Rural telcos: Bigger and better?

For most of this decade--virtually since the very first signs of access lines loss made themselves known--Verizon Communications has been looking at options for unloading rural and secondary market lines. Frontier Communications' plan to buy 4.8 million rural market lines from Verizon (or more specifically Verizon shareholders) is the latest and biggest example of how the company is doing just that. Similar past deals, such as the sale of access lines in Hawaii and the spin-off of properties in New England that were bought by FairPoint Communications, were just a warm up for this deal.

As access line loss continues, big telcos who are losing lines at the fastest rate want to focus as much on wireless and high-yield urban and suburban market broadband as possible. Getting rid of almost 5 million rural lines will help Verizon clear its decks to focus on those other specific areas.

Meanwhile, rural line acquisitions are creating new giants. FairPoint, CenturyTel (through its pending acquisition of Embarq) and now Frontier are starting to fill what used to be a major gap between the three largest telcos in the U.S. and everyone else. Windstream Communications and Iowa Telecom are also in the mix. There still may be a pretty big gap between the former Bell companies and the new independent/rural giants, but the new breed of beneficiaries from rural consolidation are gaining stature, buying power, lobbying leverage and service revenue potential that put them in a new league.

Of course, they are also inheriting challenges, the challenges that come with growing very quickly and exponentially in size, and with taking over properties that other companies did not consider viable. The mountain of problems and criticism that FairPoint has encountered since buying the former Verizon lines in New England is a perfect example of the misfortune awaiting the new rural giants if they aren't careful.

Access line loss in rural markets has proceeded at a far slower pace than in larger, denser markets. Part of the reason is because wireless options and competitive cable TV and telephony options are not as widely available in those rural markets. Every rural telco believes in its ability to turn this set of circumstances into a broadband gold mine-and maybe many of them can make it happen. It will be interesting to see how long rural telcos continue to have these markets to themselves.

However, in their attempts to corner the market on certain markets, rural telcos also need to be careful not to bite off more than they can chew, or chew it all too quickly. FairPoint's recent experiences have put state-level regulators and consumer groups on notice, and as rural telcos look to get their acquisitions approved, they can expect to face newly-stringent requirements, deadlines and goals governing how they can operate in their new markets. The new giants, just like the old giants, will need to watch where and how they step.

-Dan

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