Cablevision Systems may be engaged in a long term effort to position itself for a sale, some New York investment firms have come to believe.  The most likely buyer?  Time Warner Cable.

The bulk of Cablevision’s assets are located in several boroughs of New York, Long Island, New Jersey and Connecticut.  Virtually all of their service areas, outside of the acquisition of Bresnan Cable in the mountain west, are adjacent to Time Warner, making an acquisition by the nation’s second largest cable operator a natural fit.

This isn’t the first time rumors of a Cablevision sale have been floated.  The Dolan family has run the cable operator for decades, with family patriarch Charles Dolan still controlling a sizable interest in the company.  Barron’s notes the senior Dolan is currently in his 80s.  Son James, current president and CEO of Cablevision, seems more interested in his leadership role at Madison Square Garden, spun-off from Cablevision last year.

“I think the Dolans have positioned the company for a sale,” Mark Boyar, who heads Boyar Asset Management, told Barron’s.

Boyar points to Cablevision’s ongoing efforts to minimize their involvement in side businesses, such as MSG and cable networks like AMC, spun away from Cablevision on June 30.

Buyers like transactions to be simple and straightforward, and Cablevision’s operations increasingly meet both standards.

On its own, Cablevision’s growth opportunities come mostly from rate increases, which subscribers routinely complain about.  The company already enjoys the highest penetration rate among major cable operators and the highest average monthly revenue per subscriber — $150 a month vs. $113 for Time Warner Cable.  With a depressed economy and fierce competition from Verizon FiOS, growing the business (and the stock price) has become increasingly difficult in a maturing industry unlikely to attract new subscribers.

Among the only prospects for subscriber growth on the horizon comes from satellite TV subscribers.  But that alone may not be enough to keep investors satisfied, much less excited.  A sale could bring shareholders a massive return on their investment, particularly if a bidding war breaks out between likely buyers Time Warner Cable and Comcast.  Shareholders ultimately own the company, and should the Dolan family lose their love affair with cable, Cablevision and their subscribers will likely find themselves on the auction block.

Now selling for the "go away" price of $500 for installation.

Frontier Communications has proven it can successfully herd customers off the award-winning advanced fiber network it inherited from Verizon Communications just by increasingly gouging customers until they call and cancel.

The phone company reports success in ridding itself of 9,900 FiOS TV customers in the third quarter alone, and 3,100 FiOS Internet customers left with them in Indiana and Oregon.

Frontier CEO Maggie Wilderotter and other company executives made it known last spring that FiOS fiber optics was the unwanted stepchild best left forgotten when telling investors the company considered the fiber network unprofitable.  The company has since taken to hike rates and raised the price for service installation to as much as $500.  The combined increases have made the cable competition — Comcast — blush and look downright cheap by comparison.

Where did Frontier’s customers go?  Several left for Comcast, but others were persuaded to switch to an aggressively-priced satellite TV promotion, at least until it expires.  Frontier added 12,200 satellite subscriptions nationwide last quarter and 16,200 new DSL customers, many in ex-Verizon service areas that currently have no other choice for broadband.

Tiny Ringgold Telephone, which serves 122 square miles of northwestern Georgia, has pulled the plug on the company’s own video IPTV package and is encouraging customers to watch all of their television shows online or through a satellite TV package offered by DISH Network.

Ringgold was in the IPTV business long before AT&T began offering U-verse, having launched video over phone lines back in 2003.  The phone company invested heavily in producing local programming for their customers, including local sports, issues in the news, health and fitness, and educational shows for and about the region.  The hope was that the phone company would give cable subscribers enough reasons to cut the cable cord for good.  They’ve invested heavily to remain on the cutting edge, something uncommon for traditional wireline phone companies.

In 2000, Ringgold announced they would deliver a High Speed Internet connection to every single customer who wanted it throughout their entire service area.  The company has continuously upgraded their facilities, offering traditional copper wire customers bonded DSL service up to 25Mbps and their growing number of fiber customers speeds up to 50/50Mbps.  That’s an enormous difference over other nearby providers, including AT&T, Frontier Communications, and CenturyLink which deliver customers 1-3Mbps DSL with no fiber in sight.  The other alternative is service from Charter Cable, among the worst-rated cable companies in the country.

But that level of innovation isn’t unusual for Ringgold, which has outpaced traditional Bell System phone companies since it was first founded in 1912 with just eight telephone lines.

In 1950, Ringgold was among the first independent companies in Georgia to switch from manual to dial telephones.  By the 1990s, Ringgold realized the future was in fiber optics, and planned to replace a significant amount of copper wiring that had been on phone poles for decades.  The phone company thought it had mastered the ultimate triple-play fiber-optics package of voice, broadband, and television, until their small size got in the way.

Ringgold discovered that “bigger is better” in the pay television business.  The largest cable operators enjoy the best bargaining power for just about everything.  Companies like Comcast and Time Warner Cable can use their enormous customer base to negotiate cut rate pricing on programming and equipment and stand-up to greedy programmers that demand excessive payments for programming.  Ringgold discovered they can’t.

Light Reading highlighted the challenges Phil Erli, executive vice president of Ringgold, spoke about recently:

• Ringgold could not cut a deal with equipment vendors that would deliver DVR and HD functionality at a level above that of the local cable company.  Large set top box manufacturers deal in volume, and smaller players like Ringgold are often left with inferior technology at prices higher than large cable companies pay for the most advanced equipment available.  Erli tried to innovate a new approach using Microsoft’s Mediaroom, but discovered that required a large number of servers too costly for a small phone company to consider;
• Programming costs were completely out of line.  Volume discounting delivers enormous savings, if you are a large-sized national provider.  Large cable companies pay a fraction of the prices independent providers pay for programming, and local broadcast stations held the company hostage on retransmission consent agreements.  Erli noted the local NBC station, presumably in nearby Chattanooga, demanded an incredible $5.25 a month per subscriber.  That rate was so high, it would turn the company’s video venture unprofitable.  Even worse, Erli relates, “these weren’t negotiations, they told me what we would pay.”  Erli realized that just one programmer could make or break Ringgold’s video service profits;
• The company’s video lineup, due to wholesale costs, was inferior to that offered by the local cable company.

Ringgold's broadband network is superior to anything the competition offers in northwestern Georgia.

With these challenges, the phone company decided enough was enough and dropped its video package, redirecting customers to DISH Network for satellite-TV, and more recently to online Internet video as an alternative to pay television.

Something you won't likely see from your cable company.

While most broadband providers treat online video as a parasite, Ringgold sees it as the ultimate business opportunity to reinvent themselves through their broadband service — selling super high speed access to content that someone else provides and has to worry about.

They’re considering a new customer promotion that includes a Roku, Apple TV, or Clearleap-powered set-top box to integrate broadband connections with television sets.  The company is even educating customers about the growing number of programs available for free (or with a low cost subscription) online with an interactive web tool.

Ringgold’s new solution for online video also includes some small revenge on high programming costs, giving subscribers an integrated over-the-air antenna system that can pick up nearly a dozen HD channels, including that NBC station, for free.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Internet TV.flv[/flv]

Here is something you don’t see every day: Ringgold Telephone encourages its customers to get online and watch TV shows for free.  (1 minute)

Wall Street is pushing back against Justice Department efforts to unwind a merger proposal between AT&T and T-Mobile that will leave America with three national carriers.  Some investment firms even believe three carriers are still “too many” and want mergers and acquisitions to accelerate to allow two dominant national carriers to emerge.

“It’s pretty clear what the end game is in wireless,” said Julie Richardson, managing director at Providence Equity Partners Inc. “LTE, 4G — you have to have those services to compete. One of the most interesting things to watch in telecom will be these players coming together.”

Richardson shares the view among many on Wall Street that carriers forced to build costly 4G services like LTE need less competition and more cash-on-hand to pay for upgrades and to obtain needed spectrum.

Only AT&T and Verizon Communications have the resources to support a national 4G Long Term Evolution network, Richardson said. Sprint, the third-biggest U.S. wireless operator, is struggling to compete against larger rivals and has lost money for 15 consecutive quarters, Bloomberg News reports.

Among smaller players, Richardson believes the future is clear: mergers, acquisitions, and partnerships.  Sprint is moving increasingly closer to the nation’s cable companies, which have sought a cost-efficient way to deliver the ultimate “quad-play” service package that includes wireless, landline, cable-TV, and Internet service, all from the cable company.  But talk of constructing competing cell networks has gone largely nowhere, and cable companies that do offer some type of wireless service typically resell an existing service under their own brand.  Road Runner Mobile, from Time Warner Cable, for example, is really Clearwire under a different name.  Same for Comcast’s wireless Internet service.  Cox is pitching “unbelievably fair” wireless phone service that actually comes from Sprint.

But cable operators currently don’t seem to be interested in outright acquisitions of cell companies like Sprint, preferring to partner with them instead.

Clearwire, which needs financing and better wireless spectrum, may eventually find a friend in Dish Networks, the satellite TV company.  Dish controls wireless frequency spectrum it currently does not use, and has expressed an interest in expanding beyond a traditional satellite television provider.  An acquisition of Sprint or Clearwire could help them accomplish that.

Losing customers.

A year after Frontier Communications assumed control of Verizon’s assets in the Pacific Northwest, customers are fleeing the company’s inherited fiber-to-the-home service FiOS, after announcing a massive (since suspended, except in Indiana) 46 percent rate hike for the television portion of the service.  A new $500 installation fee has kept all but the bravest from considering replacing customers who have left for Comcast and various satellite TV providers.

Frontier’s second-quarter financial results revealed the company has lost at least 14,000 out of 112,000 FiOS TV customers in the region (and in the Fort Wayne, Ind. market, where the service is also available.)

Early reaction to the original rate hike announcement started customers shopping for another provider — mostly Comcast, which competes in all three states where Frontier FiOS operates.  Even after the rate hike was suspended in some markets, intense marketing activity by Frontier to drive customers towards its partnership with satellite provider DirecTV managed to convince at least some of those customers to pull the plug on fiber in return for a free year of satellite TV, although an even larger number presumably switched to the cable competition.

D.A. Davidson, a financial consulting firm, told The Oregonian the message was clear.

“They would love to get rid of the FiOS TV customers,” Donna Jaegers, who follows Frontier, told the newspaper. “They’re programming costs are very high compared to the rates that they charge.”

Jaegers said Frontier Communications completely botched their efforts to transition customers away from FiOS TV towards satellite, because most of those departing headed for the cable competition, attracted by promotional offers and convenient billing.

Many others simply don’t want a satellite dish on their roof, and are confounded about Frontier’s message that satellite TV is somehow better than fiber-to-the-home service.

Frontier admits its FiOS service is now underutilized, but claims it will continue to provide the service where it already exists.

Wilderotter

Frontier Claims Its DSL Service is Better Than Cable Broadband

Frontier’s general business plan is to provide DSL service in rural areas where it faces little or no competition, and most of Frontier’s investment has been to upgrade Verizon’s landline network to sustain 1-3Mbps DSL service, for which it routinely charges the same (or more) for standalone broadband service that its cable competitors charge for much faster speeds.

But Frontier Communications CEO Maggie Wilderotter says their DSL service is better than the cable competition.

“A key differentiator between our network and cable competition is that you consistently get the speed you pay for,” Wilderotter told investors on a conference call. “There’s no sharing at the local level. High demand for bandwidth-intensive applications like video are putting pressure on all wired networks. To that end, we want to make sure that we have more than enough capacity to satisfy the expectations of our customers. We’re spending capital in all parts of the network with specific emphasis in the middle mile, which will enable us to consistently deliver a quality customer experience for our customers of today and tomorrow.”

Frontier Communications CEO Maggie Wilderotter defends anemic broadband additions during the 2nd quarter of 2011 and tries to convince investors DSL service is better than the cable competition. August 3, 2011. (4 minutes)
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Netflix Traffic Represents 25% of Frontier’s Broadband Traffic; Online Video — 50%

Wilderotter admitted Frontier’s broadband network is overcongested in many regions, which she partly blamed for the company’s anemic addition of new broadband customers.

She noted Netflix, which has itself consistently rated Frontier the worst wired broadband provider in the country for being able to deliver consistent, high quality access to their streaming service, represents one-quarter of all capacity usage of Frontier’s broadband network.

“Video is about 50 percent,” Wilderotter added.  In an investor conference call, she explained network congestion in more detail:

“In [the second quarter], we had many areas with unacceptable levels of network congestion, which negatively impacted our growth in net high-speed additions.” Wilderotter said. “We believe all of the major congestion issues will be fixed by the end of [the third quarter], and that will enable us to drive higher growth and net broadband activation in [former Verizon service areas.]”

“What we decided to do is to go for fixing the middle mile, which is the [central office] to the […] neighborhood and to expand that capability by 100-fold. And then also, expand from the [central office] out to the Internet and make sure that we have huge capacity to deliver and receive capability to our customers. So when we sell 6 meg, 10 meg, 25 meg, 50 meg, the customer gets what we sell them and that was extremely important for us.”

“So what we did is in the areas where we saw the congestion increase based upon usage increases, and we’ve built new households. We’ve held off on marketing to a lot of those new households until we fixed the congestion problem because we didn’t want to exacerbate what we had already. We’ve shifted capital in terms of the mix of how we’ve spent capital to fix this problem. I’d say we’re probably 75% of the way there in fixing congestion. This quarter is another big quarter for us to get all of the major issues out of the network, which will allow us in the back end of this quarter through the fourth quarter, to really start pushing the penetration levels where we’ve built new households in the areas that have been affected by congestion.”

Frontier Introduces Line Bonded DSL — Two Connections Can Improve DSL Speeds

Frontier Faster? Frontier announces line bonded DSL.

Frontier Communications also announced the introduction of Frontier Second Connect, a DSL line bonding product that delivers two physical connections to a single household.  Line bonding allows for improved broadband speeds.

“Second Connect gives our customers two exclusive connections in one household, and we’re the only provider in every market that can do that,” Wilderotter claimed.

In more urban markets, Frontier’s DSL speeds are woefully behind those available from most cable competitors.  Frontier has begun upgrading some of their legacy service areas and retiring older equipment in an effort to improve the quality of service.

“The real initiatives that we have underway are called middle mile, interoffice facilities, as well as some of the more aged equipment that’s in the network,” said Dan McCarthy, Frontier’s chief operating officer. “So as we go through, there’s about 600 projects that are underway today that will improve both the speed and capability.”

“We’ve inherited markets that there has not been upgrades to capacity in these markets for many years and fixes to the networks, plus the elements as the DSLAMs, even the DSLAMs themselves are old,” Wilderotter said. “So we’re replacing network elements in the neighborhood. We’re splitting them and moving customers to other network elements to make sure that they have a good experience.”

Frontier executives answer a question from a Wall Street banker about DSL speeds and congestion problems on Frontier’s broadband network. A detailed technical discussion ensues as the company tells investors it is redirecting some capital to fixing Frontier’s overcongested network. August 3, 2011. (5 minutes)
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Frontier Still Losing More than 8% Of Its Landline Customers Every Year

Despite broadband rollouts and incremental improvements, more than eight percent of Frontier’s landline customers disconnect service permanently every year.  Frontier called that disconnect rate an improvement over its line losses last year, which exceeded 11 percent in some areas.

“Total line losses improved to an 8.6% year-over-year decline, our lowest level since taking ownership when the pro forma loss rate was 9.7%,” reported Wilderotter. “We also improved [the] loss rate [in former Verizon service areas to] 10.1% compared to 11.4% in Q2 2010.”

Most of Frontier’s departing customers are switching to cable providers and/or cell phone service.

(Update 8-23-2011: We are now told in many areas, Frontier’s Second Connect service is not actually a bonded DSL product, but rather a “dry loop” second DSL line that carries the same speed as your primary line.  Presumably, household members can divide up who uses which DSL circuit for Internet access.  The charge for Second Connect in ex-Verizon service areas is $14.99 per month plus a second mandatory monthly modem rental fee of $6.99. If the web link does not work, it means the service is not available in your service area.)