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| Julius & Frontier West Virginia: The Very Ordinary Facts |
| Saturday, 26 June 2010 14:22 |
 200,000 to 400,000 currently "unserved" homes would be getting broadband without any federal subsidy if Julius had taken advantage of the Verizon/Frontier deal. He certainly could have asked for more, especially since Verizon needed a controversial tax break worth $hundreds of millions. Instead, Frontier is going to do a very ordinary build, far below world standards at 80-85% in West Virginia. Steven Crosby of Frontier tells me they will bring West Virginia to 15-20% not covered with DSL from about 40% today. Frontier's planned 15-20% unserved is similar to some U.S. rural territories, although far more than the 8-9% (and improving) of the rest of Frontier's coverage. Rural carrier Madison River had 100% DSL coverage without subsidies. Literally dozens of small rurals (98-100%) prove to me it's practical to do better There's near 100% coverage in the Scottish islands and the Welsh highlands. The broadband plan found that only about 1/2 of 1% of lines were prohibitively expensive to serve. Even in rural areas the very expensive are rarely more than 5%.
It's almost certain that most homes Frontier will now serve are those who can already get cable. Very few homes that are currently unserved will be reached. Cable in 2008 (last available FCC figures) had an 85% served/15% unserved rate in West Virginia areas passed by cable. Verizon has been bleeding customers at 15+% a year where people can get cable but not DSL, so Maggie almost certainly will target those territories.
In other words, Frontier is doing about the minimum any commercial company would do taking over the territory. "We want to have the service available to sell to as many people as possible. That's our business." Crosby adds.
Both Verizon and Frontier needed the deal to be completed and would have been fools not to accept requirements for better coverage.
Putting numbers on this, between 500,000 and 1,000,000 of the 4M+ homes involved are currently unserved. Since Frontier will target areas with competition from cable, few of the unserved will be reached. DSL is very profitable, with margins of over 70%. Frontier charges $30-60/month, perhaps $450/year with a margin contribution of perhaps $300. That means a DSL customer would be profitable at 15% after three or four years if the initial investment was about $700.
Frontier in West Virginia is projecting spending $300-400/line. That's higher than AT&T is spending on U-Verse, a similar system, but the territory is tougher to serve. If you average $300, that means some lines are costing $400-500. So $700 allows them to profitably go beyond the 85% promised, but probably for only another 200K lines or so (back of the envelope). That would take the ex-Verizon territories to about 90% - where the rest of Frontier is today without any subsidy. Windstream is also at 90%, so that's clearly practical for a U.S. mid-sized carrier.
3% of a $8B deal - a reasonable concession Verizon almost surely would have made to get the deal done - is $240M. $200M is a little less than increase of Frontier's stock price compared to the market in the last month as it became clear the deal would be approved. So we're talking here about whether how much of the (projected) profits of the deal go to shareholders and how much is a consumer benefit. $180M is enough for a $600 contribution for 300,000 lines. That would take Frontier up to 95-98%, beyond which the costs really do need some support.
It's fair to ask why Frontier fought to keep the committment down to 85% if 90% is profitable. Fairpoint is constraining capital spending massively. For the last four years, capital spending has been 45% less than reported depreciation. Income has been $867M while dividends have been $1,289M. They've also bought back $500M of stock. (Yes, some of the 45% is amortization, but not enough to change the conclusion.)
Frontier has a junk bond rating. They are carrying $1,500 of debt per line, not far from the $1,800 they are paying for the Verizon lines and more per line than the likely value of Fairpoint or Hawaiian Tel when they emerge from bankruptcy. I'd like to emphasize that unlike Fairpoint or Hawaiian there is minimal likelyhood of Frontier going bust in the next few years. The main debt maturities are in 2014-2016.
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| Last Updated on Sunday, 04 July 2010 16:22 |