“We’ve been talking for some time that broadband for us is not just about customer growth… it’s about revenue growth.” — Anthony Thomas, Windstream’s Chief Financial Officer

For the first time in some time, Windstream reported revenue growth during the second quarter of 2011.  The independent landline telephone company that last week acquired Rochester-based PAETEC Corporation managed to win new revenue from its business services unit and equipment sales, even as it continues to lose core landline customers, who are disconnecting service in favor of cell phones or cable telephone products.

It added up to a measurable, but meager growth of 0.1 percent for the company year-over-year during the second quarter.

Like many traditional wireline phone companies, Windstream is betting the farm in their largely rural and suburban service areas on selling broadband and maintaining the allegiance of their business customers, challenged in larger cities by increasingly aggressive “Business Class” products from competing cable companies.

Windstream executives responded to questions from Wall Street bankers during their second quarter conference call held last Friday.

While several investment firms were happy to see Windstream manage some revenue growth, several zeroed in on the company’s increased capital expenditures.  Windstream reports the company will continue major investments in fiber and broadband services, but not primarily for their residential retail customers.  Instead, Windstream hopes to capitalize on the “high margin” business of selling fiber-based cell tower services, primarily to support forthcoming 4G deployments.

Windstream officials faced some hesitancy from Wall Street about the company’s spending during Friday’s conference call, particularly from Bank of America and Goldman Sachs.

Anthony Thomas, chief financial officer for Windstream, defended the investments.

“The most important part of fiber-to-the-tower projects are the initial investments. Those are very high-margin businesses,” Thomas said. “But you have be comfortable with the upfront capital and be patient at recognizing those are 6-to 12-month investment time horizons. But once you start bringing those revenues in, the actual cost of operating a tower is low.”

Wall Street also expressed concerns about consumer broadband traffic growth, but did not broach the subject of usage control measures like usage caps or metered billing.  Windstream acknowledged the growth, primarily from online video, and said it had well-equipped data centers to handle the traffic.

Windsteam’s Consumer Strategy: Bundle Customers & Keep Them Away from Cable TV

It's all about the bundle.

Online video may be an asset for Windstream, which is facing increasing challenges retaining landline customers and up-selling them other products like broadband.  That competition comes primarily from cable companies, who are targeting Windstream customers with invitations to cut their landline service and bring all of their telecommunications business to cable.

Traditional phone companies have a major weakness in their product bundle: video.  Independent phone companies, in particular, are usually reliant on satellite TV partners to support the television component of a traditional “triple play” bundle.  Windstream’s network is capable of telephone and slow speed broadband in most areas, but the company’s involvement in video is largely left to a third party satellite-TV provider.

Customers who do not want satellite TV service may be easily attracted to a local cable provider.  But as an increasing amount of video viewing is moving online, Windstream may find customers increasingly tolerant of doing their viewing online, reducing the importance of a video package.

Windstream’s strategies to keep customers:

• Sell customers on product bundles, now enhanced with online security/antivirus options and on-call technical support for computer-related technical issues;
• Pitch Windstream’s Lifetime Price Guarantee, which locks in a single price for basic services, good as long as you remain a customer;
• Challenge cable competitors head-on with its “Quitter Campaign,” which tries to convince cable customers to “quit cable” in favor of Windstream;
• Offer faster broadband speeds in limited areas to satisfy premium customer demand.

Windstream Tries to Convince Customers the Broadband Speeds It Doesn’t Offer Do Not Matter for Most

Windstream’s efforts at winning over new broadband customers have been waning as of late.  One of the primary issues Windstream faces is the cable industry’s effective portrayal of DSL as “yesterday’s” technology, incapable of delivering the broadband speeds consumers crave.

Instead of investing in improved broadband speeds for everyone, Windstream spends its time and efforts trying to convince most customers they don’t need the faster speeds being pitched by most cable companies in the first place.

Windstream tries to convince customers they can make do with less speed (as low as 1.5Mbps), and there is no difference in speed between different providers — both questionable assertions.  (4 minutes)

The COO says 3Mbps is Windstream's biggest seller -- their website says something else.

Windstream chief operating officer Brent Whittington says his customers “don’t want to pay for incremental speed,” but is expanding their capacity to offer somewhat faster speeds.

“We still see that long term as [an increased revenue opportunity] because we know the demand is going to be there,” Whittington told investors.  “As we’ve rolled it out currently, it’s largely to — from a marketing benefits standpoint to talk about our competitiveness relative to our cable competition, but [consumers] are largely buying at 3Mbps.”

Either Whittington is mistaken, or Windstream’s website is, because it promotes the company’s 6Mbps $44.99 option as its “top seller.”  Many of Windstream’s cable competitors charge less for almost twice the speed, which may be another reason why Windstream’s broadband signup numbers are lagging behind.

Finding More Revenue: Universal Service Fund Reform & Business Services

Among the most important components of Windstream’s strategy for future growth are reform efforts underway in Washington to overhaul the Universal Service Fund.  Rural, independent phone companies like Windstream have reaped the rewards of this subsidy for years in its rural service areas.  But now Washington wants to transform the program away from simply underwriting rural landline phone service and redirect revenues to enhancing broadband access in areas too unprofitable to service today.

Windstream sees the reform as a positive development.

“It focuses USF on high-cost areas,” said Windstream CEO Jeff Gardner. “If you were a customer in a rural area of Windstream versus a customer in a rural area of a small carrier, your subsidy would much be higher, and we would get very little USF for that going forward. In this proposal, USF is really targeted towards those high-cost areas, so we kind of deal with this issue that we refer to as the rural-rural divide.”

Gardner says USF reform will end disparity of access.

“All rural customers are going to have the opportunity to get broadband out to them under this plan,” he said. The more customers paying monthly service fees, the higher the company’s revenues, assuming nothing else changes.

While redirected subsidies may help rural broadband customers, Windstream’s capital investments in expanding their network are going primarily to benefit their business clients, not consumers.

“On the small business side, our service there is very superior to our cable competitors,” said Windstream’s chief financial officer Anthony Thomas. “We’ve made investments in our network to offer VDSL and higher-speed data services. That’s going to be directed predominately toward those small business customers.”

Whittington added most of the company’s efforts at deploying VDSL technology are focused on the company’s small business segment to bring faster speeds to commercial customers.  For consumers, Windstream’s efforts are targeted primarily at keeping up with usage demands.

“Like a lot of folks in the industry, we’ve definitely seen increases in network traffic really due to video consumption,” Whittington said. “No question Netflix and other related type services are driving some of that demand. We continue to invest in broadband transport like we have in years past. And the good thing with a lot of things we’ve been doing from just a network perspective like rolling out as I mentioned before, VDSL technology in our larger markets. That’s really all about fiber deployment, which helps solve some of those transport issues. So we feel like we’ve been in good shape there, but it’s certainly something we’ve been very focused on operationally so our broadband customers don’t see a degradation in the quality of their experience.”

Rest in Peace, AT&T DSL

AT&T CEO Randall Stephenson doesn’t think much of the company’s largest-reaching broadband product – DSL service, telling an audience at the the National Association of Regulatory Utility Commissioners summer seminar in Los Angeles that AT&T developed DSL mostly to compete with Comcast, but “now that’s obsolete.”

That’s a remarkable admission for AT&T, which continues to provide the bulk of its Internet access to consumers over DSL on its copper-wire telephone network.  Comcast spokeswoman Sena Fitzmaurice, in attendance, promptly tweeted the news to her followers: “AT&T CEO — to chase comcast we built dsl, it is obsolete now”

The story from GigaOm’s Stacey Higginbotham only got stranger when an AT&T spokesperson tried to explain away Stephenson’s careless remarks:

Stephenson was answering a question from an audience member about how state regulators should think about new technology cycles when they are considering things like USF. He said that new technology used to be amortized over a 10-15 year period, but that has shrunk to about 5 years now. He said that DSL was introduced in the 1990s, it has been surpassed in speed by U-verse and Comcast’s DOCSIS 3.0. He also gave the example of deploying 3G in 2006 … and now 5 years later we are rolling out 4G. His point was — new technology is being surpassed by the next generation much quicker than ever before. We have millions of customers using DSL and remain fully committed to the technology — even as we constantly look to bring innovation to the marketplace.

That innovation comes mostly from the company’s more advanced DSL platform U-verse, which is only slowly working its way across urban AT&T service areas.  Unfortunately, that service will not likely be forthcoming for AT&T’s rural landline customers, who will be left with “obsolete” DSL service, if available at all, indefinitely.

With an increasing amount of AT&T’s revenue coming from its wireless division, there is little incentive for AT&T to expand DSL service into areas where it is not already sold.  In fact, most of the company’s landline-oriented lobbying has been directed at allowing the company to abandon its “universal service” obligations to provide decent, basic telephone service in rural areas.  The company has already won that deregulation in several of the states it serves, but has given no indication if and/or when it plans to shut off its landline service.

Landline providers hope American consumers will lead the way, as an increasing number disconnect their home phone lines permanently.

More than half of adults between the ages of 25 and 29 reside in wireless-only homes, according to the Federal Communications Commission.

“The number of Americans who rely exclusively on mobile wireless for voice service has increased significantly in recent years,” the FCC said, citing a January-June 2010 National Health Interview Survey.

Unfortunately, rural Americans overwhelmingly receive broadband over that landline network in the form of basic DSL, usually at speeds of 1-3Mbps.  If that network is discontinued, their opportunity for broadband service goes with it.

Cantor

For all of the bluster about not raising taxes, a group of House Republicans have proposed doing what one telecom organization concludes is exactly that by diverting Universal Service Fund revenue paid by landline and cell phone customers to reduce the budget deficit.

The idea to divert at least $1 billion annually — about 25% of the USF budget, comes from House Majority Leader Rep. Eric Cantor (R-Va.).  USF fees are paid by consumers as part of their telephone bill.

With nearly a quarter of the USF’s $4.5 billion annual revenue diverted to the treasury, phone companies would either have to curtail efforts at rural broadband expansion, now proposed under USF reform efforts, or lobby for an increase in the amount of the fee to cover the diverted shortfall.

Telecom industry groups representing rural phone companies and local utility regulators blasted the proposal, saying it would destroy rural broadband expansion efforts underway by small independent and co-op phone companies.  The Universal Service Fund was designed to subsidize phone service in rural America to ensure equality of access and rates regardless of where Americans live. Without it, many rural phone companies face serious financial difficulties, especially as consumers increasingly look to providers to deliver broadband service.

“While we understand Congress is scrambling to resolve the deficit issue, our lawmakers should not tap into the Universal Service Fund as a last-minute solution. To divert these vital but limited funds from their intended use would be counterproductive and may undermine our national broadband goals,” said National Association of Regulatory Utility Commissioners president Tony Clark. “The Universal Service Fund is funded by fees consumers pay through their telephone company to ensure affordable access to telecommunications service across America. The Universal Service Fund receives no federal monies and should not even be under consideration in this debate.”

John Rose, president of the Organization for the Promotion and Advancement of Small Telecommunications Companies (OPASTCO), called Cantor’s proposal “a totally new tax.”

The Federal Communications Commission has been working with state and local regulators, members of Congress, and rural telephone interests to transition the fund away from subsidizing basic telephone service, which is now ubiquitous in the United States, and towards a general purpose broadband rollout fund, to help provide capital to expand broadband service into communities deemed by larger providers as unprofitable to serve.

Some critics of the program suggest in its present form, it suffers from waste, fraud, and abuse.  Rep. Cliff Stearns (R-Fla.) noted the original fund charged consumers less than five percent of their long distance bill, but subsequent increases have resulted in consumers paying up to 14%.  Stearns said more must be done to reduce the cost of the USF for consumers and has supported prior reform efforts.

[flv width=”640″ height=”500″]http://www.phillipdampier.com/video/Universal Service Fund – Cliff Stearns 11-18-09.flv[/flv]

Rep. Cliff Stearns (R-Fla.)’s opening remarks in a 2009 hearing criticize the increasing costs consumers find on their phone bills for the Universal Service Fund.  (5 minutes)

A telecom industry mouthpiece claims candidates lost at the ballot box because of Net Neutrality.

Scott Cleland, a paid mouthpiece for the nation’s Big Telecom companies, claimed last week’s election results were a national referendum on Net Neutrality broadband reform, and Americans ran to the polls to defeat it.

“So the best available national proxy vote gauging political support for [that] vision of net neutrality lost unanimously 95-0,” Cleland said, referring to 95 Democratic candidates who pledged to “protect network neutrality,” all of whom lost.

Cleland, who chairs the cable and phone company-financed “Netcompetition.org” website, thinks Americans hurried to polls to deliver a message against broadband reform policies at a time when the country continues to face nearly 10 percent unemployment, tight credit, poor housing values, concerns about government spending, and a continued sour outlook things will improve anytime soon.

The Net Neutrality pledge came from the Progressive Change Campaign Committee (PCCC), a liberal group trying to elect like-minded legislators to office in a year that saw major losses for Democrats, especially in the House.  The 95 signers were mostly candidates challenging open or Republican seats, often in conservative districts.

Take Ann Kuster, who sought office in New Hampshire’s conservative 2nd district.  Won by Democrat Paul Hodes in the Democratic “wave election” of 2006, Hodes relinquished the long-standing Republican seat to run for Senate (and lost).  His immediate predecessor, Charlie Bass, a “Republican Revolution” victor swept into office in 1994, held the seat for a dozen years.  Bass ran to reclaim his old seat against newcomer Kuster, who faced considerable criticism in the Democratic primary for her lobbyist ties to Big Pharma.  Despite Kuster’s alienation of the Democratic party base because of her prior career lobbying against drug pricing reform, she lost the election last week by just a single point.

One issue definitely not in contention in the 2010 election in New Hampshire’s Second District was… Net Neutrality.  In fact, the last time the issue flared up in a significant way in western New Hampshire was in 2006, when Bass was criticized for his pro-telecom industry views opposing the broadband reform policy.

Charlie Bass recaptures his seat in Congress

Bass did not even make Net Neutrality an issue this year.  Even Kuster gave short shrift to the issue on her campaign website, putting her telecommunications policy views at the bottom of a list that emphasized jobs, the economy, foreign policy, and health care.

PCCC co-founder Adam Green noted Cleland’s political allies, including Bass, kept their mouths shut about the issue during this year’s elections.

“The only significant thing about Net Neutrality in 2010 is that 95 Democratic challengers felt confident enough to actively tell voters they support this pro-consumer position,” Green observed.  “Zero candidates across the country felt confident enough to actively tell voters they opposed Net Neutrality for the obvious reason that opposing the free and open Internet would be a ridiculously stupid political move.”

Net Neutrality is still an obscure topic for many broadband users, unaware of its meaning or the implications of having net protections swept away by broadband providers intent on boosting profits.

One thing is certain — as a result of last week’s elections, Republicans in the House and Senate, who have almost universally opposed against Net Neutrality, will almost certainly be able to block legislative efforts to enact such reforms into law for the next two years.

Telecom-focused Heavyweight Faces Surprising Loss

Boucher

In the House, the surprising loss of Rep. Rick Boucher (D-Va.) in last week’s election will have a major impact on telecommunications policies.  Boucher, first elected in 1982, is a veteran of battles between consumer groups and big cable and phone companies.  Boucher championed home satellite dish-owner rights at a time when major cable companies were attempting to lock down competition from 10-12 foot backyard satellite dishes. Boucher also fought for net privacy regulations, rural telecommunications services, and supported broadband expansion.  His loss means uncertainty for telecommunications policy, as he gives up his leadership of the House Communications, Technology and the Internet Subcommittee.

“I was saddened to learn of the electoral loss of Representative Rick Boucher in the House,” Federal Communications Commission member Michael Copps said in a statement praising Boucher for nearly three decades of public service. “He has been an extraordinary public servant and a great leader across the whole gamut of telecommunications issues.  His dedication to broadband, his leadership to reform Universal Service to make sure the wonders of advanced telecommunications are available to all our citizens, and his uncommon ability to bring contesting parties to the table to forge workable compromises are the stuff of legend.”

Virginia's largely rural 9th District encompasses the western third of the state

Boucher’s loss could have dramatically negative results on rural Americans with respect to telecommunications services.  Boucher advocated heavily for the telecommunications challenges faced in rural areas like his own 9th District, located in western Virginia bordered by West Virginia, Kentucky, North Carolina, and Tennessee.  Inside his district, broadband service has been challenging to provide in many areas.  The city of Bristol decided to build its own broadband service, a fiber to the home network constructed by Bristol Virginia Utilities.  The network has been so successful, the southern half of the city — actually located in Tennessee — is following Virginia’s lead.  Boucher was a strong advocate for such community networks.

Boucher’s replacement is expected to be either Rep. Anna Eshoo (D-Calif.) or Ed Markey (D-Mass.), both of whom serve more urban districts.

But did Boucher go down because of his strong advocacy of Net Neutrality?  Not even close.  The Bristol Herald Courier reports just one issue was almost certainly responsible for Boucher’s loss: Cap and Trade, legislation that would regulate carbon dioxide by capping total emissions and allowing polluters to trade credits among themselves.  Boucher favored the policy, his opponent opposed it.

Back to the Future Under GOP Leadership

Republican tech policy, potentially under the leadership of congressmen like Rep. Cliff Stearns (R-Florida), is expected to be “Back to the Future,” a return to a more hands-off policy advocated under the former Bush Administration.

The result will be a tech agenda legislatively frozen in place.  Republicans will be unable to pass deregulation bills or block any surprise moves by the FCC to flex its regulatory muscles, thanks to Democrats in the White House and Senate.  Democrats will be unable to enact any broadband reform policies because of “majority-rules”-roadblocks in the Republican-controlled House.  The FCC, already frightened by Congressional dissent, may be less willing than ever to declare a firm position… on anything.  That’s particularly likely with issues considered “hot buttons” on Capitol Hill.

Republicans may even seek to end spending on broadband expansion and other publicly funded projects, assuming there are any funds yet to be allocated.  It is much easier to block annual re-authorizations than to cancel funding already appropriated.

New Consumer Champion Emerging in Senate from Connecticut?

Richard Blumenthal: New consumer champion?

One potential piece of good news for pro-consumer forces is the election of Sen. Richard Blumenthal, the former state attorney general.  Blumenthal’s highly aggressive investigations into wrongdoing by technology firms are likely to continue in his new role as Connecticut’s newest Democratic senator.  Blumenthal has taken aim at privacy violations at Google and prostitution advertising on Craigslist in the past, and his interest in telecommunications consumer protection could be a big help.

For issues like Net Neutrality, all eyes are turning back to FCC Chairman Julius Genachowski, perhaps the only man in Washington with the power to deliver a free and open Internet for at least the next two years.  Will he act?