Frontier’s well-documented troubled takeover of Verizon’s wireline assets in the California, Texas and Florida (CTF) markets should serve as a cautionary tale for other telcos wading through complex acquisitions. The imbroglio showed that deals of this size can help scale a company's reach, but customer and network integration issues can put a damper on new growth.
From a broader industrywide perspective, Frontier's integration issues are relevant particularly as the wireline segment moves through a large wave of consolidation. Led by CenturyLink/Level 3 and Windstream/EarthLink, service providers engaging in M&A should look at carefully as they integrate the companies they are acquiring into their own fold.
M&A integration problems are not isolated just to Frontier, however. FairPoint’s 2008 acquisition of Verizon’s Northern New England assets is another good example of this challenge. After being unable to resolve a host of fulfillment and billing issues, the service provider filed for Chapter 11 bankruptcy protection.
Frontier thinks it has an answer: creating dedicated teams for businesses and consumers. By realigning these segments, Frontier will bring greater focus to the unique needs of these customer segments.
The new two-tier structure is not only part of Frontier’s effort to integrate the Verizon CTF assets, but also a way to pave new growth opportunities in markets that Verizon largely ignored. Under this new structure, the telco realigned sales, marketing and commercial product management with a single leader, who reports directly to Frontier CEO Dan McCarthy.
Leading Frontier’s business segment is Ken Arndt, who was named as EVP of commercial services.
“Out of a year-long process, there were was a realization that in order to continue to focus on growth, we were probably better off to split the company down the middle and focus on residential and commercial,” said Arndt in an interview with FierceTelecom. “It was a realization of putting a laser-like focus on both the consumer and business segments, knowing full well that each segment has its own opportunities.”
The process of realigning the company’s focus wasn’t without pain. As part of the restructuring, Frontier announced that it would lay off 1,000 employees.
However compelling Frontier’s progress is, some analysts remain skeptical the telco can turn things around.
“The integration was a disaster on many fronts and they took a beating,” said Mike Sapien, principal analyst at Ovum. “Most business customers are just as upset as the consumers.”
Sapien added many “question if Frontier can set up to the scale of business that they have signed up for.”
The fourth-quarter earnings results did not do much to allay investor concerns either. Having reported yet another quarter of consumer and business revenue losses, Wells Fargo said in a research note that Frontier’s “integration of those CTF assets and customers continue to represent a ‘show me story.’”
Overcoming customer hiccups
After Frontier completed its acquisition of Verizon’s CTF properties, there were widespread issues across the business and consumer segments. As a result, Frontier lost nearly 100,000 video and broadband subscribers during the third quarter.
During the fourth quarter, Frontier narrowed its broadband losses to 73,000. To be fair, Frontier’s losses included a number of customers that it turned off for not paying their bills. The telco noted that it started to add more subscribers in the CTF and legacy markets.
Frontier blamed some of the issues from bad data it got from Verizon. According to Frontier, Verizon's computer records consisted of incomplete or corrupt data, meaning that network terminal boxes such as modems and network interface devices (NIDs) at customer homes and businesses did not recognize messages that Frontier was trying to send to those devices.
The telco’s integration troubles got the attention of Florida’s Attorney General Pamela Bondi and Mike Gatto, D-Los Angeles, California's Utilities and Commerce Committee chairman.
Gatto and Bondi asked Frontier for immediate action to rectify issues after receiving hundreds of complaints.
Frontier issued bill credits to every customer who reported an outage and implemented a "SWAT Team" to coordinate a fast response to complaints, and to establish of a special phone number for Florida residential customers.
Neither the Florida attorney general’s office nor Gatto’s office responded to FierceTelecom for comment.
“Our call centers returned to normal performance levels by the end of the fourth quarter after a disruption last quarter due to onshoring,” said McCarthy during the fourth quarter earnings call, adding that it expects further improvements in the first quarter.
However, Fitch Ratings said the telco faces an uphill battle to return to positive additions.
Fitch said in a report that while “the call center issues appear to have subsided, Fitch believes it will take additional time for marketing efforts to ramp up and stabilize subscriber gross addition trends.”
Advancing CTF’s business, consumer options
As Frontier looks to regain customer ground, a key focus in the CTF territories is expanding service options. Prior to purchasing the CTF assets, Verizon did not upgrade consumer and business customer segments’ broadband speeds and services.
This lack of attention by Verizon left the small- to medium-sized business (SMB) market open as a target for local cable operators Charter and Comcast.
“If you look at these acquired properties, Verizon didn’t really serve or care about that Tier 3 small business space and ceded that market to cable companies a long time ago,” Arndt said. “In the medium [business] space, they actually did a little bit better from a market perspective and the large [business] segment is where we inherited the largest market share.”
Upon completing the acquisition, Frontier immediately identified what buildings had fiber and which ones were near-net, meaning those sites that resided close to its fiber. In all, Frontier sees over 30,000 on-net building fiber opportunities.
Having available fiber will help Frontier differentiate from CLECs and cable operators that have won over SMBs selling low-cost DOCSIS-based data and voice over their existing hybrid fiber-coax (HFC) networks.
“When we took over these markets, the first thing we did was to identify where we had fiber and what buildings were lit and areas where there was fiber running by the business or home,” Arndt said. “Once we had identified those opportunities, it was about assigning people to go and sell those opportunities because we’re offering something other competitors are not, which is fiber to the business.”
A similar situation existed on the consumer side where existing copper-based DSL customers’ speeds topped at 6 Mbps. In addition to rebuilding the FTTH FiOS subscriber base, Frontier is working to introduce higher copper speeds using a mix of bonding and VDSL2.
The service provider has upgraded 800,000 addressable households to 50 Mbps and even 100 Mbps, with plans to complete an additional 300,000 CTF upgrades by the first quarter of 2017. During the fourth quarter, Frontier reported that it upgraded 1 million households to 50 Mbps or higher speed capability in 2016.
In February, Frontier launched an aggressive customer acquisition effort with a series of dual and triple play bundles. Putting its broadband and business growth plans in place is a certainly positive first step, but Frontier now has to show that it can truly return to growth in its business and consumer segments.
Frontier's efforts to reignite the CTF and legacy markets may be positive, but the onus is on the telco to regain investor faith and, more importantly, customer trust. Given the high price of acquiring these assets, winning back and retaining current customers is key for survival.—Sean