Tag Archives: Windstream

A Last Gasp at Regulating Copper

The Minnesota Public Utilities Commission recently ordered a series of public hearings to investigate the quality of service on the CenturyLink copper networks. The hearings were prompted by a complaint filed by the Communications Workers of America (CWA). The complaint listed the failures of CenturyLink to meet state service standards due to the deterioration of the copper network. CWA also noted that CenturyLink is planning to eliminate half of the remaining technicians who work on copper.

Similar inquiries by other state regulators have been instituted in the last few years against CenturyLink and Frontier. I feel sorry for any customers left on deteriorating copper networks, but proceedings like this one feel like the last gasp of regulators trying to score points by beating up on the telcos that still operate copper networks.

Not that CenturyLink doesn’t deserve a lot of criticism. Its copper networks are in dreadful condition and are in the process of dying. The poor condition of the networks is due in large part to the decades-long lack of maintenance and repairs. We know this is the case because copper networks of a similar age are still operating much better in Europe. The big telcos like CenturyLink, Frontier, Verizon, and AT&T stopped caring about copper networks back in the 1990s, and the networks have been in a steady decline since then.

But U.S. copper networks are truly near the end of life. It’s impossible to neglect maintenance for over twenty years and somehow suddenly make the networks perform better. It’s hard to fathom the intentions of having regional hearings on the topic for any purpose other than letting people vent their frustration with CenturyLink. It’s hard to imagine anything changing as a result of these hearings that will improve service. There might be new fines levied on CenturyLink, but that’s less costly for the company than trying to make the copper work.

Some big telcos are working to convert copper networks to fiber. Frontier and Windstream are building a lot of fiber – and I assume they are overlashing the new fiber wires on the old copper. AT&T and Verizon are selectively expanding fiber in neighborhoods where the cost of construction meets some internally set cost test – but these two companies are quietly moving most copper customers onto cellular connections.

CenturyLink has been up and down on the decision to overbuild residential fiber. It currently looks like the company is only building ‘strategic’ fiber, which I interpret to mean business districts and large apartment complexes. It seems unlikely that CenturyLink will overbuild much more of its residential copper in Minnesota or elsewhere with fiber.

I would bet that if CenturyLink could wave a magic wand and be rid of copper, it would do so. It’s harder each year to maintain copper networks, and a move to eliminate half of the remaining copper technicians shows that the company is finally throwing in the towel. But giving up on copper still means walking away from a lot of revenue.

There are still plenty of customers who want to keep using the copper networks. Say what you want about the inadequacies of DSL, but in most urban markets where my firm does surveys, we still find 10% to 20% of households are still using DSL. These are households for whom the price is more important than broadband speed.

CenturyLink and the other big telcos have recaptured the cost of the copper networks many times over and decided many years ago not to reinvest profits back into new and upgraded networks. We’re now reduced to watching the last death throes of copper networks, and it’s not pretty.

Big Telcos and the BEAD Grants

We’re finally starting to gain a picture of the plans of the big telcos for the upcoming BEAD grants. The bottom line is that some of the big telcos seem to be prepared to pursue the upcoming grants in a major way. Consider the following:

  • At a recent industry conference, Frontier’s CFO said that Frontier has ambitious plans to pursue grants for all of the three to four million rural homes that it serves today with DSL.
  • When the BEAD grants were first announced, AT&T added five million new passings to its goal for 2025, all due to pursuing rural grants. AT&T hasn’t said much about grants since that early announcement.
  • Brightspeed, which purchased twenty states of copper networks from CenturyLink, has made it clear that it will be seeking state and federal grants to build as much fiber as possible. CenturyLink has been aggressively pursuing grants in the states sold to Brightspeed, for the obvious benefit of the new company.
  • Windstream was a big winner in the RDOF reverse auction and has been aggressively pursuing ARPA funding. It seems obvious that the company will also pursue BEAD grants.

The two big telcos that have not said much about grants are CenturyLink and Verizon. There are rumors that CenturyLink is seeking somebody to buy the rest of its copper lines, but it also would not be surprising to see the company come out swinging for grant funding if a sale isn’t forthcoming. Verizon abandoned a rural strategy years ago, and it would be surprising but not impossible to see the company tackle grant funding if the math is good.

The other big ISP that has aggressively been pursuing grant funding is Charter. It would make sense for the company to pursue BEAD grants to fill in around where it has already won the RDOF auctions.

This is an interesting dilemma for rural communities. The telcos all say they will be building rural fiber with grant funding – which is what rural America most desires. But a lot of rural folks blame the big telcos for the current miserable state of rural broadband. It’s the big telcos that stopped maintaining copper, reduced staffing drastically, and basically walked away from rural America. I know a lot of folks who hope that anybody other than the big telcos wins the grant funding in their area.

There are several big fears that I hear voiced about the big telcos winning the grant funding. One is that the big telcos will not follow through after winning the grant funding. Many communities remember how some of these telcos walked away with huge amounts of CAF II funding without doing the promised DSL upgrades. I think the fear is that the big telcos might cut corners and not build to the most remote households in a grant award area. I’ve also heard the fear that the big telcos will accept grants and then decide not to build some areas in a state.

Perhaps the biggest fear about big telcos building rural fiber networks is that we’ll see a repeat of the past. They will build the new network as funded. But if the telcos don’t hire enough technicians or cut corners on maintenance, the fiber networks will deteriorate over time.

This is a real concern because there is a big difference between copper networks and fiber networks. It’s been possible to keep a copper network limping along for decades with minimum maintenance. This is due to the relative simplicity of the DSL technology. There are twenty-year-old DSL cards still limping along, long past the expected economic life. But fiber networks are not likely to be so tolerant. Fiber technology is complicated and precise, and when a card starts going bad, it most commonly means the fiber will go dark. I think the big fear in rural America is that the big telcos will build fiber but let it go dark in 10 or 15 years if they can’t get additional subsidies. This is an impossible scenario to imagine the big telcos demanding future subsidies to keep networks working.

One of the most important aspects of the BEAD grants will be community approval and partnerships with the grant applicants. It will be curious to see if the big telcos seriously court local support for grant applications or do little more than ask for a letter of support when it’s time to file grants. If a community really wants to keep out the big telcos, the best strategy is to partner with somebody you trust more.

Can the Big Telcos Turn the Corner with Fiber?

I was asked an interesting question recently: will fiber help the big telcos turn the corner to success? It’s a good question when looking at telcos like Frontier, Windstream, Lumen, and any others who are late to the game for converting copper to fiber. There are a lot of factors that will come into play, so the answer is likely to be different by telco.

On the plus side is a general consensus by many households that fiber is the best technology. There is a sizable percentage of homes in any market that will move to fiber given a chance. I’m sure this differs by community, but my experience is that 20% to 30% of homes will almost automatically switch to fiber, and that percentage is likely growing. It seems that all of the talk about broadband over the last few years has sold the idea that fiber is a superior technology.

We know telcos are hoping this perception is true. AT&T is the most optimistic of the big telcos and says that it will get a 50% market penetration anywhere it builds residential fiber. That’s an extraordinary prediction after considering the 10%-15% of homes in most places that still don’t have broadband and another 10%-15% of homes that will choose the low-cost alternative like DSL or cellular broadband just because of price. A 50% market share would mean largely obliterating the cable company in a given market.

But any perceived superiority of fiber is going to be relatively short-lived as cable companies upgrade networks to have faster upload speeds. Fiber today is winning the battle for consumers who care about upload speeds – but what percentage of homes is that? Fiber also has noticeably better latency and jitter – a connection on fiber is perceived by the eye to be faster even if the speeds are the same. But how many households care about that?

Telcos have a long way to go to get back to a decent market share. By delaying the transition to fiber, big telco let cable companies clobber them quarter after quarter in taking away DSL customers. While they hope that having a superior technology will help them claw back those lost customers, it’s no slam dunk that they will. The cable companies have smartly bundled broadband with cheap cellular service. The telcos are also going to see fierce competition for price-conscious consumers as they see cellular broadband offered by T-Mobile, Verizon, Dish Networks, and maybe AT&T.

One of the biggest handicaps that telcos face is that they have destroyed their brand names through poor treatment of customers. Big telcos have slowly let the copper networks die by cutting back on maintenance staff. There are millions of consumers who have a poor opinion of a telco because of week-long DSL outages or repair technicians who never showed up. People are not going to easily forgive them. Perhaps the smartest ones of all will be Ziply and Brightspeed, which purchased copper from Frontier and CenturyLink and rebranded to feel like a new company.

Another challenge will be for the big telcos to earn a decent margin from the conversion to fiber. The big telcos have a cheaper path to upgrade than fiber overbuilders due to the savings from overlashing fiber onto existing copper wires. But they are still making a significant outlay to make the conversion. There is no new revenue to the telcos from existing copper customers they move to fiber – and that means that they are paying for the new fiber networks only with the revenues from customers they lure back from cable companies. We won’t know for a few years what that means for the bottom line, but my back-of-the-envelope math says they’ll have a hard time making any noticeable return on the conversion to fiber – at least for the first 5-10 years. In the long run, the fiber customers will become cash cows, just like what happened with copper customers in the past. But will the long run be good enough for Wall Street, which will want to see a fast turnaround?

I think many of the big telcos are banking on getting giant federal grants to help them get back on their feet. But there are a lot of factors that say this might not be the great strategy they are trying to sell. First, most grants will be in the range of 75% grant funding. But covering the 25% is still expensive when the cost to reach rural passings ranges from $7,000 – $15,000. There are also higher operating costs in rural America due to longer truck rolls.

The biggest hurdle for getting grants is that the awards are going to be made at the State level – there won’t be any FCC to influence through lobbying. Many states are beyond angry with the big telcos since they rightly blame them for the poor condition of rural broadband. Additionally, the most likely grant winner in any county will be the one that partners with the county. I’ve worked in nearly 100 counties in recent years, and not one of them had any desire to partner with one of the big telcos. I know the big telcos all have huge goals of winning grant funding – I’m going to be really surprised if they achieve it.

To summarize and answer the original question – there is no guaranteed path to success for a telco that finally gets around to converting to fiber. The incremental new revenues from the conversion may not be high enough to make the math work. The big telcos will be battling a negative public perception of them as quality and reliable ISPs. They might be successful just because of the advantages that fiber has over cable company copper networks – but those advantages might not be enough to make a bottom-line difference.

Big Telcos and Federal Grants

Several large telcos have announced big plans to expand fiber coverage, and I assume that also means heavily participating in the upcoming $42.5 billion BEAD grants that are aimed primarily at bringing better broadband to rural areas.

When Frontier came out of bankruptcy, the company announced plans to pass 6 million homes with fiber by 2025. As part of its Build Gigabit America plan, the company raised that goal to 10 million homes. Frontier already has undertaken the first step in that plan. It set a goal of 495,000 new fiber passings for 2021 but recently announced that it expects to hit 600,000 passings for the year.

AT&T also has big plans. The company has been steadily building a fiber customer base and announced at the end of the third quarter that it now has 5.7 million fiber customers, representing a 37% market share of its 15.4 million fiber passings. A year ago, AT&T announced a goal to pass 25 million homes and businesses by 2025 – another 10 million passings. CEO John Stankey announced recently that the federal infrastructure bill will entice AT&T to increase that goal to 30 million passings, adding 5 million rural passings.

Windstream didn’t express expansion plans in terms of passings but announced this past summer that it is embarking on a $2 billion fiber expansion plan. It seems likely that the federal grants will entice the company to tackle even more growth.

Consolidated Communications is passing 300,000 new potential customers with fiber this year and has plans to continue fast growth into the future. I couldn’t find any specific plan related to federal grants, but I speculate that the company is likely going to chase grants close to existing properties.

The big mystery is CenturyLink. The company is passing 400,000 locations with fiber this year. But the company also announced the sale of its copper networks in twenty states.

It’s likely that all of these telcos want to benefit from the huge upcoming federal grants. The easiest ways for telcos to take advantage of the federal grant is to plan to overlash fiber onto existing telco copper where the companies are already the incumbent. But if the grants are lucrative enough, they might seek grants in other areas as well.

It would be interesting to be a fly on the walls of the corporate board rooms of these big telcos to see how they feel having the huge federal funding flowing through the states. The big companies have always done well with subsidies coming directly from the federal government, such as the $11 billion CAF II subsidies.

But will the telcos do as well with funding being decided at the state level? State regulators and state governments across the country have been unhappy with the way that the big telcos abandoned rural telephone networks. Most states have been able to make an easy comparison between smaller telcos and cooperatives that have invested in rural fiber and the big telcos that have done as little as possible to keep rural networks operating.

I’m curious about the degree to which the big telcos might have burned their bridges with past behavior. I know a lot of state regulators and state broadband offices who will not want to see money going to the companies that were largely responsible for creating the rural broadband gap. Are states going to be willing to give another chance to these big telcos?

I am sure that the state politics involving these grants is going to get intense. Most of the broadband offices that will be awarding these grants will be understaffed and under a lot of pressure to spend the grant money on schedule. Legislators are bound to get involved in some states to try to steer the grant process, although the federal money must meet federal grant rules set by the NTIA. Governors will also weigh in on the issue, and in some states, the grant offices are part of the executive branch. State regulators who have tussled with the big telcos will weigh in. And the public is likely to make itself heard as communities are coalescing around grant applications.

It’s going to be nearly impossible to follow grant policies and trends everywhere when all fifty states will be embarking on a giant grant program at the same time. One thing is for sure – the next few years are going to be interesting.

Partners are Where You Find Them

An interesting new partnership has been formed between Windstream and Colquitt Electric Membership Corp. of Georgia to build a rural fiber network. Windstream is a large price-cap telco that recently emerged from an interesting bankruptcy. Colquitt is a rural electric cooperative.

Only high-level terms of the partnership have been released. Windstream will own the fiber network, will provide broadband and other services, and will own the customers. Colquitt will provide access and rights-of-ways on poles and Colquitt technicians will place the new fiber on poles. Colquitt will get access to some fibers on the new network to connect electric substations and other electric network components to fiber. The partnership is described as having a network that is ‘jointly built and jointly-owned’.

The area to be served is rural and is described as having around 7 people per square mile. It’s a little hard to put that statistic into perspective because the most commonly used metric in the industry for understanding density is the number of homes per mile of road – however, the area sounds sparsely populated.

The state of Georgia decided a few years ago to allow electric cooperatives to become ISPs – a restriction that was imposed years ago by legislation prompted by telco incumbents. Many states have recently lifted such restrictions in an attempt to find more solutions to solve the rural broadband gap.

Partnerships with larger price-cap telephone companies to provide fiber broadband is a new phenomenon. An argument can be made that decisions made by price-cap telcos over the years are one of the major reasons why much of rural America is still served by DSL broadband provided over old and poorly-maintained copper networks.

But we’ve seen several similar partnerships with price-cap telcos. CenturyLink has partnered with the City of Springfield, Missouri to provide fiber. Consolidated Communications has partnered with several villages in New Hampshire to build fiber. Cincinnati Bell has partnered with the Butler Rural Electric Cooperative in Ohio.

This announcement is a reminder to rural communities and electric cooperatives that broadband partners might be found in unexpected places. It’s easy for rural folks to assume that the telcos that built and have been operating the dreadful copper networks are not interested in providing better service. In this case, the network is being built in a rural community and it’s extremely unlikely that Windstream could justify investing the full cost to build fiber – the return and payback on investment would never meet corporate earnings metrics and would make no sense as an investment. However, sharing the costs with the electric cooperative must have reduced Windstream’s costs to the point where the project makes financial sense.

That is the power of partnerships. Investing all of the cost to build fiber in this case probably didn’t make financial sense to either the electric cooperative or to Windstream. Both parties have something to gain out of the transaction. Windstream gains customers who will like the broadband service on fiber. The cooperative gets a fiber network connecting substations. Both are contributing to an improved community that will benefit both companies in the long-term. We’ve seen that fiber can reinvigorate a rural community. Many people want to live in rural areas but need good broadband to work from home – having a fiber network should attract new residents and keep residents some local people from leaving the area to find better broadband.

During the last year, my advice to rural communities is to have a serious discussion with the incumbent providers. Historically I’ve always advised to not bother with the incumbents because over decades I had never seen a large incumbent telco respond to plea to improve service. This is still a rare occurrence, but this partnership, and the ones mentioned earlier illustrate that it’s worth having the discussion on the outside chance that you hit the right note and the right opportunity to get the attention of the incumbents.

CBRS Auction Winners

The FCC held a recent auction for the  3.5GHz Citizens Band Radio Spectrum (CBRS). The auction went for 76 rounds and raised over $4.5 billion for the FCC. This auction was unique in that spectrum was licensed at the county-level awarding up to seven licensed 10 MHz channels in each county. Each PAL (Priority Access License) is good for 10 years.

CBRS spectrum can be used in several applications. The spectrum has good field operating parameters and falls in the middle between the two existing blocks of spectrum used for WiFi. This makes the spectrum ideal for rural point-to-multipoint fixed wireless broadband since it can carry a decent amount of bandwidth for a decent distance. The best aspect of this spectrum is that it’s licensed and will largely be free from interference. For the same reasons, this is also a good spectrum for cellular data.

The biggest winner in the auction was Verizon which spent $1.89 billion on the spectrum. The company landed 557 PALs licenses in 57 counties. The company needed this spectrum to fill-in mid-range spectrum for 5G. Verizon has also recently announced a fixed cellular broadband product for rural homes and this spectrum could provide an interference-free way to deliver that product from rural cell sites.

As expected, Dish networks was also a big winner and will be paying $913 million for CBRS spectrum. As the newest nationwide cellular carrier, the company needed this spectrum to fill in the holes in the cellular spectrum it already controls. The other traditional cellular companies were a no-show. AT&T didn’t buy any of the CBRS spectrum. T-Mobile only purchased 8 PALs licenses in six counties.

The largest cable companies scored big in the auction. Charter bought $464 million of spectrum, Comcast is paying $458 million for spectrum, and Cox purchased $212 million of spectrum. As the newest entrants in the cellular business, Comcast and Charter have been buying wholesale cellular broadband from Verizon – this spectrum will let them shift to their own cell sites for a lot of cellular traffic. There is also speculation that cable companies might be planning on using the new spectrum to launch a fixed-wireless product in the rural areas surrounding their cable properties. Both Charter and Cox have entered the upcoming RDOF auction that is awarding $16.4 billion for rural broadband and the companies might be planning on using this spectrum to cover any areas they can win in that reverse auction.

One of the smaller cable companies, Midcontinent Communications, spent over $8.8 million for PALs licenses. Midco already won sizable rural grants to deploy 100 Mbps broadband in Minnesota and the Dakotas. This spectrum will help the company meet those grant pledges and perhaps allow it to pursue RDOF grants.

There were a few other large bidders. One was Nextlink which provides fixed wireless broadband today in Texas, Oklahoma, Kansas, Nebraska, Iowa, and Illinois. Windstream purchased over 1,000 PALs and the traditional telco is likely going to replace aging rural copper with wireless service, while also possibly be expanding into new service territories with fixed wireless. SAL Spectrum LLC won 1,569 PALs. This company owns numerous other blocks of spectrum and it’s not clear who the user of this new spectrum might be.

The biggest news is that the auction allowed smaller bidders to win licensed spectrum. There were 228 different winners in the auction, most of which are small WISPs, telcos, and electric cooperatives. These entities benefited by the FCC’s willingness to auction the spectrum at the county level. Most previous wireless spectrum was allocated using much larger footprints, which kept small bidders from acquiring spectrum.

Who’s Chasing RDOF Grants?

There is a veritable Who’s Who of big companies that have registered for the upcoming RDOF auction. All of the hundreds of small potential bidders to the auction have to be a bit nervous seeing the list of companies they could end up bidding against.

As a reminder, RDOF stands for Rural Digital Opportunity Fund and is an auction that starts in October that will award up to $16.4 billion in broadband funding. The money will be awarded by reverse auction in a process that favors faster technologies, but also favors those willing to take the lowest amount of grant per customer. The areas that are eligible for the funding are among the most remote places in the country, which is why the list of potential large bidders is puzzling.

There are some big cable companies on the list: Altice, Charter Communications, Cox Communications, Atlantic Broadband, Midco, and Mediacom Communications. These companies serve many of the county seats or other nearby towns to many of the RDOF areas. One has to wonder what these companies have in mind. The only one that has chased any significant federal grants in the past is Midco in Minnesota and North Dakota. Midco has been using grant money to extend fiber backhaul to connect its smallest markets, to build last-mile broadband in some tiny towns, and to build fixed wireless in rural areas surrounding its cable markets.

One has to wonder if the other cable companies have a similar plan. It’s incredibly inefficient to build traditional hybrid coaxial-fiber networks in rural areas, so it’s unlikely that the cable companies will be extending their existing networks. The RDOF auction is being done by Census blocks, which in rural areas can cover a large area. The winner of the auction for a given Census block must offer service to everybody in that block. I also have a hard time envisioning all of these big cable companies getting into the wireless business like Midco is doing, so their presence in the auction is a bit of a mystery.

Then there are the traditional large telcos including Frontier, Windstream, Consolidated Communications, and CenturyLink. These companies already serve many of the areas that are covered by the reverse auction. These are the rural areas where these companies have largely neglected the old copper wiring and either offer no broadband or dreadfully slow DSL. The minimum technology allowed to enter the auction must deliver 25/3 Mbps broadband. It’s almost painful to think that these companies would chase the funding and promise to upgrade DSL to 25/3 Mbps after these companies largely botched an upgrade to 10/1 Mbps DSL in the just-ending CAF II grants. The cynic in me says they are willing to pretend to upgrade DSL all over again if that means substantial grant money. I have to think that some of these companies are considering deploying fixed wireless. To the extent any of these companies is willing to take on new debt or use equity, they could also build fiber. None of these companies has built a substantial amount of fiber to truly rural places, but may these grants are the inducement they were waiting for.

Verizon and U.S. Cellular have registered for the auction. You have to think the cellular carriers will be deploying fixed cellular broadband like the 4G FWA product that Verizon just announced recently. These companies already have equipment on towers in many of the RDOF grant areas and would love to grab a subsidy to roll out a product they might be selling in these areas anyway.

Then there are the satellite companies SpaceX, Hughes Network Systems, and Viasat. Viasat has won federal grant money before for selling broadband from its high-altitude satellites. SpaceX is the wildcard since nobody knows anything about the pricing or real speeds they can provide. We know that Elon Musk has been lobbying the FCC to let him have a shot at the billions up for grabs in this auction.

There is another interesting wildcard with Starry. Their business plan is currently selling fixed wireless to large apartment buildings in center cities and they’ve developed a proprietary technology that’s perfect for that application. They must have something else in mind in chasing grant money in remote areas that are 180 degrees different than their normal business model. Starry founder Chet Kanojia is incredibly creative, so he probably has a new technology in mind if he wins auction funding.

There may be other big players in the auction as well since many of the registered bidders are participating under partnerships or corporations that are disguising their identity for now. I think one thing is clear and some of the rural ISPs and cooperative who think nobody else is interested in their markets will get a surprise early in the auction. These big companies didn’t register for the grant auction to sit on the sidelines.

Windstream Adding YouTube TV

Windstream announced earlier this year that it is now offering YouTube TV to customers as an alternative to its traditional cable TV offering. The company has not yet fully ditched its traditional Kinetic TV offering, but this is a first step towards doing so. As more small cable operators look at the math of staying in the TV business, I’m expecting we’ll see a lot more ISPs considering the same transition. There are a lot of implications for converting traditional cable TV to a streaming service.

Regulatory. While regulation of traditional cable TV isn’t a massive burden, all regulatory requirements disappear with a conversion to a streaming service like YouTube TV. There are a several annual FCC filings required by cable operators that would disappear. If a cable operator is paying local franchise fees, they can avoid the monthly reporting of customers and revenues to local tax authorities.

Taxation. The biggest external change from such a conversion would be that the cable operator no longer has to collect and remit local franchise fees assessed on cable service which vary across the country between 3% and 6%. The cost of collecting taxes and fees and of dealing with tax authorities disappears for the cable operator.

The biggest implication of this change is that local communities could see franchise fees dry up overnight. I would expect a cable provider like Windstream to withdraw and cancel their franchise agreements if they fully adopt YouTube TV. If the primary cable provider in a town makes this conversion, then franchise fee payments dry up immediately. Franchise fees are an important part of balancing local government budgets, particularly in smaller towns.

Cancelling franchise agreements also means that all of the local obligations that come with a cable franchise disappear. The cable provider would no longer provide a PEG channel to show local government meetings and other local content. Any subsidies for local government iNets for bringing connectivity to city halls and schools would disappear.

Operational. There are huge operational savings for ISPs that make this conversion. Most of my clients that offer cable TV tell me that 60% or more of calls to customer service are about the cable product. Eliminating traditional cable means reducing customer service calls and reducing truck rolls.

Getting out of the traditional cable business also means getting out of the settop box business. There is a huge operational savings from not having to keep a settop box inventory and keeping boxes operational. Installations get much easier when there is no settop box to connect.

Broadcast Fees. There are also implications for the larger cable market. Online services like YouTube TV are not required to comply with FCC channel lineups and they can offer whatever packages they negotiate with programmers. This means many networks will no longer be carried and will lose the revenue for every customer that makes this conversion. This becomes cord cutting at the corporate level and as 200-channel lineups get shrunk to 70 channels, a lot of monthly fees to programmers evaporate.

If you look at the YouTube TV line-up, you’ll see the most popular networks. For example, the service includes the primary Discovery channel, but not all of the ancillary Discovery channels that come with a traditional TV subscription. This is true throughout the line-up as the service concentrates on the most-popular channels only.

Profitability. The biggest change is to profitability. I expect that if Windstream fully calculated the cost of being in the cable business that they would show no margin or a negative margin. All of the ancillary costs of extra truck rolls, dealing with settop boxes, tracking and reporting franchise fees and taxes, etc. can add up.

I don’t know what YouTube TV will pay to a cable provider like Windstream, but it can’t be much – no more than a few pennies on the dollar. Nobody would make this transition to get rich from the commission fees, but rather to avoid the costs and the hassles of remaining in the traditional cable business.

The Windstream / Uniti Mess

I’ve been fielding a lot of questions asking about the controversy between Windstream and Uniti. Most people seem to be fuzzy about the relationship between the companies. I’ll try my best to explain the mess that these two companies have created.

Windstream decided in January 2014 to spin off its assets into a REIT, which is a real estate investment trust, a formal kind of investment vehicle defined by law. A REIT generally owns real estate like apartment buildings, shopping malls, or perhaps specialty real estate like storage buildings or college dorms. REITs sell ownership shares to the public, similar to stocks. An investor in a REIT is making a real-estate investment while gaining safety by spreading risk across multiple properties. A REIT is generally expected to pay significant dividends.

Windstream was a traditional mostly family-owned regulated telco. Windstream moved its fiber and copper assets to a REIT owned by the newly-formed Uniti. In the split of assets, Robert Gunderman remained as CFO of Windstream while his brother Kenneth become CEO of Uniti. The Uniti REIT is attractive to investors because Windstream pays roughly $650 million per year in ‘rent’ to Uniti for use of the network. Since formation, Uniti has added other assets to the portfolio, but the Windstream assets still represent 70% of its assets.

The current mess was triggered when Aurelius Capital, a lender to Windstream, filed a lawsuit claiming that the REIT arrangement was a violation of Windstream’s corporate bonds. Windstream immediately filed for bankruptcy earlier this year when a judge ruled in favor of Aurelius Capital.

Windstream and Uniti immediately went to mediation to try to resolve the issues raised by the Aurelius Capital lawsuit. Recently it became clear that the two companies could not resolve the issues, and Windstream and Uniti are now going to court to decide the future of the REIT arrangement.

The court case is mostly going to have to resolve an accounting issue. At issue is the question of whether the payments from Windstream to Uniti are rent or if they are instead a disguised financing arrangement. This difference is vital to the survival of Windstream and Uniti. If the payments are rent, as Uniti maintains, then Windstream would have to pay rent before they make debt payments to Aurelius Capital and others. Further if the payments are rent then Wondstream would have to continue to pay Uniti to use the network. However, if the payments to Uniti are considered to be a financing arrangement, then those payments become unsecured debt and go to the end of the line in payment priority.

The ‘rent’ payments to Unity equate to a $6.9 billion long-term liability of Windstream. The company has another $4.8 billion in senior debt and $1.5 billion of unsecured debt. If a court decides that the payments to Uniti are rent, then the bankruptcy court is likely to erase some of the debt owed to Aurelius Capital and others. However, if the payment due to Uniti are unsecured debt, then a bankruptcy court is likely to erase some of the Uniti debt, which would put Uniti out of business.

Windstream would see a huge windfall if they could walk away from some or all of the Uniti payments – however, they’d be in the awkward position of not owning their networks. It’s hard to picture what happens to the networks if Uniti goes bankrupt.

There are several factors that the courts will use to determine if the Uniti payments are more like debt or rent. For example, rent is generally determined by fair market value of the property. The copper networks are nearing end-of-life and it’s hard to argue that the annual payments to rent copper shouldn’t be declining. However, the payments from Windstream to Uniti increase every year during the 35-year lease term. When examining all of the arguments made in this case, from an accounting perspective it seems that Windstream has the stronger arguments – but the courts will have to decide.

If Windstream is required to continue the full payments to Uniti, the telco will be cash-strapped for the foreseeable future. It seems that Windsteam feels confident they will win the lawsuit because they recently announced a plan to bring gigabit fiber to 60% of its customer base over the next 10 years, predicated upon getting out from under the Uniti debt payments. This means that the broadband future for a lot of communities rides upon the court deciding that the Uniti payments are debt and not rent.

Where’s the CAF II Success?

If you’ve read this blog you know I’ve been a big critic of the FCC’s CAF II program that gave over $10 billion in federal subsidies to the biggest telcos to improve rural broadband. My complaint is that the program set the embarrassingly low goal of improving rural broadband to speeds of at least 10/1 Mbps. My complaint is that this money could have done a huge amount of good had it been put up to reverse auction as was done with the leftover customers from this program last year – many ISPs would have used this funding to help to build rural fiber. Instead, the telcos are using the money mostly to upgrade DSL.

While I think the program was ill-conceived and was a giveaway to the big telco lobbyists, I am at least glad that it is improving rural broadband. For a household with no broadband, a 10 Mbps product might provide basic access to broadband services for the first time. We are now into the fifth year of the six-year program, so we ought to be seeing the results of these upgrades. USTelecom just published a blog saying that deployments are ahead of schedule and that CAF II is a quiet success.

The telcos have told the FCC they are largely on track – by the end of 2018 they should have upgraded broadband for at least 60% of the required households. AT&T and Windstream report that they have made at least 60% of the needed upgrades everywhere. Frontier says they are on track in 27 of the 29 states needing upgrades. CenturyLink says they are on track in only 23 of 33 states that are getting CAF II upgrades. According to USTelecom, over 2.1 million households should now be seeing faster speeds.

It’s also worth noting that the CAF II program should improve broadband for many more households that are not covered directly by the program. For example, when upgrading DSL for a CAF II area that surrounds a town, those living in the town should also see better broadband. The secondary benefit of the CAF program is that rural towns should be seeing speeds increasing from 6 Mbps or slower to as fast as 25 Mbps. By now many more millions of households should be seeing faster broadband due to CAF II.

What I find puzzling is that I would expect to see an upward burst of broadband customers for the big telcos because of CAF II. But the numbers aren’t showing that. There were four telcos that accepted more than $1 billion from the program, as follows, and three of them lost broadband customers in 2018:

Funding Households Per Household 2018 Broadband Customers
CenturyLink $3.09 B 1,190,016 $2,593 (262,000)
AT&T $2.96 B 1,265,036 $2,342 (18,000)
Frontier $1.7 B 659,587 $2,578 (203,000)
Windstream $1.07 B 413,345 $2,595 8,400
Total CAF II $10.05 B 4,075,840 $2,467

Windstream is the only telco of the four that gained customers last year. Windstream’s footprint is probably the most rural of the four telcos. We know that every telco is losing the battle for customers in towns where cable companies are increasing speeds on coaxial networks. Windstream seems to be offsetting those losses, and I can conjecture it’s because they have been selling more rural broadband.

AT&T is in a category all by itself. It’s impossible to know how AT&T is faring with CAF II. They are largely implementing CAF II using their cellular network (with the goal of tearing down rural copper). The company has also been deploying fiber past millions of homes and business in urban areas. They are clearly losing the residential broadband battle in urban markets to companies like Comcast and Charter. However, I can tell you anecdotally that AT&T hasn’t given up on urban copper. They have knocked on my door in Asheville, NC at least three times in the last year trying to sell DSL. I have to assume that they are also marketing broadband improvements in rural areas.

CenturyLink and Frontier are clearly bleeding broadband customers and each lost over 200,000 customers just in the last year. I have to wonder how hard these companies are marketing improved rural broadband. Both companies work in urban and suburban markets but also in numerous county seats situated in rural counties. Like every telco they are losing DSL customers in these markets to the cable company competitors.

Just like I have anecdotal evidence that AT&T is still pushing copper I hear stories that say the opposite for CenturyLink and Frontier. I worked in a few rural counties last year where the CAF II upgrades were reported as complete. And yet the communities seemed unaware of the improvements. Local politicians who bear the brunt of complaints from households that want better broadband weren’t aware of any upgrades – which tells me their rural constituents weren’t aware of upgrades.

I honestly don’t know what this all means. I really expected to find more positive evidence of the impact of CAF II. From what I know of rural America, households ought to leap at the opportunity to buy 10/1 Mbps DSL if they’ve had no broadband in the past. Are the upgrades being done but not being followed up with a marketing and public awareness campaign? Are actual upgraded speed not meeting the 10/1 Mbps goal? Are the upgrades really being made as reported to the FCC? We’re perhaps a year and a half away from the completion of CAF II, so I guess we’ll find out soon enough.