CenturyLink Expanding Fiber

CenturyLink recently announced its fiber plans for 2020 and says it will be building to pass 400,000 homes and businesses with fiber this year as a follow-up to 2019 that saw the company add 300,000 passings. Like with all big telco announcements, a bit of looking behind the scenes is needed to understand what the company is doing.

In 2017 CenturyLink was engaged in a major fiber expansion plan and built that year to pass 900,000 homes and businesses, mostly in large cities and surrounding suburbs in places like Seattle, Phoenix, and Denver. Those expansions plans were put on hold when new CEO Jeff Storey replaced the telco-minded Glen Post. One of Storey’s first announcements as CEO was that the company was no longer going to pursue capital projects with ‘infrastructure returns’ and building FTTH came to a screeching halt.

It was a lot harder than Storey might have hoped to inject the Level 3 mindset into a 100-year-old telco, and the company bogged down and stock prices dropped. Starting last year, the company started talking again about aggressively expanding its fiber network to add large buildings to the network. The company recently said it had connected to over 18,000 buildings last year. In digging deeper into things the company discussed over the last year, it seems that those buildings were a combination of multi-tenant business buildings and apartment complexes. The company also said that it was building a lot of the new fiber in 2019 to reach small cell sites.

The company also recently announced that it had added 300,000 passings as a result of the fiber expansion last year – a number that I can’t find mentioned as a goal last year. This does not mean that the company built fiber to pass 300,000 homes. Many of the passings came from the 18,000 buildings that were added to the network. CenturyLink has also entered into a contract to operate the fiber network in Springfield, MO – a network that is funded, built, and owned by the City. The 85,000 or so passings from that project seem to be included in the fiber passings claimed for 2019 and planned for 2020.

CenturyLink says it plans to add 400,000 fiber passings this year. The company is still aggressively adding buildings to the network and is also still building to small cell sites. The markets on the list for this year’s expansion include Denver, Omaha, Phoenix, Portland., Salt Lake City, Spokane, Springfield, MO, and a few others.

CenturyLink says the fiber expansion is starting to pay off. While the company lost a net of 11,000 broadband customers in the first quarter of this year, they added 60,000 subscribers with speeds of 100 Mbps or faster. Those gains were part of the industry gain of over 1.1 million broadband customers in the first quarter – at least some of which came as a result of the needs of employees and students being forced to work from home.

The company has gotten back into the infrastructure business somewhat reluctantly but now seems to have embraced some aspects of fiber expansion. CenturyLink is still bullish about adding buildings to the network and are at number four in terms of on-net buildings. I would be surprised if the fiber expansion includes any significant construction to reach single-family homes. It seems a lot more likely that the company is picking off low-hanging fruit in places where it is installing fiber to reach small cell sites or lucrative buildings. That’s the same philosophy that helped AT&T add over 12 million fiber passings over the last few years.

Jeff Storey is still adamantly painting a picture of a company that is focused on enterprise services and business applications. Any expansion into residential neighborhoods is likely a by-product of taking advantage of fiber built to pursue the primary goal.

But no matter how they are getting there, it’s good to see CenturyLink building fiber again. In 2018 it looked like they might permanently duck out of fiber construction. However, the stock market disappointment, and perhaps seeing AT&T success with limited fiber expansion convinced management some that fiber can earn more than infrastructure returns.

CenturyLink Embraces Fiber

CenturyLink seems to have done a 180 in terms of embracing fiber. According to Jeff Storey, the CEO of Centurylink, the company is now defining itself as the ‘go-to provider’ for fiber-based services for business customers. This is in sharp contrast to just a year ago when Storey, as the new CEO said that the company would not be pursuing low-return infrastructure investments.

Storey says that CenturyLink added 5,000 business buildings to fiber in the second quarter, following 4,500 buildings in the first quarter of this year. This contrasts to Level 3 that historically added around 500 buildings per quarter.

It appears the company may be taking a page from the AT&T storybook. AT&T has been building fiber around locations where it already has a fiber POP. This strategy has helped AT&T to now pass over 20 million locations with fiber while avoiding the high cost of large overbuilds.

CenturyLink has an extensive national fiber footprint that it’s accumulated from the purchase over the years of Level 3, Qwest, Broadwing and WilTel. Like AT&T discovered, CenturyLink is sitting close to a huge number of existing opportunities with that existing network, and perhaps that’s the new company strategy – to edge-out and take advantage of nearby low-hanging fruit.

Storey says the company has ordered 4.7 million miles of fiber to add into its urban networks. You have to take that number with a grain of salt since one mile of a 48-strand fiber counts as 48 miles of fiber when counted this way. But this is still a lot of new fiber construction. The one thing that readers of this blog will notice is that the construction is likely to be urban – it’s doubtful that the company is ever going to put another dollar into rural infrastructure. The company recently quietly searched around for the possibility of spinning off its rural business but found no takers. This is likely to mean more of the same for its rural customers – mostly neglect.

The company continues to lose broadband customers. In 2018 the company lost 262,000 broadband customers for a 4.6% drop. In the second quarter of this year, the company 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. Like all of the big telcos, it’s losing DSL customers converting to cable modems.

The company has a long way to go to convince Wall Street that its stock has value. In a May blog, I wrote how the company stock had dropped 43% over a year to a price of $10.89. It’s still sitting in that range with the stock price sitting at $11.56 yesterday.

The Level 3 acquisition is likely to be one of the more interesting stories in the history of our industry. Level 3 was the high-flying telecom company, with stock prices that climbed steadily. It seems that Jeff Storey could do no wrong as earnings grew faster than the rest of the sector. But that all came to a halt with the merger with CenturyLink. I’m sure that both companies thought that Storey could pull CenturyLink upward by tying it to Level 3, but just the opposite occurred. This might be one of the biggest cautionary tales ever in our industry and shows how difficult, and perhaps impossible it is for anybody to turn around one of the big incumbent telcos.

What’s most interesting in this story is that Glen Post and the crew from CenturyLink were in the process of that a slow and steady turnaround. A few years before the CenturyLink merger the company had decided to build residential fiber in its many large city markets and take back a significant piece of the broadband business that had been leaking away. In the year before the Level 3 merger the company had built fiber past nearly 1 million urban passings. We’ll never know now if a few more years of that kind of investment could have turned the company around – not to be a high-flyer like Level 3, but to earn decent long-term returns on broadband infrastructure – the kind that come from making a hundred-year investment in fiber.

CenturyLink and Residential Broadband

CenturyLink is in the midst of a corporate reorganization that is going to result is a major shift in the focus of the company. The company merged with Level 3 in 2016 and the management team from Level 3 will soon be in charge of the combined business. Long-time CEO Glen Post is being pushed out of day-to-day management of the company and Jeff Storey, the former CEO of Level 3 will become the new CEO of CenturyLink. Storey was originally slated to take the top spot in 2019, but the transition has been accelerated and will happen this month.

It’s a shift that makes good financial sense for the company. Mr. Storey had huge success at Level 3 and dramatically boosted earnings and stock prices over the last four years. Mr. Storey and CenturyLink CFO Sunit Patel have both made it clear that they are going to focus on the more profitable enterprise business opportunities and that they will judge any investments in last-mile broadband in terms of the expected returns. This differs drastically from Mr. Post who comes from a background as an independent telephone company owner. As recently as a year ago Mr. Post publicly pledged to make the capital investments needed to improve CenturyLink’s last-mile broadband networks.

This is going to mean a drastic shift in the way that CenturyLink views residential broadband. The company lost 283,000 broadband customers for the year ending in December 2017, dropping them to 5.7 million broadband customers. The company blames the losses on the continued success of the cable companies to woo away DSL customers.

This size of the customer losses is a bit surprising. CenturyLink said at the end of 2017 that they were roughly 60% through their CAF II upgrades which is bringing better broadband to over 1.1 million rural households. Additionally, the company built FTTP past 900,000 potential business and residential customers in 2017. If the company was having even a modest amount of success with those two new ventures it’s hard to understand how they lost so many broadband customers.

What might all of this mean for CenturyLink broadband customers? For rural customers it means that any upgrades that are being made using CAF II funding are likely the last upgrades they will ever see. Customers in these rural areas are already used to being neglected and their copper networks are in lousy condition due to decades of neglect by former owner Qwest.

CenturyLink is required by the CAF II program to upgrade broadband speeds in the rural areas to at least 10/1 Mbps. The company says that over half of the upgraded customers are seeing speeds of at least twice that. I’ve always had a concern about any of the big telcos reaching the whole CAF II footprint, and I suspect that when the CAF II money is gone, anybody that was not upgraded as promised will never see upgrades. I’ve also always felt that the CAF II money was a waste of money –  if CenturyLink walks away from the cost of maintaining these newly upgraded DSL networks they will quickly slide back into poor condition.

There are already speculation on Wall Street that CenturyLink might try to find a buyer for their rural networks. After looking at the problems experienced by Frontier and Fairpoint after buying rural telco copper networks one has to wonder if there is a buyer for these properties. But in today’s world of big-deal corporate finance it’s not impossible to imagine some group of investors willing to tackle this. The company could also take a shot at selling rural exchanges to independent telcos – something US West did over twenty years ago.

It’s also likely that the company’s foray into building widespread FTTP in urban areas is done. This effort is capital intensive and only earns infrastructure returns that are not going to be attractive to the new management. I wouldn’t even be surprised to see the company sell off these new FTTP assets to raise cash.

The company will continue to build fiber, but with the emphasis on enterprise opportunities. They are likely to adopt a philosophy similar to AT&T’s which has been building residential fiber only to large apartment complexes and to households that are within short distances from existing fiber pops. This might bring fiber broadband to a lucky few, but mostly the new management team has made it clear they are deemphasizing residential broadband.

This management transition probably closes the book on CenturyLink as a last-mile ISP. If they are unable to find a buyer for these properties it might take a decade or more for their broadband business to quietly die. This is bad news for existing broadband customers because the company is unlikely to invest in keeping the networks in operational shape. They only ones who might perceive this as good news are those who have been thinking about overbuilding the company – they are not going to see any resistance.