Frontier Communications has filed for Chapter 11, which isn’t a huge surprise to most of us who’ve followed the fortunes of the company from the first. Following hasn’t been easy, because Frontier is a hodgepodge of smaller phone companies, has gone through a number of name changes, and has explored a number of different business models. The question is whether it went wrong along its convoluted path, or whether it’s a victim of a systemic problem that more telcos might face.
Frontier’s collection of customers spans more than two dozen states. It has a very small FTTH base it acquired from Verizon, and an equally small cable system base in Connecticut. The great majority of its customers are supported on copper loop. That meant that either Frontier had to commit to DSL broadband, or to a significant capital program to upgrade these customers to fiber. Since one financial analyst categorized the various acquisitions Frontier made as “scavenger sales”, meaning that they represented customers who were considered to have lower ARPU potential than average, earning a return on that kind of upgrade was problematic.
Frontier seems to have realized its problems relate to its dependence on copper plant. In a report made to the West Virginia PUC, the company admitted to almost a million potential network problems that related to the state of the copper plant and the result of decades of accumulated maintenance patch-ups. They told the SEC that “significant under-investment” in fiber “created headwinds that the company is repositioning itself to reverse,” according to a Fierce Telecom report.
The problem, of course, is that fiber to the home has a very high “pass cost”, meaning that the costs associated with just getting into the area of a home so a connection could be made to a new customer is very high. In rural areas, and even in many suburbs, the cost could well be prohibitive, particularly since the live TV services that most telco and cable broadband services have tapped to raise ARPU are losing ground to streaming TV.
The key question is ROI, which obviously is a combination of potential revenue and cost to connect. The economic potential of a geography is roughly related to its GDP and the density of rights of way within it, which is a measure of the density of population. If we normalize the US demand density as 1.0, we find that countries where good broadband is universal have demand densities from 4.5 upward. Within the US, we find that 14 of the 50 states have demand densities in that 4.5-and-up range, and that Frontier’s DSL customers are concentrated in states where demand density is near or even below the US average.
Revenue realization from broadband depends on being able to sell useful speeds, and the standard for that is video. DSL is rarely considered competitive for streaming video delivery, and that’s now a must-have for most home broadband prospects. About half of all the complaints that the West Virginia report cited were related to DSL performance not meeting the Frontier promises, and even had the promises been met, streaming video would likely have been problematic for many.
The final nail in the profit coffin is the fact that copper loop voice communications is also in decline, as more and more users shift to mobile services. Consider that if only half of West Virginia complaints were about DSL, another 20% were about both DSL and telephony, and 29% about telephone services. That means half the Frontier customers were unhappy even with Plain Old Telephone Service (POTS). If you can’t do POTS on copper loop effectively, what good is that plant?
This isn’t a new problem. Back in the late 1980s, a Bell South expert told me that the copper loop plant was the big risk for the company, that unless something were done to shorten the loop through fiber to the node, it was unlikely loop quality could be maintained. The expert suggested that they had perhaps fifteen years of life remaining, and of course we’re now past double that lifespan.
There have been plenty of technological advances that aimed to deliver DSL at competitive speeds, but the fact is that the condition of the loop plant and the length of the loop have an enormous impact on these measures. Many of the deals Frontier did to acquire its current customers were made by other telcos who apparently believed that they couldn’t make money on the customers they were selling off. Loop condition and potential ARPU were obviously the problem.
Frontier, in the Fierce Telecom article cited above, said they had 11 million DSL customers, and that a plan to convert 3 million to fiber would cost $1.4 billion through 2024. I think it’s safe to assume that Frontier cherry-picked those 3 million, and that they represented the best potential. Think about what might be required for the average, or most challenging, customers.
This is the same dilemma faced by Australia, who took the unusual step of shifting broadband access to a semi-government company, New Broadband Network (NBN). They expect to have about 5 million of the 12 million NBN customers on fiber this year, when NBN rollout is complete. Experts in Australia complain that the fiber-to-the-node approach that Bellsouth advocated before consumer broadband was a market issue is now inadequate, and that in any event the loop plant itself is “a run-down network.”
It’s time to face an important truth, which is that the current consumer and business broadband opportunity cannot earn a respectable ROI on the cost of a full fiber modernization. We are not going to close the digital divide by putting everyone on fiber, even were we to follow Australia into an almost-nationalized approach. Maybe, aggressive investment at the dawn of consumer broadband might have paid back. Not now, and that means no “wireline” approach is going to work across a typical country or state or service area with a demand density less than 4.5, and for success 4.5 seems a bare minimum.
Wires won’t work, but wireless might. In fact, the biggest impact 5G could have on consumers and small businesses is likely to be not the changes it might (or might not) make in the mobile experience, but what it could do as a substitute for copper-loop wireline. How far the benefits of 5G could extend into the “wireline” world is hard to say, but here are some basic presumptions we could make.
First, the millimeter-wave 5G hybrid with FTTN can deliver speeds well over 100 Mbps to distances up to around four miles, according to the data I’ve been able to see. A single node could then cover an area of about 12 square miles. Using a density of 300 dwelling units per square mile (suburban average) that comes to 3,500 prospective customers per node. 5G/FTTN distances would be greater if the node were placed on a high spot in the topography, on a tall tower, etc. Operators tell me that this would be suitable for about 80% of suburban populations.
Second, standard 5G cells should deliver about 20 Gbps aggregate capacity to a distance of 10 miles, depending on the frequency used. That would mean coverage of about 80 square miles, and since “rural” areas are considered to have about 50-100 dwelling units per square mile (we’ll use 75 for an average), so that would mean a total of 600 prospective “wireline” customers, in addition to whatever mobile service might also be provided. The question, which is difficult to answer at this point, is whether it would be practical to cover 80% or even 50% of the rural population with 5G mobile-like service. The difficulty lies in the fact that there are too many ways of defining “rural”, and no matter what definition you use, the ways that rural populations are concentrated are highly variable. Some studies, though, admit that three-quarters of the cost of covering a diverse service area like a state or country could well come from covering rural customers.
It looks to me like about 7 or 8 million of the 11 million customers Frontier has could be covered with 5G in some form, but it’s unlikely at this point that Frontier could acquire the spectrum it would need. They didn’t even bid on the 23Ghz auction last year, and they’re not a mobile player at all. They’d also need to run fiber to all the cell sites and nodes. All this to overcome the fact that DSL won’t cut it, and even if you get past that issue with 5G, you have to ask whether the customer base would pay enough for super-broadband to generate an ROI.
Frontier didn’t have a sound business model, in my view. Instead, they were chasing a view of telecom as a perpetual cash cow, neglecting both the influence of mobile services and the need for truly high-speed broadband to support video. Now it may well be too late for them. It’s hard to model the cost of a 5G strategy for Frontier, but I’d estimate we’d be talking about ten billion or more, and who’s going to give it to them?
We can’t retrospectively fit the right decisions and business model on Frontier. What we need to do instead is prevent the problem from spreading. Copper loop will never provide the kind of broadband people want, and small telcos will never be able to afford to change it out without the kind of massive government subsidies we’re not likely to see in our age of the pandemic. Regulators need to think about how to get copper out of the plant, and how to encourage larger telcos to buy smaller ones, rather than selling off their less-profitable pieces.