Does Frontier's rate hike signal that it wants out of the TV space?

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Sean Buckley, FierceTelecomIf you're an existing Verizon (NYSE: VZ) FiOS TV customer that resides in Indiana, Oregon, or Washington State included in Frontier's (NYSE: FTR) 14-state acquisition of the RBOC's rural lines, you're soon going to find a fatter bill in your mailbox.

Claiming it lacks the clout to deal with the area's content owners, Frontier says it's being forced to raise its FiOS TV rates 46 percent, from $65 to $95 a month. What's perhaps even more damaging to Frontier's reputation as a provider of FiOS TV in these states is that the increase is significantly higher than Comcast's (Nasdaq: CMCSA) proposed 5 percent video rate increase.

Prior to gaining regulatory approval to proceed with its acquisition of Verizon's rural lines, Maggie Wilderotter maintained that it would keep prices competitive with Comcast before it got regulatory approvals for the 14-state deal, but it appears that's not the case.

Still, the question is why would the company step out of direct competition with are MSO Comcast-the dominant cable operator in these areas--this way?

The obvious answer here is that running a TV business isn't easy, especially for traditional smaller telco like Frontier who spent over a century delivering basically traditional POTS voice services to smaller rural markets where competition was minimal. To operate a video business, a telco not only needs the technical expertise, but a team that understands how to negotiate deals with content owners.

Battles between wireline telcos providing TV service and content owners aren't unheard of. Even large telcos like AT&T, which continues to grow their U-verse IPTV service, had to temporarily pull the plug on channels such as HGTV before it finally garnered a deal with Scripps in November.

Interestingly, Oregon regulators in August 2009 expressed concern over Frontier's ability to not only run a last mile fiber network, but their ability to negotiate deals with large content owners like ESPN.

Okay, so Frontier may only operate the FiOS TV service in three states, but the telco and its customers both loose out here.

Customers that have already committed their monthly capital to the service now have the choice of either shelling out even more money for the service or just shutting it off altogether. It's likely a number of consumers will likely cut their TV cord from Frontier.        

At the same time, Frontier not only will have to now find ways to maintain a competitive edge over Comcast, which will probably use the rate hike opportunity to target these FiOS markets with their triple play voice, data and high definition video offerings.   

Fear not, FiOS TV subscriber, says Frontier: We'll give you a free year of DirecTV (Nasdaq: DTV) satellite TV and we won't raise telephone or data rates on FiOS."

However, when customers called in to ask about the free DirecTV satellite service, DirecTV apparently was initially not aware of any free deal. Not long after complaints began coming in, Frontier clarified that only triple play customers "qualify to get free DirecTV for the rest of the year," while dual-play customers "will receive free DirecTV for six months."

And while the satellite TV service consolation prize may win over some consumers, the reality is as told by David Olson, director of the Mt. Hood Cable Regulatory Commission, to The Oregonian newspaper that Frontier's move is nothing more than a "white flag surrender and an exit from the head-to-head video competition." In other words, Frontier is clearly saying that it wants no part of the television business.--Sean