Frontier’s Lack of Fiber

The primary reason that Frontier cites for going into bankruptcy is the lack of fiber. They are finally acknowledging that customers are bailing on them due to the poor broadband speeds on their copper networks. This is being presented as if this is a sudden revelation – as if the company woke up one day and realized that it’s selling services that nobody wants to buy. I must admit this gave me a chuckle and there are some giant flaws with this argument.

Rural customers don’t hate DSL – they hate DSL that doesn’t work. If Frontier had implemented the CAF II upgrades as had been promised, then rural customers would all be using the 10/1 Mbps or faster rural DSL that would have been created as a result of those upgrades. Instead, customers have gotten disgusted by overpriced DSL that is so slow that they can’t stream video or connect to a school or work server. We’ve been doing speed tests all over the country and it’s rare to find rural DSL in many markets that delivers even 5 Mbps download – much of it is far slower than that, some barely faster than dial-up. If Frontier had provided 10/1 Mbps DSL to millions of homes, those households would gratefully be buying that broadband during the COVID-19 crisis.

Frontier blames its woes on lack of fiber with no mention of their reputation for unconscionably bad customer service. I’ve talked to customers who talk about routine network outages that lasts for many days. Customers complain about losing broadband and having to wait weeks to get it repaired – or worse, are told that the electronics needed to replace a bad DSL modem are out of stock. This is a company that has trimmed, then trimmed again its maintenance staff to the bone. Talk to any rural Frontier technician and they’ll tell you that they don’t have the time or resources available to address routine customer problems.

Frontier complains about lack of fiber, but as recently as 2015 they purchased another huge pile or dilapidated Verizon copper networks as part of a $10.5 billion acquisition. While that acquisition came with some FiOS fiber networks, the company also doubled down on buying non-functional copper networks. The speculation in the industry was that Frontier continued to buy lousy properties because it created opportunities for huge management bonuses – the company never had any plans to make the purchased copper networks any better.

And that’s the real issue with Frontier’s claim – they have no fiber because they’ve made almost no effort to migrate to fiber. The company burned all of its cash on trying to service the debt for overpriced acquisitions rather than rolling cash back into its networks.

It’s interesting to compare Frontier to the many smaller independent telephone companies. The FCC brags about places like the Dakotas that have a huge amount of rural fiber to homes. But that rural fiber didn’t happen all at once. It happened over decades. Most rural telcos went through two rounds of investment where they invested to improve rural DSL. In doing so they built fiber to go deeper into the rural areas, the first build brought fiber within maybe ten miles of homes, the second got fiber to within 3 miles of most homes. When the rural telcos decided to take fiber the rest of the way, it was reasonably achievable because they already had fiber deep into rural neighborhoods.

Frontier has done very little of that kind of incremental improvements over the years. They found it more enticing to keep borrowing to buy new rural properties rather than roll cash back into the existing networks. It doesn’t even look like they did all of that much new fiber as part of the CAF II upgrades. I’m sure Frontier would refute that statement and say they are fully compliant with CAF II, but if they had built fiber deep into the network then rural DSL would have gotten better – and for the most part, it hasn’t.

I can’t how the bankruptcy will benefit frontier’s customers. The company will likely get to walk away from a lot of the debt that was provided for the last few acquisitions – and it’s hard to feel bad for lenders who thought it was a good idea in 2015 to lend to buy copper networks. But bankruptcy won’t fix any of the fundamental problems with the Frontier networks. Customers are going to continue to bail on inferior and nonfunctional broadband products. The upcoming RDOF auction is going to give a lot of money to ISPs that are going to overbuild Frontier copper with something better (even though Frontier made a last-minute filing at the FCC to block grant funding by claiming they had magically upgraded 16,000 rural census blocks).

Is Frontier going to somehow start investing in rural fiber? My best guess is that they won’t even after bankruptcy. If they can raise any money for new capital spending they’ll likely try to salvage some of the county seats and other markets where there is a mass of customers. However, in many of those markets they’ve already lost the battle to the cable companies.

Frontier is right in that they are failing from lack of fiber. But that statement doesn’t tell the full story. They are failing because the company decided decades ago to not invest capital into their own networks – and now they are paying the price.

COVID-19 Boosts 1Q 2020 Broadband Subscribers

Leichtman Research Group recently released the broadband customer statistics for the end of the first quarter of 2020 for the largest cable and telephone companies. Leichtman compiles most of these numbers from the statistics provided to stockholders other than Cox, which is estimated. Leichtman says this group of companies represents 96% of all US landline broadband customers.

The big news is that additions in the first quarter were up nearly 85% over the number of customers added in the fourth quarter of 2019.  For the quarter, these large ISPs collectively saw growth that annualizes to 4.8%. This was the biggest quarterly overall subscriber growth since early 2015.

3/31/20 1Q Change % Change 4Q 19 Adds
Comcast 29,106,000 477,000 1.7% 443,000
Charter 27,246,000 582,000 2.2% 339.000
AT&T 15,315,000 (74,000) -0.5% (186,000)
Verizon 6,982,000 26,000 0.4% (5,000)
Cox 5,230,000 60,000 1.2% 25,000
CenturyLink 4,667,000 (11,000) -0.2% (36,000)
Altice 4,237,300 50,100 1.2% 7,000
Frontier 3,480,000 (33,000) -0.9% (55,000)
Mediacom 1,349,000 21,000 1.6% 12,000
Windstream 1,067,300 18,000 1.7% 9,300
WOW 797,600 16,100 2.1% 7,600
Cable ONE 793,000 20,000 2.6% 83,862
Consolidated 786,125 1,960 0.2% 14
TDS 460,000 4,800 1.1% 17,500
Atlantic Broadband 457,233 5,770 1.3% 5,326
Cincinnati Bell 427,500 1,800 0.4% 1,600
Total 102,401,158 1,166,530 1.2% 669,788
Total Cable 69,216,233 1,231,970 1.8% 922,788
Total Telco 33,184,925 (65,440) -0.2% (253,586)

We know that a lot of the growth was due to COVID-19, which drove employees and students to work from homes. A lot of homes likely purchased broadband for this purpose. These big ISPs also pledged to the FCC that they wouldn’t disconnect customers for non-payment during the pandemic. However, the real impact of that policy won’t show up until the second quarter.

Comcast and Charter continue to dominate the rest of industry, and accounted for 86% of total net growth for the quarter. The large cable companies collectively gained over 922,000 subscribers, which their biggest quarterly growth since 2007. The telcos collectively still lost customers for the quarter, but losses are significantly less than in 2019. The biggest telco loser was AT&T which lost 186,000 customers for the quarter. Frontier continued to lose the biggest percentage of its customer base and lost nearly 1% of its broadband customer base during the quarter.

This growth is impressive, and much of the boost has to be due to an increased need for home broadband. We’ll have to wait until later in the year to see the impact of having over 36 million people file for unemployment and for potentially millions of small businesses to close. There has been a long-running debate in the industry about whether broadband is recession-proof. Arguments can be made that homes out of work will hang onto broadband as long as they can in the hopes it can help them find work. In a few quarters, we’ll find out.

Enough is Enough

CenturyLink recently petitioned the FCC to allow them to be late in implementing the CAF II upgrades where the FCC doled out $11 billion to upgrade rural broadband speeds to 10/1 Mbps. The ostensible reason for the delay is the COVID-19 pandemic, but CenturyLink was already behind and notified the FCC earlier this year that they hadn’t completed their 2019 CAF II installation in 23 out of 33 states.

I say enough is enough. It’s time for the FCC to demand a reckoning of CAF II and begin handing out draconian penalties to the telcos that didn’t meet their obligations. I’m positive that if this was assessed fairly that the FCC will find that the vast majority of big telco customers have never gotten an upgrade to 10/1 Mbps.

Let’s start by looking at CenturyLink’s request. There is no reasonable explanation they can offer for not meeting their obligations in 2019. That was the fourth of a five-year buildout obligation, and the company has known for years what’s needed to be done – and they had the federal money in their pocket to make the upgrades. The claim for this year is also largely bogus. I have a lot of clients that are being cautious now about entering customer premises, but I don’t know any carrier that has stopped doing work outside of customer homes. I can’t think of any practical reason that COVID-19 would cause a delay for CenturyLink. Even if they upgrade somebody’s DSL, they could mail them a new modem – telcos have been having customers self-install DSL modems for twenty years.

It’s time to stop the pretense that CenturyLink or the other big telcos have been busy upgrading rural DSL. I don’t know anybody who thinks that’s happened. I have anecdotal evidence that it hasn’t, My company has been helping rural counties with broadband feasibility studies for many years. In the last four years, we’ve been asking rural customers to take speed tests – and I’ve never seen even one rural DSL connection that transmits at a speed of 10/1 Mbps. I’ve haven’t seen many that have tested above 5 Mbps. I’ve seen a whole lot that tested at less than 3, 2 or even 1 Mbps. Many of these tests have been in areas that are supposed to have CAF II upgrades.

I’ve also never talked to any County officials who have heard from the telcos that their county got rural broadband upgrades. One would think the telcos would brag locally when they were finished with upgrades as a pitch to get new customers. After all, customers that have only had slow DSL or satellite service should be flocking to 10/1 DSL. I’ve also not seen a marketing campaign talking about faster speeds due to CAF II. I’ve been searching the web for years to find testimonials from customers talking about their free upgrade to 10/1 Mbps, but I’ve never found anybody who has ever said that. This is not to say there have been zero upgrades in the CAF II areas, but I see no evidence of widespread upgrades.

The reality is that CenturyLink got new leadership a few years ago who immediately announced that the company was going to stop making ‘infrastructure return’ investments. We have Frontier that miraculously recently found 16,000 Census blocks that now have speeds of at least 25/3 Mbps when I’m still looking for proof that they upgraded places to 10/1 Mbps. Go interview folks in West Virginia if you think they’ve made any CAF II upgrades.

The FCC has a choice now. They can wimp out and grant the delay that CenturyLink is requesting, or the agency can come down on the side of rural broadband. There is no middle ground when it comes to CAF II. This FCC didn’t make the original CAF II decision – but they are the ones that are supposed to make sure the upgrades are done, and they are supposed to be penalizing telcos that failed to make the upgrades.

The response to CenturyLink’s request should be a giant penalty for missing the 2019 deadlines and a reminder that the company is still on the hook for 2020 unless they want more fines.

The FCC also needs to aggressively start testing in the areas that have supposedly gotten CAF II upgrades. This doesn’t have to be a big expensive testing program. We know exactly where CAF II should have been implemented – the FCC has made it easy by overlaying the CAF II footprint over Google maps. The FCC could ask County administrators across the US to solicit a speed test at CAF II locations – the Counties would be glad to oblige. If the FCC wanted to know the truth about CAF II they could get massive feedback within a few weeks about the abject failure of the CAF II program.

The ultimate penalty ought to be the return of CAF II money to the Universal Service Fund for areas that aren’t upgraded to 10/1 Mbps. Then the money could finally be given to somebody that will upgrade to real broadband. The CAF II program was ill-conceived, but the big telcos should have used that money to bring rural speeds up to 10/1 Mbps. Had they done so, we’d have millions of more homes that wouldn’t be struggling so hard during COVID-19. This FCC has a chance to do their job and set things right.

FCC Ignoring Consumer Broadband Complaints

One of the best aspects of broadband regulation was that a consumer was always able to file a complaint against an ISP with the FCC, and the complaint process generally resolved disputes between customers and carriers. If customers had legitimate complaints about billing or service, a complaint sent to the FCC generally solved the issue; if the carrier was in the right, the FCC sided with the carrier and asked them to explain the applicable laws or rules to the customer involved. This complaint process was the ultimate backstop for people who had tried every other avenue for resolving a dispute.

But starting with the Restoring Internet Freedom order where the FCC voted to kill net neutrality and to kill Title II regulation of broadband this all changed. After that order, the FCC stopped intervening in broadband complaints from customers. They now forward complaints to carriers but don’t insist that problems are resolved.

Jon Brodkin wrote an article about this last November where he documented a case where Frontier was billing $10 per month to a customer who had purchased a FiOS router before Frontier purchased the property there. The company insisted that the customer pay the fee for a router that the customer clearly owns. Even after a complaint was filed at the FCC on the issue, Frontier wouldn’t change its position. The FCC did nothing about the complaint – the agency forwarded the complaint to Frontier and considered the issue settled.

In the past, the FCC would have looked at the facts, which in this case any person off the street would have resolved in favor of the customer. If the FCC got too many complaints on the same issue, they would pressure an ISP to change their practices.

It’s conceivable that the FCC no longer has the power to resolve complaints and just doesn’t want to publicly say so. When the agency voided their ability to regulate broadband, it’s likely they also voided their ability to intervene on any topic related to broadband – the agency effectively gelded themselves.

As Brodkin points out, the FCC isn’t being truthful about the complaint process. They told US Rep. Mike Quigley (D-Ill.) that they forward complaints to the Federal Trade Commission, but it turns out they only forward complaints that the FTC asks about – not most complaints.

The FCC has informed some consumers that they have an option to file a formal complaint. This is a process that costs $235 and that ensures that the agency will at least look at the issue. This is the process normally used to resolve pole attachment complaints and similar disputes between carriers. A formal complaint initiates a formal process that the average person probably would find difficult to comply with – a formal complaint initiates the equivalent of a legal proceeding, and there are specific procedural rules and a legal process of filing documents and pleadings on a pre-determined schedule. A formal complaint that doesn’t follow the processes and protocols would likely be tossed as being non-responsive.

Unfortunately, paying this fee for a formal complaint still might not do any good since the FCC no longer has jurisdiction over a broadband billing dispute or other broadband issues. The resolution of a formal complaint might result in nothing more than an FCC ruling that the customer should have gone to the FTC instead of the FCC.

There are other ramifications of the Restoring Internet Freedom order. When the FCC killed its ability to regulate broadband it also theoretically voided the State’s ability to regulate broadband as well. State regulatory commissions have always had a complaint process similar to the FCC’s, but since the law of the land is that broadband is no longer regulated, consumers can’t take these complaints to a state commission. The only current recourse for a consumer is to go to the FTC. Unfortunately, the FTC regulates bad behavior by all corporations, and so the agency only opens an investigation when there are numerous complaints against a specific ISP on a specific topic. The FTC does not intervene in or try to resolve individual consumer complaints.

I don’t think it has registered with the general public that broadband is unregulated. This means that consumers are on their own when ISPs harm them and no government agency can intervene on their behalf. There is no better example than the one that Brodkin had highlighted – Frontier feels safe in mistreating a customer even when under the eye of regulators, and even when they are blatantly wrong. To Frontier, keeping the erroneous $10 in monthly billing is obviously more important than doing the right thing by a customer – and there seems to be nothing a customer can do than perhaps finding somebody in the press to highlight their story.

The Frontier Bankruptcy

To nobody’s surprise, Frontier declared bankruptcy. What is somewhat ironic is that the company blamed their problems on the lack of fiber – something that the company had the last decade to address. The company lost 6.3% of broadband customers and 21% of video customers in 2019.

People that live in rural areas in the Frontier service areas know them as a dreadful ISP. They probably don’t know the company’s history. Frontier was originally Citizens Utilities based in Minneapolis. The company decided to grow by acquisition. The company first acquired 500,000 telephone lines from GTE starting in 1993 – customers that had originally been served by Contel. In 1994 they acquired 117,000 telephone lines from Alltel – properties that were originally operated by CP National. The company picked up another 187,000 rural access lines when GTE merged with Verizon since Verizon wasn’t interested in acquiring more rural customers. In 1999, Citizens purchased Rochester Telephone that served Rochester, New York. In 2001 the company acquired the assets and customers of Global Crossings, which included local telephone customers, a long-distance network, and long-haul fiber. In 2006 the company purchased Commonwealth Telephone in Pennsylvania.

The biggest acquisitions came in 2009 when Frontier purchased the Verizon customers in thirteen states for $8.6 billion. This was followed by the purchase of Verizon customers in California, Florida, and Texas in 2016 for $10.5 billion. In 2014 the company purchased AT&T’s customers in Connecticut, which had formerly been called the Southern New England Telephone (SNET). Everybody I talked to who was knowledgeable about acquisitions thought that Frontier massively overpaid for the last three purchases. The prices paid per customer were high considering the condition of the properties they were purchasing.

There is probably no better example than West Virginia. When Frontier purchased the customers in that state, Verizon had already had the market up for sale for over a decade. During that time Verizon had stopped doing maintenance, had cut staff and had taken the normal steps to ‘dress-up’ the bottom line to enhance a sale by cutting costs wherever possible. Frontier bought a telco in West Virginia that was already in dreadfully bad shape, as were many of the other properties purchased from big telcos.

Frontier’s shortcomings were recently addressed in a 164-page report by Schumaker and Company that was funded by the West Virginia Public Service Commission. The report looked in detail at Frontier’s problems in West Virginia – a state where Frontier is the only ISP for the vast majority of the state.

Unfortunately, the current version of the report is highly redacted since Frontier claimed that details of their operations in the state are proprietary. Hopefully, the redactions will be overruled due to the fact that the company is the carrier of last resort in a state where there are still huge areas with little or no cellular coverage. However, even with the redactions it’s clear from the report that the Frontier spends little money in rural areas, has cut staff significantly in recent years, and has done very little to upgrade the networks since the original purchase. Frontier recently sold some of their properties in the Northwest as a way to raise cash.

The Frontier bankruptcy plan asks for a quick restructure and the ability to walk away from $11 billion in debt. I’ve read several analysts who are skeptical that the bankruptcy will be that easy. If the company keeps losing customers at the current pace, I find it hard to think there will be many lenders willing to front big loans for the company to rebuild.

A giant telco comprised of huge rural areas never made sense. I predicted that Frontier would eventually fold when they purchased some of the most neglected telco properties in the country. It took a decade, but those purchases finally brought the company down.

Any restructuring is not going to help the rural properties served by Frontier. The best possible solutions in terms of benefits to customers would be to restructure Frontier to just operate in its larger markets and to force it to divest of rural properties to the highest bidder – even if that offer is pennies on the dollar. New owners of the rural properties would be more likely to tackle upgrades, while Frontier is not likely to care about rural America even should they start over out of the bankruptcy.

The Frontier Bankruptcy

Bloomberg reported that Frontier Communications is hoping to file a structured bankruptcy in March. A structured bankruptcy is one where existing creditors agree to cut debt owed to them to help a company survive. There is no guarantee that the existing creditors will go along with Frontier’s plan, and if not, the bankruptcy would be handed to a bankruptcy court to resolve.

It’s been obvious for a long time that Frontier is in trouble. Three years ago, the stock sat at over $51 per share. By January 2018 it had fallen to $8.26 per share, and to $2 per share a year ago. As I write this blog the stock sits at 59 cents per share.

Frontier has been losing customers rapidly. In the year ending September 30, 2019 the company lost 6% of its broadband customers (247,000), with 71,000 of the losses occurring during the third quarter of last year.

For those not familiar with the history of Frontier, the company started as Citizens Telephone Company, a typical small independent telco. The company grew by buying telephone customers from GTE, Contel, and Alltel. The company became Frontier when they bought the remains of the Rochester Telephone Company from Global Crossings. Since then Frontier went on a buying spree and purchased large numbers of customers from Verizon.

Frontiers woes intensified in 2016 when they bungled the takeover of Verizon FiOS customers while taking on huge debt. There were major outages in some major markets that drove customers to change to the cable company competitor. However, Frontier’s biggest problem is due to operating a lot of rural copper networks. The copper networks they purchased had been maintained poorly before acquired by Frontier. For example, Frontier bought all of the Verizon customers in West Virginia, and Verizon had been ignoring the market and had been trying to sell it for over fifteen years.

Frontier got a small boost when the FCC gave them $1.7 billion to upgrade rural DSL to speeds of at least 10/1 Mbps. This month Frontier reports that it has not fully met that requirement in parts of thirteen states. Customers in many places where Frontier has supposedly made the upgrades are saying that speeds are not yet at the required 10/1 Mbps.

Frontier’s real problem is that their rural properties are being overbuilt by other ISPs. For example, Frontier properties are the targets of funding for many state broadband grants. Most of the rural Frontier network is going to be targeted in the upcoming $16 billion RDOF grants this year. It would not be surprising to see the company quietly disappear from rural America as others build better broadband.

Meanwhile, other than in properties that formerly were Verizon FiOS on fiber, the company’s networks in towns are also providing DSL. We’ve seen every telco that offers DSL in urban areas like AT&T and CenturyLink lose a lot of customers year-after-year to the cable companies. It’s increasingly difficult for DSL to keep customers with speeds between 10 Mbps and 50 Mbps when competing against cable products of 100 Mbps and higher.

Last May, Frontier announced the sale of its properties in Washington, Oregon, Idaho and Montana to WaveDivision Capital. That sale was for $1.35 billion, which doesn’t make a big dent in the company’s $16.3 billion in long-term debt. Frontier has also shed 10% of its workforce in an attempt to control costs.

Frontier may get the structured bankruptcy they are seeking or may have to give up more to survive this current bankruptcy. However, restructuring their debt is not going to make up for the huge amounts of its network that sits on dying copper. They are not the only company facing this issue and CenturyLink has even more rural copper. However, CenturyLink has a thriving business in big cities and would be stronger if regulators ever allow it to walk away from rural copper.

The harder question to answer is if there is a viable company remaining after Frontier finally sheds or loses its rural customer base. I don’t know enough to make any prediction on that, but I can predict that the company’s problems will not be over even after making it through this bankruptcy.

Comparing FCC Broadband Programs

I think it’s finally dawning on the big telcos that the days of being able to milk revenues from rural America while ignoring rural copper networks is finally ending. This becomes apparent when looking at the two most recent subsidy programs.

The original CAF II program was a huge boon to the big telcos. Companies like AT&T, CenturyLink, and Frontier collected $11 billion of subsidy to boost their rural copper networks up to speeds of at least 10/1 Mbps. This was a ridiculous program from the start since the FCC had established the definition of broadband to be at least 25/3 Mbps even before awarding this money. Perhaps the craziest thing about CAF II is that the telcos are still making the upgrades – they were required to be 60% complete with the required CAF II upgrades by the end 2018 and to be 100% complete by the end of 2020.

The big telcos report broadband customers to both the FCC and to stockholders, but the reporting is not in enough detail to know if the CAF II money has made any difference in rural America. All of the big telcos are losing broadband customers, but it’s hard to look under the hood to know if they are making any significant customer gains in the CAF II areas. We see little hints from time to time. For example, in the second quarter of this year, CenturyLink lost 56,000 net broadband customers but reports that it lost 78,000 customers with speeds below 20 Mbps and added 22,000 customers with speeds faster than that. That’s the first time they provided any color about their gains and losses. But even that extra detail doesn’t tell us how CenturyLink is doing in the CAF II areas. It’s obvious by looking at the customer losses that telcos aren’t adding the hundreds of thousands of new customers one would expect to see as the result of an $11 billion capital expenditure program. If CAF II is delivering broadband to areas that didn’t have it before, there should be a flood of new rural customers buying better broadband by now. I could be wrong, but when looking at the aggregate customers for each big telco I don’t think that flood of new customers is happening. If it was I think the telcos would be bragging about it.

The CAF II reverse auction took a different approach and awarded funding in those areas where the big telcos didn’t take the original CAF II funds. These subsidies were auctioned off in a reverse auction where the company willing to take the lowest amount of subsidy per customer got the funding. In the auction, most bidders offered to deploy broadband of 100 Mbps speeds or faster – a big contrast to the 10/1 Mbps speeds for CAF II. Some of the grant winners in the reverse auction like electric cooperatives are using the money to build fiber and offer gigabit speeds.

The original CAF II subsidy awards are probably the dumbest decision I’ve ever seen an FCC make (rivaling the recent decision to stop regulating broadband). If the original CAF II awards had been open to all applicants instead of being handed to the big telcos, then many of the homes that have been upgraded to 10/1 Mbps would have instead gotten fiber. Maybe even worse, CAF II basically put huge swaths of rural America on hold for seven years while the big telcos invested in minor tweaks to DSL.

The FCC will soon be handing out $20.4 billion for the new RDOF program to build better rural broadband. It should be press headlines that this money is going to many of the same areas that got the original $11 billion CAF II subsidies – the FCC is paying twice to upgrade the same areas.

Dan McCarthy, the CEO of Frontier Communications recently complained about the new RDOF grant program. He realizes that Frontier has little chance of winning the grants in a reverse auction.  Frontier doesn’t want to invest any of its cash for rural broadband and in an auction would be competing against ISPs willing to invest significant equity to match the RDOF grants. Frontier also recognizes that anything they might propose as upgrades can’t compete with technologies that will deliver speeds of 100 Mbps or faster.

At least the FCC is not handing the RDOF money directly to the big telcos again. It’s been five years since the start of CAF II and I’m still perplexed by the last FCC’s decision to hand $11 billion to the big telcos. Unfortunately, this FCC is still repeating the mistake of awarding grant money to support obsolete speeds. The FCC is proposing that RDOF money can be used to build broadband capable of delivering 25/3 Mbps broadband. In a recent blog, I predict that this is going to go into the books as another short-sighted decision by the FCC and that they’ll again be funding broadband that will be obsolete before it’s completed eight years from now. Hopefully most of the RDOF money will go towards building real broadband. Otherwise, in eight years we might see another giant FCC grant program to improve broadband for a third time in the same rural areas.

The Status of the CAF II Deployments

The Benton Foundation noted last month that both CenturyLink and Frontier have not met all of their milestones for deployment of CAF II. This funding from the FCC is supposed to be used to improve rural broadband to speeds of at least 10/1 Mbps. As of the end of 2018, the CAF II recipients were to have completed upgrades to at least 60% of the customers in each state covered by the funding.

CenturyLink took funding to improve broadband in 33 states covering over 1 million homes and businesses. CenturyLink claims to have met the 60% milestone in twenty-three states but didn’t make the goal in eleven states: Colorado, Idaho, Kansas, Michigan, Minnesota, Missouri, Montana, Ohio, Oregon, Washington, and Wisconsin.

Frontier received CAF II funding to improve broadband to over 774,000 locations in 29 states. Frontier says they’ve met the milestone in 27 states but haven’t reached the 60% deployment milestone in Nebraska and New Mexico.  There were a number of other large telcos that took CAF Ii funding like AT&T, Windstream, and Consolidated, and I have to assume that they’ve reported meeting the 60% milestone.

Back in 2014 when it looked like the CAF II program might be awarded by reverse auction, we helped a number of clients take a look at the CAF II service areas. In many cases, these are large rural areas that cover 50% or more of most of the rural counties in the country. Most of my clients were interested in the CAF II money as a funding mechanism to help pay for rural fiber, but all of the big telcos other than AT&T announced originally that they planned to upgrade existing DSL. AT&T announced a strategy early on to used fixed cellular wireless to satisfy their CAF II requirements. Since then a few big telcos like Frontier and Windstream have said that they are also using fixed wireless to meet their obligations.

To us, the announcement that the telcos were going to upgrade DSL set off red flag alarms. In a lot of rural counties there are only a small number of towns, and those towns are the only places where the big telcos have DSLAMs (the DSL hub). Rural telephone exchanges tend to be large and the vast majority of rural customers have always been far out of range of DSL that originates in the small towns. One only has to go a few miles – barely outside the towns – to see DSL speeds fall off to nothing.

The only way to make DSL work in the CAF II areas would be to build fiber to rural locations and establish new DSL hub sites. As any independent telco can tell you who deployed DSL the right way, this is expensive because it takes a lot of the rural DSLAMs to get within range of every customer. By electing DSL upgrades, the big telcos like CenturyLink and Frontier had essentially agreed to build a dozen or more fiber DSLAMs in each of the rural counties covered by CAF II. My back-of-the-envelope math showed that was going to cost a lot more than what the companies were receiving from the CAF fund. Since I knew these telcos didn’t want to spend their own money in rural America, I predicted execution failures for many of the planned DSL deployments.

I believe the big telcos are now facing a huge dilemma. They’ve reached 60% of customers in many places (but not all). However, it is going to cost two to three times more per home to reach the remaining 40% of homes. The remaining customers are the ones on extremely long copper loops and DSL is an expensive technology use for reaching these last customers. A DSLAM built to serve the customers at the ends of these loops might only serve a few customers – and it’s hard to justify the cost of the fiber and electronics needed to reach them.

I’ve believed from the beginning that the big telcos building DSL for the CAF II program would take the approach of covering the low hanging fruit – those customers that can be reached by the deployment of a few DSLAMs in a given rural area. If that’s true, then the big telcos aren’t going to spend the money to reach the most remote customers, meaning a huge number of CAF II customers are going to see zero improvements in broadband. The telcos mostly met their 60% targets by serving the low-hanging fruit. They are going to have a huge challenge meeting the next milestones of 80% and 100%.

Probably because I write this blog, I hear from folks at all levels of the industry about rural broadband. I’ve heard a lot of stories from technicians telling me that some of the big telcos have only tackled the low-hanging fruit in the CAF builds. I’ve heard from others that some telcos aren’t spending more than a fraction of the CAF II money they got from the FCC and are pocketing much of it. I’ve heard from rural customers who supposedly already got a CAF II upgrade and aren’t seeing speeds improved to the 10/1 threshold.

The CAF II program will be finished soon and I’m already wondering how the telcos are going to report the results to the FCC if they took shortcuts and didn’t make all of the CAF II upgrades. Will they say they’ve covered everybody when some homes saw no improvement? Will they claim 10/1 Mbps speeds when many households were upgraded to something slower? If they come clean, how will the FCC react? Will the FCC try to find the truth or sweep it under the rug?

When Big ISPs Fail

It’s obvious from reading the press that Frontier Communications is in trouble. The company visibly bungled the integration of the properties most recently purchased from Verizon, including some FiOS properties. The company was already experiencing customer losses, which have accelerated in the last year. Frontier is already looking to raise cash by finding a buyer for some of the properties they just purchased from Verizon.

I have no idea if Frontier is going to declare bankruptcy or fail. Watching them struggle, though, brings back memories of other big telcos that have struggled badly in the past. We’ve seen this scenario enough times to understand what poor performance will mean.

Not every telco that has struggled has gone through bankruptcy. Probably the best example of a company that almost went under, but which instead struggled for years was Qwest, which is now owned by CenturyLink. Within a few years after Qwest took over U.S. West the company fell on hard times. The company carried too much debt, and they didn’t do as well as expected in the long-line transport business that Qwest brought into the newly formed venture. The company was even fined $250 million by the Security and Exchange Commission for shady deals made with Enron’s broadband business.

We saw the consequences of Qwest’s financial struggles. They company had little money for capital and let the copper plant deteriorate a lot faster than would be expected. There were widespread reports of rural outages that were repeatedly patched rather than fixed while the company focused its limited resources on the major urban markets. Qwest lost huge numbers of broadband customers to the cable companies and also got clobbered in enterprise sales.

We saw something similar with Charter Communications. The company filed for bankruptcy protection in 2009. They pared back on capital spending and went for a number of years without making the upgrades we saw from Comcast, Cox and Mediacom. Much of the company’s footprint was stuck with first generation cable modems with slow broadband speeds.

Frontier looks to on a similar path to Fairpoint Communications after they purchased Verizon properties. Fairpoint took on massive debt to buy the New England properties from Verizon and struggled after adding 1.4 million customers to a relatively small company. Within two years after the purchase Fairpoint went through bankruptcy reorganization and continued to struggle since then due to lack of cash. They were recently purchased by Consolidated Communications.

What we’ve most learned from big ISPs that struggle is that the customers pay the price. All of these companies dealt with cash shortages by reducing staff and slashing capital expenditures. I remember Qwest staffing being reduced so much that there were entire rural counties that had only one Qwest technician. Qwest shuttered local business offices and lost the local touch in communities. Customers reported major delays in getting installations and repairs, with many reports of problems that were never solved.

We saw from Qwest and Charter that the first thing that goes in tight times is upgrades of technology. When those companies got into trouble they froze technology investment and innovation during a time when broadband speeds were climbing everywhere else.

The struggles of the big ISP invited in competition and many communities served by Qwest and Charter saw competitors build new networks. I know of some towns where the new competitors got practically every customer, showing how fed up customers were with being neglected by their big ISP. Unfortunately, the majority of communities served by such ISPs saw no competition and suffered with poor service.

Sometimes companies that struggle eventually right the ship. We see Charter now making upgrades that are a decade or more late. CenturyLink is under new management and is trying hard to make things better, but still doesn’t have enough capital to fix decades of neglect to the network. CenturyLink even got more than a billion dollar subsidy through the CAF II program to try to revitalize old rural copper. We’re going to have to wait to see if these big ISPs can make enough amends for communities to forgive them for decades of neglect.

My guess is that Frontier is not going to get the chance to reinvent themselves. They are struggling at a time when most of their rural communities are screaming for better broadband. It’s hard to imagine them somehow fixing their many problems.

CAF II and Wireless

Frontier Communications just announced that they are testing the use of wireless spectrum to complete the most rural portions of their CAF II build-out requirement. The company accepted $283 million per year for six years ($1.7 billion total) to upgrade broadband to 650,000 rural homes and businesses. That’s a little over $2,600 per location passed. The CAF II program requires that fund recipients increase broadband to speeds of at least 10 Mbps down and 1 Mbps up.

Frontier will be using point-to-multipoint radios where a transmitter is mounted on a tower with the broadband signal then sent to a small antenna at each customer’s location. Frontier hasn’t said what spectrum they are using, but in today’s environment it’s probably a mix of 2.4 GHz and 5 GHz WiFi spectrum and perhaps also some 3.65 GHz licensed spectrum. Frontier, along with CenturyLink and Consolidated told the FCC a year ago that they would be interested in using the spectrum in the ‘citizens’ radio band’ between 3.7 MHz and 4.2 MHz for this purpose. The FCC opened a docket looking into this spectrum in August and comments in that docket were due to the FCC last week.

I have mixed feelings about using federal dollars to launch this technology. On the plus side, if this is done right this technology can be used to deliver bandwidth up to 100 Mbps, but in a full deployment speeds can be engineered to deliver consistent 25 Mbps download speeds. But those kinds of speeds require an open line-of-sight to customers, tall towers that are relatively close to customers (within 3 – 4 miles) and towers that are fiber fed.

But when done poorly the technology delivers much slower broadband. There are WISPs using the technology to deliver speeds that don’t come close to the FCC’s 10/1 Mbps requirement. They often can’t get fiber to their towers and they will often serve customers that are much further than the ideal distance from a tower. Luckily there are many other WISPs using the technology to deliver great rural broadband.

The line-of-sight issue is a big one and this technology is a lot harder to make work in places with lots of trees and hills, making it a difficult delivery platform in Appalachia and much of the Rockies. But the technology is being used effectively in the plains and open desert parts of the country today.

I see downsides to funding this technology with federal dollars. The primary concern is that the technology is not long-lived. The electronics are not generally expected to last more than seven years and then the radios must be replaced. Frontier is using federal dollars to get this installed, and I am sure that the $2,600 per passing is enough to completely fund the deployment. But are they going to keep pouring capital into replacing radios regularly over time? If not, these deployments would be a sick joke to play on rural homes – giving them broadband for a few years until the technology degrades. It’s hard to think of a worse use of federal funds.

Plus, in many of areas where the technology is useful there are already WISPs deploying point-to-multipoint radios. It seems unfair to use federal dollars to compete against firms who have made private investments to build the identical technology. The CAF money ought to be used to provide something better.

I understand Frontier’s dilemma. In the areas where they took CAF II money they are required to serve everybody who doesn’t have broadband today. My back-of-the envelope calculations tells me that the CAF money was not enough for them to extend DSL into the most rural parts of the CAF areas since extending DSL means building fiber to feed the DSLAMs.

As I have written many times I find the whole CAF program to be largely a huge waste of federal dollars. Using up to $10 billion to expand DSL, point-to-multipoint, and in the case of AT&T cellular wireless is a poor use of our money. That same amount of money could have seeded matching broadband that could be building a lot of fiber to these same customers. We only have to look at state initiatives like the DEED grants in Minnesota to see that government grant money induces significant private investment in fiber. And as much as the FCC doesn’t want to acknowledge it, building anything less than fiber is nothing more than a Band-aid. We can and should do better.