The mainstream media loves a scare story.  Suggestions that a national H1N1 pandemic could bring the Internet as we know it to its knees is a surefire way to get plenty of attention.

The Chicago Tribune, among others, reports that a nationwide outbreak of virus forcing 40% of American workers to remain housebound could result in too many people sitting at home watching Hulu, bringing the entire Internet to a screeching halt.

The answer? Shut down video streaming sites and throttle users during national emergencies.

Of course, even more interesting is what never turns up in these kinds of stories — the news behind the sensationalist headlines.

The report on which this story is based comes courtesy of the General Accounting Office.  The GAO doesn’t simply issue reports willy-nilly.  A member or members of Congress specifically request the government office to research and report back on the issues that concern them.  In this instance, the report comes at the request of:

• Rep. Henry Waxman
• Rep. John D. Dingell
• Rep. Joe Barton
• Rep. Barney Frank
• Rep. Bennie G. Thompson
• Rep. Rick Boucher
• Rep. Cliff Stearns
• Rep. Edward J. Markey

The congressmen weren’t worrying exclusively about your broadband interests.  The GAO notes the study came from concern that such a pandemic could impact the financial services sector (the people that brought you the near-Depression of 2008-09).  The Wall Street crowd could be left without broadband while recovering from flu, and that simply wouldn’t do.

“Concerns exist that a more severe pandemic outbreak than 2009’s could cause large numbers of people staying home to increase their Internet use and overwhelm Internet providers’ network capacities. Such network congestion could prevent staff from broker-dealers and other securities market participants from teleworking during a pandemic. The Department of Homeland Security (DHS) is responsible for ensuring that critical telecommunications infrastructure is protected. GAO was asked to examine a pandemic’s impact on Internet congestion and what actions can be and are being taken to address it, the adequacy of securities market organizations’ pandemic plans, and the Securities and Exchange Commission’s (SEC) oversight of these efforts,” the report states.

Putting aside my personal desire that a little less broadband for deal-making, bailout-demanding “kings of the world” might not be a bad idea, the GAO’s report concludes what we already know — the business model of residential broadband is based on sharing connections and when too many people stay home and use them, it’s slow and doesn’t work well.

Providers do not build networks to handle 100 percent of the total traffic that could be generated because users are neither active on the network all at the same time, nor are they sending maximum traffic at all times. Instead, providers use statistical models based upon past users’ patterns and projected growth to estimate the likely peak load of traffic that could occur and then design and build networks based on the results of the statistical model to accommodate at least this level. According to one provider, this engineering method serves to optimize available capacity for all users. For example, under a cable architecture, 200 to 500 individual cable modems may be connected to a provider’s CMTS, depending on average usage in an area. Although each of these individual modems may be capable of receiving up to 7 or 8 megabits per second (Mbps) of incoming information, the CMTS can transmit a maximum of only about 38 Mbps. Providers’ staff told us that building the residential parts of networks to be capable of handling 100 percent of the traffic that all users could potentially generate would be prohibitively expensive.

In other words, guess your customer demand correctly and 200-500 homes can all share one 38Mbps connection.  Guess incorrectly, or put off expanding that network to meet the anticipated demands because your company wants to collect “cost savings” from reduced investment, and everyone’s connection slows down, especially at peak times.

One way to dramatically boost capacity for cable operators is to bond multiple channels of broadband service together, using the latest DOCSIS 3 standard.  It provides cable operators with increased flexibility to meet growing demands on their network without spending top dollar on wholesale infrastructure upgrades.  Many operators are already reaping the rewards this upgrade provides, by charging customers higher prices for higher speed service.  But it also makes network management easier without inconveniencing existing customers with slowdowns during peak usage.

The GAO didn’t need 77 pages to produce a report that concludes broadband usage skyrockets when people are at home.  Just watching holiday shopping traffic online spike during deal days like “Cyber Monday,” after Thanksgiving would illustrate that.  Should 40 percent of Americans stay home from work, instead of browsing the Internet from their work machines, they’ll be doing it from home.  That moves the bottleneck from commercial broadband accounts to residential broadband networks.

The GAO says such congestion could create all sorts of problems for the financial services sector, slowing down their broadband access.

Providers’ options for addressing expected pandemic-related Internet congestion include providing extra capacity, using network management controls, installing direct lines to organizations, temporarily reducing the maximum transmission rate, and shutting down some Internet sites. Each of these methods is limited either by technical difficulties or questions of authority. In the normal course of business, providers attempt to address congestion in particular neighborhoods by building out additional infrastructure—for example, by adding new or expanding lines and cables. Internet provider staff told us that providers determine how much to invest in expanding network infrastructure based on business expectations. If they determine that a demand for increased capacity exists that can profitably be met, they may choose to invest to increase network capacity in large increments using a variety of methods such as replacing old equipment and increasing the number of devices serving particular neighborhoods. Providers will not attempt to increase network capacity to meet the increased demand resulting from a pandemic, as no one knows when a pandemic outbreak is likely to occur or which neighborhoods would experience congestion. Staff at Internet providers whom we interviewed said they monitor capacity usage constantly and try to run their networks between 40 and 80 percent capacity at peak hours. They added that in the normal course of business, their companies begin the process to expand capacity when a certain utilization threshold is reached, generally 70 to 80 percent of full capacity over a sustained period of time at peak hours.

However, during a pandemic, providers are not likely to be able to address congestion by physically expanding capacity in residential neighborhoods for several reasons. First, building out infrastructure can be very costly and takes time to complete. For example, one provider we spoke with said that it had spent billions of dollars building out infrastructure across the nation over time, and adding capacity to large areas quickly is likely not possible. Second, another provider told us that increasing network capacity requires the physical presence of technicians and advance planning, including preordering the necessary equipment from suppliers or manufacturers. The process can take anywhere from 6 to 8 weeks from the time the order is placed to actual installation. According to this provider, a major constraint to increasing capacity is the number of technicians the firm has available to install the equipment. In addition to the cost and time associated with expanding capacity, during a pandemic outbreak providers may also experience high absenteeism due to staff illnesses, and thus might not have enough staff to upgrade network capacities. Providers said they would, out of necessity, refrain from provisioning new residential services if their staff were reduced significantly during a pandemic. Instead, they would focus on ensuring services for the federal government priority communication programs and performing network management techniques to re-route traffic around congested areas in regional networks or the national backbone. However, these activities would likely not relieve congestion in the residential Internet access networks.

It’s clear some broadband providers are not willing to change their business models to redefine congestion from measurements taken during peak usage when speeds slow, to those that anticipate and tolerate traffic spikes.  That means making due with what broadband providers are delivering today and developing technical and legal means to ration, traffic shape, or simply cut access to high bandwidth traffic during ‘appropriate emergencies.’  Right on cue, the high bandwidth barrage of self-serving provider talking points are on display in the report:

Providers identified one technically feasible alternative that has the potential to reduce Internet congestion during a pandemic, but raised concerns that it could violate customer service agreements and thus would require a directive from the government to implement. Although providers cannot identify users at the computer level to manage traffic from that point, two providers stated that if the residential Internet access network in a particular neighborhood was experiencing congestion, a provider could attempt to reduce congestion by reducing the amount of traffic that each user could send to and receive from his or her network. Such a reduction would require adjusting the configuration file within each customer’s modem to temporarily reduce the maximum transmission speed that that modem was capable of performing—for example, by reducing its incoming capability from 7 Mbps to 1 Mbps. However, according to providers we spoke with, such reductions could violate the agreed-upon levels of services for which customers have paid. Therefore, under current agreements, two providers indicated they would need a directive from the government to take such actions.

Shutting down specific Internet sites would also reduce congestion, although many we spoke with expressed concerns about the feasibility of such an approach. Overall Internet congestion could be reduced if Web sites that accounted for significant amounts of traffic—such as those with video streaming—were shut down during a pandemic. According to one recently issued study, the number of adults who watch videos on video-sharing sites has nearly doubled since 2006, far outpacing the growth of many other Internet activities. However, most providers’ staff told us that blocking users from accessing such sites, while technically possible, would be very difficult and, in their view, would not address the congestion problem and would require a directive from the government.

You have to love some of the players in the broadband industry who trot out their most-favored “network management” talking points to handle a national emergency.  It’s interesting to note providers told the GAO they were concerned with violating customer agreements regarding speed guarantees, when most providers never guarantee residential service speeds.  Their first solution is the Net Neutrality-busting traffic throttle, to slow everyone down to ration the “good enough for you” network in your neighborhood.  Shutting down too-popular, high bandwidth websites like Hulu (no worries – you can watch your favorite shows on our cable TV package) is apparently someone’s good idea, but considering providers admit it wouldn’t actually solve the congestion problem, one’s imagination can ponder what other problems such a shutdown might solve.

One provider indicated that such blocking would be difficult because determining which sites should be blocked would be a very subjective process. Additionally, this provider noted that technologically savvy site operators could change their Internet protocol addresses, allowing users to access the site regardless. Another provider told us that some of these large bandwidth sites stream critical news information. Furthermore, some state, local, and federal government offices and agencies, including DHS, currently use or have plans to increase their use of social media Web sites and to use video streaming as a means to communicate with the public. Shutting down such sites without affecting pertinent information would be a challenge for providers and could create more Internet congestion as users would repeatedly try to access these sites. According to one provider, two added complications are the potential liability resulting from lawsuits filed by businesses that lose revenue when their sites are shutdown or restricted and potential claims of anticompetitive practices, denial of free speech, or both. Some providers said that the operators of specific Internet sites could shut down their respective sites with less disruption and more effectively than Internet providers, and suggested that a better course of action would be for the government to work directly with the site operators.

A very subjective process indeed, but one many providers have sought to keep within their “network management” control as they battle Net Neutrality.  One would think “potential claims of anti-competitive practices” would represent an understatement, particularly if cable industry-operated TV Everywhere theoretically kept right on running even while Hulu could not.  As long time net users already know, outright censorship or content blockades almost always meet resistance from enterprising net users who make it their personal mission to get around such limits.

Expanding broadband networks to provide a better safety cushion during periods of peak usage is looking better and better.

Providers could help reduce the potential for a pandemic to cause Internet congestion by ongoing expansions of their networks’ capacities. Some providers are upgrading their networks by moving to higher capacity modems or fiber-to-the-home systems. For example, some cable providers are introducing a network specification that will increase the download capacity of residential networks from the 38 Mbps to about 152 to 155 Mbps. In addition to cable network upgrades, at least one telecommunications provider is offering fiber-to-the home, which is a broadband service operating over a fiber-optic communications network. Specifically, fiber-to-the-home Internet service is designed to provide Internet access with connection speeds ranging from 10 Mbps to 50 Mbps.

Hello.

Sounds like a plan to me, and not just for the benefit of the Wall Street crowd sick at home with the flu.  Such network upgrades can be economical and profitable when leveraged to upsell the broadband enthusiast to higher speed service tiers.  During periods of peak usage, such networks will withstand considerably more demand and provide a better answer to that nagging congestion problem.

The alternative is Comcast or Time Warner Cable, in association with the Department of Homeland Security, having to appear on Wolf Blitzer’s Situation Room telling Americans they have a broadband rationing plan that will give you six options of usage per day.  Choose any one:

• Up to three videos of cats chasing laser pointers on YouTube
• One episode of Hogan’s Heroes
• Up to six videos of your friends playing Guitar Hero on Dailymotion
• Unlimited access to Drugstore.com to browse remedies
• Five MySpace videos of your favorite bands
• Up to 500 “tweets” boring your followers with every possible detail of your stuck-at-home-sick routine

Frontier Communications has won approval from state utility commissions in California, South Carolina, and Nevada to take over telephone service currently provided by Verizon Communications.  The decisions were unanimous in all three votes by Commission members, and involve telephone service in several small communities in all three states.

Verizon’s castoffs serve a small percentage of customers, which made the transaction fly under the media radar in most cases.  In California, Verizon dumps customers in a small section on the northwest border with Oregon.  In Nevada, several small communities south of Reno are involved.  In South Carolina, Verizon drops scattered groups of customers in small clusters across the state.

These state regulatory approvals follow an October 27 announcement by Frontier that its shareholders have approved the transaction, which will result in Frontier owning Verizon’s wireline operations in all or parts of 14 states.

While the approval appeared pro forma in those three states, West Virginia is another matter.  Strong employee union and consumer group protests continue across the state, with many consumers concerned about the implications of Frontier controlling nearly all wired phone lines in the state.  The Communications Workers of America held a conference call with the media Wednesday to outline its opposition to the deal.

The CWA has been a vocal opponent of the deal, claiming it will risk West Virginia’s telecommunications future with a company without the financial capacity to provide the type of advanced services Verizon is providing in other states.  Kenneth Peres, an economist with the Communications Workers of America, said the deal was extremely risky for consumers, workers and the affected communities.

Peres pointed to the perfect record of three out of three failures for earlier Verizon spinoffs.  FairPoint Communications declared bankruptcy early this week after trying to take on the service needs of three New England states.

Peres told the Charleston Daily Mail that if the deal goes through, Frontier “will find it extremely difficult” to meet its $8 billion in debt obligations while simultaneously investing enough capital to maintain its physical plant, improve service quality, set up a new system in West Virginia, lease systems from Verizon in 13 other states, provide video service for the first time (in Indiana), and ensure adequate staffing “while paying out a lot more in dividends than it makes in profits.”

Frontier went on the attack Thursday, accusing the union of interfering just to grab concessions for itself.

Verizon service areas sold off to Frontier in South Carolina

Steve Crosby, Frontier spokesman, said, “They’re just throwing stuff up against the wall. They know this is a good transaction and they’re trying to extract their pound of flesh. They want more concessions. This is their opportunity to ask for more money for their union membership and more benefits. That’s what they want. Union membership across the country is declining. This is how they’re trying to extract as much as they can from either Frontier or Verizon.”

As for Frontier’s debt load, “This is actually a de-leveraging transaction,” Crosby said. “We’re taking on debt but we’re taking on a whole lot more revenue. We’re currently at a 3.8 times revenue-to-debt ratio, going down to 2.6. So we actually get better in terms of revenue to debt. And today we’re fine. We’re able to pay a nice dividend. The day the transaction closes, we are approaching investment-grade borrowings.

“Our board of directors made the decision to lower our dividend by 25 percent when the transaction closes to give us even more cash to invest in infrastructure and to give us even more financial flexibility,” Crosby said.

“Every time we have an argument we win and they bring up other stuff,” Crosby said. “They never bring up the de-leveraging because it undermines their argument. They never bring up the fact that we will reduce our dividend because it undermines their argument.

“We have said we will maintain employment levels for 18 months” after the transaction closes, Crosby said. Because of required regulatory approvals and other factors, the deal can’t close before April 2010.

“So you can figure that’s two years,” Crosby said. “Who nowadays has that kind of job security? I think we’re bending over backwards. I wish I had the pension plan, the job security the CWA has. They’re looking at extracting more from Verizon and Frontier.”

When asked by the newspaper why Frontier shareholders would approve a deal that was destined for failure, Peres told the newspaper:

Frontier’s business model is built on acquisitions. Frontier bought a portion of Global Crossing’s business which increased revenue and access lines “but that began to decline,” he said. “They bought Commonwealth Telephone but that’s flat-lining. What’s the next step? What were they going to do – improve infrastructure or go through the acquisitions route again?” Continuing with acquisitions “postpones the day of reckoning,” he said.

Commentary: Our Take

Crosby’s comments seem more suited for a talk show audience that hates unions.  Obviously the union does not think this is a good deal for West Virginia, and considering the track record of earlier Verizon deals, and the correct predictions from employee unions on their inevitable outcomes, they have every right to oppose the deal on its face.  Crosby apparently has time to address declining union membership, but not the much more relevant decline in the traditional phone company’s bread and butter business – landlines.  Frontier, like other phone companies, continues to see disconnect requests coming from coast to coast as customers dump the phone company for a cable digital phone product, Voice Over IP line, or rely on their cellphone.

Verizon recognizes their traditional business is a dying one, which is why they are in a hurry to diversify into competitive broadband and video services over their fiber optic FiOS network.  Where it doesn’t make economic sense (under their current business plan) for Verizon to deploy FiOS, decisions are being made about whether to keep those smaller phone operations within the Verizon family, or sell them off to companies like Frontier.  What Frontier acquires today from the standpoint of customers and revenues could represent the high water mark, and without offering robust options for a digital future, Frontier will likely continue to see customer erosion.

FairPoint acquired seemingly healthy Verizon companies serving the entire states of Maine, New Hampshire, and Vermont.  When their efforts to seamlessly combine Verizon’s legacy systems with FairPoint’s own systems failed, that along with an inability to properly service customers, caused a death spiral as customers dropped service, which led FairPoint straight into bankruptcy.

Frontier’s record of investment and service in western New York speaks for itself.  Time Warner Cable eats Frontier for lunch, with less expensive “digital phone” service, much faster and more reliable broadband, and a video package that Frontier doesn’t offer (reselling DISH Network is hardly the same as providing video service that doesn’t come from a third party company’s satellite dish nailed to the roof).  Frontier is ready and willing to stick with DSL service at speeds that are basically maxed out.  Time Warner Cable evidently doesn’t even consider Frontier a significant enough player to deploy upgrades in this area while they are in a hurry to provide them where Verizon FiOS is under construction.

When a company isn’t prepared to keep up with the rest of New York with fiber deployment to the home, the chances of that kind of service reaching West Virginia anytime soon are near zero.

But Frontier’s unique position as a specialist in “rural service” allows it to eke out an existence in areas where cable isn’t a big competitive threat, and where any broadband is better than no broadband at all, at least for now.  But without a plan for keeping up with the fast changing broadband world, customers happy with 3Mbps service today will despise the company for being stuck with those speeds later.  A lot of people in Rochester sure aren’t happy being stuck with Frontier DSL, and that nasty 5GB “reasonable use” language in the Acceptable Use Policy.

Crosby’s comments about CWA member job security, which he evidently envies, says more about the union’s commitment to its members than Frontier has to him.  Perhaps Crosby can quit his spokesman job and switch to a position that gets him CWA membership with a pension and job security.  Perhaps if the people of West Virginia say thanks, but no thanks, Frontier will be in a better economic state than it would be if this mega-deal collapses under the weight of debt and integration challenges.  Then Crosby can keep his job with the evidently lousy benefits.

Peres’ assumption that Frontier lives only through acquisitions isn’t the complete story.  Just like the myth sharks must constantly swim to survive, Frontier doesn’t constantly have to acquire to survive either.  It does have to concern itself with an ever-consolidating telephone line industry, where the smaller independent companies continue to be snapped up by a dwindling number of players.  If a Windstream or CenturyTel comes along with a great offer, Frontier itself may have a new name — Windstream or CenturyTel.

The economies of scale and cost savings are routinely cited by investors promoting consolidation.  It’s no surprise Frontier shareholders voted for the deal.  Bigger is often better for many investors, as long as the quarterly financials play to their interests.  Listening to Frontier investor conference calls, the Wall Street bankers, and the media that support them, are constantly concerned with keeping costs cut to the bone, customer defection limited, risk reasonable, and that dividend being paid.  They are satisfied with Frontier’s rural, less competitive market focus, even if the customers that end up served by them are not.

A few weeks after word broke that Comcast was sniffing around NBC-Universal some on Wall Street are wondering whether a deal is more trouble than its worth.  The deal, valued at $27 billion dollars, would wed the nation’s largest cable operator with NBC-Universal, which owns a broadcast network, a Hollywood studio, and several cable networks.

Bernstein Research, which has favored cable stocks for years, has been the source of considerable unease about the deal.

“Media moguls see it almost as a birthright to buy and sell assets, but most of it clearly has not worked out,” said Craig Moffett, who covers the cable industry for Bernstein. “The value of the deal is the conceptual value of vertical integration, and most of it is against the law as a regulatory matter.”

Moffett’s comment was part of a piece in The New York Times raising questions about whether a Comcast-NBC deal would create more problems than it would solve.

David Carr, writing for the Times, suggests the heady days of media moguls building celebrated giant corporate empires might be behind us, particularly in telecommunications.  Carr, among others, raised memories of the AOL-Time Warner deal, when an upstart pre-dot.com-crash online service  managed to build enough value to buy a content mega-company like Time Warner for $164 billion dollars in 2000.  Just nine years later, AOL has become a forgotten relic, a shadow of its former glory.  Even if the idea of wedding AOL’s online network with Time Warner’s content sounded like a good idea at the time, in the end it just didn’t work out, and Time Warner CEO Jeff Bewkes is devoting plenty of attention spinning AOL away, right down to peeling the letters “AOL” off the front of the building.

Deal proponents suggest Comcast’s cable systems combined with NBC-Universal’s content would give Comcast diversity in its business model, which relies almost entirely on its cable systems.  Opponents say it will preoccupy Comcast with trying to integrate its focused cable-oriented business with a Hollywood studio and a legacy television network and the distractions that come with both.  The deal also comes with a 30% stake in Hulu, which is good and bad according to Carr.  It’s good because it gives the cable operator some control over a video distribution channel that could directly challenge its cable interests.  It’s bad for precisely the same reason, practically begging for regulatory hurdles from a more sensitive-to-antitrust Obama Administration.

Carr suggests if Comcast is in the acquiring mood, it might want to keep its focus on the remarkably stable cable industry in a downturned economy.  One such company, Time Warner Cable, the nation’s second largest cable operator, is a candidate according to Carr, and like Comcast is almost entirely focused on the cable television business.

Of course, such a deal would also certainly attract regulatory attention because of its size and scope.

Consumers across 13 states impacted by the proposed Verizon sale to Frontier Communications, as well as existing Frontier customers, should tell regulators to reject the deal.

Those of us living and working in Rochester, New York are extremely familiar with Frontier Communications.  For more than 100 years, Rochester Telephone Corporation provided excellent, independent telephone service to Rochester and a significant part of the Genesee Valley.  The company had a reputation for excellent reliability and charged rates considerably lower than New York Telephone, a Bell subsidiary, in other upstate cities like Buffalo and Syracuse.  In 1995, Rochester Telephone was renamed Frontier Communications, because the company wanted to position itself as something more than just a phone company.

Frontier was acquired in 2001 by Citizens Communications of Stamford, Connecticut, who has provided service ever since.  Ironically, that company thought Frontier was a better name than the one they had used for decades, and Citizens renamed themselves Frontier Communications in 2008.

Today, Frontier Communications serves just under three million customers, primarily in suburban and rural communities in 24 states.

Since Citizens acquired Frontier, and its largest operating service area in metropolitan Rochester, the company has made some changes to the local telephone network.  Fiber optic connections are now common between their central offices and smaller “satellite” central offices.  A local wi-fi network was installed in association with Monroe County, in part as a political maneuver to stop municipally owned and operated affordable wi-fi networks from getting off the ground.  As a concession to the county, a much smaller “free” wi-fi network was also included. (See below the jump for video news coverage of Frontier’s promises vs. reality)

The company’s broadband service relies on ADSL technology delivered by traditional copper telephone wiring, providing service in Rochester at speeds up to a theoretical 10Mbps.  Actual speeds vary tremendously depending on the distance between your home or business and the telephone company central office serving it.  In most smaller communities, speeds are far lower.  In Cowen, West Virginia, Frontier markets broadband service at just 3Mbps, a typical speed for Frontier’s smaller service areas.

Unfortunately, Frontier has shown no initiative to move beyond offering traditional DSL service to its customers, including those in western New York.  Across other New York State cities, Verizon is taking a far different approach.  In larger communities, it is aggressively installing fiber optic wiring to both homes and businesses.  Verizon FiOS positions the company to effectively compete against their traditionally closest competitor – cable television.  For several years, cable operators have offered a better deal for its “digital phone” service, which works with existing home phones but delivered over cable TV lines, often charging less than a traditional phone line, and cable throws in free long distance on many of its plans.

The ubiquitous cell phone has not helped.  Many younger Americans can’t understand why they would want to bother getting a traditional phone line, when the mobile phone in their pocket works just fine, and they can take it with them wherever they go. The result has been a steady erosion of traditional “wireline” phone lines, and a corresponding decline in the revenue earned from the service in many areas.

In September Verizon CEO Ivan Seidenberg told a Goldman Sachs investor conference that the wired phone line business was effectively dead.  Seidenberg recognized that trying to guess when the company would stop losing “landline” customers was like guessing when a dog will stop chasing a bus.  In other words, the future of Ma Bell is not delivering phone service — it’s deploying advanced networks that are capable of providing customers with video, broadband, and phone service across one wire, preferably a fiber optic one.  Those that can manage the transition will succeed, those who cannot or won’t will face a steady decline to obsolescence.

There is only one major problem — it costs a lot of money to rewire entire communities, much less states, with fiber optic wiring.  It’s like building a phone network from scratch.  A company contemplating such a challenging undertaking starts by asking how much it is going to cost and when will it profit from its investment.  Many on Wall Street don’t like either question because of the up front cost, and are even less happy with the prospect of taking the long view waiting for those costs to be recouped from customers.

To date, Verizon is the most aggressive major phone company in the nation building a pure fiber optic system in its larger service areas.  AT&T, which provides phone service in many states, has taken a more cautious approach using a hybrid fiber-copper wire design they market as U-verse.  A handful of independent phone companies and municipally owned providers have undertaken to wire fiber optics to the home as well, so they can sell video, telephone and broadband service to their customers.

A major challenge confronts phone companies servicing more distant suburban and rural phone customers, often living far apart from one another in sparsely populated regions.  It costs more to service these customers, and the potential revenue gained is often not as great as what can be earned from their urban cousins.  Verizon doesn’t see many rural customers as part of their future business plans and have begun to systematically sell some areas off to other phone companies, usually in tax-free transactions.  One company that sees an ambitious future in serving rural America is Frontier Communications.  For them, finding a niche among the big boys gives them safety and security, particularly in areas that don’t have a cable competitor (or any competitor at all).

Frontier’s acquisition strategy is to sell regulators and the public on the idea that allowing Frontier in guarantees a much better chance for broadband service to reach the communities Verizon skipped over.  Their argument for success in a business seeing steady declines in customers is that broadband service will stem the tide, and help them remain profitable.  More than doubling their size with the acquisition of Verizon’s latest castoffs means more opportunity to market broadband service to those underserved communities.  Frontier argues it can be a more nimble player than Verizon because it has marketing and service experience in rural communities previously ignored by Verizon.

Frontier’s ability to provide broadband service is not the most important question.  More important is how Frontier will define broadband and at what speed. Also critically important is how Frontier will be prepared to deliver the next generation broadband platform that other communities will see with speeds up to 100Mbps, often on fiber optic networks.

Frontier’s reliance on ADSL technology, which worked fine for 1990s Internet connectivity, is increasingly falling behind in the speed race, and for much of the next generation of online content, speed will matter very much.

Unfortunately, the track record for the success of these spinoffs has been universally lousy for consumers and for many employees who live and work in the impacted communities.  Promises made quickly become promises delayed, and later broken as companies like Hawaii Telecom and FairPoint tried to integrate former Verizon operations into their own.  Service outages, billing errors, confusion, and finally a mass exodus by customers looking for better alternatives has been the repeated result.  The faster customers depart, combined with the enormous debt these transactions create for the buyer, the faster the journey ends in Bankruptcy Court.  There is nothing about the Frontier deal proposal that suggests their experience will be any different.

Shouldn’t Three Strikes Mean You Are Out?

Consumers should tell state regulators they should pay careful attention to the failures Verizon has left in its wake from previous deals:

• FairPoint Communications, which assumed control of phone service in Maine, New Hampshire and Vermont just last year declared bankruptcy this morning, even now still plaguing customers with billing and service problems.  The company choked on the debt it incurred from financing the deal.  Before this morning’s bankruptcy, their stock price had lost 95% of its value, and customers were leaving in droves, only accelerating the company’s demise.  FairPoint thought it could integrate Verizon’s byzantine billing system into its own.  Thinking and doing turned out to be two entirely different things.  Frontier has experience integrating other small independent phone companies into its billing system, but now faces the same prospect of dealing with Verizon’s own way of doing everything, and for twice the number of customers Frontier serves today.
• Hawaii Telecom and its 715,000 customers were dumped by Verizon in 2005.  Once again, transition issues plagued the post-sale experience for those customers, and almost a quarter fled the company over three years.  Last December, Hawaii Telecom declared bankruptcy.
• Verizon’s yellow pages unit was also thrown overboard by the company to Idearc in November 2006.  Saddled with $9.5 billion in debt and interest payments representing almost one quarter of the entire company’s revenues, Idearc finally had enough in March 2009 when it also declared bankruptcy.

The deal between Verizon and Frontier could easily follow the same path, as Frontier gets loaded down with massive debt financing the purchase, and has to immediately provide better service than Verizon did, or face a stampede of customers heading for the exit.  The impact of a debt-laden Frontier could be felt by more than just the newcomers.  Existing Frontier customers could also be impacted as the company turns its attention to a potentially lengthy integration process.

The Promise of Anemic Broadband, The Fiber Myth & The 5GB Acceptable Use Policy

Frontier’s plan to bring broadband to a larger number of customers is a noble gesture, particularly for households that currently do not receive any broadband service.  Unfortunately, a short term gain of what will likely be 1-3Mbps DSL service will leave these communities behind in the next few years as broadband speeds accelerate far faster than what Frontier is prepared to provide.

Some press accounts in West Virginia have left residents with the impression fiber optic service will reach their individual homes should Frontier be successful in purchasing Verizon’s assets.  There is no evidence to suggest this is true.

In earlier deals, these kinds of rumors started when companies advocating the sale staged press-friendly events announcing a fiber connection between hospitals, schools, or community centers, allowing the media to give the impression there would be fiber upgrades for all… if the deal gets approved.  In the case of Frontier, they have suggested they will continue work on Verizon’s FiOS system in the communities where construction was already underway.  That’s an important distinction for the millions of customers who don’t live in those communities.  Verizon’s FiOS network that is part of this transaction serves less than 70,000 residents.

Residents should consider what possibility their community has of obtaining this type of advanced service when Frontier refuses to provide anything comparable in their largest service area – Rochester, New York.

If they are not doing it in Rochester, do you really believe they will do it in your community?

The company certainly has a competitive need to provide such service in our city where Time Warner Cable has accelerated speeds beyond what Frontier is capable of providing.  Indeed, Time Warner Cable officials tout their largest number of new Road Runner broadband sign-ups comes from departing DSL customers who are fed up with the anemic, inconsistent speeds offered by this aging technology.

In the town of Brighton, I gave Frontier DSL service a try this past spring.  The company promises up to 10Mbps of service to my area, which is less than 1/2 mile from the city of Rochester, and literally just a few blocks from the town’s business center.  After installation, the company was only able to provide me with service at 3.1Mbps, just less than one-third of the speed marketed to local residents.  Even more surprising was the fact they charged a higher price for that service (including taxes, fees, and modem rental charge) than their competitor, Time Warner Cable.

This website was founded after Frontier inserted language into its Acceptable Use Policy defining “reasonable” broadband usage at just five gigabytes per month.  That’s right, the same limit your mobile phone provider applies to their wireless broadband service.  Viewing one HD movie over Frontier’s DSL service would put you perilously close to unreasonable use.

Are consumers willing to give up unlimited Verizon DSL service for a company that refuses to drop a 5GB acceptable usage definition from their terms and conditions?

America is on the threshold of 50-100Mbps broadband service, with some communities already enjoying those speeds.  If your community isn’t served by a competing provider, do you want to limit your future to yesterday’s DSL technology, and then told it is inappropriate for you to actually use it beyond five gigabytes per month?

The Billing and Customer Service Nightmare

The days of local customer service are over with Frontier.  Back during the days of Rochester Telephone, there were several occasions when a local customer service representative would recognize me by name.  Those days are long gone.  Now, a good deal of Frontier’s customer service is handled by a call center in DeLand, Florida.  While the representatives mean well, experiences with them suggest many are not well equipped to understand and consistently market Frontier’s products to existing customers.  Pile on more than double the number of new customers, and the problems are likely to become much worse.

Frontier has personally plagued me with billing errors this past year, gave inconsistent and inaccurate answers to pricing and service inquiries, and created major runaround hassles to correct them.  From the DSL self-install kit that never arrived (requiring me to visit a local office to pick one up myself), to the impenetrable and inaccurate bills that resulted, the company could not correct the problems without consulting someone with supervisor status.  I canceled service within the month.

Customers signing up for service have been pressured into “peace of mind” agreements that lock customers into long term contracts that automatically renew unless the customer actively cancels them (and is certain the request to cancel was processed correctly.)  Frontier has been fined twice by the New York State Attorney General for “misleading advertising and marketing tactics,” once in 2006 and again just a few weeks ago.  Some customers are now waiting for substantial refunds ranging from $50-400 dollars for “early termination fees” charged when they tried to cancel service.

Are you comfortable knowing some customers have been inappropriately placed on a one to three year contract without their full informed consent, and billed hundreds of dollars when they tried to cancel?

The Art of the Deal

By no means will a Verizon-Frontier transaction be the last.  As the industry continues to consolidate around a dwindling number of wired phone line customers, it’s a safe bet there will be more phone customers thrown away by the bigger players.  Nothing guarantees Frontier itself will be freestanding when the consolidation wave ends.  While these deals may make sense for some shareholders and company executives, they often don’t for local experienced employees who know the network and how to provide quality service.  They never have for consumers who will always have to foot the bill to pay off these transactions and have to live with the company trying to integrate Verizon’s bureaucracy with their own.

What is the ultimate price to pay?  For employees — their jobs, and as FairPoint employees are discovering today, those workers are being asked to pay the price for management mistakes.  In West Virginia, some of the most experienced Verizon employees are getting out with their pensions intact, not willing to take a chance on Frontier.  For customers living with FairPoint, horror stories of weeks without service, $400 phone bills for service long since canceled, company technicians that cannot find the customer even when they are located right next door to the phone company, and broken promise after broken promise continue.

Some consumer groups and local workers correctly predicted, in each instance, the horrific outcome of these kinds of deals.  Their uncanny knack to correctly predict disaster contrasts with company marketing, lobbying, and astroturf efforts that promise the sky and tell each successive news reporter covering the latest atrocity that “things are getting better” and “will be fixed soon.”  Unfortunately for too many customers, the fix has to come from a judge in Bankruptcy Court.

The International Brotherhood of Electrical Workers who repeatedly warned about the perils of FairPoint, now warns state regulators about Frontier, and direct attention to the numbers:

If the transaction is approved, Frontier management will have to deal with a 300% increase in access lines (from 2.2 million access lines now to 7 million after the sale) and a 200% increase in employees (from 5,700 employees now to 16,700 after the sale).

Frontier’s debt will increase from $4.55 billion to $8 billion—an increase of over $3.4 billion. Servicing this debt will mean less money for infrastructure, service quality, and high-speed internet build out.

While Frontier argues that somehow this deal will make it stronger, the issue for the states being sold is how much weaker it will make the operations in those states.

The leverage ratio is one way to measure the financial health of a company. The leverage ratio is calculated by taking net debt and dividing it by earnings (before interest, taxes, depreciation and amortization). The leverage ratio for the states being sold will increase from 1.7 immediately before the transaction closes to 2.6 after the sale. The entire deal revolves around Frontier’s ability to cut its operational expenses by $500 million or 21%.

This is significantly greater than the 8-10% cut that FairPoint hoped to achieve—and much of these savings were to be generated from replacing Verizon’s network and back-office systems. Yet, Frontier states that all of the operations except for West Virginia will continue on Verizon’s existing systems—for which Frontier will pay a fee.

Where will Frontier generate the savings—from reduced service quality, workforce, or maintenance of the communications infrastructure? In spite of brave talk from Verizon and Frontier, as recent events have demonstrated, obtaining financing for a transaction this size can be difficult. Frontier does not currently have financing for the additional debt it will take on for this transaction.

As an existing Frontier customer, I’d like an answer myself.

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Watch these two Wall Street guys talk about the previous Verizon deals that threw customers under the bus.  Plenty of praise for the skilled deal maker Verizon CEO Ivan Seidenberg, and no concern for you, the consumer and telephone customer impacted by a deal that got a few people very rich and left you with a bankrupt phone company.  (3 minutes)

It’s Not Worth the Risk

Unfortunately, for too many rural Americans impacted by this deal, there is only one phone company.  Cable television is not in their future, and in mountainous regions like West Virginia, wireless phones may not be suitable as a phone line replacement.  Risking 100 years of solvent phone service on a deal that could ultimately follow earlier deals into bankruptcy is not worth the risk.  The nightmares of converting operations from one provider to another is a hassle consumers should not have to face.

For decades, you faithfully paid your Verizon telephone bill and made the company the telecommunications powerhouse it is today.  Now they want to abandon you because, frankly, you just aren’t important enough to them anymore.  It doesn’t have to be this way.  State regulators can tell Verizon they need to make different plans — by forgetting about trying to cash in on a deal that is good for them and bad for you, and by staying put and providing consumers with the same kinds of network upgrades they are building in communities across the country.

Unfortunately, Frontier before this deal was ill-equipped to embark on the kind of investment necessary to provide fiber optic broadband connectivity to its customers.  Now pile on billions of additional debt and the challenge of trying to more than double their size and integrate diverse phone networks in 13 different states and ponder what the chances will be for fiber service after the deal is done.  Far more likely for residents is a company that will rely on slow speed DSL service, providing “good enough for them” broadband for the indefinite future.

Take Action!

As has been the case with Hawaii Telecom and FairPoint, naive regulators believed the false promises and approved earlier deals, and are frankly responsible for part of the blame.  Face-saving telecommunications regulators in New England initially even tried to cheerlead for FairPoint as they stumbled through one customer service nightmare after another.  Too late, they realized the grim reality that their approval saddled their states with a phone company totally unequipped to do the job.

Consumers who do not want a repeat performance can contact their state representatives and tell them to put pressure on each state’s public utility commission to reject the deal.  You should also contact your state’s public utility commission yourself.

No amount of concessions and written agreements will make a difference if that phone company ends up in financial distress and takes a walk to Bankruptcy Court.  Regulators should not even bother trying, after witnessing the debacle with FairPoint.

In your polite, persuasive and persistent communication with state officials, let them know:

• We’ve been down this road with Verizon before, with FairPoint Communications and Hawaii Telecom, leaving a litany of broken service promises, unfulfilled broadband commitments, unacceptable billing mistakes, and poor quality customer service.  In both instances, customers fled and the companies ended up in bankruptcy;
• Frontier has been unable or unwilling to wire its largest service area, Rochester, New York, with the advanced fiber connectivity that Verizon is wiring throughout the rest of upstate New York.  If the company cannot meet the needs of customers in their largest service area, what in the world makes you think they’ll do it for us?
• The company has been fined twice by the New York State Attorney General for dubious business practices, costing consumers hundreds of dollars the company has now agreed to return to those customers;
• A broadband service for our community’s future should not come with a 5 gigabyte monthly limit attached in the fine print.  How can our community compete in the digital economy if you have to ration your broadband usage to an unprecedented level in wired broadband?
• The devil is always in the details.  Verizon has an aggressive plan to stay relevant in a digital future, with video, telephone, and Internet service running across advanced fiber optic lines.  Frontier has a plan to serve rural communities with yesterday’s technology.  Frontier’s vision for video is to “get a satellite dish” and rely on the existing aging copper wiring to do everything else.
• What kind of service and growth can we expect from a company mired in debt?  As seasoned Verizon employees in our community start retiring, understanding the writing on the wall, what do they know that you and I don’t?
• Phone companies are a regulated utility, essential to the public interest.  Why permit a risky deal that could ultimately lead to a taxpayer bailout to keep operations running if Frontier follows its predecessors into bankruptcy, all while Verizon walks away with billions in proceeds?

You can locate the names and contact information for your state representative(s) on Congress.org simply by entering your zip code.  When calling or writing, always be courteous, and request that your representative respond in writing to your concerns, and share with Stop the Cap! any correspondence you receive in reply.  As always, we’ll be holding elected officials accountable.

Your next contact must be with your state public utility commission.  If a hearing is planned in your community, share your views in person and feel free to point them here if they want to watch how bad telecommunications deals have unfolded in the past.  We have countless hours of news reports archived for their viewing pleasure.  Each state has a different procedure for contacting them.  In West Virginia, for example, consumers can call the Commission at 1-800-642-8544.  Ohio residents can fill out an online form.

Perhaps Frontier can one day take on a transaction like this, but only after it can demonstrate it has the resources and willingness to provide customers with better options for service.  Had they done that in our community, local residents would not have taken to signing a petition for Verizon to overbuild, or buyout Frontier’s Rochester operation.  Local residents want the advantage fiber optic service can bring our community and its local economy, some even expressing a willingness to send $10 and $20 checks to Verizon for an acquisition fund to get the sale done.  When consumers give money to the phone company when they don’t owe anything, that should be a clear signal consumers are dissatisfied and want a change Frontier, thus far, has not provided.

There are more videos below the jump….

… Continue Reading

Opposition to the sale of Verizon’s landline business to Frontier Communications in 13 states continues to increase, particularly in Ohio and West Virginia, where several employee unions have argued the deal represents a win for Wall Street and company executives, but a raw deal for millions of consumers.

The Communications Workers of America and the International Brotherhood of Electrical Workers, who also warned state regulators in New England about the consequences of approving the sale of Verizon’s operations in Maine, New Hampshire, and Vermont to FairPoint Communications, continue to warn consumers and state officials that a similar deal between Verizon and Frontier Communications could spell major problems for telephone customers.  They call on state officials to reject the deal and force Verizon to invest some of their substantial profits earned in these communities into providing better service instead of dumping customers overboard.

The CWA says the sale would put $3.3 billion dollars into Verizon’s coffers — tax free — and leave Frontier buried in debt, which could impact both new and existing Frontier Communications customers, including hundreds of thousands of those in Rochester, New York, Frontier’s biggest service area.

“Verizon Communications has been divesting assets to smaller, less stable corporations in order to reap large, tax-free, profits,” CWA International Representative Elaine Harris said. “Verizon proposes to repeat that formula, and its disastrous effects, with the sale of all of its wireline operations here in West Virginia to Frontier.”

The CWA considers the transaction based primarily on corporate greed, not the best interests of phone customers.

“The only winner in all of these deals has been Verizon Communications and especially Verizon’s corporate executives,” Harris said. Verizon CEO Ivan Seidenberg is the highest paid executive in the telecom industry, with $24.31 million dollars in annual compensation from Verizon.

“His salary could have funded the entire network of senior services in West Virginia last year and he still would have had $8 million in his pocket,” Harris said.

The deal will leave Frontier Corporation with a total of $8 billion dollars in debt. “The West Virginia consumers will experience the effects of converting more than 617,000 aging access lines to a smaller, debt-ridden company,” Harris said. “The public will be forced to pick up the pieces if Frontier follows Verizon’s other buyers and files for bankruptcy.”

“We’ve closely watched the failures of the companies that purchased Verizon’s assets and we don’t need a crystal ball to figure out what will happen if Verizon tries the same scheme in West Virginia. There’s absolutely no reason to gamble West Virginia’s telecommunication’s future just to increase Verizon’s bottom line,” Harris added.

The CWA is running radio ads across the state of West Virginia opposing the deal.

Audio Clip: Communications Workers of America Radio Ad (1 minute)
You must remain on this page to hear the clip, or you can download the clip and listen later.

Verizon spokesman Harry Mitchell said Verizon wants to sell its access lines so the company can focus on its wireless and broadband business. Mitchell told The Charleston Gazette the union has opposed the deal from day one.

“They’re spending their members’ dues on advertising in an effort to cloud the issue,” he said.

Frontier Communications has protested accusations that their purchase of Verizon assets will result in the same kinds of colossal failures impacting other Verizon sell-offs.  Company officials claim Frontier already has a successful customer support operation in DeLand, Florida, and billing and operating systems in place.

In West Virginia, those existing operations serve 144,000 Frontier customers.  If the deal is approved, Frontier will take on the responsibility of serving 1.3 million landlines across the southeastern U.S. alone.

The International Brotherhood of Electrical Workers, integrally involved in fighting the FairPoint transaction in New England, says the Frontier deal is reminiscent of what happened with FairPoint:

Regulators in the 14 states where Verizon now proposes to sell its landlines to Frontier face an almost identical situation as New England regulators did last year. Frontier Communications is proposing to buy Verizon’s entire wire line operation in West Virginia – as well as Verizon’s scattered landlines across 13 other states – in a similarly structured deal.

In both cases, Verizon chose a much smaller company in order to take advantage of an obscure tax loophole. With the Frontier sale, Verizon will avoid paying any taxes on the $3.3 billion it will receive from Frontier. Frontier will have to cope with three times more employees, three times more access lines and a 75 percent increase in its debt from $4.5 to $8 billion.

Verizon has a very poor track record in these sales. Verizon sold its Hawaii operations to Hawaiian Telcom in 2005 and it filed for bankruptcy. Customers, service and employees have suffered as a result.

Frontier – just like FairPoint – is a making promises that it may not be able to meet. Like FairPoint, state regulators are being asked to approve a deal where a small company will attempt to simultaneously run a much larger operation, pay off billions of dollars more in debt, integrate Verizon’s computer systems and spend more money to expand broadband.

In the end Verizon will profit but consumers, workers and communities are put at real risk.

Expanding broadband access is an especially critical factor for all rural areas. But Frontier has failed to make any specific commitments, set any timeline or offer a plan for its broadband buildout.

Union leaders believe that states shouldn’t risk their telecommunications’ future just so Verizon can fatten its bottom line. Regulators shouldn’t approve this sale because the risks are too great. Instead, our legislators, regulators and the Governor should require Verizon to meet its service responsibilities. Verizon shouldn’t be allowed to walk away with $3.3 billion tax free, and leave the fate of its customers in the hands of a company with a lot less resources. If Frontier should falter, customers and the public would be required to pick up the pieces – not Verizon!

The track record for Verizon spinoffs has hardly been one of success.

FairPoint Communications, the company to which Verizon sold its Maine, New Hampshire and Vermont operations in 2008, is foundering as it tries to integrate operations and is choking on the debt it incurred to finance the transaction Since the deal was announced, FairPoint’s stock price has declined by about 95%, and the company has been forced to suspend dividend payments.

Hawaiian Telecom, the company to which Verizon sold its Hawaii operations in 2005, filed for bankruptcy. Verizon sold its 715,000 access lines in Hawaii. Since then, Hawaiian Telcom has experienced significant transition issues that resulted in major financial and customer service problems. In three years, the company lost 21% of its customers. In December 2008, Hawaiian Telcom filed for bankruptcy.

The yellow pages company that Verizon spun off also filed for bankruptcy. In November 2006, Verizon spun off its yellow pages directory business to Verizon shareholders, loading the new company, Idearc, with about $9.5 billion in debt and extracting a cool $9 billion in cash and debt reduction. Last year, interest payments alone on Idearc’s debt accounted for almost one-quarter of its total revenues! Representing something of a Verizon failing company “hat trick,” Idearc filed for bankruptcy in March 2009.

[flv]http://www.phillipdampier.com/video/WSAZ Huntington Frontier CWA Fight 10-14-09.flv[/flv]

WSAZ-TV Huntington, West Virginia reported on the growing opposition to the Frontier sale by employee groups on October 14th. (3 minutes)

In Washington State, IBEW Local 89, outside Seattle, says the sale could cripple one of America’s most tech-savvy regions.

“We’ve always been a leader in communications in this part of the country,” said Ray Egelhoff, business manager of IBEW Local 89. “If this happens, we’re afraid businesses won’t move in, and some may even move out.”

Egelhoff, along with more than 1,500 Verizon workers who may become Frontier employees, deluged officials with letters and e-mails expressing their concerns. More than 500 have gone out so far to senators, house members, governors and business leaders. The workers worry Frontier —at about the a third the size of Verizon—won’t be able to absorb the huge Verizon assets, won’t be able to keep customers happy and, eventually, will have to shed staff.

Robert Erickson, International Representative in the IBEW’s Telecommunications Department said, “The deal poses risks to consumers and employees. Frontier is making all kinds of promises about synergy and how they’ll expand broadband. FairPoint Communications made the same grand claims and now they can’t meet their commitments and fulfill the promises they made. It’s clear that Frontier will be in a similar situation and not have the resources to fulfill the commitments they are making.”

Consumer groups are also raising objections to the sale.

The National Association of State Utility Consumer Advocates urged the Federal Communications Commission, which is reviewing the proposed transaction, to reject the deal.

“The merger proposed by Frontier and Verizon is not in the public interest,” said David Springe, president of the consumer advocate group. “The failure of the companies to offer adequate consumer benefits or protections puts customers at risk of being served by a company without enough financial strength to make necessary improvements to local telephone facilities and widen the deployment of broadband access.”

Free Press, a nonpartisan group that works to reform the media, also raised concerns about the sale in a filing with the FCC. Free Press cited Verizon’s sale of lines in New Hampshire, Maine, and Vermont to FairPoint, which subsequently acquired substantial debt, was unable to accommodate the increased service area, and is now on the edge of bankruptcy.

“This trend has the potential to leave rural areas with ill-equipped companies offering inadequate service at high prices,” says the Free Press report. “This is in direct contrast to the stated intent of Congress and the Obama Administration to foster universal broadband to all Americans.”

[flv]http://www.phillipdampier.com/video/WCHS Charleston Verizon Sale Fight 10-14-09.flv[/flv]

WCHS-TV in Charleston, WV talked with the CWA and company officials about the sale of Verizon operations to Frontier Communications. (1 minute)