Frontier Communications continues to lose access line customers at a rate of 8.5 percent overall, 9.8 percent in the former Verizon service areas they acquired more than a year ago.  The company’s third quarter results show lackluster performance as revenue declines of 30 percent impacted both their residential and business customer units.

Company officials spent most of the question and answer session responding to Wall Street concerns about revenue, spending, promotions, customer churn, the company’s pension fund, and the outright defection of Frontier FiOS TV customers away from the fiber network the phone company inherited from Verizon.

Mike McCormack of Nomura Securities suggest the weak figures should concern investors because it may show Frontier unable to compete effectively with cable companies, which also offer phone service.

Frontier CEO Maggie Wilderotter put her best face forward trying to promote the company’s successes, particularly bringing DSL broadband to former Verizon service areas:

“Our broadband expansion reached an additional 126,000 new homes in the acquired properties during the quarter, bringing our year-to-date total to 352,000 which is on track to reach our 2011 goal of increasing broadband availability to more than 400,000 additional homes. Broadband availability in the acquired properties is now 80%, a significant increase from the mid-60% range when we acquired them. As a result of our expansion and sales efforts, we had a very strong quarter for broadband growth, adding 16,900 total DSL subscribers, a 38% sequential increase from Q2. We also added 2,300 wireless data customers. This growth reflected the effectiveness of our local engagement model, as well as organic demand for broadband in both legacy and acquired properties.

“We have also largely completed our efforts to migrate middle mile congestion, which now gives us the ability to more effectively market higher speeds in markets that were already enabled.”

Frontier executives sought to portray West Virginia as their biggest success story.

Daniel J. McCarthy, Frontier’s chief operating officer and executive vice-president, claims Frontier’s installation of 12 integrated fiber rings throughout the state provides broadband capacity and integrated network capability beyond what is available anywhere else in the United States from a state-wide perspective.  McCarthy claims Frontier is on track to turn West Virginia from one of the least connected states in the nation to one of the most connected.

But Margaret Kings from MacArthur, W.V. says she’ll believe it when she sees it, and she hasn’t seen it yet.

“My extended family has experienced endless problems dealing with Frontier in this state, and I have relatives in the Panhandle to boot,” Kings says. “We have collectively won more than $300 in service credits for out of service broadband and phone service, slow speeds when it rains, and missed appointments, billing errors, sneaky charges, and contract disputes.”

Kings’ immediate family left Frontier for Suddenlink more than a year ago when she moved.

“Why pay Frontier more for phone service and 1.7Mbps broadband when I can pay Suddenlink less for their phone service and 10Mbps Internet access,” she asks.

Frontier hopes to win back former customers with new broadband services, such as their newly-introduced “Second Connect” service, which delivers a second DSL line for existing broadband homes for what the company claims is $14.99 a month.  Frontier says a few thousand customers have signed up for the service, which is now being pitched aggressively by Frontier’s call centers.

But some customers who have signed up for the service are accusing Frontier of billing fraud for wildly misleading customers about the true cost of the service.

The $14.99 price tag Frontier advertises omits modem rental fees, taxes, surcharges, and other fees customers first discover on their monthly bill.

Chris Photoni discovered, after five calls and a combined two hours on hold, the true out-the-door price for Frontier Second Connect is actually $48 for him.  The Broadband Reports reader elaborates:

Don’t waste your time. Even after the ‘corrections’ the Second Connect line cost around $48. I say ‘around,’ [because] I haven’t met a staff member yet that could correctly calculate tax. How convenient for you Frontier. Their computer system can calculate it for your bill, but is unable to calculate it when inquiring about the service.

The new ‘taxes’ come to $27.64!

Frontier is one of the worst phone companies. They have terrible customer service, and the wait times usually seem to be 20-30 minutes per call. Most issues take at least THREE calls to resolve. I’ve actually have been on hold for 25 minutes as I’m writing this.

Kings said she wouldn’t have bothered inquiring about Second Connect in the first place.

“Let me understand this,” she writes. “The same phone company that offers 1.7Mbps to my house wants another $15 a month to ‘double my speed?’  I could pay $100 a month to Frontier for 3Mbps broadband along with my phone line or pay Suddenlink $100 for 10Mbps broadband, phone and cable-TV service.”

Other highlights from the conference call:

• Frontier is getting into the home security business in a two state trial with ADT and Protection 1.  Customers will be strongly encouraged to bundle the home security service with other telecommunications products to hold them in contracts and provide discounts up to 15 percent;
• Frontier will begin to resell AT&T wireless voice and data services in bundles with existing products. Frontier plans to trial this service during the first half of 2012 before expanding it nationally.  This service is only going to be available to bundled service customers.  Why customers wouldn’t pursue an agreement with AT&T themselves, without the phone company’s involvement, isn’t well-explained;
• The company plans no significant high-value promotional offers for the 4th quarter.  They didn’t pitch any during the 3rd quarter either.  Customers with pre-existing promotions, including “free satellite TV for 2011” or “six months of free DSL” will find their bills rising considerably as those promotions expire in the next few months;
• Frontier’s pension plan is not in the best shape.  The company had to contribute $58 million of real estate to the plan fund to manage investment losses for the year;
• Frontier’s $500 FiOS installation fee has effectively kept new customers away from the fiber network.  Although the company claims it wants to maintain support for FiOS, video customers have left in droves and a smaller number of broadband customers have left as well, primarily for Comcast;
• Frontier plans to continue investment in its middle mile network to handle broadband traffic growth in 2012 and 2013.

Time Warner Cable experienced another challenging quarter, continuing to lose cable TV customers who either drop or pare back their television service, often in favor of broadband.

The company reported losses of an additional 128,000 video subscribers during the third quarter, but is partly winning that revenue back with new broadband customers — 89,000 of them in the last three months.

“Broadband is a powerful service for which there appears to be unquestionable consumer thirst,” Time Warner Cable CEO Glenn Britt said on the investor call. “Over time, we will contribute more of our plant’s capacity to broadband.”

The company is also poised to expand its marketing to win new broadband customers away from their primary competition — telephone company DSL service.  Company officials remain confounded by customers who subscribe to Time Warner’s cable TV service and take broadband from “inferior” phone company-delivered DSL.  Time Warner will continue to target these customers with win-over promotions offering a year of Road Runner Standard Service at the $29.95 promotional price point.

For the company as a whole, this is the tenth consecutive quarter of year-over-year residential broadband revenue improvement, coming from a combination of higher-priced, faster speed tiers, price increases, and subscriber additions.  The company’s DOCSIS 3 upgrade has proven itself a winner for customers and the company, with 18 percent of Time Warner subscribers now choosing 30 or 50Mbps broadband services.

Wall Street expressed some concern about statements from CEO Glenn Britt that the company was going to expand capital spending on broadband to handle increasing demand, especially from online video.  That concern comes despite the fact the company’s “capital intensity” (spending) from January-September was the lowest in the history of the company.  The full year’s capital spending is on track to reach up to $3 billion, which is consistent with what the company spent last year.

Glenn Britt

So despite the plans to spend more on broadband, that spending is actually in line with previous years.

In response to an opening question from Deutsche Bank’s Doug Mitchelson, Britt delivered an extended explanation downplaying the company’s spending plans:

In a way, there’s nothing really new here. I think you’ve seen this trend for a while. Our broadband product is very strong.

As most people know, the usage of broadband is skyrocketing, as it has been for some time. And that means that we will need to spend more money on it. We have been already, both in capital and operating expenses.

The great thing about the Internet is lots of third parties dream up lots of new applications that require more speed and more bandwidth. And we anticipate that we’re going to have to devote more capacity to that over time. We will do that by gradually removing our analog signals from our — analog TV signals from our plan. We’ve been doing that over the last several years by migrating to digital using Switched Digital technology. And over the next several years, we’ll be going all digital in the TV space.

I don’t see this driving a dramatic change in our cap spending, I think, to the core of your questions. The spending has been going on for a while, and I think you’re seeing a change in mix. The video spending is going down over time. The business services is going to go up, although it didn’t this quarter. And you’re going to see the spending on broadband going up. But I don’t think the overall trajectory is mutually different.

This quarter, the company’s conference call seemed to embrace greater broadband usage, and pondering Internet Overcharging schemes like usage caps or usage-based billing never came up.  But Richard Greenfield from BTIG alluded to usage in his questions to Rob Marcus, president and chief operating officer at Time Warner Cable.

“I think we’re somewhere in the 7GB a month [range] of downstream bandwidth on a median basis,” Marcus said. “The average is much higher given the disproportionate usage by our high-end users.”

There were plenty of other facts to be gleaned from this morning’s conference call:

TV

• Whole Home DVR service has been introduced nationwide.  In the coming year, Time Warner will begin deploying “home gateways,” which reduce equipment costs;
• Time Warner is testing improved cloud-based set top boxes with home networking capabilities in parts of Syracuse, Los Angeles and Dallas.  These boxes will expand across the country in 2012.  They offer better search capability and deliver an improved user experience;
• 60% of customers reject “triple-play” offers from Time Warner and choose either “single” or “double-play” service instead;
• Much of Time Warner’s revenue growth is coming from rate increases on programming, services, and equipment;
• TV Essentials, the smaller, less expensive video package, is now available in New York City and Northeast Ohio, as well as upstate New York. It will launch nationwide by year end.  Unsurprisingly, company officials admit the less-than-attractive channel lineup has resulted in the vast majority of customers calling about the offering taking the traditional video package instead;
• Customers continue to drop ancillary services to cut their cable bill.  The increasingly expensive DVR box is a new target for cutting, and premium movie channels, adult pay-per-view, and mini-pay services all continue to suffer significant declines in business;
• The Google-Motorola deal will likely have little impact on Time Warner’s set top boxes, which primarily come from Cisco and Samsung.

Broadband

• By the end of the year, Time Warner plans to offer an Android-based TV Everywhere application similar to the existing iPad application, which will also continue to be upgraded to include on-demand offerings;
• Time Warner will make their TV Everywhere service available on game consoles, smart TVs and PCs in the near future;
• New York City customers will soon be able to select from a range of local broadcast stations on the company’s iPad app.  Other markets will start to see local channels added to this app in 2012;
• Major parts of Time Warner’s capital investments this year are: building data centers in Charlotte and Denver, conversion to all-digital in Maine to make room for enhanced broadband, and the continued rollout of DOCSIS 3.0. The company is also continuing to spend significantly on wiring commercial buildings to sell services to business customers;
• TV Essentials customers will soon be offered a “lite user” slower speed discount broadband plan to accompany their video package;
• In Los Angeles, Wideband 50Mbps customers also get 2 gigabytes of 4G/3G mobile broadband for no additional monthly charge on the company-branded Clearwire service. For Turbo Plus and Wideband 30Mbps customers, they can get the same 4G/3G capability for an additional $10 a month. Standard and Turbo customers can get it for an extra $20.  The company’s mobile broadband add-on product has not enjoyed much success with paying customers, however.  Time Warner hopes the value-added bundling of mobile broadband will attract more interest.

Phone

• Cord-cutting is now impacting Time Warner “digital phone” service, too.  Customers are increasingly reluctant to purchase phone service from any landline provider.  Now Time Warner’s regular pricing is starting to cost them business.  Executives revealed Time Warner’s “digital phone” service costs the company $9.06 to provide.  They charge consumers $30.  With that kind of profit margin, the company admits it will have to get more aggressive in pricing to attract new customers (and potentially keep existing ones);
• Time Warner lost 8,000 residential voice line customers last quarter, cushioned by net additions of 13,000 business line customers;
• The company continues to show little interest in selling cell phone products or services, either owned by themselves or others.  Mobile data remains an exception.

The primary backers of the ABC Plan

Today, Federal Communications Commission Chairman Julius Genachowski is scheduled to deliver a major announcement on reforming the Universal Service Fund (USF) — a federal program designed to subsidize the costs of delivering telecommunications services to rural America.

The reform, long overdue, would transition a significant percentage of USF fees every telephone customer pays towards broadband deployment — a noble endeavor.  For years, Americans have paid more than $5 billion annually to phone companies large and small to maintain rural landline service.  Small co-op phone companies depend on the income to deliver affordable service in places like rural Iowa, Kansas, and Alaska.  But large companies like AT&T and Verizon also collect a significant share (around $800 million annually) to reduce their costs of service in the rural communities they serve.

That’s particularly ironic for AT&T, which time and time again has sought the right to abandon universal rural landline service altogether.

Genachowski’s idea would divert USF funding towards broadband construction projects.  The argument goes that even low speed DSL requires a well-maintained landline network, so phone companies that want to deploy rural broadband will have to spend the money on necessary upgrades to provide just enough service to earn their USF subsidies.  The lower the speed, the lower the cost to upgrade networks and provide the service.  Some may choose wireless technology instead.  Since the telephone companies have fought long and hard to define “broadband” as anything approaching 3-4Mbps, that will likely be the kind of speed rural Americans will receive.

At first glance, USF reform seems like a good idea, but as with everything at the FCC these days, the devil is always in the details.

Dampier: Another day, another self-serving plan from the phone companies that will cost you more.

While headline skimmers are likely to walk away with the idea that the FCC is doing something good for rural broadband, in fact, the Commission may simply end up rubber stamping an industry-written and supported plan that will substantially raise phone bills and divert your money into projects and services the industry was planning to sell you anyway.

Stop the Cap! wrote about the ABC Plan a few weeks ago when we discovered almost all of the support for the phone-company-written proposal comes from the phone companies who back it, as well as various third party organizations that receive substantial financial support from those companies.  It’s a dollar-a-holler astroturf movement in the making, and if the ABC Plan is enacted, you will pay for it.

[Read Universal Service Reform Proposal from Big Telcos Would Rocket Phone Bills Higher and Astroturf and Industry-Backed, Dollar-a-Holler Friends Support Telco’s USF Reform Plan.]

Here is what you probably won’t hear at today’s event.

At the core of the ABC Plan is a proposal to slash the per-minute rates rural phone companies can charge big city phone companies like AT&T and Verizon to connect calls to rural areas.  You win a gold star if you correctly guessed this proposal originated with AT&T and Verizon, who together will save literally billions in call connection costs under their plan.

With a proposal like this, you would assume most rural phone companies are howling in protest.  It turns out some are, especially some of the smallest, family-run and co-op based providers.  But a bunch of phone companies that consider rural America their target area — Frontier, CenturyLink, FairPoint and Windstream, are all on board with AT&T and Verizon.  Why?

Because these phone companies have a way to cover that lost revenue — by jacking up your phone bill’s USF surcharge to as much as $11 a month per line to make up the difference.  In the first year of implementation, your rates could increase up to $4.50 per line (and that fee also extends to cell phones).  Critics have been widely publicizing the increased phone bills guaranteed under the ABC Plan.  In response, advocates for the industry are rushing out the results of a new study released yesterday from the Phoenix Center Chief Economist Dr. George S. Ford that claims the exact opposite.  Dr. Ford claims each customer could pay approximately $14 less per year in access charges if the industry’s ABC Plan is fully implemented.

Genachowski

Who is right?  State regulators suggest rate increases, not decreases, will result.  The “Phoenix Center,” unsurprisingly, has not disclosed who paid for the study, but there is a long record of a close working relationship between that research group and both AT&T and Verizon.

But it gets even worse.

This shell game allows your local phone company to raise rates and blame it on the government, despite the fact those companies will directly benefit from that revenue in many cases.  It’s a real win-win for AT&T and Verizon, who watch their costs plummet while also sticking you with a higher phone bill.

The USF program was designed to provide for the neediest rural phone companies, but under the new industry-written rules being considered by the FCC, just about everyone can get a piece, as long as “everyone” is defined as “the phone company.”  There is a reason this plan does not win the hearts and minds of the cable industry, independent Wireless ISPs, municipalities, or other competing upstarts.  As written, the USF reform plan guarantees virtually all of the financial support stays in the Bell family.  Under the arcane rules of participation, only telephone companies are a natural fit to receive USF money.

Genachowski will likely suggest this plan will provide for rural broadband in areas where it is unavailable today.  He just won’t say what kind of broadband rural America will get.  He can’t, because the industry wrote their own rules in their plan to keep accountability and oversight as far away as possible.

For example, let’s assume you are a frustrated customer of Frontier Communications in West Virginia who lives three blocks away from the nearest neighbor who pays $50 a month for 3Mbps DSL broadband.  You can’t buy the service at any price because Frontier doesn’t offer it.  You have called them a dozen times and they keep promising it’s on the way, but they cannot say when.  You may have even seen them running new cable in the neighborhood.

Frontier has made it clear they intend to wire a significantly greater percentage of the Mountain State than Verizon ever did when it ran things.  Let’s take them at their word for this example.

The telephone companies have helpfully written their own rules for the FCC to adopt.

Frontier’s decision to provide broadband service in West Virginia does not come out of the goodness of their heart.  At a time when landline customers are increasingly disconnecting service, Frontier’s long-term business plan is to keep customers connected by selling packages of phone, broadband, and satellite TV in rural markets.  Investment in DSL broadband deployment has been underway with or without the assistance of the Universal Service Fund because it makes financial sense.  Our customer in West Virginia might disconnect his landline and use a cell phone instead, costing Frontier any potential broadband, TV and telephone service revenue.

Under the ABC Plan, Frontier can be subsidized by ratepayers nationwide to deliver the service they were planning to provide anyway.  And what kind of service?  The same 3Mbps DSL the neighbors have.

If your county government, a cable operator, or wireless competitor decided they could deliver 10-20Mbps broadband for the same $50 a month, could they receive the USF subsidy to build a better network instead?  Under the phone company plan, the answer would be almost certainly no.

Simon Fitch, the consumer advocate of the Federal-State Joint Board on Universal Service, which advises the FCC on universal service matters, says the ABC Plan is a consumer disaster.

“Although a stated goal of the FCC’s reform effort is to refocus universal-service funding to support broadband, the industry’s ABC plan requires no real commitment to make broadband available to unserved and underserved communities,” Fitch writes. “Companies would receive funds to provide broadband with upload and download speeds that are already obsolete. States would be given no real enforcement power.”

Fitch is certain companies like AT&T and Verizon will receive enormous ratepayer-financed subsidies they don’t actually need to provide service.

Back to AT&T.

In several states, AT&T is seeking the right to terminate its universal service obligation altogether, which would allow the same company fiercely backing the ABC Plan to entirely walk away from its landline network.  Why?  Because AT&T sees its future profits in wireless.  Under the ABC Plan, AT&T could build rural cell towers with your money to provide “replacement service” over a wireless network with or without great coverage, and with a 2GB usage cap.

At the press conference, Genachowski could still declare victory because rural America would, in fact, get broadband.  Somehow, the parts about who is actually paying for it, the fact it comes with no speed, coverage, or quality guarantees, and starts with a 2GB usage cap on the wireless side will all be left out.

Fortunately, not everyone is as enamored with the ABC Plan as the groups cashing checks written by AT&T.

In addition to state regulators, Consumers Union, the AARP, Free Press, and the National Association of Consumer Advocates are all opposed to the plan, which delivers all of the benefits to giant phone companies while sticking you with the bill.

There is a better way.  State regulators and consumer groups have their own plans which accomplish the same noble goal of delivering subsidies to broadband providers of all kinds without increasing your telephone bill.  It’s up to the FCC to demonstrate it’s not simply a rubber stamp for the schemes being pushed by AT&T and Verizon.

CenturyLink has unveiled its own discounted Internet access program for the income-challenged, loaded with tricks and traps buried in the fine print.

Dubbed CenturyLink Internet Basics, the 1.5Mbps DSL service is available to those who currently qualify for Lifeline Affordable Telephone Service, a federal program that provides discounts on basic monthly telephone service to eligible low-income consumers.  The service sells for $9.95 a month, before taxes and fees.

But buried in the fine print are a number of surprises that deliver higher prices and some nasty surprises (underlining ours):

• Listed High-speed Internet rate of $9.95/mo. applies for first 12 months of service (after which the rate reverts to $14.95/mo. for the next 48 months of service), and requires a 12-month term agreement or 24-month term agreement (if purchasing Netbook);
• Customer must either lease a modem/router from CenturyLink for an additional monthly charge or purchase a modem/router from CenturyLink for a one-time charge, and a one-time High-Speed Internet activation fee applies;
• A one-time professional installation charge (if selected by customer) and a one-time shipping and handling fee applies to customer’s modem/router;
• Taxes, Fees, and Surcharges – Applicable taxes, fees, and surcharges include a carrier Universal Service charge, carrier cost recovery surcharges, state and local fees that vary by area and certain in-state surcharges. Cost recovery fees are not taxes or government-required charges for use (which means they are little more than bill padding junk fees). Taxes, fees, and surcharges apply based on standard monthly, not promotional, rates;
• The first bill will include charges for the first full month of service billed in advance, prorated charges for service from the date of installation to bill date, and one-time charges and fees described above.
• Netbook purchase must be paid in full to CenturyLink prior to shipment. Shipping and handling fees, and applicable taxes will apply. If customer purchases Netbook as part of the CenturyLink Internet Basic service, all warranty and support for the Netbook and accompanying equipment will be covered by the manufacturer or other identified third party, not CenturyLink.
• No software applications or wireless service are included with the Netbook.
• An early termination fee will apply based on the applicable monthly recurring service fee multiplied by the number of months remaining in the minimum service period, up to $200.

Unlike Comcast, CenturyLink claims it will provide equivalent discounts for faster speeds — an important consideration for those with school-age children at home who may need multimedia capability for research and studies.

CenturyLink also offers a netbook computer for an additional $150, plus shipping and taxes, at the time of enrollment in the program.  The service also includes educational training, a 30-day money back guarantee, Norton Security Suite, and parental controls.

“While the Internet has become part of daily life for most Americans, many still aren’t connected because the cost is beyond their reach. CenturyLink is pleased to introduce this new program that offers affordable High-Speed Internet service and computers to those who need help getting online,” said CenturyLink CEO and President Glen F. Post, III.

That and the fact the company was required to offer discounted Internet service as a condition for the approval of their acquisition of Savvis, a web hosting company, according to Broadband Reports.

Like Comcast, participation in the program requires meeting a number of terms and pre-conditions:

AT&T has lost a case it appealed all the way to the U.S. Supreme Court to win favorable tax treatment for income it received from the Universal Service Fund program, designed to help underwrite the costs of providing rural telephone service.

AT&T was seeking a $500 million income tax refund on its 1998 and 1999 federal taxes from money the government provided AT&T.

Federal tax law requires phone companies to treat the USF revenue as income, subject to regular taxation.  AT&T argued the money was actually a “contribution to capital,” which would have substantially reduced the company’s tax burden.  Contribution to capital, as a concept, has been the subject of several corporate lawsuits over the years.  The genesis of court challenges comes from a 1925 case — Edwards v. Cuba Railroad Co., that held government subsidies provided to induce the construction of facilities and provision of service were not taxable income within the meaning of the Sixteenth Amendment.

AT&T believed that USF funding subsidized the delivery of phone service, so it cannot be considered taxable income.

The U.S. Supreme Court disagreed.  The justices elected to leave intact a lower court ruling that threw AT&T’s arguments aside.

Considering the long history of court losses for other corporate entities who have argued similar cases all the way back to the 1950s, the decision should not come as a surprise to the phone company, and AT&T’s reaction was muted.

“We are disappointed with the Supreme Court’s decision,” the company said in a statement. “However, AT&T does not expect any impact to our financial statements.”

The case is AT&T v. United States, 10-1204.