Shammo

Verizon’s vision of broadband economics depends on the technology used to provide the service, according to some insights shared by the company’s chief financial officer at yesterday’s Deutsche Bank Access Media, Internet & Telecom Conference.

Fran Shammo outlined two strategies the company is using to profit from its broadband services. For wireless, Verizon has “flipped the model” from the traditional voice plan that starts with a bucket of voice minutes towards monetizing broadband usage instead. Today, customers buy plans that focus on anticipated data usage with unlimited voice and texting thrown in. But marketing broadband on Verizon’s fiber optic FiOS network is markedly different because the company is focused on speed over consumption.

“We are now shifting into concentrating on the broadband piece of that product, and the speed that the fiber to the home can give you we believe can’t be matched with anyone,” Shammo told an audience primarily made up of Wall Street analysts and investors. “We have a superior product.”

Shammo explained Verizon intends to “monetize speeds” that fiber broadband is capable of providing. That is important because Verizon FiOS now represents 70 percent of Verizon’s wired business, as traditional landline revenue continues to decline.

That is welcome news to broadband advocates that prefer current pricing models based on broadband speeds, not usage. Verizon FiOS intends to capitalize on its superior speed to differentiate itself from the cable competition, especially when some of those competitors are slapping usage limits on their customers.

Another important new revenue source for Verizon comes from switching legacy DSL users to FiOS technology.

In 2012, Verizon commenced its copper-to-fiber migration in FiOS areas. At least 200,000 homes formerly served by copper-based DSL were transitioned to fiber. In 2013, Verizon plans to migrate another 300,000 customers. When customers are switched to the fiber network, their former DSL speeds remain the same, but now Verizon’s marketing department has an opportunity to target upgrade offers for faster speeds.

“We give them the choice to start upgrading that speed [to] 15, 25, or 50Mbps,” Shammo reports. “What we are seeing is people are willing to pay for that additional speed, so we can monetize that fiber network more.”

However, Shammo reiterated that beyond what Verizon has already committed to in FiOS agreements with local municipalities, Verizon plans no additional expansion of FiOS in 2013.

The foundation for future profits come from data usage.

Unintended Consequences of Share Everything: Customers do an end run around Verizon’s “device fee.”

The conference also provided new insights into Verizon’s Share Everything wireless plans and the company’s other strategies.

Shammo admitted customers have done an end run around the “device fee” for multiple add-on devices.

Verizon expected mobile wireless-enabled tablet sales would increase as the cost to add a tablet to a Verizon Wireless account no longer required a separate data plan. But Verizon’s “device fee,” charged for each device connected to a Share Everything plan, has backfired. Customers are instead adopting Verizon’s “Mi-Fi” wireless hotspot device or other tethering solutions. Customers can then connect up to five Wi-Fi enabled devices through the hotspot and bypass paying multiple device fees that range from $5-20 per device.

Living Off the Revenue from a 3G Network Verizon Has Stopped Expanding, Improving

Shammo also noted Verizon has stopped further investments in its 3G wireless network.

“We are not investing any more capital in that network other than to keep it up and running, so no more coverage [expansion] capital, no more capacity [expansion] capital,” Shammo said. “If I can keep that network up and running that just generates more [revenue] for us.”

Verizon plans to keep a moratorium on further expansion of its fiber to the home service except in areas where it has existing agreements to deliver service.

Verizon’s Plans to Reduce Device Subsidies, Discounts

Customers have grown to expect a free or low-cost upgrade to a new smartphone every two years. But wireless companies find the costs of fronting device subsidies troubling because it affects the short-term bottom line. As wireless providers trim discounts, tighten upgrade policies, raise prices, and introduce new upgrade and activation fees, the $200-400 device subsidy recouped over the life of a two-year service contract remains a fat target for pruning.

But Verizon and other cell phone companies do not want to cut plan prices that are now inflated by $10-15 a month to cover paying back phone subsidies. The best of both worlds: eliminating device upgrade discounts –and– keeping prices the same for wireless service, banking the extra revenue as profit.

Verizon’s current solution is a middle-ground approach that gradually reduces device subsidies while hoping increased competition among device manufacturers will lower retail prices. For the consumer, that means prices will remain generally the same. But for Verizon, it means higher revenue from paying out lower subsidies while being able to maintain current pricing.

“I am a believer that over the next two to three years subsidies will start to decrease just because of the ecosystem,” said Shammo.

Verizon’s conversion to LTE means the day of a pure LTE-only smartphone is not far off. It will not include added-cost chips to support legacy technology, particularly older data networks and CDMA.

Wall Street Pressures Verizon to Talk Customers into Less-Costly (Anything but an iPhone) Smartphones

Brett Feldman, an analyst at Deutsche Bank who moderated the question and answer session with Shammo pointedly noted the Apple iPhone is the most-costly phone to subsidize.

“Are there things you can do with your sales force where you would proactively incentivize them to maybe sell different devices,” asked Feldman.

“It is critical that we don’t do that,” Shammo explained. “What is more important for us is a customer walks out with a phone that they will be happy with and not return under our 30-day guarantee. Because the worst thing that can happen for us is for me to incent a salesperson to get you into a phone thinking you are going to like and in three days you come back because you don’t. Now I’ve just subsidized two smartphones because that phone you used I can’t resell as a new phone.”

Cablevision’s yesteryear marketing: As outdated as this Harvest Gold Trimline phone.

Cablevision’s bizarre new ads for its Optimum triple-play package (the one that puts broadband, arguably its most important component, dead last) have reached a new low in the latest series featuring… Michael Bolton?

Bolton is a practical unknown to the most important demographic group not buying cable: recent graduate twenty-somethings that were 12 when one of his songs last plagued top-40 radio. Cablevision’s misfire could only be outdone if Nike hired Dick Van Dyke to pitch their shoes.

This is the best Cablevision can manage after Sandy blew away 11,000 of their customers (potentially for good) and rate increases took another 28,000 households with them (mostly to the benefit of Verizon FiOS)? Was the runner-up Joyce DeWitt from Three’s Company pitching a three-pack of phone, television, and (oh yes) Internet service?

Cablevision’s marketing efforts are now partly overseen by the CEO’s wife, who ‘somehow’ landed the prominent role of rebranding Cablevision/Optimum. Perhaps her best talents lie elsewhere.

Verizon featured Michael Bay blowing things up in FiOS ads five years ago that were more trendy than Cablevision was this week.

The point of the ad? Michael Bolton keeps getting annoyed with masses of would-be Cablevision customers calling in to sign up for cable service on a toll-free number that is just one digit away from Michael Bolton’s toll-free number (?) Yes, that is Bolton talking on a (shudder) landline (at least he has a cordless phone). Does anyone under 30 even know what a “toll-free” call is?

For those of us who remember what a dial tone sounds like and can still recognize a Trimline rotary phone, the ad still does not make sense. I am perplexed why Michael Bolton has a toll-free number. I guess when Tonya Harding’s name recognition rivals Michael Bolton’s, the fact he has a toll-free number gives him the edge.

A minute later, I am left wondering why I care. I am not certainly not wondering why I haven’t picked up the phone to order Cablevision service.

When it comes to branding and image, here is what Cablevision just accomplished:

• Verizon FiOS circa 2008 = Michael Bay blowing cool stuff up.
• Cablevision this week = Michael Bolton.

‘Nuff said.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Cablevision Ads Michael Bolton.flv[/flv]

AD FAIL: What were they thinking? Michael Bolton annoys viewers trying to recollect his career while Cablevision tries to make New York, New Jersey and Connecticut remember why they should care.  (1 minute)

Frontier Communications is hoping to capitalize on cable operators alienating customers with extra modem fees and the increasing cost of cable broadband with a new offer it claims is free from hidden charges and other gotcha’s.

Frontier’s “Simple Choice” offers DSL broadband at speeds up to 6Mbps for $19.99 a month with the promise of an “end to confusing Internet bills” loaded with modem rental fees, contracts, or other “plan-cuffs” that “require a law degree to understand.” Frontier also offers to double your speeds for $10 more per month.

“It gives consumers an awesome amount of flexibility and choice,” said Cecilia K. McKenney, executive vice president of administrative services at Frontier. “By offering new broadband speed tiers to residential and commercial customers and eliminating contracts and early termination fees on our residential offers, we are truly simplifying the broadband experience.”

The offer includes a three-year price lock on voice and broadband, a free wireless router, no contract and no early termination fees. There is no Internet activation fee where a free self-installation kit is available.

But despite the promises of no tricks or traps, Frontier couldn’t help themselves in the fine print accompanying the offer:

1. The offer is only available to customers subscribing to a “qualifying package of Frontier residential local service with calling features and long distance.” This means you must keep a Frontier voice landline with an added-cost long distance and feature package (eg. Caller ID, Call Waiting, voicemail, etc.) In Rochester, N.Y., a landline with qualifying features starts at $31 a month before taxes and fees.
2. A $49.99 “Internet installation fee” is payable if a self-install kit is not available.
3. A $9.99 “broadband processing fee” applies if/when you disconnect your broadband service.
4. Taxes, governmental, and “other Frontier-imposed surcharges” that go unspecified also apply.
5. Frontier does not guarantee you will actually receive 6Mbps service. Speeds will vary depending on local line conditions.

The Kansas House of Representatives voted 118-1 to pass a bill they admit was written and pushed by the largest telecom companies in the state. The chief supporters all received campaign contributions from AT&T and other telecom interests.

Kansas’ House of Representatives voted 118-1 Monday to support a bill largely crafted by AT&T that will let the state’s largest phone company discontinue service at-will in rural areas of the state.

H.B. 2201 had near-universal support from legislators that openly admitted the legislation was conceived and written by the state’s largest telecommunications companies, chiefly AT&T, and grants the phone companies a third round of deregulation.

The legislation is expected to sail through the Kansas Senate with bipartisan support and Republican Gov. Sam Brownback, who generally favors telecom deregulation, is likely to sign it.

The legislation was originally pushed as a money-saver for Kansas ratepayers. The bill calls for a major reduction in funding requirements for the Kansas Universal Service Fund (KUSF), which subsidizes rural telecommunications services in the state. The KUSF is principally funded through a surcharge found on customer bills. Under the terms of the bill, funding requirements will be drastically reduced, cutting the surcharge in the process.

The Kansas Citizens’ Utility Ratepayer Board testified if H.B. 2201 only contained KUSF reform, the group would have supported the measure. But the bill also has a myriad of deregulation measures that received little apparent attention by legislators:

1. H.B. 2201 eliminates quality of service requirements. AT&T and other phone companies can deliver any level of phone service they choose with no oversight and nobody to answer to;
2. Allows price discrimination based on geographic location, which could mean substantially higher phone rates in rural areas, especially for nearby toll calls;
3. Allows telecom companies to exit the Lifeline program for inexpensive service for the poorest Kansans after 90 days written notice;
4. Removes AT&T and other phone companies as “carriers of last resort,” which means they are no longer required to provide phone service upon request.

The elimination of the “carrier of last resort” provision is essential to AT&T’s plans to abandon rural landline service, forcing customers to buy substantially more expensive cellular phone and data service. With the passage of H.B. 2201, AT&T can notify rural Kansas customers it will drop their landline service and/or broadband at-will.

Siewert

The single “no” vote came from freshman Rep. Larry Hibbard, (R-Toronto), who noted landline service was essential in many rural areas. Hibbard worried AT&T would use the legislation as an excuse to raise rates or force elderly Kansans to use a wireless cell phone, which could prove too confusing for them.

“This bill may come back to haunt rural Kansas,” Hibbard warned.

“We have this mentality, ‘if I don’t have a wire, I can’t make a phone call.’ That’s not true,” countered Rep. Scott Schwab, an Olathe Republican who supports the bill. “That copper line is being replaced with an antenna, and it’s more reliable.

“We are not killing Lifeline,” Schwab added. “We are just not mandating it.”

Other supporters were far more sanguine, even disclosing the substantial role telecom companies had getting the legislation written and shepherded through the House.

“This was an industry bill that they all worked very hard” to put together, admitted Rep. Joe Seiwert (R-Pretty Prairie) during a House Republican caucus meeting. “[This bill] puts legislators in an easier position of not having to ‘choose between friends.'”

Kuether

Seiwert, for example, did not have to disappoint his largest campaign contributor — AT&T — or others who donated to his campaign, including the Koch Brothers, Cox Communications, CenturyLink, Verizon, and the Kansas cable lobby.

Rep. Annie Kuether of Topeka, who is the ranking Democrat on the Utilities and Telecommunications Committee, also supported the bill. Kuether is the recipient of campaign contributions from AT&T, Cox Cable, Time Warner Cable, Kansas cable and telephone company PAC groups, and more than a dozen independent telecommunications providers doing business in Kansas.

For ordinary Kansans, the bill does not assure savings, and could lead to dramatic price increases, especially in rural areas forced to pay for cell service. The measure also eliminates the Kansas Corporation Commission as a last resort for customers with service problems that go unresolved. Those customers would be on their own after the bill becomes law.

Legislators did not see any incompatibility between the proposed bill and Kansas state policy, set forth in Statute 66-2001:

It is hereby declared to be the public policy of the state to:

(a) Ensure that every Kansan will have access to a first class telecommunications infrastructure that provides excellent services at an affordable price;
(b) ensure that consumers throughout the state realize the benefits of competition through increased services and improved telecommunications facilities and infrastructure at reduced rates;
(c) promote consumer access to a full range of telecommunications services, including advanced telecommunications services that are comparable in urban and rural areas throughout the state;
(d) advance the development of a statewide telecommunications infrastructure that is capable of supporting applications, such as public safety, telemedicine, services for persons with special needs, distance learning, public library services, access to internet providers and others; and
(e) protect consumers of telecommunications services from fraudulent business practices and practices that are inconsistent with the public interest, convenience and necessity.

The Associated Press notes this is AT&T’s third trip through the state legislature to win deregulation. A 2006 state law deregulated prices for bundles of services that included wireless, Internet access, cable TV or other video and moved toward deregulating rates for local service in exchanges where competition existed. A 2011 law went further, allowing companies to avoid most state price caps. This year’s bill would allow those companies to avoid even the Kansas Corporation Commission’s consumer protection regulations and minimum quality-of-service standards.

CenturyLink investors got the shock of their investment lives last week after company executives announced the phone company was slashing its dividend by 26 percent from 72.5 cents to 54 cents per share. The stock immediately tanked, tumbling the most in more than three decades, according to Bloomberg News.

The stock price crash wiped out about $6 billion in market value after the dividend cut was announced and stock analysts lambasted executives for the decision.

But CenturyLink’s move to stop paying out large sums to investors does not mean the company is going to spend the money on network and service upgrades. Instead, CenturyLink executives plan to spend $2 billion in stock purchase buybacks over the next two years.

“This is one of the most unusual capital allocation decisions I have ever seen,”  Todd Rethemeier, an analyst with Hudson Square Research in New York told Bloomberg.

CenturyLink, like Frontier Communications and Windstream, have all been popular “investment-grade” stocks for investors that rely on dividend payouts. All three phone companies have paid extremely high dividends to attract shareholder investment, but the ongoing decline in revenue from landline customers disconnecting service has made high dividend payouts financially untenable. CenturyLink has lost six percent of its landline customers in the 12 months ending last September, a decline of 857,000 lines. In the last two years, the dividend payout has cost CenturyLink 50-55 percent of its free cash flow. That is unsustainable at a time the company is losing upwards of $25 million in operating revenue every quarter.

From: Seeking Alpha

CenturyLink executives told shareholders in the company’s latest quarterly conference call that much of CenturyLink’s investment will continue to build fiber links to serve highly profitable cell towers. The company also plans to further expand its fiber-to-the-neighborhood service Prism, which works similarly to AT&T’s U-verse. Phoenix, Arizona is the company’s next major target for rollout, with the service already soft-launched in certain neighborhoods. But do not expect CenturyLink to begin a spending spree to expand Prism rapidly into other communities, even if it means losing more landline customers.

The Minneapolis Star-Tribune reports CenturyLink, the city’s primary phone company, is now in a race against time in a country where more than a third of Americans rely on cellphones — a service CenturyLink does not provide. In response, CenturyLink has relied on its multi-platform Prism service, which can provide phone, broadband, and cable-TV in its bid to stay relevant and help improve earnings growth. The company also sees corporate customers as a major income source, and has expanded into the business of cloud computing with its acquisition of Savvis.

But the company has a more immediate potential challenge. The Communications Workers of America (CWA), the union representing as many as 13,000 CenturyLink employees, has authorized its executive board to set a strike date. The company’s labor contract expired in October and bargaining has yet to achieve a renewal. Workers are complaining about significant benefits cuts, especially to health care plans.