Column: As its losses and debt grow, can Frontier remain a player in the phone business?
Before Frontier Communications took over Verizon’s California landlines last year, the company insisted that it knew how to make money from aging phone networks that bigger telecom companies didn’t know what to do with.
“We’ve done well so far,” a Frontier spokesman told me in 2015, dismissing my concerns that the company was losing money and carrying more than $8 billion in debt — higher than the industry average relative to equity value.
How, I wondered, would it be able to maintain and upgrade Verizon’s system?
Two years on, that question has yet to be answered.
Connecticut-based Frontier is bleeding customers — another 102,000 landline-dependent broadband subscribers nationwide said adios in the first quarter. The company lost $373 million last year and another $75 million in the first three months of this year.
Frontier’s debt load has more than doubled since the Verizon deal and its stock is down almost 70% since January.
Last week, Frontier announced a dividend cut and a 1-for-15 reverse stock split (swapping one share for every 15 outstanding) to boost the price and maintain the company’s imperiled Nasdaq listing.
This raises an interesting question: What happens if Frontier can’t afford to keep its creaky phone network up and running?
The company has offered no indications that it’s eyeing cutbacks to network investment or service. Even so, “California consumers should be very concerned,” said Christine Mailloux, an attorney with the Utility Reform Network, an advocacy group.
“All wireline companies are losing customers,” she said. “But they still have obligations that have to be met.”
I’ve had cordial relations with Frontier. After the glitch-ridden takeover of Verizon’s California service was completed, the company’s regional president, Melinda White, told me her door was always open. If I ever had any questions, all I had to do was call.
So I got in touch the other day. A company spokeswoman, Christy Reap, emailed this cryptic response: “Frontier declines to be interviewed.”
She also passed along this statement on behalf of the company:
“Frontier Communications is committed to improving the customer experience, reducing churn, stabilizing revenue and generating cash flow. Our new capital allocation policy will allow us to pay down debt and lower our leverage ratio, while still paying a meaningful dividend. We are investing in our networks, growing our commercial business segment and reducing costs.”
The statement added that “we have learned hard lessons and are doing what it takes to become better.”
Clearly the message from Frontier is: “Don’t worry your pretty head.”
What I’m hearing instead is: “Be afraid, be very afraid.”
The Federal Communications Commission requires that any phone company “planning to discontinue or reduce domestic wireline service” must notify customers in advance and continue providing service for up to 60 days after making its intentions clear to authorities.
At the state level, the California Public Utilities Commission defines Frontier as a “carrier of last resort.” That means the company must meet a variety of obligations as a provider of basic phone service, such as reliable voice connections and free 911 access.
Frontier and AT&T are California’s two largest carriers of last resort. About 14 other smaller companies hold the designation in various communities statewide.
The PUC requires that such carriers notify authorities if meeting those obligations causes “undue hardship or expense.” In such cases, according to the commission’s General Order 133-C, the company “may request specific relief” from regulators.
There’s no indication that Frontier plans to file any such notice. Then again, financial meltdowns by providers of basic phone service are rare, and both Frontier and the PUC are feeling their way along amid consumers’ mass migration to wireless technology.
One of the few examples of a basic phone service provider collapsing financially is a 2009 bankruptcy filing by North Carolina’s FairPoint Communications, which provides local, long-distance and other telecom services in 17 states.
Like Frontier, FairPoint was an eager buyer of Verizon landlines, spending $2.7 billion in 2007 for residential phone networks in Maine, New Hampshire and Vermont.
FairPoint was saddled with nearly $3 billion in debt at the time of its bankruptcy — a fraction of Frontier’s current burden — and, like Frontier, had a difficult time taking control of Verizon’s old systems.
FairPoint emerged from bankruptcy in 2011. A bitter four-month strike by workers followed in 2014 as the company sought to reduce employee benefits. New England telecom authorities warned that the company needed to step up its game amid rising customer complaints.
FairPoint is now being purchased by Illinois-based Consolidated Communications for $1.5 billion.
Frontier’s current reticence is worrisome. Saying you “decline to be interviewed” isn’t a very encouraging response to reasonable questions about the company’s stability.
Constance Gordon, a spokeswoman for the state PUC, said a carrier of last resort would have to apply to the commission for any financial assistance, such as charging customers higher rates.
“And if the carrier were closing down completely, it would need to have a migration plan to ensure that customers have service throughout the exit process,” she said.
That would mean making sure customers find a home either with another wireline phone service provider, or with a cable or wireless company.
I asked AT&T if the company would be interested in picking up Frontier’s California wirelines for a song? A spokesman declined to comment.
Then again, AT&T backed state legislation last year that would have allowed it to abandon its own wirelines. The bill died in the Assembly, but it suggests that AT&T isn’t looking to expand its landline phone network.
Landlines are quickly becoming a historical relic as consumers increasingly go wireless. The fact that Verizon has been dumping its wirelines across the country should tell you something.
According to AT&T, the number of California households with landlines has declined 85% since 1999. But carriers of last resort are nevertheless required to maintain full capacity for their phone networks, as if every home still used copper phone lines.
This will change as wireline demand disappears. In the meantime, thousands of seniors and low-income people depend on landlines for their communications needs, and they can’t simply be abandoned.
State officials will have to oversee a smooth transition from 20th to 21st century technology. AT&T has the size and clout to survive this challenge.
As for Frontier, that remains to be seen.
David Lazarus’ column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5 and followed on Twitter @Davidlaz. Send your tips or feedback to [email protected].
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