Frontier Communications is preparing a detailed plan for bondholders explaining how the company hopes to cut its $17 billion in debt before it faces the possibility of bankruptcy.

The Wall Street Journal reports Frontier is ready to begin formal negotiations with those holding its debt to create a new payback plan before it faces the first of several repayment deadlines for bonds running into the billions, starting in 2022. But the strategy is risky because if any of the company’s major bondholders disagree, it could put Frontier on a fast track to Chapter 11 bankruptcy reorganization.

Frontier’s debt problems are a consequence of its decision to expand its wireline footprint through acquisitions of castoff copper landline networks being sold primarily by Verizon Communications and AT&T. Critics have repeatedly called out Frontier for bungling network transitions with extended service outages, billing problems, and other customer service-related failures that left customers and some state regulators frustrated and alienated. The company is still facing regulatory review in states like Connecticut, where it failed to properly manage a customer cutover from AT&T’s systems to its own, and in Utah, West Virginia, California, and Florida where similar cutovers from Verizon Communications left more than a few customers without service and months of billing problems.

As a result, Frontier lost many of the customers it acquired, with many unwilling to consider doing business with the phone company ever again.

Although Frontier’s latest acquisitions of Verizon landline customers in California, Texas, and Florida included large Verizon FiOS fiber to the home territories, Frontier customers continue to disconnect service at a greater pace than the phone company’s chief cable competitors — Comcast and Charter Spectrum. Customer defections are even worse in large sections of Frontier’s stagnant “legacy” markets — service areas that have been managed by Frontier or its predecessor Citizens Communications for decades. That is because almost all of those legacy markets are still serviced by decades-old copper wire networks, many capable only of providing low speed DSL internet access.

Frontier’s large debt load is cited as the principal reason the company cannot embark on upgrade efforts to replace existing copper wiring with optical fiber. In fact, virtually all of Frontier’s fiber service areas have been acquired from AT&T or Verizon. Frontier executives have attempted to placate shareholders by promising to aggressively manage costs. But promises of dramatic savings have proved elusive and frequent media reports have emerged covering extensive service outages, poor network maintenance, ongoing billing and customer service issues, and inadequate staffing to address a growing number of service outages and problems. In several states, repeated 911 outages have triggered regulator investigations with the prospect of stiff fines.

Three Frontier insiders have privately shared their insights with Stop the Cap! about ongoing frustrations with the company and the most recent developments.

“Upper management has no comprehension that in many of our markets, customers have choices and they abandon us when all we can sell is DSL service at speeds often less than 12 Mbps,” one senior regional executive told us. “Our retention efforts are so poor these days, representatives are not really expected to rescue accounts because in most cases there is no legitimate reason to do business with us. In some states where there are high mandated surcharges, we cost more than our cable competitors.”

Another mid-level executive in one of Frontier’s largest legacy markets — Rochester, N.Y., said morale is low and a growing number of colleagues believe the days to bankruptcy are short.

Frontier Communications debt load.

“Our loyal customers are literally dying off, as their adult children disconnect decades-old landline accounts,” said an executive who wished to remain anonymous because they were not authorized to speak with the media. “The customer numbers have been ugly for a long time and are getting worse. Our recently retired customers who have had DSL and voice service with us since the 1990s are disconnecting because some have gone with Spectrum and others are moving out of the area. Some of these customers hate Spectrum and won’t do business with them no matter the price, but we are losing their business anyway when they move out of state.”

The Rochester executive noted Frontier has an impossible job trying to sell its internet and voice products against Charter Spectrum.

“Their offers are $40 a month for 100 Mbps internet and $10 for unlimited local and long-distance calls,” the executive noted. “Ours costs nearly $30 just for the phone line after taxes and fees, and how can you sell someone DSL that delivers less than 6 Mbps to many parts of a market still served by copper trunk lines to a central office several miles away? They also find out they have to lease our modem at an additional fee and there are other fees in the contract many customers have learned to look for. Answer: you can’t.”

A Frontier executive in Ohio shared a similar story.

“We hold our own in our rural markets where we can offer a customer better than dial-up internet, and our service is very good if you live in an area where we expanded broadband thanks to FCC subsidies. Some of these new areas are even served by fiber,” the executive explained. “The problem with this is fewer people live in rural areas and these places cost a lot more to maintain when we dispatch service crews or have to run new cable. For Frontier to be truly successful, we have to get better internet service into our larger older markets, but that means pulling copper off poles and putting up fiber and there is just no interest from the higher ups to spend the money to do this. So instead the company bought new territories to keep revenue numbers up, but we are also quickly losing many of those customers to cable too. I really don’t know what we will do when wireless companies offer 5G internet.”

Some Frontier bondholders recognize Frontier must reduce its debt to have the financial resources to expand fiber service. Others want the company to shed its legacy copper service areas (while keeping FiOS/U-verse enabled markets) either to regional companies willing to invest in upgrades or to hedge funds that would likely ring whatever remaining value still exists out of these abandoned service areas. Some suspect these hedge funds would also load up the spinoff companies with even greater debt to facilitate dividend payouts and other investor-friendly rewards.

It will be up to state and federal regulators to protect Frontier’s customers as the two emerging groups of conflicting bondholders angle to protect their investments, perhaps at the risk of reliable phone and internet service.

The Wall Street Journal:

One, including Elliott Management and Franklin Resources, pushed for an exchange of their bonds at a discount to their face value for new secured debt that would be paid before unsecured debt in a potential bankruptcy.

Still, bondholders including GoldenTree Asset Management have warned the company against doing such a swap since 2018, arguing it violated the terms of their bonds.

The company this week reached out to Houlihan Lokey, which represents a group of bondholders that includes GoldenTree—as well as JPMorgan Chase & Co., Oaktree Capital Management and Brigade Capital Management—to sign up to view a confidential restructuring proposal, a person familiar with the matter said. That group has yet to gather enough holders to form a majority, people familiar with the matter said.

Charter Communications has set the stage for a Wall Street-pleasing boost in average revenue per user (ARPU) with a major broadband rate hike planned for this fall.

The rate of U.S. broadband subscriber growth slowed significantly in the second quarter of 2019, as the marketplace for internet access remains saturated and current customers are largely staying with the provider they know.

A MoffettNathanson report to investors shared by Light Reading reported subscriber growth is down from 3% during the first three months of 2019 to 2.8% over the late spring and early summer. In total, cable and phone companies added 438,000 new broadband customers in the second quarter, a significant drop from the 570,000 they added at the same time last year.

The number of new household formations continues to decline in the United States, presumably because younger Americans saddled with student loan debt are having a tougher time buying property or justifying high rent payments. Providers also believe the ongoing shift away from copper telco DSL service to cable broadband has slowed to a trickle, with those still loyal to DSL not concerned about internet speed, are happy with lower cost service, or do not have any other option. Craig Moffett, chief analyst for MoffettNathanson believes much of the growth in cable broadband at this point is coming from customers switching from services like AT&T U-verse, which still offers top speeds of under 30 Mbps in some areas. Other phone companies still relying on fiber-to-the-neighborhood service are likely also seeing customer departures triggered by recent discontinuation of video service. In most areas, cable operators are still the largest beneficiaries of provider changes. Phone companies relying on DSL continue to report broadband subscriber losses. Last year during the second quarter, phone companies lost 127,000 subscribers (a 1.1% decline). This summer, they lost 172,000 subscribers (a 1.3% decline).

With slowing cable broadband growth, companies are still under pressure to report positive quarterly results to shareholders. Without a significant number of new customers, Moffett believes operators will raise broadband prices to deliver higher revenue, especially in light of ongoing video cord-cutting. Moffett points to Charter Communications’ Spectrum in particular. Spectrum has one of the cable industry’s lowest ARPU numbers, because it does not impose cable modem rental fees or usage caps. That may explain the company’s plans to hike general internet pricing 6% starting in October, soon collecting $69.99 for Standard 100 (or 200 Mbps) service and $75.99 a month for customers bundling Standard Internet with Wi-Fi.

“The broadband increases alone would suggest significant upside to Charter ARPU estimates,” Moffett said. He also noted Charter’s plan to dramatically increase video pricing also “underscores their recent pivot towards ‘letting’ video customers leave if they want, and repricing those who remain for profitability.”

That means customers outraged by Spectrum’s cable TV rate hikes will not get much sympathy from customer retention agents. Moffett believes customers will be invited to cancel cable television service, because Charter does not make as much profit on the service as it used to, and customers will probably still keep their Spectrum internet service, which is enormously profitable for the cable operator. Customers will also pay an even higher price for standalone internet service once they stop bundling television service, increasing Charter’s profits even more.

Ironically, the more Spectrum customers drop cable TV packages, the more profit Charter can report to shareholders. Those keeping cable television won’t hurt Charter’s bottom line either. Customers that readily agree to pay more with each cable TV rate hike are statistically the least likely to complain or cancel.

Charter Spectrum TV customers will pay at least $94 a month for cable television starting this October, thanks to a sweeping rate increase that will hike the cost of TV packages, internet service, equipment, and fees. Internet customers will soon face a base price for internet service of just under $70 a month.

Cord Cutters News quotes an anonymous source that claims the rate increases will begin in October, and will impact just about every plan except phone service.

The most striking increase is the Broadcast TV Fee, charged to recover the costs imposed by local TV channels. After increasing the price by $2 earlier this year to $11.99, Spectrum customers will now be required to pay $13.50 a month — almost $1.50 more. The Broadcast TV Fee alone will soon amount to $162 a year, just to watch TV stations you can receive over the air for free. Just a year ago, the average Spectrum customer paid a Broadcast TV Fee of $8.75 a month.

A Spectrum receiver is considered required by most customers, and starting this fall, it will cost $7.99 a month to lease one (up about $0.50 a month).

Cable TV packages are also getting more expensive:

• Spectrum TV Select: $72.49 a month (was $64.99 a month)
• Spectrum TV Silver: $92.49 (was $84.99)
• Spectrum TV Gold: $112.49 (was $104.99)

Internet customers will not escape Charter’s rate hikes either. The entry-level package — Spectrum Standard Internet (100 or 200 Mbps in some areas), will increase $4 a month to $69.99. If you use Spectrum’s equipment for Wi-Fi service, your price is increasing $5 a month to $75.99.

Although the rate increases are significant, they are not outlandish when compared with the regular internet-only prices charged by other cable providers:

• Comcast: 150 Mbps (a 1 TB cap applied in most areas) costs $80 plus $13 gateway rental fee = $93/mo
• Cox:  150 Mbps (a 1 TB cap applies in most areas) is priced at $84 a month plus $11 modem rental fee = $95/mo
• Mediacom: 100 Mbps (a 1 TB cap applies) costs $95 a month plus $11.50 modem rental fee = $106.50/mo

Note: Gateway/Modem Rental Fee can be waived if you purchase your own equipment. Prices are lower when bundling, and you may get a better deal threatening to cancel or agreeing to a term plan.

One Wall Street analyst, New Street’s Jonathan Chaplin, predicted in 2017 that the cable industry would use its market power to nearly double rates consumers paid just a few years ago, which for most would mean an internet bill of at least $100 a month.

“We have argued that broadband is underpriced, given that pricing has barely increased over the past decade while broadband utility has exploded,” the researcher said in 2017.

Customers should watch their September bills for Charter Spectrum’s official rate increase notification. Customers on promotional or retention plans are exempt from increases except the Broadcast TV Fee and equipment charges until their promotion expires.

Customers that bundle multiple services will pay slightly lower prices as a result of bundling discounts, but the overall price increase will still be noticeable to most customers.

Cord-cutting is likely to accelerate dramatically because of Spectrum’s TV rate hikes, as customers reassess the value of a basic cable television package that is nearing $100 a month.

Netflix stock lost over 11% of its value late today after the company reported second quarter results that underwhelmed Wall Street, including a surprising loss of 130,000 U.S. customers that left the streaming service during the last three months.

Netflix added 2.7 million customers in the second quarter, a much smaller number than the 6 million it added during the same period last year. As of the end of June, Netflix now has 151.6 million customers worldwide. Wall Street expected between 153-156 million by that time. The $2/month U.S. rate increase during the first quarter for Netflix’s popular two-concurrent stream plan (was $10.99, now $12.99 in the U.S.) helped keep company revenue up 26%, to $4.92 billion for the quarter. But analysts expected $4.93 billion. Profits also declined to $270 million, compared with $384 million a year ago during the same quarter.

The company blamed the lackluster results on the lack of compelling content during the second quarter. In a letter to shareholders, Netflix claimed the recent price increase slowed growth, but the real problem was overheated growth during the first quarter and not a lot of blockbuster movies and shows to watch.

“We think [the second quarter’s] content slate drove less growth in paid net adds than we anticipated,” Netflix executives said.

The company also noted it is raising prices in several European countries including the United Kingdom, Spain, Ireland, France and Germany.

Netflix does not believe competition with other streaming services had a material impact on its subscriber numbers during the quarter, but analysts suggest Netflix should be concerned about forthcoming streaming competition from AT&T/WarnerMedia (HBO Max) and Walt Disney (Disney+). As more services become available, consumers are likely to take a hard look at the streaming services they are watching and ditch those they are not.

Netflix also declared it will not introduce a cheaper, ad-supported version, despite increasing speculation it would.

“We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.” Netflix told shareholders.

The Wall Street Journal reviews the many challenges to Netflix from forthcoming contenders in the streaming wars. (4:36)

Could this be the Netflix of the future?

Investors concerned about the increasing costs of developing new original content for Netflix have caused a drumbeat for the world’s largest on-demand video streaming company to start running advertising inside TV shows and movies.

A new study finds that almost one-third of Netflix customers claim they would not mind seeing advertising if it meant paying a lower price for Netflix.

The Diffusion Group, based in Los Angeles, asked 1,292 current Netflix subscribers if they would switch to a new, lower-priced Netflix tier that included commercial advertising. Nearly 32% of respondents expressed confidence they would make that switch, with 49% opposed and 20% undecided.

A recent streaming conference in Europe seems to have stoked interest in the concept of an ad-supported Netflix, although the company has repeatedly claimed it has no plans for an advertiser-supported tier, dismissing the idea as a concept dreamed up by their competitors, notably Comcast/NBC and Hulu.

TDG Research president Michael Greeson believes advertising on Netflix is inevitable however, driven by a backlash from Wall Street over how much Netflix is spending on content as it continues to lose access to some of its most popular licensed content, being pulled off Netflix by its competitors Disney and AT&T/WarnerMedia.

“Given the rising costs of programming and growing debt, so goes the argument, it is just a matter of time before the company makes a move,” TDG said in its report.

Netflix’s early days of streaming depended on a deep library of popular movies and TV shows that were readily licensed to the company by major Hollywood studios. But in the last five years, those studios have demanded dramatically higher licensing fees, and in the last year they have ended some contract renewals altogether to reserve content for the launch of their own affiliated streaming services, including Disney+ and HBO Max.

“Netflix’s response to its thinning third-party library is to spend more on originals, which it’s gambling will keep subscribers from jumping ship,” Greeson said. “But with half or more of its most-viewed shows being owned by three studios, each of which is launching their own direct-to-consumer services, how long can you convince 55+ million US consumers that your service is worth paying a premium price, especially compared with Hulu (offers an ad-based option), Amazon Prime Video (free with Prime), and Disney+ (coming in a $6.99/month)?”

Greeson

Netflix has faced growing pressure from investors to reduce the level of debt it has accumulated financing those original productions, including pushes for rate increases and advertising. Netflix raised prices, but has publicly opposed advertising. Some investors now want another rate increase, which Greeson warns would be perilous for Netflix’s subscriber count, because their research found the last price increase “strained the limit of the service’s value.” That research was done before subscribers start to discover their favorite shows will increasingly be pulled off the platform. Greeson believes another rate increase will cause at least some customers to flee, stalling Netflix’s growth.

The happy medium in Greeson’s view is the introduction of an ad-supported tier for price-sensitive subscribers, and he predicts Netflix will introduce it in the next 18 months.

“Ads will become an important part of a comprehensive tiering strategy that helps bullet-proof Netflix for years to come,” Greeson said.