Frontier says BDS price caps will mean $10M revenue impact in 2017

Frontier Communications (Frontier Communications)
Image: Frontier Communications

Frontier expects that if the FCC implements its special access proposal that placed price caps on TDM-based services next July it could have an initial $10 million impact on the telco’s 2017 revenue.

Following the initial year, Frontier expects the revenue impact to be even bigger, reaching $20 million in 2018 and 2019, followed by subsequent annual declines following that three-year period.

FCC Chairman Tom Wheeler made his long awaited BDS proposal public on Friday. While the proposal would offer a light touch regulatory regime on next-gen packet-based services, TDM-based services would still be subject to price caps.

Dan McCarthy, CEO of Frontier, said in a statement that “we intend to mitigate the potential effect of all rate reductions with incremental reductions in our expenses.”

Just last week, Frontier, which often sided with CenturyLink on special access re-regulation, joined Sprint and Windstream to support part of Verizon and Incompas' proposal, specifically price caps for BDS.

However, Frontier does not agree with the joint proposal beyond the element that deals with TDM-based special access services. 

While CenturyLink has not yet specified the impact, UBS said in a research note that it “would expect a similar outcome within its low-bandwidth revenues, which are already declining at low-teens.”

CenturyLink laid out its own four-part proposal that among other things would call for services under 10 Mbps (such as DS1 links) would be subject to a separate competitive market test from services with speeds above that threshold, and offerings provisioned using Ethernet over HFC would be counted as competing offerings.

Meanwhile, AT&T did not say whether price caps would have a specific impact on its revenues. However, Bob Quinn, senior EVP of external and legislative affairs for AT&T, said in a blog post that “the special access proceeding seems designed to pick winners and losers.”

“While the Commission has correctly determined (for the time being) not to re-regulate the Ethernet market, there is no evidence in the record to support the Commission’s proposal to re-regulate all legacy TDM-based service without regard to the number of competitors operating in a markets,” Quinn said in a blog post. “To reach such a preposterous conclusion, the Commission had to ignore facts and virtually all of the economic analysis submitted by its own ‘independent’ economist as well as all of the other economists who provided analysis in this proceeding.” 

Wall Street responded favorably to Wheeler’s scaled down BDS proposal on Friday, sending up CenturyLink and Frontier’s stock prices 2.9 percent and 6 percent to $27.76 and $4.23, respectively, at the close of Friday trading.  

“For the RLECs (rural local exchange carriers), this had clearly been an overhang,” said Jennifer Fritzsche, senior analyst of wireline/wireless technology for Wells Fargo, in a research note. “Perhaps this was best evidenced by the +6.0% move in FTR and +3.2% move in CTL (vs. -0.3% in the S&P) on Friday and the bounce as soon as the fact sheet (summarizing the FCC Order related to Special Access / Business Data Services) hit the wires.”

Under Wheeler’s proposal, the FCC proposed implementing a one-time 11 percent pricing decreased that would be phased in over 3 years, beginning in July 2017. Specifically, this includes 3 percent in the first year, 4 percent in year two, and 4 percent in the third year.  

Wheeler’s plan is lower than the 15 percent cut proposed by what has become known as the controversial Verizon/INCOMPAS proposal.

“To promote fairness, competition, and investment in this $45 billion marketplace, FCC Chairman Tom Wheeler circulated to his fellow Commissioners proposed rules to take necessary and overdue steps to reform a long-broken regulatory regime,” the FCC said in a fact sheet about Wheeler’s proposal. “The Order provides a new framework for this market that strikes a balance between targeted regulation for legacy TDM (DS1 and DS3) services, where evidence of market power is strongest, and lighter-touch regulation of packet-based services, where there has been new entry and competition may be emerging.”

While Wheeler’s BDS proposal is not listed yet on the FCC’s preliminary agenda for the regulator’s October 27 meeting, it’s possible an agreement could be reached before that time by taking a lighter regulatory touch. However, it’s also possible that incumbent telcos like AT&T and CenturyLink could challenge such an agreement in court.

For more:
- see the Frontier release
- here’s the FCC proposal (PDF)

Related articles:
FCC to propose scaled down special access plan, says report
CenturyLink: Incompas-Verizon proposal would drive drastic Ethernet rate reductions, proposes counter framework
Sprint, Frontier, Windstream back Verizon-Incompas price cap proposal on BDS
Verizon-Incompas BDS proposal may be Wheeler's likely gambit as vote nears: analyst