While Verizon and AT&T have increasingly given up on their legacy landline networks, Bell Canada is showing that investment in their network to keep up with the times can make all the difference.

Ten years ago, Bell was hemorrhaging customers with the advent of cable “digital phone” service and the growing number of Canadians turning to cell phone service. Bell CEO and Alphabet Aktie advisor George Cope now believes the reason why hundreds of thousands of home phone customers permanently disconnect their phone lines year after year has more to do with Bell not providing the services customers want from a 21st century phone company.

Cope believes the key to turning around the landline business is to invest in it. Bell has spent hundreds of millions overhauling its phone network for the Internet era — replacing copper phone wires with fiber optics to enhance reliability and, more importantly, sell broadband service at speeds customers demand.

“I’ve never felt more positive about our consumer land line business than I do right now,” Cope told investors on a recent conference call.

Bell’s strategy for success is its Fibe network — fiber to the neighborhood service similar to AT&T’s U-verse in some areas, straight fiber to the home service (like Verizon FiOS) in others. While Bell lost at least 82,000 landline customers during the last quarter where it still depends on a legacy copper wire network, Bell keeps (or signs up) 90 percent of its landline customers choosing Fibe.

At least 2.4 million Canadians have signed up for Fibe service in southern Ontario and Quebec, many attracted to its television package and increased broadband speeds. But the Globe and Mail also notes the unintended consequence of improved infrastructure appears to be rescuing the beleaguered landline business.

So far Wall Street appears skeptical, however. Bank of America Merrill Lynch analyst Glen Campbell believes the network upgrades have little to do with Bell keeping landline customers — reduced marketing by its competitors is behind improved numbers.

Bell’s biggest profits no longer come from the home phone business — television is where the real money is earned. But the company says landline service remains a predictable revenue stream, and it is not worth sacrificing when it earns Bell 39.9 percent profit margins.

Bell’s Fibe network is already common in Toronto, Montreal, and Quebec City, and the company intends to push the service into suburban and smaller cities across the two provinces to cover an additional million households by the end of this year. Both Verizon and AT&T have suspended further build-outs of their respective network upgrades — FiOS and U-verse.

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.

Comcast last week told Wall Street three important facts:

1. They have plenty of capacity to handle increasing broadband traffic and can deliver faster speeds;
2. They are reducing the amount of money they invest in broadband;
3. They are still moving forward on usage caps and usage billing experiments.

Comcast CEO Brian Roberts told investors the company was well positioned to handle increasing broadband traffic and monetize its usage.

Wall Street liked what it heard. Valuentum Securities Inc., called themselves “big fans of Comcast’s cash flow generation.”

“We’re big fans of the firm’s Video and High-Speed Internet businesses because both are either monopolies or duopolies in their respective markets,” Valuentum concludes. “Further, we believe that both services have become so sticky and important to consumers that Comcast will be able to effectively raise prices year after year without seeing too much volume-related weakness.”

An other way to raise prices is to cap broadband usage and charge customers extra for exceeding their allowance, a plan Comcast has begun testing.

“As you know we announced two different flavors of plans,” Roberts said. “One was capacity linked with the tier that subs are buying and [the other] was just being able to buy blocks of capacity.”

Roberts is referring to Comcast’s pricing experiments now being rolled out in markets like Nashville. The tests will determine whether customers will pay higher prices for different tiers of broadband based on variable speed and usage allowances or whether a flat cap with an overlimit fee is the better way to go.

Roberts

“[Hard] caps are gone,” Roberts said. “We raised the amount people could consume to 300 gigabytes as a base limit. We have not announced the markets for the roll outs yet but I would expect something shortly.”

Comcast used to have a 250GB hard cap which, if exceeded, could result in termination of a customer’s account. Now the company is pondering whether a consistent 300GB cap with an overlimit fee is a better choice.

But Roberts also acknowledged Comcast has plenty of capacity and flexibility to adjust its broadband offerings to compete.

“[…] We have a great network that has tremendous flexibility and capacity to offer more speeds than we offer today and we’re constantly hoping that new applications and needs develop,” Roberts said in response to a question regarding potential competition with Google Fiber.

Comcast added 156,000 new high speed data customers, an 8% increase, over the last quarter. At the same time, the company lost 176,000 video subscribers.

The importance of Comcast’s broadband service was underlined by the fact broadband revenue was the largest contributor to cable revenue growth in the second quarter, with revenue increasing 9%. Comcast attributes that to rate increases, a growing number of new broadband customers, and the 27% of current subscribers upgrading to higher speed services.

Comcast does not and will not have to spend a growing amount of its capital on its broadband service. Comcast cut spending on its network by 5% in the second quarter to $1.1 billion. That represents 11.4 percent of cable revenue earned by Comcast. So far this year, capital expenditures have dropped 2.4% to $2.2 billion — 11.2% of its total revenue.

These days, much of Comcast’s capital expenses support the company’s expansion into business services. The company also expects considerable reductions in spending from completion of its transition to digital — freeing up capacity on existing cable systems instead of spending money to upgrade them. For the full year, including its business services expansion, Comcast expects spending on its own network to be flat.

Comcast’s new X1 platform (Image courtesy: BWOne)

In other Comcast developments of note:

• In June Comcast rolled out its new X1 cloud based set top platform in Boston and is currently launching X1 in Atlanta. Comcast is marketing the upgraded platform first to HD Triple Play customers, who can upgrade for a one-time installation fee. The company plans to roll out the new upgraded platform in five major markets by the end of this year, with a greater expansion in 2013;
• Comcast has increased broadband speeds, particularly in competitive markets, for no additional charge;
• Streampix now offers twice as many titles as the product offered at launch in February;
• Comcast has rolled out its marketing partnership with Verizon Wireless to 22 markets nationwide;
• The company’s ongoing rebranding under the Xfinity name now has a new catchphrase: Xfinity — The Future of Awesome;
• Nearly 75% of Comcast’s customers now take at least two products and almost 40% are signed up for the company’s triple play package;
• Comcast has saved more than $8 million by reducing the number of occasions the company will send technicians to customer homes. The cable company is heavily promoting self-install kits, which has brought a 65% increase  in the number of customers who install Comcast equipment and services themselves.

Time Warner Cable last week intimated the only thing keeping faster cable modem speeds from Kansas City customers is consumer demand and they are not worried about the arrival of Google Fiber’s 1Gbps broadband speeds.

The cable operator claims they have the advantage in Kansas City, as the first provider to offer a triple play package of voice, broadband, and television service. Time Warner also says they are constantly working on new, innovative services, including the much-touted “tablet remote” the company says it already offers customers in Kansas City in the form of apps available on the Android and iOS platforms.

“We always have the ability to adjust our network to keep up with demands from consumers [for faster broadband speeds],” Time Warner Cable said.

Cable operators and phone companies have traditionally argued there is little consumer demand for gigabit broadband speeds because the services most customers access online don’t need or cannot support that level of speed. Cost has also usually been a factor, and many operators point out the majority of their customers are satisfied with speeds of 20Mbps or less.

“We’re ready to compete any day, anytime, anywhere, with anyone,” said Time Warner Cable spokesman Mike Pedelty.

AT&T, which has been providing U-verse in parts of Kansas City since 2007 says it isn’t threatened by Google Fiber either.

Chris Lester from AT&T Media Relations notes AT&T now offers U-verse to more than 400,000 households in and around Kansas City and claims the company has gotten a “great response” from consumers, but declined to specify exactly how many of those households have actually signed up for service.

Both the dominant cable and phone company in Kansas City are betting on subscriber loyalty and consumer resistance to change to maintain their subscriber numbers. Statistically, they have a good chance of holding most of their current customers, at least for now.

The threat of Google’s fiber fast speeds may not be limited only to Kansas City, however. The Wall Street Journal has learned Google may be intending to bring its fiber network to other American cities, as long as they are not already served by Verizon’s FiOS fiber-to-the-home network.

Incumbent cable operators facing new competition from phone company IPTV (AT&T U-verse, Verizon FiOS) have not lost as much business as they first anticipated. In most cases, only 25-35% of customers eventually left for a satellite or phone company competitor. The older the subscriber, the less likely that customer is to consider a change, unless the service is poor or the price becomes unaffordable.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/KCTV Kansas City Competition for Google Fiber 7-26-12.mp4[/flv]

KCTV in Kansas City talks with AT&T and Time Warner Cable about their newest competitor.  (2 minutes)

No cable operator has reported alarming results from subscriber defections, either from competition or cord-cutting behavior, and Wall Street analysts are watching subscriber numbers closely.

So far, reports on the ground indicate AT&T and Time Warner Cable are following the playbook first established when any new broadband provider arrives on their turf — aggressively market discounts tied to a contract with a stiff early termination fee to discourage customers from switching. At least one local provider has been reportedly sending salespeople door to door to try and lock customers in with a multi-year service contract. When that does not work, both companies use their customer retention departments to offer customers cheaper service in a last ditch effort to keep them from heading for the door.

Even with those defensive measures, some investors still see Google’s new fiber service as something new and different in the broadband marketplace — “the most disruptive thing since Gmail,” concludes Business Insider‘s Matt Rosoff.

Rosoff says Google Fiber could completely change the broadband landscape in the United States much the same way Gmail changed e-mail.

Back when Gmail launched, the other free email providers like Hotmail and Yahoo Mail were offering less than 5MB of storage — that’s five megabytes,” Rosoff writes. “Google trumped them all with 1GB of free storage. With so much storage, there was no need to trash anything. You could archive it and keep it forever.”

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Fox Business News Google Stirs It Up 7-26-12.flv[/flv]

Fox Business News explores Google Fiber and finds phone companies telling reporters consumers don’t need 1Gbps broadband.  (2 minutes)

Gmail has since captured a large share of the email market, while also paving the way for Google’s increasingly profitable business apps. Some also argue Google’s “save everything online” approach was like training wheels for the cloud computing concept, where consumers think less about local storage and more about going online to access content. Google Fiber’s speeds make accessing online content effortless, and with no usage caps, customers need not ration their usage.

As of Monday, Google has already achieved the minimum number of needed homes to install Google Fiber in several, mostly affluent, Kansas City neighborhoods.

Rosoff says much like Gmail exposed the weaknesses of former email leaders like Hotmail, Google Fiber embarrasses incumbent Internet Service Providers and illustrates just how slow they have been to innovate.

“Google Fiber makes the cable-based ISPs look pathetic,” says Rosoff. “It promises to offer speeds up to 1,000Mbps downstream and upstream, for only $70 a month.”

In comparison, Time Warner Cable charges $100 for 50/5Mbps service in Kansas City. AT&T’s U-verse can only offer up to 24/3Mbps service, and it charges well over $50 a month for that, except on a new customer promotion. Both Time Warner and AT&T also sell “lite use” packages from 1-6Mpbs for $20-25 a month — service Google intends to give away for free after a $300 installation fee.

Many industry observers suggest Google is using its new fiber network in part as a hedge against market abuse from dominant cable and phone companies who are fiercely opposed to Net Neutrality and favor monetizing broadband usage.  Both are serious threats to Google’s business model which seeks more usage, not less. The more time consumers spend online, the more likely they will be exposed to a Google ad, use a Google product, or purchase a current or forthcoming service owned or partnered with the search engine giant.

Early indications from Kansas City show the cable and phone companies do have something to be concerned about. In more affluent areas of Kansas City, Google passed the minimum number of households willing to commit to the fiber service in just two days. Enthusiasm has been so overwhelming, tech entrepreneurs drooling for fiber service are hiring door-to-door promoters to visit nearby residents to encourage them to show their interest, in some cases even paying Google’s $10 pre-registration fee on their behalf.

More than 20 percent of the eligible “fiberhoods” in Kansas City, Mo. have already passed their signup goals. In poorer, mostly minority neighborhoods, Google is still waiting for their first pre-registration. In less affluent Kansas City, Kan., Google is finding considerably less interest, and pre-registrations are running below goal in all but three “fiberhoods.”

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/WDAF Kansas City Competitors Gear Up For Google’s Challenge 7-26-12.flv[/flv]

WDAF says competing cable and phone companies cannot deliver the speeds Google Fiber will offer, but they are betting consumers don’t need or care about faster broadband speeds. (3 minutes)

AT&T lost 649,000 DSL customers in three months.

AT&T’s broadband customers are taking their business elsewhere as second quarter results show the phone company lost 649,000 DSL customers in the last three months, while only picking up 553,000 new U-verse Internet users to replace those leaving. The result was a net loss of nearly 100,000 broadband customers in a single quarter. The company also only managed to attract 155,000 new U-verse television customers away from satellite or cable operators during the quarter.

AT&T blames the losses on “seasonality” — code language for part-time residents, college students, and other fluctuations that occur as customers come and go. Total broadband connections dropped 0.2% for AT&T, with 16.43 million remaining customers.

Landline customers also continue to depart AT&T in droves. More than one million home phone customers pulled the plug on AT&T this quarter. AT&T has lost nearly 11 percent of their landline customers over the past year.

For those remaining, a combination of rate increases, cost cutting and fierce marketing of bundled packages of services are keeping revenue growing on both the residential and business side.

AT&T is getting closer to announcing a “rural landline solution,” which some analysts predict will be the company’s exit from the rural landline business.

Executives continue to hint the company is reviewing its future in the rural landline business. AT&T lobbyists have shepherded new laws in several states that would allow them to abandon rural landline customers where the company is no longer required to be “the carrier of last resort.”

AT&T U-verse is turning out to be not much of a threat to cable and satellite operators, only achieving a 17.3% penetration rate in areas where the service is available.

The real money for AT&T is being made in the wireless sector, where increasing prices, changes to service packages, and data usage-based billing are all paying off  — revenue for wireless data alone is up 18.8% to $1 billion during the second quarter. AT&T earned $14.3 billion from its wireless business in just the second quarter alone.

At the same time, the company is slashing investments in parts of its network and cutting employees.

Capital expenditures in the second quarter amounted to $4.48 billion, down 15% from the $5.27 billion AT&T spent a year ago. AT&T also cut its workforce by 6.4% since June 2011, with a reported 242,380 total remaining employees.

Despite the company’s talking points, AT&T’s upgrade fee is designed to slow down customers considering upgrading their smartphones.

In other highlights:

• Wall Street analysts are praising AT&T’s stricter upgrade policies and device upgrade fees. In fact, at least one analyst wants to see AT&T raise the fee to $50 for every phone upgrade. The fees discourage customers from upgrading their phones, which dramatically reduces AT&T’s costs. AT&T subsidizes phones for customers. The longer customers hold off from upgrading, the more revenue AT&T keeps for themselves and shareholders. AT&T has made it clear it will continue to “introduce discipline”  in the handset market to enforce “rational pricing,” which means customers will continue to see further reductions in device subsidies and face higher prices when upgrading phones.
• Much of AT&T’s investment will be in its LTE 4G network. AT&T’s spending on wireline services including U-verse is on the decline.
• AT&T admitted its policy of monetizing data usage for profit is well underway: “[We are getting] ourselves set up for revenues that are going to be tied to usage, which will then be tied to our capital requirements and a really profitable situation.”
• AT&T is aggressively pushing customers to upgrade to smartphones so they can earn additional revenue. “Smartphone subscribers now number 43 million and make [up] 62% of our total postpaid base. But smartphones accounted for 77% of postpaid sales during the quarter, showing continuing opportunity for growth. And when you look at our total smartphone base, we’ve added 9 million high-value smartphone customers in just the last 12 months.”

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/ATT 2Q2012 Results.flv[/flv]

AT&T spins its 2nd Quarter results for shareholders in the best possible light. Although revenues are up, the number of customers leaving AT&T for other providers may challenge future growth and earnings. (4 minutes)