Windstream, one of America’s largest independent phone companies, has reported lower profits in the fourth quarter, declining four percent year-over-year to $72.4 million.  Windstream’s core business continues to decline — losing another 36,000 landline customers during the quarter, as Americans continue to drop traditional telephone service.

But Windstream’s ongoing acquisitions, as structured, are helping boost revenues on the company’s balance sheet.  Windstream completed four acquisitions in 2010: the phone companies Iowa Telecom, Nuvox and Q-Comm Corp, and a data center operator, Hosted Solutions.

Although boosted revenue numbers can temporarily improve a company’s share price, investors are unlikely to ignore Windstream’s ongoing decline in profits for much longer.  Windstream officials expect revenue growth for 2011 to remain flat, or potentially edge up by 3 percent. But part of that revenue growth comes from $40 million in broadband stimulus funding the company expects to receive from the Obama Administration during the year.

Windstream's 2009 announced purchase of Iowa Telecom expanded Windstream's reach.

Windstream has made inroads in expanding broadband service in its largely rural service areas.  The company added 12,000 broadband customers during the quarter, mostly for its DSL product.

Windstream’s results show a growing disparity between its residential customers and its business services unit.  While growth on the residential side has been flat to anemic at best, the company is finding better results from its business customers.  The decision to acquire a data center is part of the company’s growing strategy towards those clients.  Windstream plans to spend a considerable amount of its capital during 2011 on improving its data hosting and wireless backhaul product lines to service these customers.

“We’ve made great strides in our business channel, which now represents roughly half of Windstream’s total revenue and importantly, these revenues are growing,” said Brent Whittington, chief operating officer at Windstream.

Windstream’s acquisition plans for 2011 appear cooler than in previous years as it attempts to reduce its leveraged debt.  Most of Windstream’s growth has been attributed to its aggressive mergers and acquisitions strategy.  The company, created in 2006 from Alltel’s landline division and Valor Telecom has grown into a national player, serving nearly 3.4 million customers in 23 states.  Among its larger acquisitions — CT Communications (2007), D&E Communications (2009), and Iowa Telecom (2010).

Despite the lower profits, Windstream’s dividend payout ratio was 57 percent for the year, and the company expects to pay between 52 percent and 59 percent of earnings for 2011.

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)

The telephone landline business is hardly a growth industry, as an average of 5-7 percent of customers disconnect their home phone service every quarter, but you wouldn’t know that from the dividends being paid to stockholders.

From AT&T, Bell Canada, Frontier to Qwest — the companies that speak in terms of keeping their customer defection rates down are paying dividends that often exceed earnings.

Among the worst of all — Frontier Communications, whose outsized dividend is expected to reach 75 cents a share.  That, despite the fact analysts predict the phone company will earn only 40 cents a share or so this year.

Where do these phone companies expect to make their money?  Their broadband and wireless divisions.  AT&T and Bell Canada are able to cover landline losses with enhanced profits from their IPTV services like U-verse and Fibe.  Frontier and Qwest expect to survive on providing cheap-to-deploy DSL service in rural areas avoided by cable operators.

Kent Carper says magicJack has been stiffing Kanawha County for 911 fees the Florida-based phone company has refused to collect from its customers in West Virginia.

Carper, who serves as president of the County Commission, is taking his case to the West Virginia Public Service Commission (PSC) with the hope they’ll order the West Palm Beach-based YMax Communications, which owns the service, to start paying up.

“There’s nothing ‘magic’ about magicJack,” Carper told the Charleston Gazette. “It erodes the ability of the 911 center to pay for the services it’s being mandated to provide. MagicJack is not paying a penny, and their position is they don’t have to.”

Kanawha County currently collects a surcharge of $3.34 a month from landline and “digital phone” customers, $3 a month from those with cell phones.  If the county wins its dispute, the costs for 911 service will far outweigh the $19.95 a year magicJack charges for its own service.

Even Carper admits, “They’re practically giving away telephone service.”

It’s a high stakes battle for magicJack, because if it loses, other counties will surely follow with demands for 911 surcharges of their own.  magicJack officials argue they cannot collect the fees Kanawha County wants because of the way the product is marketed — typically through annual subscriptions.

magicJack’s lawyers also argue the company is not selling a true “voice-over-IP” (VoIP) service, comparable to Vonage, cable’s “digital phone” products, or other similar services.

The Federal Communications Commission partly defines VoIP as a single service for making and receiving phone calls over the public telephone network.  That’s a distinction that allows most Skype customers to avoid getting hit with fees and surcharges — Skype has a business firewall between their incoming and outgoing services. SkypeOut, which allows callers to connect with non-Skype customers, is a subscription service and does not support 911 calls.  SkypeIn service requires most users to dial from their computer, not a traditional phone line, unless a customer optionally rents a phone number from Skype.

The inventor of magicJack, Dan Borislow, said in legal filings with the PSC that customers are only buying a license for the device and the accompanying software — making and receiving calls are handled by two different services that customers get for free as part of the annual license:

The magicJack is a portable device that can be used by a customer anywhere in the world by plugging the device into a computer USB port, provided the computer has a broadband connection.

Upon purchasing a magicJack device, a customer receives a one year license, with the option to renew for an additional year or years, of software commonly known as a “softphone”. The software allows the magicJack device to operate.

The softphone operating software license gives the customer the option to subscribe to magicIn, which is a service offered by YMax. MagicIn permits a customer to obtain a phone number and to receive phone calls via his or her magicJack device.

The softphone license also permits a customer to subscriber to a service offered by magicJack known as magicOut. Subscription to the magicOut service allows a customer to make outgoing calls to the United States, Canada, Puerto Rico and the Virgin Islands through his or her magicJack device.

A magicJack purchaser who subscribes to magicOut or magicIn is not charged for either subscription, and the purchaser is also not billed for incoming or outgoing calls made or received through the magicJack device.

Kenawha County is West Virginia's most populous, home to Charleston, the state capital.

Billy Jack Gregg, the PSC’s former consumer advocate who was hired as a consultant by the Kanawha County Commission, thinks that’s nonsense. Gregg suspects magicJack is trying to avoid being designated as a VoIP provider because of mandated fees and surcharges that could come along for the ride.  Gregg testified few, if any magicJack customers are aware of “magicIn” or “magicOut,” and they don’t have the option of choosing one or the other anyway.

Gregg left Wal-Mart employees scratching their heads when he proved his point trying to only purchase the magicOut outgoing call service.  They had no idea what he was talking about.

Presumably, neither does the PSC which has rejected repeated attempts from magicJack and YMax to dismiss the case using those arguments.  Hearings are scheduled for March 1-2.

Carper says he has nothing personal against magicJack — he just wants the company to realize its refusal to collect and pay 911 fees affects the county emergency operations center’s ability to serve the public.

“Simply put, the failure of any provider to collect and remit fees impacts public safety and the ability of Metro 911 to serve the citizens of Kanawha County,” he said. “It erodes our ability to afford these emergency services.”

Some outside observers have zeroed in on a related matter — the very steep $3+ monthly 911 fees demanded by the county, West Virginia’s most populous and home to the state capital, Charleston.

Most 911 surcharges in the United States range between $0.35-0.50, with some larger cities across the country charging one dollar.  Some state laws prohibit fees in excess of $2 per month.

In earlier filings, magicJack’s lawyers appeared amenable to negotiating smaller payments, but not the $3+ county officials are demanding.

[flv width=”576″ height=”344″]http://www.phillipdampier.com/video/Boston Globe MagicJack Review.flv[/flv]

The Boston Globe’s video review of magicJack was more charitable than the accompanying write-up, which called its marketing “gaudy,” “sleazy,” and “crude.”  Author Hiawatha Bray also didn’t think that highly about the quality of the service he received, saying the product doesn’t inspire confidence and is not suitable as a home phone replacement.  Still, for long distance calls, a second line, or for travelers, magicJack can save you money.  (2 minutes)

Talk. Watch. Surf. Cancel. -- Major price increases on the way for Frontier FiOS customers in Indiana.

When is a rate increase not just a rate increase?  When it’s also “an attractive offer.”

Frontier Communications is getting heat from consumers in Fort Wayne, Ind., with news their Frontier FiOS TV bill will skyrocket $12-30 higher in the coming month.

To distract from the disaster-in-the-making, Frontier representatives are waving shiny keys to customers preparing to depart, trying to “upgrade” Indiana residents back to satellite TV.

Don Banowetz, president of Frontier’s Midwest division, told Fort Wayne customers he was personally excited by the satellite offer, because customers can get free programming services for the remainder of 2011, a $700 value according to Banowetz.

“It’s not just a price increase, it’s an offer — a quite attractive offer,” Banowetz told INC Now.

Frontier is also pitching a free 32-inch “web-capable” digital television for customers signing an extended length contract.

Frontier says these televisions are going to revolutionize the way Americans watch TV over the next five years, and they believe their offer will be well-received by customers.

Not so much.

"It's not just a price increase, it's an offer!"

“I’ll bet their letter will leave out the part about how Frontier rations the Internet to their customers,” writes Fort Wayne resident Irv, who has been closely following Frontier’s Internet Overcharging antics in the Sacramento area.  “Will the coin slot be on the top or side of their television, because after you start watching, you’ll have to start paying.”

Frontier has sent letters to customers in Minnesota and California demanding up to $250 a month for residential broadband access because they used the company’s DSL service “too much.”

“Who wants to sign a two or three contract with Frontier, raise your hands,” Irv asks.  “They have just destroyed their FiOS TV service in Indiana — my fingers couldn’t dial the cable company fast enough as I take my business somewhere else.”

Another Fort Wayne resident — Nick Behm, has been following Stop the Cap! ever since Verizon announced it was selling Ft. Wayne’s phone lines to Frontier.

“You guys had this company nailed — Indiana’s regulators should hire you folks and some other actual consumers to review these deals before they get rubber-stamped, because Frontier is going to put themselves out of business and risk landline service throughout our area,” Behm writes.  “How can you ruin a fiber service that sells itself?  Let Frontier run it.”

Neither Behm or Irv will be taking up Frontier’s offer, although Behm still has a term contract of his own — with Verizon.

“I am protected from Frontier’s cash grab for several more months, so at least I have time to prepare for the forthcoming cancellation — bye, bye Frontier.”

[flv width=”432″ height=”260″]http://www.phillipdampier.com/video/INC Now Ft Wayne New Charges for Frontier Customers 1-18-11.mp4[/flv]

INC Now delivers the bad (and according to Frontier – good) news to Fort Wayne, Ind., FiOS TV customers — your rates are going up as much as $30 a month.  (1 minute)