Disconnected & Disempowered, Part Two: Frontier’s Failures Aren’t Market Failures
Hate Frontier's Service? Talk to the Invisible Hand.
Frontier is a big deal in West Virginia.
For over a decade, Frontier has been the top internet provider and the main landline phone provider in the West Virginia.
In a massive merger/split with Verizon back in 2009, Frontier took over Verizon’s infrastructure, spanning fourteen states.
As Anupreeta Das & Sinead Carew reported for Reuters at the time:
‘Verizon Communications Inc will sell 4.8 million rural phone lines to Frontier Communications Inc for $5.25 billion in stock, getting rid of a declining business to focus on wireless and broadband services.
The deal will triple the size of Frontier, making it the largest rural-only service provider in the United States. Frontier, whose shares fell slightly, said the deal will boost earnings and provide $500 million of annual savings.
On the closing of the deal, Frontier will take on $3.3 billion of Verizon debt and Verizon shareholders will receive Frontier stock giving them up to a 71 percent stake in Frontier.”
It was a tax-free deal for Verizon’s shareholders too! Verizon created “a separate entity for the assets being sold,” which were “spun off to Verizon investors and then merged with Frontier.”
Frontier tripled its size, became the largest provider in West Virginia and the largest rural provider in the country, and to do so they sold more than $5 billion in stock and took on $3.3 billion of Verizon’s debt.
Frontier knocked $8 billion in value off of their books, in exchange for Verizon’s “declining business.”
Small wonder that they didn’t invest in the infrastructure here: after selling $5 billion in stock and assuming $3 billion more in debt, it seems like the actual physical infrastructure in West Virginia was an afterthought in the whole deal.
As Reuters noted, the merger came “amid a wave of consolidation in the rural phone market,” as providers “cut costs.”
This was after 30 years of deregulation and just 13 years after the Telecommunications Act of 1996 deregulated the telecom industry to “let anyone enter any communications business – to let any communications business compete in any market against any other."
Regulators let Frontier consolidate rural monopoly power because Frontier’s CEO at the time, Maggie Wilderotter, claimed the best intentions to regulators and reporters alike. She told Reuters at the time that “she would expand high-speed Internet services,” which were then in only 60 percent of the lines that Frontier bought from Verizon.
“These markets have a lot of upside opportunity from a revenue perspective,” Wilderotter told Reuters. “One of the things we’re going to be very focused on is bringing broadband to rural America in these 14 states.”
How’s Frontier doing? Recently, in March 2021, West Virginia Public Broadcasting reported:
“After acquiring territory formerly owned by Verizon in 2010, the company made a series of commitments to the Public Service Commission, which regulates the company for landline phone service, to expand broadband access.
[…]
Most recently, in bankruptcy agreements and following a third-party audit of the company’s landline and broadband offerings, Frontier pledged to spend $200 million on capital improvements by the end of 2023, and to expand its broadband fiber offerings to at least 150,000 households by 2027.”
Frontier is doing badly in the ‘expanding high-speed internet’ department, except through a series of increasingly ridiculous acquisitions.
For some reason, federal regulators let Frontier takeover AT&T’s lines in Connecticut in 2014, and then let Frontier and Verizon engage in another merger in 2015 for Frontier to buy Verizon’s landline operations in California, Florida and Texas.
Announcing the 2015 acquisition, Frontier chairwoman and CEO Maggie Wilderotter confidently, and hilariously, declared, “Frontier has a solid track record of successful integrations, and we welcome the new employees who will help us implement our local engagement model in these markets."
The business community responded with a unilateral “buy Verizon, short Frontier” call. The investment news outlet Seeking Alpha ran an analysis of the deal headlined, “Verizon Fools Frontier Again”.
We were pleased to see that Verizon Communications (NYSE:VZ) was able to reach an agreement to sell some of its wireline assets for $10B recently. However, we were absolutely stunned to see that Frontier Communications (FTR) was willing to purchase these assets from Verizon because we remembered that its $8.7B wireline purchase in 2010 did not work out so well for it. […]
Frontier's pro forma revenue has declined by 30% since 2009, its residential consumer base declined by 33%, its operating income declined by 34% and its dividend declined by 60% since then. Albert Einstein said that insanity is doing the same thing over again and expecting a different result and we think that Frontier's CEO Maggie Wilderotter has come down with a serious case of insanity for her willingness to buy whatever Verizon is selling. As such, we think income-oriented telecom investors should consider accumulating shares of Verizon, and selling or shorting Frontier.”
When Wall Street analysts are “absolutely stunned” by a deal, regulators should probably take a second look.
A 2017 headline in The Dallas Morning News described the predictable outcome: “A Year Later, Frontier’s Verizon Fios deal is a Textbook Case of How Not to do an Acquisition”.
Meanwhile, after more than a decade of Frontier buying Verizon’s “declining business,” many West Virginians are on the exact same lines that Frontier bought at that time, and we’re hearing the same promises that the company made in 2009.
It would be bad enough if it were just déjà vu all over again.
But it is even worse than that.
As Schumaker & Company reported to the West Virginia Public Services Commission in 2020, “(99%) of Frontier WV’s network is less than 60 years old with 46.8% being 36-47 years old.”
The report was dated March 25, 2020. Thirty-six years ago before would have been 1984 (or 1983, depending on when the report was drafted). In 1984 the U.S. broke up Ma Bell and as a result, Bell Atlantic formed and eventually subsumed The Chesapeake and Potomac Telephone Company of West Virginia.1 Bell Atlantic then eventually became Verizon, which eventually sold all of its infrastructure to Frontier.
Based on the timeline, it seems to me that a lot of Frontier’s copper in West Virginia was probably laid by Ma Bell.
Since then, it seems to me that companies have just viewed these lines as depreciating assets that reduce corporate tax burdens, and the fact that the depreciated assets come with a captive customer base is just the gravy.
Frontier tried, and failed, to redact a lot of information in that report, including the age of their infrastructure. Fortunately Jon Brodkin at Ars Technica caught and preserved it. I encourage everyone to go look it over for themselves, because it is pretty incredible.
Brodkin reports:
“Another redacted portion shows that Frontier repeatedly failed to meet a service-quality benchmark that 85 percent of outages should be fixed within 48 hours. The data shows that "Frontier West Virginia missed the metric 21 of the 60 months [from 2015 to 2019], with 14 of those months falling in the past 24 months." While Frontier uses a 48-hour benchmark internally, state regulations say that outages should be fixed within 24 hours of customers reporting them, the report said.”
And make no doubt, we are talking about a utility service. U.S. Sen. Shelley Moore Capito noted in December that broadband is now “a core component of everyday life,” and she’s right. But more fundamentally, Frontier’s infrastructure is a utility because lives literally depend on the existing copper service.
On July 31, 2019 Shauna Johnson with WV Metro News reported on a 12-hour long outage that knocked out 911 services in Lincoln County, WV.
Allen Holder, director of the Lincoln County E-911 Communications Center and Lincoln County Office of Emergency Services, said it was far from the first time in Lincoln County for such a [12 hour long] outage which stopped all incoming 911 calls.
“It’s not just a problem in our county, but it’s a problem that is symptomatic of a much, much bigger problem with Frontier statewide,” Holder told MetroNews.
“A few years ago, we might have experienced a 911 outage occasionally, but now they’re becoming much more common with difficulty from Frontier giving us answers as to why those problems occurred.”
For many West Virginians, this one included, Frontier is the only company that has a physical line run to their property. In almost half of these cases, these lines are between 30 and 60 years old. The service is expensive, and if you don’t want to use Frontier, you either can find a wireless provider or pay another company to run a new line to your property.
And this is exactly what the market has determined is the optimum for West Virginia, Appalachia, and all of rural America.
The root problem is that rural America is not a profitable market and these private companies are happy to shuffle around dilapidating infrastructure without ever investing in the infrastructure. They don’t compete because entering into each others turf would cut into everyone’s profits.
Frontier owns the copper that runs to my house, and my choice is simple. I can pay Frontier, or I can lose access to the copper that runs into my house. It’s a natural monopoly. The reason why Comcast hasn’t run its lines to my neck of the woods is because there aren’t enough potential customers here to make it a profitable endeavor for them in any reasonable timeframe. That’s not even accounting for the potential risk that they run the lines and customers don’t switch for one reason or another, which would leave them with all liabilities and no benefits.
Trying to compete with a well-established geographical monopolist is expensive for everyone involved. So everyone stays out of each other’s way, which is the most rational and profitable course of action. And that is exactly how Frontier became the largest provider of phone and internet for rural America.
Frontier’s dominant position in West Virginia is the result of 40 years of Reaganomics and bipartisan deregulation based on the idea that the market produces efficient and optimal outcomes.
The lack of high-speed broadband across large parts of West Virginia is exactly what the market has determined is the most efficient outcome.
Misguided politicians and bad economists look at this and say “well, the federal government needs to support the private market by shoveling money at the private corporations so that they don’t lose money when they build out this infrastructure”.
But that will never work—because it’s attempting to use the logic of the market to solve a problem that the market doesn’t see as a problem.
If we want to address the problem, we can’t use the same logic that created the problem.
Right now, the deal is that we throw money at private companies, and the private companies get to keep the upgraded infrastructure, the customers, and the profit. That’s a great deal for anyone, and if you’re a bankrupt company like Frontier, the deal doesn’t get much sweeter.
We need to change the deal if we want to solve the problem—fortunately we don’t have to come up with new solutions on our own; we just need to scale the solutions that have worked other places, in the United States and elsewhere.
In the next part, I’ll finally get to some plausible solutions that would help West Virginia without using public funds to create private monopolies.
At that time in 1984 Charleston, WV was on the cutting edge of telecom as the first city in the United States to have an option of long-distance carriers. It may have been as the last time telecom in West Virginia was on the cutting edge.