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FCC’s Ajit Pai Will Meet Privately With Wall Street Analysts in Closed Door Meeting

Phillip Dampier June 17, 2020 Public Policy & Gov't No Comments

Pai

Federal Communications Commission Chairman Ajit Pai will meet with Wall Street analysts at a Wells Fargo investors conference on Thursday closed to the public and news media.

Pai is expected to focus most of his remarks on the topics of 5G wireless networks and forthcoming spectrum auctions, but will also likely praise the Trump Administration’s overall deregulatory policies and achievements Pai feels point to the regulator’s recent successes. In attendance will be top executives from T-Mobile, Verizon, AT&T, and the powerful D.C. law firm Wilkinson Barker Knauer, LLP that specializes in serving telecommunications industry clients. That firm will present a regulatory discussion entitled, “Will Washington Topple Tech and Telecom.”

A review of past investor conferences shows it is rare for a chairman of the FCC to appear at such private events, usually attended by professional analysts working for Wall Street investment firms and top executives from the businesses analysts cover for their investor clients. The propriety of public officials attending closed door events with the industries they regulate is controversial, particularly because topics discussed during informal meetings are not always disclosed to the public through “ex parte” notices filed with the Commission. But Pai has proven to be an industry-friendly chairman and formerly served as counsel for Verizon Communications.

A transcript of Pai’s formal remarks at the event will be published on the FCC’s website within a few days of his speech, and it likely Pai will speak on issues already a part of the agency’s public record. Normally the opportunity to strengthen personal ties between regulators like Pai and the regulated and a chance to meet Pai to exchange views is worth gold to many investors, but this specific event will be conducted entirely “virtually” online.

Defenders claim such meetings allow the FCC to become better informed about Wall Street investor concerns not discussed by corporate executives worried about any negative impact on their stock price. They also contend there is no opportunity for Pai to engage in “ex parte” discussions because the event is entirely webcast online. But critics note regulators that appear at such industry events rarely attend Question and Answer events open to the public. Critics view that as further evidence of the kinds of cozy D.C. relationships between the government and special interests many ‘good government’ groups decry as a conflict of interest.

Telcos Without Fiber to the Home Service Face Crisis As Their Market Share Will Erode to Zero

Phillip Dampier June 3, 2020 Broadband Speed, Competition, Consumer News 2 Comments

The death of DSL?

If your local phone company does not offer fiber-to-the-home service, it risks seeing its market share as a broadband competitor drop to zero, according to new research from Wall Street analyst firm MoffettNathanson.

As the cable industry prepares to deploy DOCSIS 4.0, capable of much faster upload speeds in the gigabits and downloads as fast as 10 Gbps, the future of telephone companies that have under-invested in their networks for years is dire. The research firm’s “Equilibrium Forecast” sees DSL’s market share in areas where cable broadband is available dropping to zero. Phone companies that have invested in fiber half-measures, including fiber to the neighborhood, IP-DSLAM, and VDSL technology that traditionally delivers internet speed between 25-75 Mbps are not far behind. Only true fiber-to-the-home service stands a chance at protecting phone company broadband market share.

“DSL [and] mid-tier [fiber/copper combinations are both] obsolete,” researchers said in a private note to investors. “Broadband is increasingly a two-horse race between cable and telco fiber-to-the-home service, where it exists.”

The COVID-19 pandemic has only increased problems at the nation’s legacy phone companies, as customer losses accelerate in favor of cable company delivered internet. In the first quarter of 2020, cable company broadband sign-ups increased 122% compared to the same quarter last year, while phone companies said goodbye to at least 65,000 subscribers. Last year during the first quarter, telcos managed to add 20,000 customers.

Leichtman Research Group reports that most customers are looking for stable and reliably fast internet service, and phone company DSL delivers neither. Having a speedy and dependable connection has become crucial as tens of millions of Americans work from home to avoid contracting the illness. Sharing that internet connection with kids staying home from school quickly caused a spike in upgrade orders.

“The increased level of usage was enough to convince many customers that they needed higher speeds to handle the number of simultaneous users in their home,” MoffettNathanon wrote.

Many phone companies lacking fiber were unable to deliver on upgrades, and customers that could went shopping for alternatives. At the same time, large DSL providers like Frontier Communications and Windstream have become mired in bankruptcy and have been losing residential customers for years. MoffettNathanson told its investor subscribers it was time to declare DSL effectively dead as a competing technology, with fiber service variants like U-verse and other flavors of VDSL near-dead.

“As with legacy DSL, it is increasingly clear that this segment is simply not competitive anymore. Equilibrium market share in this cohort, if one looks out far enough, is 100/0.”

MoffettNathanson expects cable operators will achieve an 85% market share for broadband service in markets where their chief competitor is a phone company yet to provide fiber-to-the-home service. If phone companies do not embark on immediate fiber upgrades, the damage to their market share could be permanent, especially after DOCSIS 4 arrives, according to the researchers, because the newest cable broadband platform may be able to erase fiber’s speed advantage.

Will Dish Wireless Actually Launch Its Own Network? Some Think Not

The merger of T-Mobile and Sprint would never have been approved by the Justice Department had Charles Ergen not promised to launch a new nationwide wireless competitor to protect competition. But now Ergen may be wavering over his commitment.

The founder of satellite TV company Dish Network had promised to spend nearly $10 billion to build a new 5G network capable of reaching 70 percent of the population by June 2023 as part of negotiations between T-Mobile, Sprint, and the federal government. But with the coronavirus pandemic shutting down the U.S. economy, the New York Post reports the company will have a difficult time finding the money to build that network.

“I think whatever rosy projections Charlie had are now very questionable,” said a source who expected to be part Dish’s lending group. “There is no financing to build a telecom network.”

Oddly, Ergen predicted just such a scenario in December when he testified to Dish’s ability to replace Sprint. In order to prove he was fit for the job, the 67-year-old media mogul showed off letters from three banks — Deutsche Bank, JPMorgan and Morgan Stanley — saying they would gladly fund his expensive network construction.

“Where the markets are today — if we don’t have another 9-11, God forbid — the banks are confident,” Ergen told the packed courtroom.

That testimony helped convince Manhattan federal judge Victor Marrero to approve T-Mobile’s $26 billion acquisition of Sprint, despite calls by a group of attorneys general, including Letitia James of New York, to block the deal, which they said would reduce competition and increase prices for consumers.

Ergen’s commitment to build a new fourth national wireless carrier was crucial for T-Mobile and Sprint to win regulatory approval of their $26 billion merger, which will reduce the number of national wireless competitors to three. That merger secretly received help from the country’s chief antitrust enforcer, Makan Delrahim. The Trump-appointed regulator, who serves as the head of the Justice Department’s antitrust division, exchanged numerous text messages between himself and top executives of Sprint, T-Mobile, and Dish to help salvage a merger deal under heavy criticism from Democrats and consumer advocates. Delrahim signaled his approval of the merger if Dish promised to buy Sprint’s prepaid wireless brand Boost and was offered access to T-Mobile’s wireless network to help launch Dish Wireless as a new competitor. But executives from Sprint and T-Mobile repeatedly quarreled over the details of the merger with Ergen, forcing Delrahim to intervene and bring the parties together to smooth things over.

Several consumer advocates and state attorneys general questioned the merger and Ergen’s commitment and capacity to serve as a new competitor. Ergen has warehoused wireless spectrum for years and has yet to meaningfully deploy it, deal critics contend. Additionally, Dish Wireless will be unlikely to achieve the scale and size of Sprint, the wireless carrier absorbed by the merger. That could mean it would be unable to deter anti-competitive behavior by the three larger companies — AT&T, Verizon, and the New T-Mobile. The most skeptical suggest Ergen has no intention of constructing a network for Dish Wireless. Instead, they contend he quietly intends to sell the wireless operation and potentially sweeten the deal by including Dish’s satellite TV business, its existing portfolio of unused wireless spectrum, or both.

If Ergen cannot meet the 2023 deadline, regulators could fine his company $2 billion and force it to relinquish the $12 billion worth of wireless spectrum Dish Network has been warehousing for years.

To succeed, Ergen will need Wall Street banks to cooperate and continue extending Dish Wireless credit. He will also need to find capable engineers ready to place 5G infrastructure on thousands of cell towers at the same time other wireless providers are building 5G networks of their own. None of this will be possible until the coronavirus crisis abates and the economy recovers. Despite this, some analysts are willing to still give Ergen the benefit of the doubt.

“Two months of severe market uncertainty doesn’t really alter my view of a company to execute on a three-year plan,” Lightshed Partners Analyst Walt Piecyk told The Post, saying it is too soon to question if Ergen will meet the deadline.

Ergen may also be able to convince regulators to approve a delay, pushing out the deadline. Assuming Ergen closes the deal to acquire Boost Mobile, which currently relies on Sprint’s 4G network to service its prepaid wireless customers, Boost will likely be rechristened Dish Wireless and serve as Ergen’s contribution to a competitive wireless industry until his own network gets off the ground.

Frontier’s Inner Secrets Revealed: ‘We Underinvested for Years’

Frontier Communications has revealed to investors what many probably realized long ago — the independent phone company chronically underinvested in network upgrades and repairs for years, giving customers an excuse to switch providers.

Remarkably, the phone company did not just underperform for its remaining voice and DSL internet customers. In a sprawling confidential “Presentation to Unsecured Bondholders” report produced by Frontier’s top executives, the company admits it was even unable to achieve significant growth in its fiber territories, where Frontier-acquired high-speed FiOS and U-verse fiber networks held out a promise to deliver urgently needed revenue.

Frontier’s bondholders were told the company’s ongoing losses and poor overall performance were unsustainable, despite years of executive “happy talk” about Frontier’s various rescue and upgrade plans. In sobering language, Frontier admitted its capital structure and efforts to deleverage the company’s massive debts were likely to cut the company off from future borrowing opportunities and deter future investment.

The presentation found multiple points of weakness in Frontier’s current business plan:

Voice landline service remains in perpetual decline. Like other companies, Frontier’s residential landline customers left first, but now business customers are also increasingly disconnecting traditional phone service.

About 51% of Frontier’s revenue comes from its residential customers. That number has been declining about 5% annually, year over year as customers leave. Frontier’s internet products are now crucial to the company’s ability to stay in business. Less than 30% of Frontier’s revenue comes from selling home phone lines. For Frontier to remain viable, the company must attract and keep internet customers. For the last several years, it has failed to do either.

Frontier customers are disconnecting the company’s low-speed DSL service in growing numbers, usually leaving for its biggest residential competitor: Charter Spectrum. Frontier remains saddled with a massive and rapidly deteriorating copper wire network. The company disclosed that 79% of its footprint is still served with copper-based DSL. Only 21% of Frontier’s service area is served by fiber optics, after more than a decade of promised upgrades. Frontier’s own numbers prove that where the company still relies on selling DSL, it is losing ground fast. Only its fiber service areas stand a chance. Just consider these numbers:

  • Out of 11 million homes in Frontier’s DSL service area, only 1.5 million customers subscribe. That’s a market share of just 13 percent, and that number declines every quarter.
  • Where Frontier customers can sign up for fiber to the home service, 1.2 million customers have done so, delivering Frontier a respectable 40 percent market share.

Frontier has been promising DSL speed upgrades for over a decade, but the company’s own numbers show a consistent failure to deliver speeds that can meet the FCC’s definition of “broadband,” currently 25 Mbps.

At least 30% of Frontier DSL customers receive between 0-12 Mbps download speed. Another 35% receive between 13-24 Mbps. Only 6% of Frontier customers get the “fast” DSL capable of exceeding 24 Mbps that is touted repeatedly by Frontier executives on quarterly conference calls.

Despite the obvious case for fiber to the home service, Frontier systematically “under-invested in fiber upgrades” in copper service areas at the same time consumers were upgrading broadband to acquire more download speed. Frontier’s report discloses that nearly 40% of consumers in its service area subscribe to internet plans offering 100 Mbps or faster service. Another 40% subscribe to plans offering 25-100 Mbps. In copper service areas, Frontier is speed-competitive in just 6% of its footprint. That leaves most speed-craving customers with only one path to faster speed: switching to another provider, typically the local cable company.

So why would a company like Frontier not immediately hit the upgrade button and start a massive copper retirement-fiber upgrade plan to keep the company in the black? In short, Frontier has survived chronic underinvestment because of a lack of broadband competition. Nearly two million Frontier customers have only one choice for internet access: Frontier. For another 11.3 million, there is only one other choice – a cable company that many detest. Frontier has enjoyed its broadband monopoly/duopoly for at least two decades. So long as its customers have fewer options, Frontier is under less pressure to invest in upgrades.

For years Frontier’s stock was primarily known for its generous dividend payouts to shareholders — money that could have been spent on network upgrades. But what hurt Frontier even more was an aggressive merger and acquisition strategy that acquired castoff landline customers from Verizon and AT&T in several states. In its most recent multi-billion dollar acquisition of Verizon customers in California, Texas, and Florida, Frontier did not achieve the desired financial results after alienating customers with persistent service and billing problems. The longer term legacy of these acquisitions is a huge amount of unpaid debt.

Frontier’s notorious customer service problems are now legendary. Frontier’s new CEO Bernie Han promises that customer service improvements are among his top four priorities. Improving the morale of employees that have been forced to disappoint customers on an ongoing basis is another.

Frontier executives are proposing to fix the company by deleveraging the company’s debt and restructuring it, freeing up capital that can be spent on long overdue network upgrades. Executives claim the first priority will be to scrap more of Frontier’s copper wire network in favor of fiber upgrades. That would be measurable progress for Frontier, which has traditionally relied on acquiring fiber networks from other companies instead of building their own.

But the company will also continue to benefit from a chronic lack of competition and Wall Street’s inherent dislike of large capital spending projects. The proposal does not come close to advocating the scrapping of all of Frontier’s copper service in favor of fiber. In fact, a rebooted Frontier would only incrementally spend $1.4 billion on fiber upgrades until 2024, $1.9 billion in all over the next decade. That would bring fiber to only three million additional Frontier customers, those the company is confident would bring the highest revenue returns. The remaining eight million copper customers would be stuck relying on Frontier’s existing DSL or potentially be sold off to another company.

Frontier seems more attracted to the prospect of introducing or upgrading service to approximately one million unserved or underserved rural customers where it can leverage broadband subsidy funding from the U.S. government. To quote from the presentation: Frontier plans to “invest in areas that are most appropriate and profitable and limit or cease investments in areas that are not.”

Another chronic problem for Frontier’s current business is its cable TV product, sold to fiber customers.

“High content/acquisition costs have made adding new customers to the Company’s video product no longer a profitable exercise,” the company presentation admits. If the company cannot raise prices on its video packages or successfully renegotiate expensive video contracts to a lower price, customers can expect a slimmed down video package, likely dispensing with regional sports networks and other high cost channels. Frontier may even eventually scrap its video packages altogether.

To successfully achieve its goals, Frontier is likely to put itself into Chapter 11 bankruptcy reorganization no later than April 14, 2020. The company’s earlier plans may have been impacted by the current economic crisis caused by the coronavirus pandemic, so the exact date of a bankruptcy declaration is not yet known.

Trump Pardons Junk Bond King Michael Milken, Financier of America’s Cable Monopoly

Phillip Dampier February 19, 2020 Public Policy & Gov't No Comments

Milken in the 1980s (Image: The Gentleman’s Journal)

President Donald Trump granted clemency on Tuesday to Michael Milken, the so-called “junk bond king” who violated scores of securities and insider trading laws and was instrumental in helping finance the creation of America’s cable monopoly.

Milken used his position at the now-defunct Drexel Burnham Lambert to run its “high-yield bond unit.” More commonly known as “junk bonds,” these high-risk securities are typically issued by companies to finance mergers and acquisitions, often to strip assets or put competing companies out of business.

As a result, a new era of media and telecommunications tycoons emerged. Many successfully gained control of other companies and consolidated them into business empires, significantly reducing or eliminating serious competitors. Most of those companies still hold dominant positions today or have since merged with even larger companies. President Trump credited Milken for helping “create entire industries, such as wireless communications and cable television.”

By the late 1980s, Milken had advised scores of firms to rely on leveraged junk bond financing of corporate takeovers, a practice that endures to this day. Milken financed Rupert Murdoch’s ambitions to turn what was once a small newspaper chain into News Corp., which today still dominates in broadcasting, cable news channels like Fox News, and newspapers including the Wall Street Journal.

Milken also helped arrange financing for Craig McCaw, an early pioneer in cellular communications that leveraged cellular licenses McCaw borrowed heavily to obtain into one of the country’s first major wireless companies. But McCaw found bigger riches buying and selling mobile companies, first acquiring MCI’s cellular division in 1986 and selling his family’s cable operations to what would later become Comcast. By 1990, McCaw was the country’s highest paid CEO. Four years later, he sold McCaw Cellular to AT&T for $11.5 billion. AT&T sold that wireless company to Cingular in 2004 and then acquired Cingular itself some years later. McCaw would later plow $1.1 billion of family and borrowed money to take control of Nextel in 1995, only to sell it 11 years later to Sprint for $6.5 billion.

Malone

The country’s first cable giant, Tele-Communications, Inc. (TCI) would not have been possible without Milken’s junk bond financing scheme. Cable tycoon John Malone acquired hundreds of regional cable operators to create a cable empire that was often loathed by subscribers. TCI leveraged its position as a de facto monopoly, scaring off competitors, raising prices, and often delivering horrendous service. Vice President Al Gore would later characterize the Milken-financed emerging cable industry as a “cable Cosa Nostra,” and Malone himself as “Darth Vader.”

Time Warner’s cable division was also created as a result of a wave of consolidation that snapped up countless locally owned cable operators and smaller operators run by various media companies. Ted Turner also depended on Milken’s junk bond financing to create Turner Broadcasting, turning what was originally a single UHF independent TV station in Atlanta, Ga., into a superstation seen around the country and the launch of Cable News Network, better known as CNN.

Sometimes Milken’s clients benefited from his advice, sometimes they became targets themselves. Years after Turner Broadcasting was a major powerhouse in the cable programming business, Time Warner relied on a similar acquisition strategy to acquire Turner Broadcasting itself. Milken reportedly received a $50 million bonus for “advising” on the transaction, despite being in jail at the time. Years later, TBS founder Ted Turner would regret the buyout, which took CNN and TNT out of his hands.

Turner

Other household names from the past and present that expanded as a result of Milken’s financial advice include Viacom (now a part of CBS), MCI (embroiled in one of the country’s largest fraud schemes before being quietly sold off to Verizon), Telemundo (now effectively owned by Comcast), and Metromedia (which sold its network of popular independent TV stations to News Corp., which rechristened them FOX television network affiliates).

Milken quickly attracted the attention of the Securities and Exchange Commission, which took years to build a case against the Wall Street star. It took arbitrageur Ivan Boesky to help bring Milken down after pleading guilty to securities fraud and insider trading. He ‘ratted out’ Milken, which prompted a major investigation of him and the investment firm he worked for.

Milken was eventually indicted for racketeering and securities fraud in 1989 and through a plea bargain, pleaded guilty to securities and reporting violations, which won him a reduced sentence. He was supposed to serve 10 years in jail, but was released after just 22 months for good behavior. He was also fined $600 million (later apparently reduced to $200 million), a fraction of his reported net worth of nearly $4 billion. Although Milken was permanently barred from the securities industry, he still received compensation from certain transactions after that ban, which raised eyebrows.

Critics claim Milken’s legacy emboldened Wall Street to engage in riskier behavior and to innovate new leveraging schemes. Some claim that eventually helped create the conditions leading to the 2008 Great Recession.

The president offered nothing but praise for Milken in his pardoning statement and claimed prosecutors were overzealous in pursuing Milken. The president received an earful of advice in favor of a presidential pardon from his Treasury Secretary, Steve Mnuchin, who is a close person friend of Milken and has flown on his private plane. Many Trump allies, including conservative powerhouse donors Sheldon and Miriam Adelson and property developer Richard LeFrak also lobbied the president on Milken’s behalf. So did the president’s personal lawyer Rudy Giuliani, who ironically helped prosecute Milken in the 1980s. Some benefactors of Milken’s financial advice were also in favor of a pardon, including Rupert Murdoch.

Milken’s fans have been persistently seeking pardon relief for years. They failed to win a presidential pardon from former president Bill Clinton in 2001, after a joint letter strenuously objecting to the idea was sent from the SEC and U.S. attorney’s office in the Southern District of New York. The letter said pardoning Milken would “send the wrong message to Wall Street.”

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