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Wall Street Hates CenturyLink’s Dividend Cut; Company Punished for Upgrade Spending

CenturyLink’s stock is being pummeled after the company announced a cut in divided payouts to shareholders earlier this year, preferring to keep the money in-house to reduce debt and increase spending on necessary broadband upgrades.

Last fall, CenturyLink stock was trading for over $23 a share. By January, rumors that CenturyLink was going to cut its dividend put the stock on a downward trajectory, falling to an all-time-low below $11 this month. Company officials argued that with tightening credit opportunities and increasing interest rates, the company needed to devote money normally paid back to shareholders towards paying down its $35.5 billion long-term debt and provide better service to its customers.

A half billion dollars of that money will also be spent on upgrading CenturyLink’s broadband service, particularly in rural areas where the company is receiving Connect America Fund (CAF) dollars from the federal government.

“Our plan for 2019 includes investing to improve the trajectory of the business increasing CapEx by roughly $500 million,” Jeff Storey, president and CEO of CenturyLink said on a January analyst conference call. “As I mentioned earlier those investments include expanding the fiber network, adding new buildings throughout our footprint, enhancing our enterprise product portfolio, continuing our investments in CAF-II, and transforming our customer and employee experience.”

Investors were not impressed with those plans, and CenturyLink’s share price cratered.

Independent phone companies have traditionally attracted investors with handsome dividend payouts, but the realities of their aging infrastructure and the inability to compete effectively with cable companies on lucrative broadband services have left companies like CenturyLink, Windstream, and Frontier Communications in a quandary. Shareholders do not perceive value investing in fiber optic network upgrades and punish companies that announce dramatic increases in network investments. Customers left on slow-speed ADSL networks are increasingly dissatisfied with their internet experience and seek alternative providers — usually the local cable company. As Frontier Communications has discovered, attempting to win back ex-customers has been exceedingly difficult, often only possible with lucrative promotional offers that undercut the cable company. But such offers attract customers with above-average price sensitivity, making it difficult to extract increased revenue from them going forward.

CenturyLink’s stock price has dropped to an all-time low over the last six months.

Investors are also increasingly concerned about the financial viability of investor-owned phone companies that are stuck between leveraging their old networks and facing down shareholders when upgrades become essential. AT&T and Verizon have wireless units responsible for much of the revenue earned by those two Baby Bells. Traditional phone companies have had less luck trying to sell ancillary support services like Frontier’s “Peace of Mind” technical support service, or bundling satellite TV service into packages.

CenturyLink’s Local Service Territory (Source: CenturyLink)

CenturyLink is increasingly depending on its enterprise and wholesale businesses to earn revenue. That fact has prompted some shareholders to ask why the company hasn’t spun off or sold off its traditional landline network and consumer businesses, which currently account for only 25% of its revenue. In May, CenturyLink seemed determined to placate those investors with an announcement it was exploring “strategic options” for its consumer business. Investors theorize that CenturyLink could “unlock value” from its legacy landline networks in such a sale or spinoff that would benefit shareholder value. It would also be much cheaper than investing in that network to upgrade it.

The chorus for a sale increased after Frontier Communications announced it was spinning off its landline territories in the Pacific Northwest to a company specializing in upgrading legacy networks to support better broadband. Frontier, mired in debt and facing a concerning due date for some of its bonds, made the sale to give a boost to its balance sheet. Frontier had also been facing increasing scrutiny about a potential Chapter 11 bankruptcy filing. Windstream declared bankruptcy earlier this year, reminding investors that a trip to bankruptcy court could quickly wipe out all shareholder value.

MoffettNathanson, a Wall Street analyst firm that specializes in telecommunications, finds little to like about CenturyLink shedding its own landline operations. Frontier’s sale benefited from the fact a significant part of its Pacific Northwest territory was built from an acquisition from Verizon, which had already installed its FiOS fiber to the home network in parts of Washington and Oregon. About 30% of the territory Frontier is selling is fiber-enabled. In comparison, CenturyLink has installed fiber to the home service in only about 10% of its territory, dramatically reducing any potential sale price. Much of CenturyLink’s core fiber network powers its enterprise and wholesale operations — businesses CenturyLink would likely keep for itself.

MoffettNathanson also sees little value from the proposition a buyer could leverage CenturyLink’s network to provide backhaul fiber capacity for future 5G services, because CenturyLink provides service mostly in smaller communities likely to be bypassed by 5G, at least for the near term.

Wall Street’s idea of a win-win strategy for CenturyLink is to keep its consumer business and expand its broadband service footprint and capability, if the federal government offers to cover much of the cost through more rounds of CAF subsidies. Taxpayers would subsidize broadband expansion while CenturyLink and shareholders share all the profits.

Cable’s DOCSIS 4.0 – Symmetrical Broadband Coming

Phillip Dampier June 25, 2019 Broadband Speed, Consumer News No Comments

The next standard for cable broadband is now due by 2020.

CableLabs is working on the next generation of broadband over existing Hybrid Fiber-Coax (HFC) networks, finally achieving identical upload and download speed and supporting more spectrum on existing cable lines, which could mean another leap in broadband speed.

DOCSIS 4.0 is still evolving, but according to Light Reading, the next upgrade will fully support Full Duplex DOCSIS, allowing customers to get the same upload speed as their download speed, and will fully implement Low Latency DOCSIS which could reduce traffic delays to under 1 ms. The new standard will also introduce Extended Spectrum DOCSIS, which will open up broadband traffic on frequencies up to 1.8 GHz — 600 Mhz more bandwidth than available today. That additional spectrum will allow for speed increases in excess of 1 Gbps, support IP video traffic, and backhaul for wireless applications like small cells. 

According to Light Reading, people familiar with the development of the cable broadband specification believe much of the work will be complete by the end of 2019, with the spectrum expansion specification expected before mid-2020. This would allow the introduction of DOCSIS 4.0 modems for purchase beginning in 2021.

Cable operators are largely taking a break on large investments this year, with few planning major infrastructure changes beyond some projects underway at Comcast and Altice-Cablevision’s ongoing replacement of its HFC network with fiber to the home service. In 2020, operators will make crucial decisions about their next upgrade commitments. Comcast and Altice will have the easiest time delivering symmetrical broadband because Comcast will support the “Node+0” design that eliminates amplifiers between the nearest node and the customer’s home. This will facilitate the introduction of symmetrical speeds. Altice is dropping the DOCSIS standard as it moves to fiber service, which already supports symmetrical speeds.

Other cable operators are not currently committed to removing amplifiers from their networks, supporting alternate designs like “Node+1,” “Node+2,” etc., which are similar to today’s cable system designs. Instead, they are hoping to leverage Extended Spectrum DOCSIS to boost their speeds. Most will likely offer significant speed bumps for uploading, but those speeds won’t match download speed. For example, Charter Spectrum or Cox might upgrade customers to 500/100 Mbps service, on the theory that 100 Mbps upload speed will still be a welcome change for customers, and not noticeably slower for most current applications, such as uploading videos or file storage in the cloud.

Industry trade association NCTA reports that Comcast, Charter, Cox, Mediacom, Midco, Rogers (Canada), Shaw Communications (Canada), Vodafone (Europe), Taiwan Broadband Communications, Telecom Argentina, Liberty Global (Europe/Latin America) are all implementing the industry’s 10G initiative, with lab trials already underway, and field trials beginning in 2020. DOCSIS 4.0 will ultimately be a part of that project.

CableLabs is already making plans for DOCSIS 4.1 (our name, not theirs), that will further extend DOCSIS spectrum up to 3 GHz — a massive upgrade in usable spectrum. Whether that will be technically plausible on aging cable systems last rebuilt in the 1990s isn’t known, and probably won’t be for two or more years. But if it proves technically feasible, DOCSIS 4.1 could be one of the last DOCSIS standards before cable systems consider abandoning HFC in favor of all-fiber networks.

CableLabs has proved itself to be adept at squeezing every bit of performance out of a network that was originally built with simple coaxial copper cable and designed to distribute analog TV signals. DOCSIS 4.1 would support speeds potentially as high as 25 Gbps downstream and 10 Gbps upstream. Customers would require new cable modems and cable systems would have to tighten standards to take aging infrastructure out of service more frequently. Upload traffic would likely be assigned spectrum below 1 GHz, with 1-3 GHz reserved for downloads. By then, television, phone, and internet services would likely all be a part of a single broadband pipe.

Cable systems have enjoyed enormous cost savings over the last 20 years deploying DOCSIS upgrades instead of scrapping their existing HFC networks in favor of all-fiber. Charter Spectrum admitted the cost to upgrade from DOCSIS 3.0 to DOCSIS 3.1 was just $9 per subscriber.

Google Fiber Expansion in North Carolina Draws Complaints from Angry Neighborhoods

Phillip Dampier June 18, 2019 Consumer News, Google Fiber & Wireless, Video No Comments

Third party contractors hired to install fiber optic infrastructure that will deliver Google Fiber internet service in parts of North Carolina are getting an increasing number of complaints from frustrated residents upset with the pace of the work, the mess it creates, and disruptions caused when crews accidentally damage existing utilities.

In Cary, construction crews are testing the patience of residents on Kilarney Drive, who have endured multiple power outages caused by Google’s contractors digging up the streets in the area.

In one neighborhood, crews removed a section of a sidewalk and installed a utility cabinet in its path. In others, cabinets were installed on the wrong side of the street. In some areas, Google’s contractors are still experimenting with shallow dug fiber installations. Some residents reported they unearthed their underground Google Fiber connection after raking their lawns. Others claimed their home’s water service line was cut by construction crews. Last winter brought multiple outages when snowplows dragged up fiber lines buried just an inch or two into the pavement and held in place with foam.

This summer’s service disruptions are coming at inopportune times, Cary residents complain. Recently, crews mistakenly cut through cables providing power, phone, and cable service, knocking out power for four hours and cutting off air conditioning on a 92 degree day.

Watching the crews slowly move through the neighborhood also has some residents concerned.

“It took them a week or two to do a couple hundred yards,” Cary resident Ed Fillback told WRAL-TV. “How long is it going to take to do the town?”

Google Fiber officials shared a response to the disruptive work in a prepared statement.

“Building a brand new fiber network is a big and complex project, and we’re sensitive to the impact construction has on a community. We want to be good neighbors, and do everything we can to minimize disruption, respond to residents, and resolve issues quickly.”

WRAL in Raleigh reports neighborhood frustration with Google Fiber’s buildout in North Carolina is growing. (2:56)

Frontier Bails on Idaho, Montana, Oregon and Washington in $1.35 Billion Cash Deal

Frontier Communications is selling its wireline and fiber assets in Idaho, Montana, Oregon and Washington in a $1.35 billion all-cash deal with two private investment firms.

Frontier will continue operating its FiOS and traditional landline networks in the four states until the transaction closes with regulator approval.

The buyers are WaveDivision Capital, a private investment firm run by the founder of Wave Broadband, an independent broadband provider serving the Pacific Northwest and Searchlight Capital Partners, a Wall Street investment firm seeking to “accelerate value creation” for its investors. The new owners plan to launch a new company to service existing Frontier customers and will honor existing contracts and service commitments.

“The sale of these properties reduces Frontier’s debt and strengthens liquidity,” said Dan McCarthy, Frontier’s president and CEO, in a statement. “We are pleased to have a buyer with extensive experience building and operating advanced fiber-based communications assets in these regions. We will be working very closely with the new owners to ensure a smooth, successful transition for our customers and the communities we serve.”

About 150,000 fiber, 150,000 copper and 35,000 fiber video customers are impacted by the sale in the four affected states. Frontier’s service area in the region is made up of large former Verizon service areas, many upgraded to fiber-to-the-home service, and a significant number of rural telephone exchanges operating with traditional copper wire networks. WaveDivision Capital claims it wants to invest in Frontier’s existing network to upgrade service and potentially retire additional copper infrastructure in favor of fiber.

Frontier service areas in Oregon, Washington, and Idaho.

“We are excited to transition these operations to a local ownership team and to invest in building out the network of next generation fiber throughout our region,” said Steve Weed, CEO of WaveDivision Capital, and founder and former CEO of Wave Broadband. “We are big believers in the Northwest’s future growth opportunities and that future runs on broadband. As the former leaders of another successful Northwest internet provider, Wave Broadband, we know what it takes to bring fiber and other advanced services to residential and business customers, give them choices, and keep them happy.”

Frontier, which has been struggling with a tremendous debt load and underinvestment in its network, sees the sale as a way to improve its balance sheet and cut both debt and expenses. The Pacific Northwest is a difficult region to serve because it is sparsely populated and can be a high cost area because of difficult terrain or long distances between customers. Although Frontier had committed to spending on upgrading its fiber customers, it promised little for its copper wireline customers still relying on low-speed DSL. Weed says his company hopes to change that.

“Our plan is to invest further in our markets, specifically by extending fiber to more homes and businesses, to bring them the high speeds they want,” Weed said in a statement.

Frontier’s Montana operations are in the northwest corner of the state, near the Kootenai National Forest.

The transaction is subject to regulatory approvals by the Federal Communications Commission, the U.S. Department of Justice, the Committee on Foreign Investment in the United States (CFIUS), applicable state regulatory agencies, and certain local video franchise authorities where Frontier FiOS operates. Frontier expects little opposition to the deal.

Weed’s involvement in Wave Broadband is no more, but at the time he left the company, Wave had reached 140 cities and towns in Washington, Oregon, and California. Wave was formed in 2003 with a series of strategic acquisitions of “distressed” independent cable systems and those owned by pre-bankruptcy Charter Communications, Northland Communications, and Cedar Communications. In May 2017, Wave Broadband was sold to TPG Capital for $2.36 billion, and today operates under TPG’s leadership with its close cousins RCN and Grande Communications.

Weed has a reputation for successfully deploying fiber networks in a region where capital can be difficult to find and easy returns on investment are rare, so there is considerable good will he will successfully upgrade Frontier service areas that have been neglected for years.

Although the transaction could deliver temporary fiscal relief for Frontier, shareholders remain displeased with the current leadership team at the company, and there are still significant signs Frontier remains in serious financial and operational distress, especially because of its ongoing customer losses. Frontier is likely to be pressured to find other sales opportunities, assuming it can find willing buyers.

AT&T Expects to Offer “Nationwide” 5G and Fiber Broadband Service Within 3-5 Years

Stephenson

AT&T CEO Randall Stephenson on Tuesday told investors that AT&T will deploy a combination of fiber optics and 5G wireless and be able to sell a “true, high-speed internet network throughout the United States” within the next three to five years.

“In three to five years out, there will be a crossover point,” Stephenson told investors. “We go through this all the time in industry. 5G will cross over, performance wise, with what you’re seeing in home broadband. We’re seeing it in business now over our millimeter-wave spectrum. And there will be a place, it may be in five years, I think it could be as early as three, where 5G begins to actually have a crossover point in terms of performance with fiber. 5G can become the deployment mechanism for a lot of the broadband that we’re trying to hit today with fiber.”

Although the remarks sound like a broadband game changer, Stephenson has made this prediction before, most recently during an AT&T earnings call in January, 2019. Stephenson told investors he believed 5G will increasingly offer AT&T a choice of technology to deploy when offering broadband service to consumers and businesses. In high-cost scenarios, 5G could be that choice. In areas where fiber is already ubiquitous, fiber to the home service would be preferred.

Stephenson’s predictions about nationwide service will depend in part on the commercial success of millimeter wave 5G fixed home broadband, which will be required to satisfy broadband speed and capacity demands. Verizon Wireless has been offering fixed 5G in several markets with mixed results. The company’s early claims of robust coverage have been countered by Verizon’s own cautious customer qualification portal, which is more likely to deny availability of service to interested customers than offer it.

But Stephenson remains bullish about expanding broadband.

“So all things considered, over the next three to five years, [with a] continued push on fiber, 5G begins to scale in millimeter-wave, and my expectation is that we have a nationwide, true, high-speed internet network throughout the United States, [using] 5G or fiber,” Stephenson said.

Whether anything actually comes of this expansion project will depend entirely on how much money AT&T proposes to spend on it. Recently, AT&T has told investors to expect significant cuts in future investments as AT&T winds down its government-mandated fiber expansion to 14 million new locations as part of approval of the DirecTV merger-acquisition. In fact, AT&T’s biggest recent investments in home broadband are a result of those government mandates. AT&T has traditionally focused much of its spending on its wireless network, which is more profitable. For AT&T to deliver millimeter wave 5G, the company will need to spend billions on fiber optic expansion into neighborhoods where it will place many thousands of small cell antennas to deliver the service over the short distances millimeter waves propagate.

AT&T could sell a fixed 5G broadband service similar to Verizon Wireless, confine its network to mobile applications, or offer fixed wireless service to commercial and manufacturing users in selected areas. Or it could offer a combination of all the above. AT&T will also need to consider the implications of a fiber buildout outside of its current landline service area. Building fiber optic networks to provide backhaul connectivity to AT&T’s mobile network would not antagonize its competitors nearly as much as the introduction of residential fixed 5G wireless as a home broadband replacement. The competitive implications of that would be dramatic, especially in communities skipped by Verizon FiOS or stuck with DSL from under-investing independent telephone companies like CenturyLink, Frontier, and Windstream. Should AT&T start selling 300+ Mbps fixed 5G wireless in these territories, it would cause significant financial distress for the big three independent phone companies, and could trigger a competitive war with Verizon.

Wall Street is unlikely to be happy about AT&T proposing multi-billion dollar investments to launch a full-scale price war with other phone and cable companies. So do not be surprised if AT&T’s soaring rhetoric is replaced with limited, targeted deployments in urban areas, new housing developments, and business parks. It remains highly unlikely rural areas will benefit from AT&T’s definition of “nationwide,” because there is no Return on Investment formula that is likely to work deploying millimeter wave spectrum in rural areas without heavy government subsidies.

For now, AT&T may concentrate on its fiber buildout beyond the 14 million locations mandated by the DirecTV merger agreement. As Stephenson himself said, “When we put people on fiber, they do not churn.” AT&T has plenty of runway to grow its fiber to the home business because it attracts only about a 25 percent market share at present. Stephenson believes he can get that number closer to 50%. He can succeed by offering better service, at a lower price than what his cable competitors charge. Since 5G requires a massive fiber network to deploy small cells, there is nothing wrong with getting started early and then see where 5G shakes out in the months and years ahead.

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