Four of the nation’s largest phone companies — two former Baby Bells, two independents — have very different ideas about solving the rural broadband problem in the country. Which company serves your area could make all the difference between having basic DSL service or nothing at all.

Some blame Wall Street for the problem, others criticize the leadership at companies that only see dollars, not solutions. Some attack the federal government for interfering in the natural order of the private market, and some even hold rural residents at fault for expecting too much while choosing to live out in the country.

This four-part series will examine the attitudes of the four largest phone companies you may be doing business with in your small town.

Today: Frontier — “Rightsizing” Our Broadband Revenue in Barely-Competitive Markets, Even When It Costs Us Customers

“We have been very disciplined with our [data] pricing and really trying to make sure that we are moving the prices up in a right direction and looking at customers who are paying way below where they should be,” Donald R. Shassian, chief financial officer and executive vice president of Frontier Communications told investors on a conference call earlier this month. “They are not a valued customer. If we can’t get them up, we are sort of letting them disconnect off, if you would, and it’s enabling us to be more disciplined.”

That “direction” has meant higher bills for some long-standing customers that suddenly lost discounts or service credits. One common example is Frontier’s mandatory broadband modem rental fee, increasingly turning up on customer bills even though they own their own equipment or had previously arranged a fee waiver. Ex-Verizon customers were particularly hard hit when Frontier switched to its own billing platform. Just about every customer has also been impacted by Frontier’s “junk fees,” including company surcharges that effectively raise the price of the service.

As a result of higher pricing and dissatisfaction with the quality of service, some customers have disconnected, and the company recently reported second quarter profits were down 44%, offset by slightly higher earnings from higher bills.

The New Frontier

Frontier Communications has enormously expanded its reach over the past few years. Frontier’s original “legacy” service areas were dwarfed in 2010 by the company’s acquisition of 4.8 million landlines from Verizon Communications.

Frontier’s Combined Service Map — Areas in red are “legacy” Frontier service areas. Those in blue were acquired in 2010 from Verizon. (click to enlarge)

Frontier roughly tripled in size as a result, and the huge spike in customers delivered four straight quarters of triple-digit revenue growth. But the transition for ex-Verizon customers has not been easy. Customers endured billing errors, service plan confusion, and service quality issues as Frontier got up to speed managing Verizon’s landline network. A significant number of those customers have had enough and are switching to other providers.

West Virginia is the best place to study the contrast between Frontier’s failures and successes. A large number of service problems and lengthy outages plagued the state after Frontier took charge of a landline network Verizon treated as an afterthought. Over at least a decade, Verizon allowed its landline network to deteriorate to abysmal condition in several areas of the state. Little was invested to upgrade service, and Verizon ultimately left West Virginia with one of the lowest national broadband service penetration rates — about 60 percent.

Verizon’s priorities were elsewhere: spend millions on FiOS fiber upgrades in larger, urban markets while letting rural landline networks stagnate. Eventually, Verizon’s management team decided it was no longer worth hanging on to these low priority service areas and began selling them off. FairPoint Communications acquired Verizon customers in northern New England and Frontier bought mostly rural midwestern and western territories long struck from Verizon’s priority list.

Wilderotter

Frontier’s key argument for acquiring Verizon landlines was that the company could bank on deploying broadband to a much larger percentage of customers than Verizon ever bothered to serve.

Frontier places a very high priority on broadband, because the company can significantly boost the average revenue it earns from each customer by providing the service. With Frontier often the only home broadband choice around in its most rural markets, the company can charge whatever it wants for DSL service, tempered only by how much customers can afford to pay. Broadband is also a proven customer-keeper, an important consideration for any company facing ongoing losses from customers dumping landlines for cell phones.

Since its acquisition, Frontier has been aggressively deploying rural broadband in the former Verizon territories — typically the cheapest form it can deliver — 1-3Mbps ADSL service. Frontier considers its legacy service areas already well-covered, claiming around 93 percent of customers can already subscribe to Frontier DSL.

In states like West Virginia, the fact anyone is supplying anything resembling broadband has been well-received by those who have never had the service before. But where competition exists, Frontier has been losing ground (and customers) as cable competitors provide more consistent, higher speeds and quality of service.

The frustration is especially acute in the Mountain State. Steve Andrews, a Beckley resident complained, “This company’s idea of broadband access is up to 3Mbps DSL while nearby states like Virginia and Pennsylvania are getting fiber or cable broadband speeds ten times faster.” Andrews added that on most days his Frontier-provided broadband provides only around 800kbps, not the advertised 3Mbps.

Frontier Admits It Uses Government (Your) Money to Expand Broadband Where It Would Have Expanded Service on Its Own… Eventually

Frontier Communications was by far the most enthusiastic participant in the Federal Communications Commission’s Connect America Fund (CAF). This subsidy program currently covers $775 of the cost to extend broadband service to a currently unserved customer. Frontier agreed to accept nearly $72 million from the program, which commits the company to offering at least 4Mbps broadband service to an additional 92,877 homes and businesses around the country.

But Maggie Wilderotter, CEO of Frontier Communications, admitted Frontier would have eventually spent its own money to extend service to those rural customers without a subsidy:

“Get broadband out faster to a bunch of customers that we would have built anyway, at some point in time. And it also accomplishes the objectives of using the funds that are available from the FCC. We actually could have taken more money…. So we felt good about it. We totally understand why the other carriers made the decisions they made because we didn’t — we’re not building anything on our legacy markets. So it’s the money. It’s all in the acquired properties where we still had pretty low penetration with enough density to support the parameters that the FCC put in place.”

The fund, paid for by telephone customers nationwide through a surcharge on customer bills, will also subsidize a lucrative business opportunity for Frontier, according to Wilderotter.

“These are unserved locations that really are not competitive at all,” Wilderotter told investors. “So there’s no competition in those areas. So we’re pretty excited about it. We think that this is going to be good for Frontier and good overall.”

More than $38 million of the total broadband subsidy Frontier received will be spent in 30 counties in just one state: Wisconsin. Among other locations where Frontier will spend the money:

• 1 Arizona county
• 2 California counties
• 1 Florida county
• 5 Idaho counties
• 25 Illinois counties
• 2 Indiana counties
• 26 Michigan counties
• 2 Nevada counties
• 8 New York counties
• 1 North Carolina county
• 8 Ohio counties
• 5 Oregon counties
• 2 Tennessee counties
• 7 Washington counties
• 25 West Virginia counties

Trying to Hang Onto Customers Frontier Already Has… With Serious Speed Boosts

Frontier’s speed plans through 2013.

One of the loudest and most consistent complaints Frontier broadband customers mention is the slow speeds they receive from Frontier’s DSL. Frontier traditionally offers 1-3Mbps in rural areas, up to 10Mbps in urban areas. But in fact many customers report their speeds are much lower than advertised. Data from the FCC’s national broadband speed measurement program bears this out. Frontier was the only measured provider in the United States that has been losing ground in promised broadband speed and performance.

Frontier officials announced earlier this month the company was shifting some of its capital investments away from broadband expansion towards improving the performance of its broadband service for current customers.

In highly competitive, urban markets Frontier will deploy VDSL2 technology which can support significantly faster and more reliable Internet speeds. In more rural markets, bonded ADSL 2+ will deliver speeds of 10Mbps or better to customers currently stuck with around 1-2Mbps speed.

Daniel J. McCarthy, president and chief operating officer:

• We expect our 20Mbps service to move from 28% of residential households today to 42% by year-end and then 52% by the end of 2013;
• The 12Mbps services planned to increase from 33% of homes today to 51% by year-end and 60% by 2013;
• And the 6Mbps service is planned to increase from 57% of homes today to 74% by year-end and 80% by 2013.

The new speeds will not come free of charge. Customers will be marketed speed upgrades for additional monthly fees.

Customers will also discover Frontier has been simplifying its packages and moving away from high-value promotional offers that bundled a free laptop, television, or satellite dish in return for a lengthy contract. Today, the company is emphasizing increasing discounts for customers subscribing to two or more services that include telephone/long distance, broadband, and satellite television.

Speeds Going Up, Employees (and their salaries) Going Down

Finally, Frontier executives told investors they are scouring the company looking for cost savings. They appear to have identified around $100 million worth, a good portion of which will come from employees facing job cuts or salary reductions.

Wilderotter said she is focusing on call center workers, retiree positions, and “tech op” savings.

“We still have some bubble workforce in the call centers that will continue to go away,” Wilderotter told Wall Street. “We have a number of employees, too, that are going to be retiring over these next several months. And our goal is not to replace any of those retirees either.”

One of the best examples of this cost savings, according to unions representing Frontier employees, is the forthcoming closure of an Idaho-based call center in Coeur d’Alene. More than 100 workers, average age 55, will lose their $15-21/hour jobs Sept. 18 while Frontier prepares to leverage cheaper labor in South Carolina.

Frontier’s new call center employees in Myrtle Beach will receive $11 an hour while training, $12/hour after training — with a five year wage freeze. Benefits will be considerably leaner for South Carolina employees as well, according to union officials.

Frontier Communications faced unhappy investors Thursday after announcing it was slashing its dividend nearly in half in an effort to raise money to sustain the company’s cash flow and reduce its debt.

The company’s earnings fell 8.1% as customers continued to leave for the competition, seeking better service and lower prices.

The poor earnings results and the dividend cuts delivered a one-two punch to Frontier stock, which slid to $4.20 a share, down 16 percent in the last three months.

Among Frontier’s biggest challenges remains the quality of its broadband service to customers.  Where competition exists, Frontier DSL continues to lose the speed battle, and recent junk fees padding customer bills, including a “High Speed Internet surcharge,” and increasing modem rental fees have alienated some customers.

Frontier’s chief operating officer and executive vice president Dan McCarthy told investors 83 percent of Frontier’s service area has access to the company’s broadband product.  However, fewer than 20% of Frontier’s customers have access to speeds as high as 20Mbps.  Only just over half can access the Internet at 6Mbps.  Many of Frontier’s customers can only access lower speed service (66% can choose 4Mbps, 76% — 3Mbps, and the rest 768kbps-3Mbps).

“We’ll be investing throughout the year to improve speed-reaching capability in all our markets,” McCarthy told investors on a conference call last week.

In the second half of 2010, Frontier is expected to increase the amount of Ethernet in its middle mile network, which McCarthy expects will allow the company to deliver faster speeds over VDSL2 and VDSL2 bonding as means of driving both speed increases in the residential and the commercial markets.

However, Frontier’s preoccupation with an internal system conversion, to integrate its acquired Verizon service areas with the rest of its network, has stalled much of the company’s marketing.  Promotions, in particular, have been anemic over the last several months and will likely remain that way until later this year.  Where competition exists, cable operators have successfully been picking off Frontier’s customers.

• Broadband and satellite TV additions are down, in part due to the lack of promotions and marketing;
• FiOS video losses continue as the company shuns its fiber video service in favor of satellite TV cross-marketing;
• Line loss rates remain very high: 8.3% of Frontier’s customers disconnected their landline service in the last quarter, 5.9% in areas that were not acquired from Verizon.
• Once customers leave, they rarely return.  Churn rate of Frontier customers coming and going is at just 1.6%.

As with similar Verizon landline sales in the past, initial revenue growth from acquired customers starts out high, boosting revenue numbers and often the value of a company’s stock.  But the heavy debt load incurred from acquisitions and ongoing line losses to the competition eventually take their toll, and Frontier’s revenue now reflects the reality of a company trying to sell more services to a declining number of customers.

Morningstar notes the company’s debt problems are significant:

Frontier has struggled to bring leverage down and hasn’t successfully placed new debt since closing the Verizon transaction in 2010. Management has talked about taking care of the $580 million maturity it faces in early 2013 for the better part of a year, with no result to date. Yields on the firm’s existing debt have increased over the past year, despite the sharp decline in Treasury rates.

Standard & Poor’s Ratings Services reduced its outlook on the company from stable to negative, noting the competition is increasingly hurting Frontier’s capability to raise revenue.

The company’s decision to slash its dividend in an effort to reduce debt has created consternation for some investors who stuck with the company when the share price was above $7 and the dividend was declared safe for two years.  Neither seems to the be case any longer.

Ethernet over Copper is becoming an increasingly popular choice for business customers stuck in areas where companies won’t deploy fiber broadband (Graphic: OSP Magazine)

With Verizon and AT&T effectively stalling expansion of their respective “next generation” fiber and hybrid fiber/coax networks, and independent phone companies fearing too much capital spent improving their networks will drive their stock prices down, telephone companies are desperately seeking better options to deliver the faster broadband service customers demand.

The options over a copper-based landline network are not the best:

• ADSL has been around for more than a decade and is highly distant dependent. Get beyond 10,000 feet from the nearest switching office and your speeds may not even qualify as “broadband;”
• DSL variants represent the second generation for copper-broadband and can deliver faster speeds, but usually require investment to reduce the amount of copper between the customer and the switching office;
• Fiber networks are more expensive to build, and some companies are using it to reduce, but not eliminate copper wire in their networks. But companies traditionally avoid this solution in rural/suburban areas because the cost/benefit analysis doesn’t work for shareholders;
• Ethernet Over Copper (EoC) is increasingly the solution of choice for independent phone companies because it is less expensive to deploy than fiber and can quickly deliver service at a cat 5e speed of up to 50Mbps.

Unfortunately for consumers, EoC is typically way above the price range for home broadband.  Most providers sell the faster service to commercial and institutional customers, either for businesses that have outgrown T1 lines or where deploying fiber does not make economic sense.  Some companies have tried to improve on DSL by bonding multiple connections together to achieve faster speeds, but Ethernet is quickly becoming a more important tool in the broadband marketing arsenal.

With phone companies pricing EoC service from several hundred to several thousand dollars a month, depending on the speed of the connection, they hope to remain competitive players against a push by the cable industry to more aggressively target business customers.  In more rural areas, phone companies lack cable competition, so they stand a better chance of success.

Fierce Telecom‘s Sean Buckley published an excellent series of articles outlining the current state of EoC technology and what phone companies are doing with it:

• AT&T: Inherited EoC from its acquisition of BellSouth, and barely markets it. Instead, AT&T uses it as a quiet solution for challenging customers who cannot affordably be reached by fiber.  AT&T will either deliver the service over copper, copper/fiber, or an all-fiber path depending on the client’s needs.
• CenturyLink: No phone company is as aggressive about EoC as CenturyLink. When CenturyLink acquired Qwest, interest in the technology only intensified. EoC is a CenturyLink favorite for small businesses that simply cannot get the speeds they need from traditional DSL.  Most EoC service runs up to 20Mbps.
• Verizon: Verizon’s network is the most fiber-intense among large commercial providers, so EoC is not the first choice for the company. However, it does use it to reach multi-site businesses who have buildings and offices outside of the footprint of Verizon’s fiber network/service area.
• Frontier: In the regions where Frontier acquired Verizon landlines, EoC has become an important component for Frontier’s backhaul traffic. EoC has been deployed to reach cell tower sites and handles broadband traffic between central office exchanges and remote D-SLAMs, used to let the company sell DSL to a more rural customer base.  Frontier looks to EoC before considering spending money on fiber service, even for commercial and institutional users.
• Windstream: EoC is the way this phone company gets better broadband speeds to business customers without spending a lot of money on fiber. Small and medium-sized customers are often buyers of EoC service, especially when DSL can’t handle the job or the company requires faster upstream speeds.  Windstream markets upgradable EoC capable of delivering the same downstream and upstream speeds and can deliver it more quickly than a fiber project.
• FairPoint: Much of this phone company’s EoC efforts are in territories in northern New England acquired from Verizon.  FairPoint targets small and medium sized companies for the service, especially those who have remote offices or clinics that need to be interconnected. FairPoint has also gotten more aggressive than many other companies working with ADSL2+ or VDSL2 to deliver faster broadband to office buildings and complexes more economically than fiber.
• SureWest: This company is strong believer in fiber to the premises service, so its interest in EoC has been limited to areas where deploying fiber makes little economic sense. In more out-of-the-way places, EoC is becoming a more common choice to pitch businesses who need more than traditional broadband.
• Hawaiian Telcom: HawTel uses copper-based EoC to provide connectivity across the diverse Hawaiian Islands.  Speeds are generally lower than in mainland areas, partly because HawTel still relies heavily on traditional copper-based service. But fiber-based EoC is increasingly available in more densely populated areas.

While most rural telephone companies are selling customers 1-3Mbps copper-delivered DSL service, Alcatel Lucent has announced the commercial availability of VDSL 2 Vectoring, a new way of delivering up to 100Mbps over the copper wire telephone network most rural North Americans still depend on for telecommunications service.

VDSL2 combines a fiber-copper hybrid network similar to Bell’s Fibe or AT&T’s U-verse, with interference-cancelling technology called “vectoring” to deliver speeds much closer to the 100Mbps theoretical limit of current DSL technology.

“Alcatel-Lucent’s plan to make VDSL2 vectoring commercially available is very timely,” said Rob Gallagher, Principal Analyst, Head of Broadband & TV Research, Informa.  “VDSL2 Vectoring promises to bring speeds of 100Mbps and beyond to advanced copper/fiber hybrid networks and make super fast broadband speeds available to many more people, much faster than many in the industry had thought possible.”

A new way to boost copper speeds even faster.

Different flavors of DSL are currently in use around North America and beyond.  The most basic form, ADSL, also happens to be the most commonplace among phone companies offering basic broadband service.  For customers up to 12,000 feet away from a phone company central office, DSL delivers speeds usually at 1Mbps or faster.  Customers enjoying the fastest speeds must live much closer to the phone company facilities.  The further away you live, the slower your broadband speed.  In rural areas, consumers can live further away than the maximum distance of the central office, which means no DSL service for those subscribers.

A combination of signal loss and interference, called “crosstalk,” from adjacent copper wire pairs are both the enemies of DSL broadband, because they can drastically reduce speeds.

Telephone companies can address this problem by building new satellite central offices located halfway between customers and their primary facilities.  These offices, usually connected by fiber, can successfully reduce the amount of copper wire between the customer and the company, boosting speeds.  Many phone companies also deploy DSL extensions called D-SLAMs, which can be attached to a phone pole or enclosed in a metal box by the roadside.  A fiber cable connects the D-SLAM back to the phone company, while existing copper phone wires go back to individual subscribers.

More modern forms of DSL: ADSL2, ADSL2+, and VDSL, share some of those concepts.  The key is cutting as much copper wire out of the network as possible, replacing it with fiber optic cable which does not suffer signal loss or interference in the same way.

Many European and Pacific broadband networks rely on ADSL2/2+, which can usually deliver reliable speeds in the 20Mbps range.  VDSL networks offer even more bandwidth, and are the basis of U-verse and Fibe, which split up broadband, phone service, and television on the same cable.  When customers demand even faster speeds, phone companies can “bond” several individual DSL connections together to deliver faster speeds.  Some traditional ADSL providers do that today for their customers, especially in areas where low speeds prevail.

An argument the phone company will love.

Alcatel Lucent says VDSL2 with Vectoring is the next best thing to fiber to the home, because it is cheaper to deploy with fewer headaches from local authorities when streets and yards are dug up for fiber cable replacements.  It also meets the growing speed needs of average consumers.  Alcatel Lucent predicts the minimum speed North Americans will need to support the next generation of online video is 50Mbps, more than 10 times the speed phone companies like Verizon, AT&T, Frontier, and CenturyLink provide over their traditional DSL networks, especially in rural and suburban areas.

Vectoring can deliver results for phone companies with aging copper wire infrastructure, more prone to crosstalk and other signal anomalies.  Alcatel Lucent compares vectoring with noise-cancellation headphones.  By sampling the current noise conditions on copper cable networks, vectoring can suppress the impact of the interference, boosting speeds and delivering more reliable results.

With technologies like VDSL2 with Vectoring promising speeds far faster than what rural North Americans currently enjoy, the Federal Communications Commission may want to re-evaluate its national minimum speed standard for broadband — 3-4Mbps — found in its National Broadband Plan.  Alcatel Lucent promises they can do much better.

[flv width=”640″ height=”324″]http://www.phillipdampier.com/video/Alcatel Lucent VDSL2.flv[/flv]

Alcatel Lucent produced this video to promote its new VDSL2 with Vectoring technology.  The video targets cost-conscious phone companies who are being pressured to deliver faster service, but don’t want to spend the money on a fiber to the home network.  (6 minutes)

While America’s heartland is being wired for 3Mbps DSL service, residents in Pakistan are getting ready for speeds up to 50Mbps thanks to a major broadband expansion in the country.

Pakistan’s PTCL, the country’s state-controlled phone company, is working on a major upgrade to bonded VDSL2, the next generation of DSL, which can deliver more than five times the top speed of the country’s highest level of service, at a construction cost of just $200-300 per home passed.

PTCL, the largest broadband provider in Pakistan, has plans to complete the project in selected cities by the second quarter of the year, and then expand the service further out into more rural regions.

“PTCL is the first service provider worldwide to deploy a commercial VDSL2 bonding solution that aims at doubling the bandwidths provided to its existing customers,” PTCL President and CEO Walid Irshaid said.

Ishaid’s company chose VDSL2 over fiber to the home primarily because of cost.  With fiber installs now running around twice as expensive as a DSL upgrade, a developing country like Pakistan couldn’t justify the higher price.  VDSL is expected to be an important part of broadband expansion in the developing world, particularly in Africa, southeastern Europe, and central Asia.

Alcatel-Lucent, which is supplying equipment to deploy bonded VDSL2 service, says it has customers in western and central Europe as well.  Several providers are interested in VDSL2 technology because it could serve as a platform to deliver broadband, video, and phone service, much like AT&T’s U-verse.  Most Europeans get their broadband from DSL-equipped phone lines.

Pakistan hopes to eventually sell packages of service well beyond today’s maximum speed of 10Mbps, at a significantly lower cost.

Currently, Pakistan sells broadband ranging from a basic 256kbps connection (1GB limit) for around $3.50 a month, a popular 4Mbps unlimited package for around $24 a month, and 10Mbps service for a super pricey $119 a month.  With the upgrades, PTCL can either raise speeds, reduce prices, or a combination of both.  Outside of the 256kbps service, all other broadband packages from the company offer unlimited use.

OK for the $3.50 a month price, but it has a 1GB cap.

2Mbps unlimited service for $17.78.

10Mbps service is fast for today's DSL, but at more than $100 a month (ouch), it explains why Pakistan wants better and cheaper options for its citizens.