that relies on a working DSL modem for dial tone. Cell service at the house was sketchy at best — if I could even get through to technical support during a hurricane.

With the help of an old Windows XP machine, Mitchell managed to finally get back online.  Later, he learned the power spikes and brownouts that preceded the blackout in his neighborhood had caused his DSL modem to resort to its original default settings.  When FairPoint customers first connect a DSL modem, the company prompts them to perform the aforementioned “security update.”  Only FairPoint stopped offering that update more than eight months earlier.  Now, according to Mitchell, it’s just the default start page for newly activated DSL modems.

Customers further east in downstate New York, Massachusetts, Maine, Long Island, Connecticut, and New Jersey are finding getting service restoration highly dependent on which provider they use.

Time Warner Cable customers numbering about 350,000 found their service out Wednesday after leftover flooding and debris tore up fiber cables serving Maine, New Hampshire and Vermont.  Service was restored that evening.

Cablevision customers in Connecticut are still experiencing new outages caused by flooding, and with power company workers contending with more damage in that state than further south in New York, cable crews can’t restore service until the lights are back on.

Cablevision customers on Long Island are still being told not to bother calling the cable company to report outages.  Those that do are often given a date of Sept. 15 for full service restoration, although it could be sooner if damage in individual neighborhoods is less severe.  A Cablevision spokesman said, “Cablevision is experiencing widespread service interruptions, primarily related to the loss of power.  Cablevision crews are in the field and we will be working around the clock to make necessary repairs, in close coordination with local utilities.  Generally, as electricity is returned to an area, customers will be able to access Cablevision service.”

Verizon customers in downstate New York and New Jersey faced lengthy hold times to report service outages, and are given a range of dates from later this week until mid-September for full service restoration.  Some pockets of very badly damaged infrastructure may take even longer to access and repair.  Verizon’s largest union workforce, under the auspices of Communications Workers of America District 1 are accusing Verizon management of slowing repairs with denials of overtime work requests, in part to punish workers for their recent strike action.  John Bonomo, a Verizon spokesperson, denies that accusation, but added the company is not treating the thousands of customers still without service as an emergency, noting landline service “is not as vital as it had been in past years.”

Comcast customers, mostly in Pennsylvania, Vermont and Massachusetts, are turning to smartphones to cope through extended service outages, according to the Boston Globe:

Comcast Corp. customer Soraya Stevens turned to her iPhone when her cable blew out, logging on to Twitter from her Bedford home for the latest power outage updates. “I would not have any communication or insight without my smartphone,’’ said Stevens, a software engineer.

Some customers who lost cable service lost their TV, Internet, and landline phone, which are often bundled and sold together. Many turned to their smartphones, operating on batteries and the signal from cellphone towers, or friends and family who still had cable service.

AT&T, which serves landline customers in Connecticut, experienced more outages a day or two after Irene departed as battery backup equipment installed at landline central offices finally failed.  Those equipped with diesel generators are still up and running, but many AT&T customers sold a package of broadband and phone service may actually be receiving telephone service over a less-robust Voice Over IP network, supported with battery backup equipment that shuts down after 24 hours, when the batteries are exhausted.  This has left customers with standard copper wire phone service still up and running, but customers on Voice Over IP completely disconnected.

Bill Henderson, president of Communications Workers of America Local 1298, told the Hartford Courant those landlines aren’t considered landlines by the Department of Utility Control, and aren’t regulated for reliability, as the old system is.

“Technology has risen. Some of the things we’ve given up in that system is reliability,” he said. “This is what I’ve been screaming about to the DPUC. It’s a telephone! We need to regulate this service.”

Customers are also complaining loudly about AT&T’s poor wireless performance during Irene, with many tower outages and service disruptions that are still ongoing.

Remember, when services are restored, be sure and contact your provider and request a full service credit.  You will not receive one unless you ask.

AT&T's Fairy Tales of Broadband Congestion

Just a few days after Broadband Reports broke the news AT&T was imposing an Internet Overcharging scheme on its broadband customers, evidence continues to arrive illustrating the company’s planned usage limits are more about protecting their U-verse video business than actually controlling “heavy users.”

Dave Burstein, a well-known industry analyst who has tracked the broadband universe for years was so miffed about the nonsense he was reading in the Wall Street Journal, he picked up the phone and called the AT&T spokesperson who claimed the company was overburdened by heavy users:

Mark Siegal, AT&T’s top flack, hung up the phone on me when I said his comment to the Wall Street Journal was apparently a lie. It’s prohibitively unlikely their DSL cap “is to ensure the quality of the customer experience” necessary to solve “congestion in certain points of the network and interfering with other people’s access.” I’m certain that far less than 1% of the time do AT&T DSL customers have any impact from congestion. I’m pretty confident it’s less than 1/10th of 1% and probably less than 1/100th of 1%. My sources that wireline congestion on AT&T is minimal include statements from two CTOs of the company. Cheng, now a veteran in D.C., knew the comment was misleading at best. A mantra in D.C. is “wireline may not have congestion but wireless is different.” It was Sunday and perhaps hard to factcheck, but he’ll easily confirm the problem on Monday.

AT&T has long maintained they have a more robust network and cable is the one with “bandwidth hog” problems. But Comcast’s cap was 60% higher than AT&T and Comcast has said they will raise it. AT&T has gone 13 years without caps on their DSL network because they said they didn’t need them. Traffic growth is actually down slightly (Cisco, Odlyzko) so there’s only one reason to impose caps now: their video service, U-Verse, has become a $5B business. They don’t want people to be able to cut the cord and watch all their video over the net. 150 gigabytes is 40-80 hours of U-Verse quality TV, far less than the average U-Verse user watches.

In fact, AT&T is one of America’s largest Internet Service Providers, and maintains an important role in America’s Internet backbone.  As one of the largest providers, AT&T doesn’t worry about broadband traffic like a small wireless ISP does.  Its broadband pipes from the middle-mile to their nationwide network offers near limitless capacity thanks to fiber optic technology.  In fact, AT&T’s theoretical “bottlenecks” occur in the “last mile” of the network, from the phone company’s central switching offices or its interface between a fiber connection and the plain old copper wires that work their way into your home or business.

But first, a word about costs.

Dave Burstein

We have new evidence from both Burstein and the Internet Overcharging drama unfolding in Canada that providers literally pay pennies per gigabyte of traffic.  In fact, the broadband traffic customers generate represents only 2%-5% of what we pay for broadband in both countries.  Burstein uses some of Craig Moffett’s prolific comments in the media against his own argument for Internet Overcharging.  Moffett, a Wall Street analyst, is not alone when he reports broadband margins are as high as 90%, according to official company filings.  John Hodulik from UBS joins him.

Burstein gives providers’ argued need for increased investment to keep up with demand the benefit of the doubt and is willing to suggest profit margins at a reduced 75%.  In either case, running a large broadband network is a veritable license to print money in North America.  The costs to provide the service keep dropping, and providers keep on raising prices.

Burstein was generous with Comcast when he called their 250GB usage limit imposed in 2008 “fair.”  But as Stop the Cap! has argued, Comcast — like other Internet Overchargers — has not grown the cap over time, even as their costs decline.  In fact, customers are probably lucky the country’s largest cable operator hasn’t reduced it, as providers in Canada have done repeatedly. Burstein calls on Comcast to honor their promise and raise their cap.

Burstein also notes the rest of the world enjoys lower prices, more competition, and often faster service — with providers across the board still enjoying considerable profits.

But why not here?

America’s broadband market is a monopoly or duopoly in virtually every American city.  One cable operator and one telephone company deliver service to the vast majority of American broadband users.  Wireless providers are largely owned by legacy phone companies and strictly limit usage.  Without significant competition, providers can raise prices at will and milk profits to sustain their balance sheets even as other business divisions suffer from a downturned economy or shifting cultural changes.  The “landline” is rapidly becoming a thing of the past, and cable television provided by cable and phone companies could face cord cutting from consumers watching their favorite shows over their broadband connections.

Broadband service carries up to a 90 percent profit margin

Burstein tracks the business model:

15 gigabytes/month: The average (mean) user in the U.S., per Cisco’s respected VNI survey and numerous comments from the major companies.

Going Down: Bandwidth usage growth per customer. The rate has been about 30% per year, with the rate slightly falling the last few years. The growth in average usage is actually going down slightly, per Cisco VNI and the MINTS data of Professor Andrew Odlyzko.

Going Down: Capital investment required. In 2009, AT&T cut U-Verse by 1/3rd. In 2010, Verizon cut FiOS by 2/3rds. John Stankey of AT&T has said they will cut U-Verse much further after this year. Fran Shammo of Verizon says “Wireline will continue to come down year over year.” Cablecos have been dropping capex as a % of sales and often in absolute dollars. According to a recent survey by Heavy Reading, 70% of the cable networks have been upgraded to DOCSIS 3.0 already. There’s no significant capital spending beyond that at least until mid-decade. The Columbia University CITI report to the broadband plan aggregated analysts forecast and predicted a drop in overall capital spending on broadband, particularly in wireline. The primary capital spending for wired broadband is behind us, with few significant network buildouts in the next five years or longer.

Going Up: Profit Margins. Prices for broadband have generally been going up in the U.S. since 2007 while costs drop. Comcast, Time Warner, Verizon and most others have raised their broadband prices and ARPU. They also have (modestly) raised the prices of triple play including broadband, according to Dave Barden of Bank of America. Capex is dropping pretty dramatically while other operating costs are also falling. Customer support costs have gone down as few new customers (who need more support) are added. Modems and other gear continue dropping in price. Costs down, prices up = higher profits. Both Stankey and Shammo pointed to improved margins.

AT&T DSL (left) vs. AT&T U-verse (right): Hunting season on customers of both is now open.

AT&T argues their usage caps are less about the money and more about dealing with network congestion.  But does that play out?

AT&T has a convenient argument to use, which several journalists have come to believe gives the company a track record of being victimized by “heavy users.”  Namely, their network congestion brought about by the flood of iPhone users on AT&T Mobility’s cellular network.  Even if a reporter does not understand the profound differences between a wired and wireless broadband network, they have heard about AT&T’s problems coping with their wireless traffic.

In short, the company underestimated demand from its exclusive deal with Apple for the wildly popular phone, and refused to invest adequately to mitigate overcongested cities.  Instead, it spent millions lobbying for permission to “manage” the traffic with artificially-slowed speeds, usage limits, confiscatory overlimit penalties, and even some equipment to offload wireless users onto home broadband connections (for which AT&T still deducts airtime and data usage from your wireless allowance.)  Robust Wi-Fi also tries to drive customers off of AT&T’s inadequate 3G network.

For home broadband users who will be affected by AT&T’s Internet Overcharging scheme, let’s break them into two separate categories: DSL customers who face a 150GB cap and U-verse customers who will get a 250GB allowance.

AT&T DSL is a legacy product dependent on traditional copper wire phone lines.  Available in many areas unserved by U-verse, this technology typically provides up to 6Mbps service — often slower, sometimes higher.  The distance between the phone company office and one’s home usually determines what speeds customers receive.  In rural areas, 1-3Mbps is often typical.  In some urban areas, higher speeds are sometimes possible.  DSL is not a “shared” technology like cable broadband.  Each DSL customer has their own line between their home and central office (or remote repeater).  From there, a connection from the central office to AT&T’s backbone is made over a middle mile network.

AT&T U-verse VRADs (a/k/a 'lawn refrigerators') in Houston, Tex. (Courtesy: Swapdisk)

But AT&T’s DSL customers are already constrained by the reduced speeds DSL provides them.  It is unlikely a customer with 3Mbps DSL service is going to present much of a traffic challenge to a multi-billion dollar company unless they purposely under-invest in network upgrades.

Where congestion does exist, it occurs at the central office — usually because the company inadequately provisioned a sufficiently large data pipe to handle the traffic.  Since these circuits are increasingly fiber-based, congestion issues disappear when AT&T uses technology from this century instead of the last.

AT&T argues heavy users are overburdening their DSL lines, but their prescription makes no sense.  The company says, despite the alleged traffic jam, it is more than willing to sell users additional capacity for $10 per 50GB increment.  If AT&T’s aim was to cut congestion, they would be unwilling to sell additional capacity they don’t have to customers who need it.

A usage cap on AT&T’s new U-verse platform makes even less sense and opens a political minefield.

When one pushes away the promotional and marketing glitz AT&T provides when pitching U-verse, you are left looking at just one thing — a high speed broadband connection.  AT&T’s entire platform of television, phone, and broadband all resides on that single, super-speed broadband pipeline.

AT&T has built this super fast pipe with a combination of fiber optic cables and copper phone wires.  It uses fiber, which doesn’t degrade with distance the way copper wire connections do, to reduce the amount of copper phone wiring between your home and AT&T.  With this “fiber to the neighborhood” approach, AT&T can create a robust pipeline which can accommodate multiple television channels, a phone line, and your broadband connection all running concurrently.

AT&T only seeks to limit one part of that connection, however: the broadband service you could theoretically use to bypass AT&T’s television and phone service in favor of another provider.  It’s the same platform — only the services are different.

AT&T claims network congestion is a problem for U-verse as well, which is a controversial claim to make considering AT&T designed U-verse with excess capacity that goes unused to this day.

What does AT&T’s U-verse network look like?

AT&T’s regional offices maintain watch over their U-verse network of TV, Internet, and phone services.  This portion of the network is entirely fiber-based.  From there, fiber extends to individual central offices, part of the company’s middle-mile network.  AT&T’s fiber journey typically ends at large metal cabinets strategically placed in different neighborhoods.  These “Video Ready Access Devices” (VRADs) are probably familiar to you if you live in an AT&T area.  Sometimes derided as “lawn refrigerators,” the huge metal cabinets contain the interface between the fiber optic network and the copper wire telephone lines running to your home.

It’s this “choke point” AT&T tries to claim as a point of congestion.  If enough customers use their connection at the same time, it can “overburden” the network.  But can it, really?

Early adopters of U-verse pestered AT&T engineers about the network as it was constructed and learned a lot about it.

Phil Karn has been a U-verse customer since November 2009 and has become an expert on how his U-verse service works, and importantly how it holds back a considerable amount of available bandwidth.

An AT&T engineer “tried to tell me that the network equipment was like the engine in a sports car. You don’t want to drive it at the red line all the time because that will wear it out. I don’t know if he was told to use that analogy or if he came up with it on his own, but needless to say it’s a pretty silly one. And completely inapplicable,” Karn shares on his website.

He then claimed, rather weakly, that backhaul capacity considerations from the VRAD limit how much can be offered to each individual subscriber. This argument might even have begun to hold water except for the numbers he then provided. The VRADs, he said, are connected by 10 gigabit Ethernet over fiber, and each VRAD serves upwards of 200 homes. Let’s see…10 gigabits over 200 homes is 50 megabits per home. My [U-Verse] link runs at 32.2Mbps.

The whole point is that it doesn’t really matter how fast or slow the backhaul from the VRAD may be. With modern Internet routers and priority [Quality of Service] mechanisms, there is no reason to force capacity to remain idle when a user could be using it. Not unless, of course, you’re trying to maintain the public impression that broadband capacity is really scarce and expensive.

Karn

In fact, because few Internet users fully drive their broadband connections on a continuous basis, it can be argued that continuous video streams delivered to television sets left on in the homes of U-verse customers for hours at a time present a bigger “congestion” problem for AT&T, at least at this point in their network.  But the company has no plans to limit television viewing — only their broadband Internet service.

U-verse is AT&T’s answer to slow speed DSL, and part of how the company intends to stay relevant as landline customers depart.  But the company’s business plan depends on a certain percentage of customers subscribing to their pricey television service.  Should AT&T’s broadband customers decide to stop paying for television service, watching everything online instead, that threatens a $5 billion dollar business.

Burstein predicted this scenario when he discussed it with former FCC Chairman Kevin Martin:

“In 2005, Kevin Martin discussed with me the issue of what he would do if AT&T favored U-verse. I believe he felt he would have to act, but at that point hoped competition would prevent him from facing that decision. Now AT&T’s multi-million dollar über-lobbyist Jim Cicconi has presumably told them [current FCC Chairman] Julius Genachowski is sufficiently under control he won’t do anything about this.”

In the end, many of AT&T’s arguments simply are incoherent.  If only a small handful of AT&T customers are creating such a dilemma for the company it has to inconvenience every customer with a usage limit, AT&T has a much larger problem to contend with.  Furthermore, the company’s existing acceptable use policy already includes provisions for dealing with users that create problems on their network, all without bothering everyone else.

Frontier attempts to dig themselves out.

The Oregonian has been covering the plight of Frontier customers in the Pacific Northwest who signed up for Verizon’s fiber to the home service — FiOS — and are now facing down the new owners who want to raise the price by $30 a month.

Frontier has done itself no favors in the media with an ongoing series of reports of service problems, rate increases, and now the latest signs it wants out of the television delivery business altogether.

In a letter dated March 4th, Steven Crosby — senior vice president of government and regulatory affairs, told the city administrator in Dundee, Ore., Frontier FiOS TV has been a flop.

Since Frontier Communications Northwest, Inc., acquired Verizon’s operations on July 1, 2010, it has built on Verizon’s prior actions and continued to offer a robust and aggressively priced video product to attract Dundee subscribers.  Despite these efforts, however, customer growth has been disappointing and stagnant and Frontier has not achieved a commercially reasonable level of subscriber penetration.

Frontier also admits it has been under-pricing its video service to stay competitive and attract new customers, but those days are over.  The company earlier announced its intention to raise rates by $30 a month for its standard cable TV service, making it more costly than its nearest competitor, Comcast.

Frontier recognizes the impact its enormous rate increase will have on its subscriber base, soberly noting it is likely to “further depress subscriber penetration.”

With this in mind, Frontier is exercising its right under the franchise agreement it has in Dundee to provide notice it intends to terminate its video service at a future date, after providing subscribers with 90 days advance notification.

Similar letters went to city administrators in Newberg, McMinnville, and Wilsonville.  City officials had no reservations about interpreting the meaning of the letters and plans to implement a $500 installation fee for future FiOS TV installations.

“Looking at it, you expect there will be no new customers,” Dan Danicic, Newberg’s city manager told The Oregonian. “Getting this opt-out notice is not a huge surprise to me, but we are disappointed.”

Frontier's rate increases are driving many consumers back to Comcast for their television service.

Sources tell Stop the Cap! there was considerable debate inside Frontier’s offices last week on how to implement directives from executives to shut down FiOS installations as quickly as possible.  Initial efforts to quietly raise the installation price — without giving subscribers’ advance notice — were on track until Frontier’s legal department quashed the plan.  Concerns were also raised inside the customer support units responsible for taking orders and handling customer billing inquiries over how to deal with the inevitable subscriber backlash when the first bills arrived in the mail.

“Frontier hates dealing with FiOS and they can’t wait to be rid of it — they claim that the product is at least 10 years away from really returning any investment from its original deployment,” a well-placed source told Stop the Cap! late last week.

Frontier FiOS is an anomaly for the rural phone company, which delivers the vast majority of its broadband customers DSL service over copper wire phone lines, usually at speeds approaching 3Mbps.  Frontier FiOS “came along with the deal,” one Indiana Frontier official told local media there in response to rate hikes there.

Still, media reports that the company plans to ditch its TV customers created a small panic inside Frontier by the weekend.

“Getting customers switched over to satellite TV service in an orderly manner was the original plan, but reports the company was abandoning the service altogether risks we’ll lose our customers to Comcast, and many will take their phone lines to the cable company, too,” a second source informed Stop the Cap! this morning.  “We were told ‘orderly transition’ over and over again, so reassuring customers is today’s top priority.”

Dundee, Oregon

Evidence of this campaign was not difficult to find over the weekend, as The Oregonian amended its original story claiming Frontier does not have immediate plans to exit the video business.

Crosby told the newspaper: “Our actual implementation decisions will be business driven. At this time, there is no change in our FiOS video offerings or in our FiOS video service delivery to our customers. And this filing does not affect our FiOS high speed service.”

Stephanie Schifano, identifying herself as an employee of Frontier Communications, attempted to spin the letters sent to several Oregon communities as a simple matter of business and not a foreshadowed abandonment of television service.

“Frontier is exercising our right under the franchise agreements to terminate the franchises. The right to terminate soon expires, and if Frontier didn’t give notice now we may have been required to provide this service, with these franchises, for another 12 years. This notice offers Frontier the flexibility to continue to analyze the FiOS Video/TV business and continue to service our customers,” Schifano wrote.

But both of our sources well-familiar with Frontier FiOS say the company’s actions speak louder than its words.

“When you increase the installation fee to $500 and raise your prices nearly $30 higher than Comcast, you would be crazy not to interpret the message Frontier is trying to send — go get your satellite dish from us and get off FiOS,” our second source told us.

Telecompetitor read into some of the company’s comments about utilizing the acquired fiber network in a new way, perhaps for over-the-top Internet video content.

“That’s wishful thinking,” our second source says.  “Frontier’s only online video efforts surround its rebranded Hulu service, relabeled myfitv.”

Frontier's online video platform serves up mostly repurposed Hulu content.

“The company has no plans I am aware of for a grand video strategy — FiOS covers far too small a service area and there is no way Frontier will spend more money to increase that fiber footprint,” our source adds. “Frontier wants to meet its general obligations made as part of its deal with state regulators when it bought Verizon FiOS with the landline deal, and little else.”

Frontier will continue to offer FiOS to broadband customers for the time being, regardless of what it does with its video package.

“If it’s already there and not costing a lot of money to maintain for broadband, why not?” our source says.

One direct sales contractor for competitor Comcast suspects that train may have already left the station.

Calling Frontier’s customer service operation “a circus,” the salesman says Comcast is benefiting from Frontier’s ball-dropping.

“Many Frontier customers are unhappy with the customer service side while stating they do enjoy their phone, Internet, and video services provided by the FiOS network, but lose the business on the practically non-existing customer service side.”

The contractor says he hears stories from Frontier customers all day who are fed up with the frustration of extended hold times, inaccurate or missing bills, online account access problems, excessive call transfers to deal with service issues and high fees.

For regulators, the aggravation is much the same.

After being promised by CEO Maggie Wilderotter that Frontier would be an aggressive competitor in a barely competitive marketplace, Frontier has raised rates by 46 percent, irritated their customers with customer service problems and outages, and now has served notice it intends to flee the TV business at an undetermined point in the future.

Invest or die.  That succinctly explains the current state of the landline telephone business and the companies providing service to a decreasing number of Americans.  Some companies, like AT&T and Verizon have heavily diversified their business into wireless, fiber, IPTV and broadband.  Others, like Frontier are hoping their presence in uncompetitive rural markets will keep them in business, as long as their dividends keep stockholders happy.

CenturyLink, which is in the process of absorbing the last remaining Baby Bell — Qwest, has decided to invest in their business to stay competitive with their biggest nemesis — the cable company.  CenturyLink is still hanging on to ADSL broadband service in many rural areas, but the company sees the promise of future relevance with bonded DSL, which is delivering 25/2Mbps broadband service to an increasing number of their customers.  Where distances allow, CenturyLink is at least temporarily providing the fastest residential broadband service available in areas like southwest Florida.  They are holding their own against local cable competitors like Comcast.

Now the company is following AT&T in introducing a new IPTV service to many of its customers.  Dubbed Prism, the U-verse like service delivers a true triple play package to customers who thought they would be stuck with their local cable company or satellite dish provider for TV programming.

Prism offers more than 200 channels, a multi-room DVR capable of recording up to four shows at the same time, and an interactive program guide that doesn’t need an instruction manual to navigate.

[flv width=”640″ height=”390″]http://www.phillipdampier.com/video/Introducing CenturyLink Prism.flv[/flv]

This promotional video introduces CenturyLink’s Prism service and its television features.  (4 minutes)

Prism has been introduced in larger CenturyLink areas ranging from southern Nevada, southwestern Florida, and North Carolina, where EMBARQ used to provide telephone service.

The service works through a hybrid fiber-copper wire IPTV network.  Fiber optic cable reduces the distance data needs to travel over ordinary copper phone wires.  The less copper, the faster the potential speed.  With a 25-30Mbps broadband platform, Prism can divide up available bandwidth to support television, phone, and up to 10Mbps broadband service.  It’s all delivered over the same digital network.  While not as advanced as Verizon FiOS and other fiber to the home networks, IPTV services like Prism and U-verse are cheaper to provide, and that can mean faster deployment in areas not well served by competition.

Reaction to Prism has been generally positive among Stop the Cap! readers who have shared their stories with us.  Among the positives:

• The interactive program guide is light years ahead of Comcast, Cox, and Time Warner Cable;
• Broadband speeds are generally better than the original DSL service CenturyLink used to provide;
• The picture quality is excellent where the telephone network has been upgraded the most;
• Competitive introductory and retention offers mean consumers can pay less for service, at least initially.

But there are some problems, too:

• Bandwidth varies depending on how far away you are from the nearest fiber node.  This affects what you can do with the service.  If you are further out, you can only watch one HD television channel at a time, and may not be able to record more than one HD channel at the same time;
• The DVR box has issues — readers report shows disappear, don’t get recorded, or show poor results when line quality drops;
• Broadband speeds with Prism officially max out at 10Mbps;
• If you are watching a number of televisions at the same time, your broadband speeds could drop;
• Variability in service quality comes largely as a result of inferior copper wire phone networks CenturyLink chose to stick with.  If your phone line is prone to static or hum, or deliver poor results when the weather is bad, Prism might not work well for you.

Some subscribers found they initially loved the service, but when bad weather arrived, it all fell apart.

“Our phone lines are decades old, so this comes as no surprise,” says Manny who writes from Naples, Fla.  “I was also disappointed some of the channels in HD I had with Comcast are not available from Prism.”

In parts of Raleigh, N.C., Prism just launched a few weeks ago.  But some of our readers are sticking with Time Warner Cable.

“After looking over their pricing and packages, Time Warner has more HD channels and doesn’t charge $12 a month extra for them,” writes Ralph.  “CenturyLink also only bundles 3Mbps broadband service with most of their packages, and you have to pay extra for 10Mbps service.”

Ralph thinks Road Runner from the cable company will provide a more consistent broadband experience for his family.

“There is only so much you can push through a phone line at the same time; I like the fact they are competing, but they will not be able to keep up if they rely on copper phone wiring forever,” Ralph says.

Cox faces new competition in southern Nevada

Despite some of the negatives, CenturyLink may deliver formidable competition where cable companies haven’t kept up.  Some other markets where Prism will offer service: Jefferson City, and Columbia, Mo., and La Crosse, Wis.  Cox Cable in southern Nevada is now competing with Prism, and believes it has the superior network.

“The way our system is constructed, we have services equally distributed everywhere in the valley,” Juergen Barbusca, Cox manager of communications, public and government affairs in Las Vegas said. “Everybody in our footprint can get our highest advertised speeds.”

Cable broadband is less susceptible to distance degradation that can make Prism a no-go in neighborhoods at the far end of a phone company’s central office.

Also equally distributed is the price.  Outside of new customer promotions, nobody will save any money here.  Cox and CenturyLink are both selling their respective triple-play packages of TV, Internet, and phone for exactly the same price: $143 a month.

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/KTNV Las Vegas CenturyLink Prism 2-8-11 WFTX Cape Coral CenturyLink in SW Florida 12-7-10.flv[/flv]

KTNV-TV in Las Vegas introduces viewers to CenturyLink’s Prism service and WFTX-TV in Cape Coral, Florida talks with CenturyLink about their new 25Mbps broadband service in two exceptionally company-friendly pieces from the stations’ respective news shows.  (13 minutes)